Is Lexmark the printing world's most eligible bachelor?

May 7, 2010: 8:00 AM ET

Dell is set to begin selling some of Lexmark's multifunction printer hardware and software. Why not just buy the whole company? Photo: Lexmark.

Hollywood has George Clooney. New York has Derek Jeter. Lexington, Kentucky has Lexmark.

Lexmark (LXK), for the uninitiated, is a printer company; pretty much the one that isn't based in the New York area, California or Japan. And recently investors have been buzzing again that the printer-maker would make a fine target to get hitched – either taken private or acquired. Bank of America Merrill Lynch ranked it number one on a recent list of leveraged buyout candidates.

After all, Lexmark has been turning in impressive earnings numbers lately. Plus, as the recession lifts and credit markets loosen up, large tech companies like Hewlett-Packard (HPQ) and Dell (DELL) find themselves with pockets full of cash and a mandate to grow.

That's not to say Lexmark is desperate for a suitor. The company has developed a proud, independent culture in the 19 years since it spun out of IBM (IBM), and CEO Paul Curlander hasn't exactly encouraged the notion of a buyout. But it's easy to see why Lexmark would be attractive. It owns much of its own printing technology, and has built out a formidable army of consultants who sell document services to large businesses. The business is healthy: Gross margins hover at around 36.9%. Lexmark's $1.2 billion cash reserve is roughly twice as big as its debt.

In another sign of Lexmark's allure, last month, HP poached Lexmark's enterprise sales VP for its own printing group. That echoed a move four years ago, when HP stole away another of Lexmark's top business execs, Bruce Dahlgren, a move that provoked a flurry of lawsuits from both companies. (HP and Lexmark eventually settled.)

Dahlgren now leads enterprise printing at HP. When I sat down with him a few weeks ago to talk about HP's print services strategy, one of the initiatives he highlighted – pictures on hospital wristbands – was an idea that actually originated at Lexmark. That detail didn't escape his former company. (Lexmark sent materials that show it was selling the idea before HP got serious about the business.) An honest mistake – and more evidence that HP is keeping tabs on what's happening in Lexington.

Lexmark executives are now focused on growth. Last summer when I spoke to CEO Paul Curlander, the shares hovered around $15, and he was focused on expanding Lexmark's reach in low-cost printers for small and medium-size businesses. Today, Lexmark has slashed costs, and its shares are trading over $35. In its most recent quarter, enterprise sales jumped 20% and profits smashed Wall Street estimates.

So what are the chances of Lexmark getting hitched to a bigger player? There could be complications. Lexmark's inkjet printing business relies on cross-licensing pacts with HP and Canon that could complicate a deal. But still, given the fact that Lexmark has $1.2 billion in cash and a market cap below $3 billion, a deal seems possible. The question is, who would do it?

An offer could always come from one of the Japanese printer companies, or from Chinese PC maker Lenovo. Someone could try to take Lexmark private. And then there are the U.S. tech companies:

  • HP probably wouldn't make sense as an acquirer. HP doesn't need to buy Lexmark's market share or technology, and the culture clash would be epic.
  • On paper, Xerox (XRX) would be a slightly better suitor. By adding Lexmark, Xerox could at least beef up its share in small business and enterprise sales. Trouble is, the two companies overlap everywhere when it comes to product and services. Who would stay and who would go? Sounds like a bad season of Survivor, a major distraction, and generally a bad time for everyone.
  • But Dell (DELL) is probably the best fit of all. The PC giant already sells Lexmark printers to consumers and small businesses under its own brand. In March, Dell doubled down on Lexmark again when it began selling its high-end office printers and software. What's more, Dell has admitted it wants to get into managed print services. Lexmark's already there – a fact that Dell is well aware of, since it has purchased managed print services from Lexmark.
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