As the printer industry continues to wrestle with overcapacity and declining print volumes, word came in 2016 of two major deals involving three key vendors. The deals promise to radically change the competitive landscape. In April, a consortium of Chinese investors announced their intentions to acquire Lexmark and in September Hewlett-Packard revealed its plan to acquire Samsung’s printer and copier business in 2017.
It is hard to say which deal was more surprising. Rumors regarding the potential sale of Lexmark (or some portion thereof) began circulating after the firm said during its Q3 FY15 earnings call that it would “explore strategic alternatives to enhance shareholder value.” Various companies including Canon, Konica Minolta, and Ricoh as well as others were all said to have taken a look at the Lexington, KY-based OEM. When news finally broke, however, that Apex Technology along with Legend Capital and PAG Asia Capital had reached a definitive agreement with Lexmark to acquire the firm the industry was stunned. Few expected the Zhuhai, China-based chip maker could make such a deal. A few months later, the industry was surprised again when news broke that HP would acquire Samsung’s printer assets. What a year!
Curious and Curiouser
When I first heard that Apex was involved in a potential Lexmark buyout, it seemed like a long shot—not to mention ironic. As a major supplier of third-party chips and other components to the third-party printer consumables industry, I was well acquainted with Apex. It’s an important company. But, it just seemed too small to be in a group of bidders made up of OEMs with billions of dollars in annual revenue. The deal was also ironic because of Apex’s tight relationship with the oft-sued, third party cartridge manufacturer Ninestar (also known as Zhuhai Seine Technology Co., Ltd.). On numerous occasions, Ninestar has been hauled into court for violating patents held by an assortment of OEMs including Lexmark.
Apex was spun out of Ninestar in 2004 after being established as Ninestar’s internal chip supplier. Ninestar was founded and continues to be run by Dongying Wang, who is also known by his English name, Jackson Wang. Mr. Wang’s brother Dongjie, whose English name is Jason Wang, runs Apex. Today, Apex is a public company listed on the Shenzhen Stock Exchange under the name Apex Technology (stock code 002180). Seine Technology remains the largest stakeholder in Apex, holding about 70 percent of the firm’s voting shares. Although Apex doesn’t have the annual sales of one of the huge OEMs it was bidding against, it does have an impressive market capitalization of RMB29.31 billion (USD4.26 billion) at the time of this writing, which it leveraged to get the deal done.
According to its annual report, Apex had revenue of RMB2.049 billion (about USD297 million) in 2015, up 22 percent from the year prior. In fiscal 2015, Apex’s operating income was RMB315 million (USD45.7 million), up 43 percent from fiscal 2014, while net income of RMB281 million (USD40.7 million) was up 39.1 percent from the year prior. In contrast, Lexmark’s revenue was $3.551 billion in 2015, down 4.3 percent from the year prior. Lexmark posted an operating loss of $24.5 million last year and a net loss of $40.4 million.
The Lexmark Deal
News of buyout by Apex and its Chinese partners first broke on April 19 and the deal was finalized on November 29. Valued at $40.50 per share or $3.6 billion, the Chinese investors paid well over Lexmark’s market capitalization of about $2.2 billion. Lexmark shareholders apparently liked the $1.4 billion premium and approved the acquisition at a special shareholder meeting held in July. The deal cleared a major regulatory hurdle when the Committee on Foreign Investment in the United States (CFIUS) signed off on the deal in September and subsequently passed the scrutiny of other regulators, including regulators in China. When it announced the deal had closed, Lexmark said its stocks have ceased trading on the New York Stock Exchange.
Lexmark filings with the Securities and Exchange Commission (SEC) reveal that the U.S. OEM met with companies in Japan about an acquisition before having Goldman Sachs contact firms about bids. In the end, there were three serious bids for the company as a whole, but, as of April, only Apex had secured committed financing, which ultimately led Lexmark to accept Apex’s offer.
According to one SEC filing, the partners raised $1.14 billion in debt financing; Ninestar Group contributed $443 million in term loan facilities; and under equity commitment letters, Apex, PAG Asia, and Legend Capital Management agreed to put up $2.32 billion to finance the deal. Reuters reported in September that Apex will take out RMB8 billion (USB1.16 billion) in loans related to the acquisition, presumably to meet its end of the financial commitment.
When it announced the Chinese consortium’s acquisition was completed, Lexmark said it was changing leadership at the firm. Paul Rooke stepped down as president and CEO to be succeeded in these roles by David Reeder, formerly Lexmark vice president and CFO. Lexmark will remain headquartered in Lexington, KY. In previous announcements, Lexmark had indicated that business would continue as usual but in addition to the management change the firm announced another big change. The Enterprise Software group will be separated from Lexmark and rebranded Kofax.
