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 user 2010-05-10 at 10:02:53 am Views: 45
  • #23501
    HP, Xerox: Is Lexmark
    the printing world’s most eligible bachelor?

    Hollywood has George Clooney. New York has Derek Jeter.
    Lexington, Kentucky has Lexmark.Lexmark , for the uninitiated, is a
    printer company; pretty much the one that isn’t based in the New York
    area, California or Japan. And recently investors have been buzzing
    again that the printer-maker would make a fine target to get hitched –
    either taken private or acquired. Bank of America Merrill Lynch ranked
    it number one on a recent list of leveraged buyout candidates.

    all, Lexmark has been turning in impressive earnings numbers lately.
    Plus, as the recession lifts and credit markets loosen up, large tech
    companies like Hewlett-Packard (HPQ) and Dell (DELL) find themselves
    with pockets full of cash and a mandate to grow.That’s not to say
    Lexmark is desperate for a suitor. The company has developed a proud,
    independent culture in the 19 years since it spun out of IBM (IBM), and
    CEO Paul Curlander hasn’t exactly encouraged the notion of a buyout. But
    it’s easy to see why Lexmark would be attractive. It owns much of its
    own printing technology, and has built out a formidable army of
    consultants who sell document services to large businesses. The business
    is healthy: Gross margins hover at around 36.9%. Lexmark’s $1.2 billion
    cash reserve is roughly twice as big as its debt.

    In another
    sign of Lexmark’s allure, last month, HP poached Lexmark’s enterprise
    sales VP for its own printing group. That echoed a move four years ago,
    when HP stole away another of Lexmark’s top business execs, Bruce
    Dahlgren, a move that provoked a flurry of lawsuits from both companies.
    (HP and Lexmark eventually settled.)

    Dahlgren now leads
    enterprise printing at HP. When I sat down with him a few weeks ago to
    talk about HP’s print services strategy, one of the initiatives he
    highlighted – pictures on hospital wristbands – was an idea that
    actually originated at Lexmark. That detail didn’t escape his former
    company. (Lexmark sent materials that show it was selling the idea
    before HP got serious about the business.) An honest mistake – and more
    evidence that HP is keeping tabs on what’s happening in Lexington.

    executives are now focused on growth. Last summer when I spoke to CEO
    Paul Curlander, the shares hovered around $15 and he was focused on
    expanding Lexmark’s reach in low-cost printers for small and medium-size
    businesses. Today, Lexmark has slashed costs, and its shares are
    trading over $35. In its most recent quarter, enterprise sales jumped
    20% and profits smashed Wall Street estimates.

    So what are the
    chances of Lexmark getting hitched to a bigger player? There could be
    complications. Lexmark’s inkjet printing business relies on
    cross-licensing pacts with HP and Canon that could complicate a deal.
    But still, given the fact that Lexmark has $1.2 billion in cash and a
    market cap below $3 billion, a deal seems possible. The question is, who
    would do it?

    An offer could always come from one of the Japanese
    printer companies, or from Chinese PC maker Lenovo. Someone could try
    to take Lexmark private. And then there are the U.S. tech companies:

    * HP probably wouldn’t make sense as an acquirer. HP doesn’t need to
    buy Lexmark’s market share or technology, and the culture clash would be

        * On paper, Xerox (XRX) would be a slightly better
    suitor. By adding Lexmark, Xerox could at least beef up its share in
    small business and enterprise sales. Trouble is, the two companies
    overlap everywhere when it comes to product and services. Who would stay
    and who would go? Sounds like a bad season of Survivor, a major
    distraction, and generally a bad time for everyone.

        * But
    Dell (DELL) is probably the best fit of all. The PC giant already sells
    Lexmark printers to consumers and small businesses under its own brand.
    In March, Dell doubled down on Lexmark again when it began selling its
    high-end office printers and software. What’s more, Dell has admitted it
    wants to get into managed print services. Lexmark’s already there – a
    fact that Dell is well aware of, since it has purchased managed print
    services from Lexmark.