Capture vendor Lexmark’s investor focus raises concerns of product dilution, stability for resellers & customers after conglomerate buy out

Over the past year I’ve written several times about the merger mania that has struck some of the legacy vendors in the advanced capture market.  Now, in the days just before AIIM, our industry’s annual conference, capture vendor Lexmark announces that it has sold its hardware and software business to a group of Chinese investors, including inkjet cartridge manufacturer APEX and a leveraged consortium of investors headed by PAG Asian Capital.

As you might suspect, at Ephesoft we’ve had a number of discussions among our business partners, colleagues and industry luminaries on how this might affect our industry as a whole, and Ephesoft specifically.  The entire executive team and several of our other key employees held similar positions at Kofax—which was acquired less than a year ago by Lexmark as a cornerstone of its Transact software business.

Not surprisingly, much of the focus has been on the concerns that Lexmark’s customers and prospects will have with core component(s) of their information technology stack being owned by Chinese investors.  We’ve certainly seen this issue raised within the public sector in the past—and sure enough we have already heard that this will be a problem for Lexmark, particularly with Federal Agencies.


The Impact of Investor Focus for Corporate Users

For corporate users, foreign ownership of Lexmark may be the least of their concerns. Or more to the point, last weeks’ announced sale should be looked at as a predictable next step given the business actions over the past five years, which resulted in 20 software acquisitions.  It is this pattern of investor focus that should be top of mind with customers and potential customers when they consider their own strategic investment in advanced capture or process automation solutions. In fact, it’s the very assurances that capture vendor Lexmark executives provide to their customers and partner constituents that sheds light on the fundamental issues with the company.

“We will continue to do business as we always have…”

Business as usual is the reassuring message from the CEO of Lexmark in a letter to stakeholders, where he then continues to explain how this is a strategic move for business groups, operations and the executive team. Herein lies the issue. The spate of enterprise software acquisitions from Perceptive through Brainware, ReadSoft and Kofax, all seem to fit into the corporate goal of top line growth through acquisition.

What appears to be missing is an Umbrella Strategy. How will Lexmark streamline these software investments for the benefit of customers and developers?  Customers, partners and employees of the acquired companies for that matter, still await a reasonable roadmap.  In the most recent issue of Document Imaging Report, the head of Lexmark’s Transact Software division explained the—to pirate a Saturday Night Live phrase—“Strategery”:

“The second thing we did was look at our products for A/P automation and decide which ones to place our bets on for the future…We went with ReadSoft in the SAP space…We went with Kofax in the Oracle space for similar reasons. For A/P in all other ERP environments, we went with Perceptive.”

Document Imaging Report interview with Reynolds Bish, April 8, 2016

From an investor standpoint, this sounds like a safe, short-term hedging play; we’re not entirely sure what we have here, so for the time being we’ll keep all of these competing product lines on life support until we figure out a long term solution.  This indecision is reflected in Lexmark’s change in direction for the software division less than six months after acquiring Kofax.

By the way, the first thing “we” did, according to the Bish interview in DIR was eliminate redundancies and “optimize the entire software business for not only growth, which it had been achieving (mainly through acquisitions), but also profitability.”   And the third thing? “…products that didn’t have a large revenue stream, we moved to maintain and sustain mode.”

So in summary, the three P’s of the Lexmark software strategy:

  • Profitability
  • Place Bets
  • Purge Products and People

The Dilution Effect

Look, there is nothing wrong with pursuing corporate profitability — even if it hasn’t worked out too well for longer-term Lexmark shareholders. I’m certain several key executives have done well through the twenty-company churn and stand to do even better from a compensation standpoint with the latest financial maneuver.  But, consider the fallout of employee talent that each subsequent acquisition represents.

Most of the visionaries responsible for product innovation at Perceptive, Brainware, ReadSoft, Kofax and the sixteen or so other companies are no longer with the entity acquired by Apex.  They have been replaced by business managers working to extract profits from the remains.  The other thing that remains are the sales and maintenance contracts signed by customers representing a financial commitment to the products that Lexmark owns.

Each subsequent merger or acquisition has seen a talent drain from the remaining company. Perceptive’s original leadership team has moved on since the Kofax acquisition. The ReadSoft leadership team has either retired or moved on to another vendor focused on shareholder value.  And every month for the past year we have seen talent from Kofax look for new opportunities.  Of course, we would like to think that the true innovators from Kofax left a long time ago to build a solution developer that is focused on Advanced Capture Innovation!

Can Lexmark Maintain Stability for Customers in the Future?

This should be the primary concern for the newly merged Lexmark / Apex Transact customers moving forward: What have you invested in, and is it time to move on from that investment?  In other words, is it time for the end game?  One last quote, this time from the President of Lexmark Transact Software Reynolds Bish during his keynote address at this month’s Lexmark conference:

“Regardless of the outcome, this process will likely be brought to a conclusion in the near term. It has created fear, uncertainty, doubt and unfounded speculation about the future of Lexmark Transact Software.”

Agreed, there is FUD, but perhaps the source of that uncertainty is Lexmark’s failure to integrate acquired companies and platforms.  With the conclusion near, it seems that little will be done form a structural perspective. That is the FUD for customers.