In a prepared statement, Lexmark said, “The Consortium and Lexmark will engage in a process to sell the business while focusing on growing the imaging business, particularly in China and the Asia-Pacific region.”
What’s Next?
In prepared remarks, Mr. Reeder, Lexmark’s new head, said, “I’m incredibly excited about Lexmark’s future…We are now uniquely positioned to grow the company in China and greater Asia, along with continuing to deliver industry-leading products and services to customers in other regions of the world.” Later in the release, Lexmark stated that its partnership with Apex “will allow it to offer a complete line of printer products, streamline its development and supply chains, and extend its reach into the growing markets of China, the rest of Asia and elsewhere.” Lexmark is well positioned to give laser printer vendors like Canon, HP, Fuji Xerox, and Ricoh a run for their money in China and the Asia Pacific region.
Lexmark has consistently indicated that Apex will allow it to expand its business in China and the Asia-Pacific, which are not currently strong markets for the OEM. In addition to gaining share in Asian markets under the Lexmark brand, I would not be surprised to see Lexmark engines sold under Ninestar’s Pantum brand should Ninestar decide to subsume its Pantum operations into Lexmark proper. Right now, it seems it could go either way. Ninestar currently markets a limited number of Pantum laser printers and MFPs, and has indicated that it would like to broaden the line to include a range of devices for various market segments. It’s also quite possible that Lexmark engines may be used in machines marketed under the Lenovo brand—after all Legend Holding is a controlling shareholder in Lenovo and Lenovo has been rumored to be interested in acquiring Lexmark for years.
In terms of supplies, it will be interesting to see if Apex and Ninestar continue to market Lexmark chips and components along with finished compatible and remanufactured cartridges. If so, presumably the manufacturing of these will shift from Lexmark to the Chinese firms. That would be an obvious manufacturing synergy to exploit, but it will be interesting to see how Apex and Ninestar rationalize their own cartridge-collection and manufacturing facilities in China with those that Lexmark has in Mexico. One way or another, there can be no question going forward that Apex and Ninestar will certainly be able to offer Lexmark compatibles with an iron-clad guarantee not to infringe.
Beyond cartridges for use in Lexmark machines, it’s quite possible that Apex and Ninestar may decide to leverage the well-known Lexmark brand to bring to market third-party cartridges and components for use in other OEMs’ devices. At one time, Lexmark marketed SKUs for LaserJet machines under the Linea brand, but that line has slipped into obscurity. Might it be revived? The prospect of Lexmark selling Ninestar-built, Lexmark-branded remanufactured cartridges direct from its own webstore and through their numerous distributors and other channel partners has got to be something that keeps folks at other OEMs lying awake at night. Xerox and other OEMs have done well offering their own lines of remanufactured cartridges for competitors’ machines. None of these firms, however, does the actual remanufacturing nor do they offer the breath of products that Apex and Ninestar have at their disposal.
Perhaps the biggest question on the supplies front is what does the Lexmark acquisition mean for ongoing litigation? As noted earlier, Lexmark is a litigant in a case slated to be heard by the U.S. Supreme Court next year. Related to how patent-holder rights are exhausted, the case has huge implications for the remanufacturing industry as well as for industries outside of the imaging space.
As the case progressed through the lower courts, Lexmark has prevailed, successfully defending its right to sue various third-party supplies vendors under current U.S. patent law. As major stakeholders in the non-OEM cartridge industry, Apex and Ninestar undoubtedly want the Supreme Court to rule against Lexmark and overturn the earlier lower court decisions. So, will Lexmark’s new owners withdraw the case from the high-court and let the lower court rulings stand, which would be bad for remanufacturers? Or will they allow—and fund—the case before the Supreme Court to proceed hoping it will overturn earlier decisions?
At this point, I can offer no answers to the questions I’m raising. Clearly, the industry needs to follow the newly merged companies in the New Year to see how things ultimately shake down.
Autumnal Surprise
As unexpected as the news was in April that Apex et al were buying out Lexmark, word of HP’s plan to purchase Samsung Electronics’ printer business also seemed to come out of the blue. Calling it “the largest print acquisition in HP’s history,” the company told attendees at the September HP Global Partner Conference in Boston, MA that it would purchase the South Korean company’s assets for $1.05 billion. HP said that the transaction should close within 12 months and that after closing Samsung will make a $100 million to $300 million equity investment in HP.
According to Samsung, its printing business had revenue of 2 trillion Korean won (USD1.8 billion) in 2015. For the fiscal year just ended, HP’s printer business was more than ten times as large with revenue of USD18.26 billion. The market research firm IDC ranks HP as the world’s top vendor in terms of overall printer and MFP shipments, and ranks Samsung number five. In the second quarter of 2016, IDC reported that HP had a 36.6 percent share of worldwide hardcopy peripheral shipments, while Samsung held 4.0 percent of the market.
