Yes Virginia, It’s True: Lexmark Acquired for $3.6B by Consortium of Apex and PAG Asia Capital

Rumors suggesting that Lexmark was being pursued by Apex Technology Co., the same company that bought Lexmark archenemy Static Control last year, have percolated since April 7 from numerous sources. The reports were discounted by many in the printing/imaging industry because the move was seen as an odd fit – a major printer hardware OEM being acquired by a company known principally for producing components for aftermarket ink and toner makers. At the same time there were also reports that Lenovo expressed interest in acquiring Lexmark, a move that would reunite two substantial ex-IBM divisions under Chinese ownership.

But indeed, Lexmark’s Board of Directors announced on April 19 that the company had agreed to a buyout from a consortium of purchasers including Apex and PAG Asia Capital (self-described as “one of Asia’s largest alternative investment management firms,”) and additional participation from Legend Capital Management (read the press release here.) The Wall Street Journal notes that Legend Capital, an associate of Lenovo’s biggest shareholder Legend Holding, is also part of the buying consortium. The $3.6B all-cash deal means Lexmark shareholders will get $40.50 for each share, representing a premium of 16.8 percent to the April 19 close of $34.66. In another surprise, the Apex deal includes buying Lexmark intact – including its attractive Enterprise Software unit (that includes Kofax, acquired last year) – which the company has been shopping around for several months.

Apex, based in Zhuhai, Guangdong, China, is reported to have about 5,400 employees and sales of RMB2.05B. Aftermarket supplies maker Zhuhai Seine Technology Co. is the largest shareholder of Apex, holding about 70 percent of the voting shares of Apex. Besides being a huge ink and toner supplies maker, Zhuhai Seine is also the manufacturer of the Pantum brand of low-cost laser printers/MFPs, which were introduced several years ago but don’t appear to have generated much market momentum in the U.S. Apex is known largely as a fast-growing, major supplier of cartridge chips to Asian aftermarket supplies producers, and for its acquisition of aftermarket technology leader Static Control for about $60M last year. The Wall Street Journal, in its story about the buyout, explained that China’s state-owned fund tasked with boosting the country’s semiconductor industry invested $80 million into Apex last year. Lenovo’s presence in the deal, via Legend, brings with it experience in successfully closing deals for U.S. tech assets, including getting regulatory approval. So, yes … Lexmark and Static Control are now part of the same company. Wrap your head around that for a minute … will the Static Control legal department now have to defend the Lexmark “Return” program against aftermarket companies? We will have to buy a new Magic 8 Ball to fathom the implications of this deal (Ask again later).

PAG’s financing participation in the deal is from its private equity unit, PAG Asia Capital (PAGAC), a group the company states focuses on large-scale buyouts, control deals, and structured minority investments. PAG was founded in 2002 and claims it has grown to become one of Asia’s largest independent alternative investment management groups, with US$15 billion in capital under management and a team of over 380 employees. PAG’s strength, it says, is its regional expertise – it focuses exclusively on investments in Asia, so the Lexmark deal is a bit curious: is this considered an investment in China-based Apex, or in Lexington, KY-based Lexmark? According to the company, the core business of Legend Capital is early-stage venture capital and expansion-stage growth capital investment. The announcement says the merger will be financed through equity contributions by the consortium and debt financing, but that the merger is not subject to any conditional financing – so it is a done deal.

According to a Kentucky.com interview with Paul Rooke, the chairman and CEO of Lexmark said that being bought by the consortium including Apex “provides a wonderful growth opportunity into Asia and China … and we’ll strengthen their technology portfolio.” In the press release announcing the agreement, the company stated that the sale “enables Lexmark’s continued focus on strategic initiatives while strengthening access to substantial market opportunities in Asia.” The company says the transaction was unanimously approved by Lexmark’s Board of Directors, that Rooke is expected to continue to lead Lexmark after the transaction closes, and that Lexmark will remain headquartered in Lexington. As noted, Lexmark’s two business groups, Imaging Solutions and Services and Enterprise Software, as well as the company’s regional and country operations, are expected to continue unaffected and the company remains intact. Lexmark also says that when the deal is closed, which is expected to happen in the second half of 2016, Lexmark’s common stock will cease to be publicly traded on the NYSE. Lexmark notes that it will not host a conference call with securities analysts and investors to review its upcoming first quarter 2016 performance, and does not expect to do so for future quarters while the transaction is pending. Before the ink was dry on the agreement, “shareholder rights” law firm Johnson & Weaver LLP announced it had launched an investigation into whether the board members of Lexmark “breached their fiduciary duties in connection with the proposed sale of the Company to a consortium of investors,” – apparently the 16.8 percent bump in share value, in cash mind you, wasn’t enough for some (biting my tounge).

