$1.5 Billion or $150 Million,
the Lexmark-Xerox Deal is Still a Total Mess.
The recent deal between Xerox and Lexmark has stirred confusion in the financial community, especially regarding the difference between enterprise value and equity value. While many are fixated on the figure of $1.5 billion as the deal price, it’s important to recognize that this represents the enterprise value of Lexmark — not its equity value. So, let’s clear up the confusion and break down what Xerox is really acquiring and at what cost.

The $1.5 Billion Deal: Enterprise Value Explained
The $1.5 billion initially quoted as the value of the transaction refers to Lexmark’s enterprise value. In simple terms, enterprise value (EV) is the total value of a company, including not just its equity, but also its debt, liabilities, and other financial obligations. When Xerox agreed to buy Lexmark, the price tag of $1.5 billion was not just for the physical assets or the company’s equity but included its debts and liabilities, which Xerox would assume as part of the deal.

However, Lexmark comes with a significant financial burden. The company has substantial debts, including long-term liabilities and negative working capital. So, when Xerox says it is paying $1.5 billion, this doesn’t mean they are handing over $1.5 billion in cash for Lexmark’s equity alone. Instead, Xerox is essentially agreeing to take on all of Lexmark’s debts, liabilities, and financial troubles — and then add $150 million in cash for good measure.

Breaking Down the Price: Equity Value vs. Enterprise Value
A key point of confusion arises when some observers equate the $1.5 billion enterprise value with the true price that Xerox will pay for Lexmark’s equity. In reality, the equity value is far lower, likely in the range of $75 million to $150 million. That’s the value of Lexmark’s assets after accounting for all the debts and liabilities that Xerox will inherit. The massive discrepancy between the two numbers — the enterprise value of $1.5 billion and the equity value of $75 million to $150 million — raises significant questions.

Let’s put this into perspective. When Xerox buys Lexmark, it isn’t just buying Lexmark’s physical assets like buildings, manufacturing equipment, and intellectual property. It’s also inheriting a significant financial mess. Lexmark has racked up over $743 million in annual losses and written down $841 million in assets. The company’s balance sheet shows negative working capital, meaning its liabilities exceed its assets.

Thus, Xerox isn’t getting a healthy company for $1.5 billion. Instead, it’s taking on a company weighed down by debt and financial turmoil, and the true price for this “bargain” is much lower than originally stated.

Questions About the Deal: Was $800 Million of Debt Justified?
Given the massive reduction in the company’s estimated value, one of the most pressing questions is: how did Xerox manage to issue $800 million in debt to acquire what now seems like a distressed, low-value asset? What were the financial advisors, such as Jefferies, thinking when they underwrote $800 million in debt for this deal?

If the deal’s original terms were based on Lexmark’s enterprise value — which included a hefty portion of liabilities — then Xerox’s decision to go through with the deal raises red flags. A reduction of the company’s value by over 90% suggests a major change in the financial landscape of Lexmark. According to the terms of most purchase agreements, a drastic drop in value like this could trigger a Material Adverse Change (MAC) clause, allowing Xerox to walk away from the deal without penalty.

Xerox should consider whether it’s worth going forward with a company in such dire straits. Why throw good money after bad and sink more shareholder funds into an asset with serious financial issues?

The Case for Walking Away
A 90% reduction in the deal value likely indicates severe financial issues at Lexmark. From an outside perspective, it may be prudent for Xerox to walk away from the deal altogether. Lexmark’s negative working capital and billions in losses make it a risky proposition for Xerox’s shareholders. If the purchase agreement allows, Xerox might want to exercise its right to terminate the deal and reconsider whether investing in Lexmark’s assets — which may be much less valuable than previously thought — is truly in the best interest of the company.

Understanding the Deal in Context
The confusion surrounding Xerox’s purchase of Lexmark stems from a basic misunderstanding of the difference between enterprise value and equity value. The $1.5 billion figure often cited in the media refers to the enterprise value, not the equity value. Xerox is paying far less — likely between $75 million and $150 million — for Lexmark’s equity after assuming all its liabilities and debts.

Given Lexmark’s poor financial performance and significant asset write-downs, Xerox’s decision to move forward with the deal should raise concerns. The possibility of a MAC clause providing Xerox with the option to walk away from the deal might be something they should seriously consider in order to protect shareholders from investing in a company with negative working capital and ongoing losses.

The price of $1.5 billion was never the price Xerox was paying for Lexmark’s equity. By digging deeper into the deal structure and understanding the true financial condition of Lexmark, it becomes clear that the situation is far more complicated than the headlines suggest. For Xerox’s shareholders, it might be time to ask whether this is a strategic move — or a costly mistake.