Imaging and printing products and solutions provider Lexmark International Inc. (NASDAQ: LXK) recently announced its acquisition of smart process application software provider Kofax Ltd (NASDAQ: KFX). Lexmark's motives behind the acquisition were mainly to boost its Perceptive Software division through an expansion of its software business. The deal is expected to be worth around $1 billion and will be fully closed out towards the end of the second quarter of the current fiscal year. The expansion of the software business will add another dimension to Lexmark's portfolio and will allow the company to diversify more thoroughly and thereby hedge against any risk to its core laser printers division.
Lexmark International has seen steady top lines but bottom lines have declined over the course of the past few years. With the prices of laser printers falling, the company has managed to boost sales volumes but earnings per unit have declined and there has been pressure on margins as a result. A boost to its software division would go a long way towards offsetting downsides from the products division, and would allow Lexmark to explore further avenues of growth and give the company's margins the boost they need. The company's acquisition of Kofax is thus a step in the right direction towards enhancing long term growth prospects.
Lexmark's Laser segment
Lexmark's laser printer sales have been the major source of the company's revenues for a long time, since laser printers have now pretty much taken over from inkjet printers. Lexmark's laser printers segment now accounts for 88% of the company's total revenues and over 80% of share value. The company's growth over the years has been driven by laser printers and cartridge sales. Lexmark's product division, the laser printers segment in particular, has been the key growth driver for the company over the years. However, there is a long term downside to the company's core laser printer division. With the growth of digital communication, wireless internet and mobile devices in particular, printer demand will continue to slow down which will drive prices further downward and thus add further pressure on Lexmark's faltering margins. Moreover, improved networking and wireless broadband has allowed for easy implementation of shared wireless printers which will drive down laser printer sales. There could be an upside for the sales of printer equipment and supplies such as cartridges, but the major revenue earning segment for Lexmark will suffer. There could be a potential downside to the company's share prices too as a result.
Lexmark's Perceptive Software business
Lexmark International's Perceptions Software business has shown tremendous growth over the years despite its relatively smaller contribution to the company's revenues. Revenues from the segment has grown at a CAGR of almost 60% over the course of the last 5 years and are expected to continue to grow at a CAGR of around 25% over the course of the next 5 years. Lexmark's acquisition of Kofax will allow the company to boost its Perceptive Software business with upsides in store for its Enterprise Content Management (ECM) and Business Process Management (BPM) software products. The acquisition of Kofax will add further value to the company's software segment and will thus ensure long term growth prospects given the growth that the software division has shown over the years. Higher adoption of ECM and BPM by businesses will allow the segment to grow at a CAGR of almost 10% over the years to come. However, with the added impetus and size after the acquisition of Kofax, growth is expected to double.
Taking into account the current 10% contribution of the software business to total revenues and an expected doubling of the size of the software business in the company's portfolio, I estimate incremental revenues of over $300 million in the first fiscal year after the deal with Kofax is closed. There are higher benefits to be reaped over the long term as the software business which has grown tremendously will continue to grow after integration with Kofax, and may become the core value driver for Lexmark given the long term downsides to the company's core laser printer segment. There are surely rewards to be reaped for long term investors as growth prospects for Lexmark International are definitely looking up in light of the massive synergies for its fastest growing division.
Lexmark's acquisition of Kofax will complement its software division and result in a huge boost to its current ECM and BPM software line. The synergies from the acquisition will allow Lexmark to take advantage of market trends and cater to growing demand in the software market and increasing application of ECM and BPM technologies by firms. The company's software division is thus expected to step up in a big way and drive long term revenue growth. Lexmark does have tremendous growth prospects in store and it would be highly rewarding for long term investors to buy into the company's stock.
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