At the time the acquisition was announced, Samsung indicated that the deal would allow it to focus on its core businesses, such as smartphones and appliances. For more than two decades, the South Korean firm has been one of the world’s major producers of A4 laser engines, which have been sold under various brands as well as Samsung’s. Since the 1990s, executives for the company declared Samsung would be among the industry’s largest OEMs and that the printing business was crucial for the firm’s overall growth. In recent years, however, the firm has struggled to shift from marketing low-cost A4 products to the more profitable A3 MFP and its market share slipped. It appears Samsung found it difficult to get BTA and office-equipment dealers to carry its line. Faced with difficulties in both the A3 and A4 markets, it appears that Samsung no longer had the stomach to continue to battle for share.
For HP, the deal is all about entering the A3 market. Valuing the A3 copier/MFP market at $55 billion annually, the company said in a prepared text that Samsung’s printer business “accelerates its [HP’s] growth opportunities in the copier segment, strengthens its leading laser printing portfolio that has been established with Canon, and paves the way for future printing innovation.”
Calling the copier market “a segment that hasn’t innovated in decades,” HP says it will be market disruptive. According to HP, “Copiers are outdated, complicated machines with dozens of replaceable parts requiring inefficient service and maintenance agreements,” and the firm plans to penetrate the market with what it calls “superior multifunction printer (MFP) technology.”
HP has made more than one attempt to crack the A3 market and woo copier dealers but like Samsung it has met with little success. A couple years ago the company expanded its A3 portfolio to include some Sharp-manufactured MFPs that HP sells under its own brand through its managed print business. Now, it appears the firm believes that snapping up Samsung’s printing business will be the key move that enables it to enjoy a greater share of a delicious $55 billion pie.
The proposed acquisition is subject to regulatory approval and other closing conditions. It will be interesting to see if there are any objections from regulators, given HP’s already large market share. However, I suspect that given the large number of players remaining in both the A4 and A3 printer and MFP markets and HP’s very small share in A3, the deal will go through.
Unanswered Questions
Like Apex’s Lexmark acquisition, HP’s purchase of Samsung’s printer assets leaves industry wonks like me with more questions than answers. Perhaps the most pressing and potentially impactful question is: “What will become of the HP-Canon partnership?” From the introduction of the 2680A Laser Printing System in 1980 to the latest Jetintelligence models, Canon has been HP’s main laser technology supplier for nearly 40 years. Acquiring the Samsung assets gives HP access to its own laser technology—and not just for A3 products but A4 as well. Does this sound the death knell for the relationship between HP and Canon?
For the moment, the two companies are down playing any changes. Announcing the Samsung asset purchase, HP said in a press release that the deal will “strengthen its leading laser printing portfolio that has been established with Canon.” It described its decades-long partnership with Canon as “strong” and “mutually beneficial,” and said that the deal “will provide new opportunities to further strengthen and accelerate this highly valued relationship.” Fujio Mitarai, chairman and CEO of Canon Inc., even commented in the HP press release, saying, “HP and Canon have long discussed print innovation to create customer value in business printing and in the growing MPS market. This transaction will further evolve our collaboration and bring about growth for both of our companies.”
Despite the positive spin on the HP-Canon relationship and the indications that the companies will continue to work together, the Samsung acquisition will force the two firms to square off in the market. At the very least, HP will be looking to compete head-to-head against Canon and other leading A3 vendors and trying to woo away dealers, if possible. Worst case, the deal will give HP the option of quietly or not so quietly beginning to launch Samsung-based devices in the A4 market to replace previous Canon-based machines. For its part, Canon has been quite active in expanding its line of imageCLASS laser printers and MFPs, which compete directly with HP LaserJet machines. The move to market more imageCLASS devices over the past couple of years suggests that Canon has been anticipating a change with its partner for a while.
Another question I have is if HP wanted to enter the A3 market, why acquire Samsung’s assets? Sure, the South Korean firm has good technology and has been making hardware for more than 25 years so it’s well established. But one of HP’s past failing in the A3 market has been its rather feckless pursuit of office-equipment dealers and while arguably Samsung has had better success with its A3 line than HP ever did, that ain’t really saying much. It would seem that HP might have been better off purchasing the assets of a company with an established channel as well as A3 technology. It seems to me that Xerox, for example, would have made a better acquisition target. But maybe regulators would have nixed the deal, or, perhaps with a price tag that was less than 1x Samsung’s print business’s annual revenue, the deal to acquire the South Korean firm’s assets was simply too good to turn down.
So, even before the New Year gets under way, we at Actionable Intelligence can see there will be plenty to write about in 2017. I hope you’ll frequent our website as we follow how all these deals shake down. Moreover, I’m thinking it’s a good bet that the urge to merge will continue to be felt during the upcoming year and all the M&A activity we’ve been seeing will continue. Happy New Year!
