Kofax shared shot up by nearly 50% in afterhours trading following the announcement of Lexmark’s intended acquisition. We have expected 2015 to be an active year for M&A in the BPM arena, although this one did catch us by surprise. Lexmark’s subsidiary Perceptive Software has been fairly timid compared Kofax’s much more aggressive go-to-market and M&A activity over the last year. Both Perceptive and Kofax have acquired early innovators in the BPM arena (notably Pallas Athena and Singularity, respectively). Kofax has gone beyond traditional BPM with the acquisition of Big Data and analytics innovators Kapow and Altosoft. The portfolio of capabilities for mobile, cloud, analytics and intelligent capture have positioned Kofax in the front-end of the market, which has benefited from relatively stable leadership in the management of both business and engineering function, as well as helped attract senior roles from competitors such as IBM and EMC. Yet one of potentially discounted or leverage points for Kofax is rich and deep channel network, which could either be a force-multiplier or a new source of conflict for Lexmark. It will certainly require rationalization on multiple levels, and question remains whether this amounts to “1+1=10” or “1+1=1.5” – fast and effective integration will be key.
Lexmark International, Inc. (NYSE: LXK) and Kofax Limited (NASDAQ and LSE: KFX) today announced that the two companies have entered into a merger agreement in which Lexmark will acquire Kofax. 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.
Lexmark will fund the acquisition with its non-U.S. cash on hand and its existing credit facility programs.
Kofax’s Board of Directors has unanimously recommended in favor of the merger agreement. Kofax shareholders, holding approximately 25 percent of the outstanding shares of Kofax, have signed a voting agreement committing to support the merger.
Upon successful completion of the acquisition, Lexmark will nearly double the size of its enterprise software business to an approximately $700 million business competing in the expanding $10 billion content and process management software market. This market is expected to have a compounded annual growth rate of approximately 10 percent. In addition to the significant increase in scale, Kofax will help accelerate the growth and significantly increase the operating margins of Lexmark’s software business.
The addition of Kofax immediately enhances Lexmark’s industry-leading enterprise content management and business process management offerings. In the capture technology field, the combination of Kofax’s smart process applications with Perceptive Intelligent Capture will create the broadest and deepest portfolio of capture solutions in the market, ranging from Web portals and mobile devices to smart MFPs.
The acquisition will result in an enhanced, more efficient balance sheet benefiting from the deployment of available overseas cash and existing balance sheet capacity. Founded in 1985 and headquartered in Irvine, California, Kofax reported 2014 revenue of $297 million. Kofax has over 20,000 customers worldwide, including 80 on the Fortune Global 100 list. The company operates in all regions of the world and has more than 850 channel partners globally.
The acquisition of Kofax demonstrates the continued execution of Lexmark’s capital allocation framework, which is to pursue acquisitions that strengthen and support the growth of Lexmark’s solutions capabilities, while returning capital to shareholders. Since the first quarter of 2011, Lexmark has returned 78 percent of its free cash flow to shareholders in the form of dividends and share repurchases. The transaction will not impact Lexmark's quarterly dividend.
The acquisition is expected to close in the second quarter of 2015 and is contingent on Kofax shareholder approval, applicable regulatory clearances and other customary closing conditions.
Goldman, Sachs and Co. is serving as exclusive financial advisor to Lexmark. Lazard is serving as exclusive financial advisor to Kofax on this transaction.