In prepared statements, Paul Rooke, Lexmark chairman and chief executive officer stated, “This is an exciting transaction that Lexmark’s Board of Directors believes is in the best interests of our shareholders following an exhaustive strategic alternatives review process to maximize value …The transaction will benefit our customers and provide new opportunities for our employees.” Rooke added, “As part of the Consortium, Lexmark will be able to reach the next level of growth and innovation, to the benefit of our customers, business partners and suppliers, faster than we could achieve on our own … With the Consortium’s resources, we will be able to continue to invest in and grow the business to more fully penetrate the Asia Pacific market for hardware, software and managed print services.”

Why?

What is behind this unusual, extraordinary marriage of one of the industry’s most prominent and well-known printer OEMs and one of the world’s most prominent technology suppliers to the leagues of Asia-based newly manufactured and remanufactured non-OEM cartridge makers? In the minds of most printer industry observers, few would expect these companies to even consent to sit at the same table for lunch. Lexmark is a company utterly reviled in the aftermarket sector for its decades-long aggressive pursuit to protect its intellectual property assets against what it has claimed are infringements by numerous newly manufactured and remanufactured non-OEM cartridge makers, distributors, and sellers at almost any level – including an important, possibly landmark, case against Impression Products now being appealed to the U.S. Supreme Court. Apex is a technology enabler for many of Lexmark’s major aftermarket supplies competitors – the firm currently offers a wide array of compatible chips for use in producing various Lexmark compatible or remanufactured cartridges. It has only been a few hours since the announcement of the deal, but the following questions or thoughts spring to mind:

• This sale is simply about the cash – the company says the Apex consortium made the best offer it could find after months of searching “strategic alternatives.” Lexmark’s investors put the company up for sale because they were clearly unhappy with the company’s performance and doubted its future, wanted out, and took the best deal that was offered – and it was cash. That the offer came from an aftermarket supplier apparently did not matter (nor should it) – the cash is still green and spends the same, folks.

• We would have to assume Apex will de-emphasize or eliminate its aftermarket Lexmark-targeted chip sets. While this move will keep the peace internally in the Lexmark-Apex boardroom, it will have little practical effect in the markets, as other chip suppliers will jump to the fore to satisfy the demand for Lexmark-enabled cartridge chips.

• In the acquisition, Apex gains access to Lexmark’s extensive IP assets in basic electrophotography, advanced supplies material sciences, specialty knowledge developed for use in vertical printing applications and large-scale cartridge remanufacturing. It is reasonable to expect Apex to significantly expand its product portfolio by leveraging the new resources and assets it has in Lexmark.

• As principal Apex shareholder, Zhuhai Seine Technology, one of the world’s largest aftermarket cartridge makers, also gains access or control over that knowledge base, which it can leverage to try to build a dominant position among all aftermarket producers. Think about it this way – how aggressive will the new Apex-Lexmark partnership be in targeting Zhuhai Seine’s peer competitors when they are seen to infringe any Lexmark IP?

• The new Apex-Lexmark partnership will now be on the radar of every other printer OEM if or when any Apex chip offering – or any Zhuhai Seine compatible cartridge – appears to infringe any other OEMs IP. A new “Civil War” worthy of a Marvel summer blockbuster could be in the offing – printer OEMs openly suing each other.

• Does Apex dare think about competing with its own customers by leveraging Lexmark’s new or remanufactured cartridge production capabilities to make compatibles for other OEM brands?

• Taking Rooke’s statements at face value, it appears that Lexmark is prepared to make an Asian pivot and begin focusing its marketing and development plans on growth opportunities in Asian markets. As the only significant China-based and owned laser printer OEM, one could speculate that political and local market knowledge and leverage could be applied to help the company ascend to a more important market position in the domestic Chinese printer market. Lexmark’s new “family” connections to PC powerhouse Lenovo will likely open a lot of doors in the domestic distribution chain and make Lexmark a (or even the) preferred printer brand for state-owned or controlled businesses across the country. That’s big. Grabbing a bigger share of the Chinese market could by itself drive growth in Lexmark’s revenues and profits if the company can retain the annuity supplies business for the hardware its sells – a very dicey proposition in the ultra-competitive domestic Chinese supplies market. Lenovo also has tremendous influence in technology distribution worldwide; we would expect them to help one of its family members to strengthen its printer market footprint wherever it has influence or resources.

• Will we see Lenovo-branded laser printers in the Chinese market or elsewhere? Very likely – Lenovo is a much-better known brand than Lexmark, especially in Asia and in parts of the developing world.

• Now that Apex owns Lexmark, does Lexmark (or Apex) still want to win its possible pending U.S. Supreme Court case?

Some say this is a mature and boring industry, but that is a difficult assertion to support when the industry is occasionally turned upside down with unpredictable and unconventional moves like this one. Where’s my Magic 8 Ball? It seems to be as accurate as any well-informed industry observer!