Xerox's $1.5B Deal to Acquire Lexmark: A Strategic Move

Xerox's Acquisition of Lexmark: An Overview

Xerox Holdings Corporation (NASDAQ: XRX) has solidified its strategic position by announcing a definitive agreement to acquire Lexmark International, Inc. for $1.5 billion. This notable transaction, which includes assumed liabilities, is expected to close in the latter half of 2025, pending necessary regulatory and shareholder approvals.

Enhancing the Print Portfolio

The move is poised to significantly enhance Xerox's core print portfolio and expand its managed print services business, effectively addressing the evolving needs of the modern hybrid workplace. Xerox, a key player in the Technology Hardware, Storage & Peripherals sector, has been facing a decline in revenue of 9.76% over the past twelve months. Offering insights on the acquisition, Xerox CEO Steve Bandrowczak highlighted the merger of these two industry stalwarts as a catalyst for achieving long-term profitable growth and delivering better solutions for their clients.

Integrating Technologies for Better Service

Recognized for its innovative imaging solutions, Lexmark is an essential supplier to Xerox. The synergy of Lexmark's technological expertise with Xerox's acclaimed ConnectKey services promises to foster the creation of enhanced product offerings. This integration aims at fortifying Xerox’s presence in the A4 color market while concurrently diversifying its distribution channels, especially in the Asia-Pacific region.

A Comprehensive Global Reach

The newly formed entity will be well-equipped to serve over 200,000 clients spanning 170 countries and operate 125 manufacturing and distribution facilities across 16 nations. Both companies hold a significant share in various print markets, including entry-level, mid-range, and production capacities, as well as managed print services, placing them among the top five global leaders.

Financial Implications of the Deal

From a financial perspective, this acquisition is predicted to be immediately accretive to Xerox’s earnings per share and free cash flow. The company anticipates achieving cost synergies exceeding $200 million within two years post-transaction closure. Furthermore, Xerox is targeting an improved gross debt leverage ratio, aiming for a medium-term goal below 3.0x.

Funding the Acquisition

Xerox plans to finance this significant acquisition using available cash reserves alongside committed debt financing. However, in light of this financial maneuvering, the Xerox Board of Directors has made the decision to amend its dividend policy, reducing the annual dividend from $1 per share to 50 cents, effective from the dividend expected in the first quarter of 2025.

Ongoing Operations and Future Aspirations

Until the acquisition is finalized, both companies will continue their operations independently. Despite recent challenges in the market, Xerox has shown operational resilience, boasting a gross profit margin of 32.17% and impressive free cash flow generation. Lexmark President and CEO Allen Waugerman expressed genuine excitement about the potential of combining forces with Xerox to enhance market reach and deliver more robust solutions.

Recent Developments and Market Response

Recently, Xerox has also pursued significant developments to diversify its business portfolio. The company finalized the acquisition of ITsavvy for $400 million, an investment involving cash payment of $180 million and two secured promissory notes summing up to $220 million.

Market Performance Overview

In terms of financial performance, Xerox reported a 7.5% decline in third-quarter revenue, tallying $1.5 billion, alongside a decrease in adjusted earnings per share to $0.25. Nevertheless, Xerox successfully trimmed its operating expenses by over $50 million year-over-year, yielding an adjusted operating margin increase of 110 basis points to 5.2%.

Outlook and Future Commitments

Market analysts, such as Loop Capital, have started reassessing their outlook on Xerox, lowering its price target from $11.00 to $8.00 while maintaining a Hold rating. This follow-up comes in light of operational hurdles faced by the company. Despite these challenges, Xerox remains committed to delivering shareholder value, as illustrated by ongoing declarations of quarterly dividends for both common and preferred stock, with the common dividend set at $0.25 per share.

Frequently Asked Questions

What is the total value of Xerox's acquisition of Lexmark?

The acquisition is valued at $1.5 billion, which includes assumed liabilities.

When is the acquisition of Lexmark expected to close?

The transaction is anticipated to conclude in the second half of 2025, subject to necessary approvals.

How will the acquisition affect Xerox's financial position?

Xerox expects the acquisition to be immediately accretive to its earnings and anticipates over $200 million in cost synergies within two years.

What changes have been made to Xerox's dividend policy?

Xerox has altered its dividend policy, reducing the annual dividend from $1 to $0.50 per share, effective first quarter of 2025.

What recent acquisitions has Xerox made?

Recently, Xerox acquired ITsavvy for $400 million to expand its business portfolio in IT services.

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