The chart below compares the money needed to buy printer-maker Lexmark at a 30% premium to its current stock price. Except for Epson, the buyout would amount to just a fraction of these companies' cash hoards, that are currently earning next to nothing in interest. It makes the most sense for Dell or HP (NYSE:HPQ) to buy them, but I put the others in there too -- why not? It'd be a better use of cash.
The interesting thing about a potential Lexmark buyout is that once the numbers are run (and they have been, I don't consider myself alone in this thinking), it looks just as good on a standalone basis! So for those who buy the stock, the upside is there with or without a deal.
LXK jumped 10% after crushing recent q4 2009 estimates. Their EPS of 1.16 per share beat the consensus estimate by 54 cents. Huge. 2009 was a big year of restructuring for the company and these reductions in operating costs may lead the way to big upside leverage if a PC refresh cycle (no one's mentioned that, right? just kidding) occurs in the second half of 2010.
In an increasingly commodity-like business, Lexmark is shifting its revenue mix upstream, to target small and medium sized businesses. Instead of being the Canon (NYSE:CAJ) and Xerox (NYSE:XRX) giants with higher price points and looking nervously below you, Lexmark is attacking from the low end, driving market share increases with competitive pricing and excellent customer satisfaction. In some ways, their attack on the small business segment is like people trading down to store brands in the supermarket -- cheaper product, but nearly equal quality.
As for a potential deal, Lexmark would be a bargain for an acquirer. Below are my estimates for 2010 and 2011. In a buyout scenario, I pull out a bit from operating expenditures, but not nearly as much as could be extracted. I am conservative on my Free Cash Flow estimates, pulling out working capital boosts from operating cash flow. I'm also likely conservative on my hefty estimates for "other expenses."
LXK's enormous cash position - $1.1billion in cash and securities, or $14 per share, is a major part of why the deal is a bargain. Some of it is in non-US bank accounts, so would be subject to confiscatory taxes once repatriated. I net it out of the purchase price (below) when calculating the potential buyer's return.
These shares are a great deal with or without a buyout. I purchased shares earlier yesterday (02-08-2010), and I suggest others buy some as well.
Disclosure: Long LXK, DELL