M&A News: Lexmark Acquires Kofax – Initial Market Analysis

Earlier this week, Lexmark announced it was acquiring Kofax. The Deal reports that the transaction will add, “$300 million in 2014 sales from a base of more than 20,000 global customers … [and] will boost its enterprise software sales to $700 million.”

Spend Matters believes the transaction will further fuel valuation levels in the enterprise software sector (Kofax is now trading at over 3X top-line at the time of publication of this post – up over 25% over the pre-deal multiple) given that the firm competes in the somewhat stodgy world of accounts payable automation, inclusive of OCR services, among other areas. Given the rather old-school nature of what Kofax does for procurement and AP (i.e., scan, capture and workflow in a traditional software environment), the valuation is all the more impressive.

Spend Matters initial analysis suggests the following:

  • The move is a smart one for Lexmark as it is trying to (still) make the transition to becoming a truly digital business. Wall Street responded positively, so it is clear investors support the deal. And everyone is aware the printer business as we know it is not exactly a growth sector (unless it's 3D printers of course).
  • It’s also a good move because the transaction is somewhat of a Trojan horse that gets Lexmark in on the maturity curve for AP automation and procurement workflow and adoption, moving up from scanners to hybrid environments and ultimately – albeit slowly – to real e-invoicing (we would not be surprised to see follow-on acquisitions in this regard).  This isn't without precedence - especially given that Kofax acquired 170 Systems (very similar to Basware) over 5 years ago.  Has it been that long?!
  • Moreover, from a plug and chug transaction perspective, it will allow Kofax to sell into the Lexmark base and at least keep customers who are going digital from defecting to greener pastures (literally).

From a competitive standpoint, it will also be curious to see how Xerox responds, which will potentially become the “odd man out” in accounts payable automation and related lower-value purchasing/finance business process outsourcing deals (and a rival to Lexmark in other product and solution areas as well). There are numerous providers Xerox could consider to build up its business here through acquisition or merger (e.g., ReadSoft, Captiva (EMC), ABBYY, Perceptive, Corcentric, Basware, Esker, etc.)

There’s also the expansion play on the BPO market as well for accounts payable to initiate the “toss-it-over-the-wall-or-lower-cost-labor-border” play as well. And besides, the weather is a whole lot better in Bangalore than Rochester. But that doesn’t explain why the market values Lexmark at over twice the P/E multiple as Xerox. We’ll leave that factoid to our readers’ imagination to ponder as they visualize a Kodachrome moment (sorry, we couldn’t resist – Rochester-based companies get no respect).

On a more serious note, a quick thumbs up to the transaction all around from the Spend Matters research team. This is positive consolidation for the industry, and clearly a move shareholders are cheering already (on both sides), and one customers will likely support as well.

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