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 user 2007-07-16 at 11:10:00 am Views: 57
  • #18379

    Talk of selling company continues
    a discussion last week about Lexmark International’s struggling inkjet
    division, the first question on an analyst’s mind was where the company
    saw itself in the future.The question came from UBS analyst Ben Reitzes
    to CEO Paul Curlander during a conference call about lowering the
    outlook for Lexmark’s upcoming quarterly earnings. Would the company
    consider a sale of itself, or at least of its inkjet segment, Reitzes
    inquired.Curlander replied that Lexington’s largest private employer is
    focused on improving its inkjet division, and thinks it will be a
    profitable contributor in the long term.But the projected earnings
    shortfall has again given rise to conjecture on whether Lexmark might
    be prime for a buyout.Analysts and others point to parts of the
    business that would make Lexmark an appealing buy for a private equity
    firm or other purchaser. But they also note the barriers that could
    discourage such an acquisition.

    A good buyout candidate?
    The laser printer business
    company’s laser segment recovered quickly after a downturn in the
    latter half of 2005. Its positives include a strong direct sales force
    that has helped the company penetrate vertical markets like banking and
    retail, said Larry Jamieson of industry tracker Lyra Research.The
    company also runs a toner cartridge remanufacturing program, which
    “helps keep people coming back to buy their products … and also keeps
    the supplies out of the aftermarket,” Jamieson said.The program, which
    was at the heart of the recent trial in the civil case between Lexmark
    and Static Control Components, has been upheld by a federal district

    Low market capitalization
    Lexmark’s current market capitalization, or total value of outstanding shares, is around $4.4 billion.
    company’s stock price has fallen precipitously since the beginning of
    the year — now trading in the mid- to upper $40s — but the lower
    market capitalization also results from a decision to repurchase a
    significant amount of stock over the last few years.In 2006, the
    company repurchased $0.9 billion of its stock, or 16.5 million shares.
    The year before, the company spent $1.1 billion on repurchasing 17
    million shares.The current market cap is inexpensive compared to the
    past, such as at the end of last year, when its market cap was more
    than $7 billion.Tom Carpenter, a vice president and senior equity
    analyst at Hilliard Lyons in Louisville, wrote in a note to clients
    last week that he questions “whether some of the money should have
    instead been spent on product development and
    distribution.”Carpenter’s firm or affiliates beneficially owned at least 1 percent of Lexmark’s stock at the end of May.

    Cash flow
    of the sale of ink and toner cartridges, the company produces a steady
    cash flow that could appeal to a business looking to leverage that cash
    for further acquisitions.It could also appeal to consumer electronics
    companies, Jamieson said. Most of those companies have only one contact
    with a customer: the sale of hardware. In the printer industry, though,
    “because of supplies, you get a pretty good ongoing annuity.”However,
    that steady annuity has declined on Lexmark’s inkjet side because its
    installed base of printers has shrunk as, among other things, it
    withdrew from part of the market in a bid to increase profitability.

    A bad buyout candidate ?
    Cross-licensed technology
    most frequently mentioned barrier to an acquisition of Lexmark is
    probably the agreements it has with competitors about certain
    patents.Cooperation among the competitors in the industry is common.
    For instance, Hewlett-Packard purchases its laser engines from Canon.
    In many cases, there are cross licenses, in which companies resolve
    patent disputes by agreeing to license intellectual property to
    another.Jamieson said he thinks the bulk of the patents that could
    stymie a sale of Lexmark focus on the inkjet side and
    printheads.”Because of the way the patent structure is, as you come up
    with inkjet technology, at some point or another you’re going to have a
    couple of things that infringe on somebody else’s patents,” Jamieson
    explained. “So they’ll say, ‘OK, we’ll give you this, you give us that’
    … That’s what kept a lot of companies out of the business.”Shannon
    Cross of Cross Research, in a recent note to clients, cited a 1996
    agreement between Lexmark and HP, which was included in Securities and
    Exchange Commission filings, as evidence that cross-licensing could
    prevent a sale.That document, which is heavily redacted for
    confidentiality, resolved claims by each company that the other had
    infringed on its intellectual property. The document mentions inkjet
    products and states that in the event of a change of control of either
    company, the other can terminate the licenses granted.In a recent note
    to clients, though, Bernstein Research analyst Toni Sacconaghi Jr.
    suggested that the cross-licensing may not be as disruptive to a buyout
    as thought.And as Jamieson put it, an acquirer could always “write a
    very big check.”

    Laser printer business, again
    the laser printer business has strong points, Jamieson and Carpenter
    question whether a buyer could find strong value in operating it alone
    if it sold off Lexmark’s inkjet business or stopped research and
    development and simply milked the sale of existing replacement ink

    Competitive marketplace
    all, the printer industry has become more competitive in recent years
    as the overall market matures. Despite its maturation, the market does
    have some high-growth segments, which Lexmark has targeted over the
    last year with a spate of product introductions.

    Back to the future
    Ultimately, analysts suggest Lexmark’s future may depend on whether it can turn around its inkjet business.
    think it should exit the business entirely, while others note the
    balancing act the company is attempting in spending now and depressing
    profits in order to grow them in the long term.”I’d like to see Lexmark
    pull a couple of rabbits out and keep it going,” Jamieson said.
    “They’ve got some good stuff going, and they’ve got a lot of good