Lexmark Acquires Kofax To Double Its ECM-BPM Business

Lexmark (NYSE:LXK) announced last week on Tuesday that it was acquiring Kofax Limited (NASDAQ and LSE:KFX). Under the terms of the merger agreement, Lexmark will acquire all of the outstanding shares of Kofax for $11.00 per share in cash for a total enterprise value of approximately $1 billion, net of cash acquired. While Lexmark will fund the acquisition with its non-U.S. cash on hand and its existing credit facility programs, Lexmark will nearly double the size of its enterprise software business, which is spearheaded by Perceptive Software,  to an approximately $700 million or 18% of its total revenues. The deal is expected to close in Q2 2015 pending regulatory and full shareholder approval. In this article, we will explore the importance of the Perceptive software division and why this acquisition is strategically important for Lexmark.

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Perceptive is Key To Revenue Growth

The Perceptive software division is the second biggest business unit and makes up 8.7% of Lexmark’s estimated value. As Lexmark plans to become an end-to-end solution provider, Perceptive Software is becoming an increasingly important division for Lexmark. Perceptive experienced annual growth of 31% in 2014 and reported $313 million in revenues for FY14. Lexmark has guided 15% growth in Perceptive’s revenue for 2015. The content and process management software markets that Lexmark participates in are projected to grow in aggregate approximately 11% annually over the next several years. Prior to this acquisition, the company completed only one acquisitions (ReadSoft) in 2014 that was integrated into Perceptive Software. We expect the seamless integration of Perceptive’s array of solutions with MPS to bolster revenue for the company. Currently, we expect Preceptive’s revenues to grow from $313 million in 2014 to over $500 million by 2021. However, once the Kofax deal is completed the revenues from this division will be significantly higher as Kofax generated $297 million in revenues in 2014. Moreover, we expect that revenues will continue to increase at a robust pace in the future due to organic and inorganic growth.

Kofax To Strengthen Lexmark’s ECM And BPM Offering

According to Lexmark, the addressable market for both electronic content management (ECM) and business process management (BPM), is fairly large and offers good growth rates. We estimate that the content and process management software will account for at least 18% of its revenue in 2015. Lexmark estimates that the worldwide spend for content and process management in 2014 exceeded $10 billion. The content and process management is expected to grow at 11% per annum in the near foreseeable future, which leads us to believe that it would be over $11 billion in 2015. ^[1]

Kofax has over 20,000 customers worldwide.  Among them are 80 on the Fortune Global 100 list, including Citi, AllState, Ford, Metlife and ING. The company operates in all regions of the world and has more than 850 channel partners globally. It will strengthens Lexmark’s capabilities in multi-channel capture, smart process applications, data/content integration, and process analytics.  The acquisition also supplements Lexmark’s portfolio for Banking, Healthcare, insurance and manufacturing. Throuh the acquisition, the company will also be able to realize synergies in cost (worth $40 million) and revenue from the product offering and cross selling. The deal, subject to shareholder and regulatory approval, is expected to close in the second quarter of 2015. We will update the model once the deal is completed. At present, we have a $42.2 Trefis price estimate for Lexmark, which inline with its current market price.

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1. Lexmark 10-K, www.sec.gov [↩]