When it comes to investing, the most important rule is “buy low, sell high.” That is surely the thinking at private equity investment firm Thomas Bravo, which is reportedly mulling a sale of its Kofax holding for as much as $3 billion. Thoma Bravo purchased Kofax (for an undisclosed sum) from Lexmark International Inc. back in 2017, after Lexmark’s then-new owners—a Chinse consortium made up of Apex Technology Co Ltd, PAG Asia Capital, and Legend Capital Management Co, LTD—were looking to divest the Lexmark Enterprise Software business to focus on the company’s traditional print-hardware business.
A Long and Unwinding Road
The sale of the software unit effectively unwound the diversification away from print that former Lexmark CEO and Chairman Paul Rooke, had been pursuing. In the years before Lexmark was purchased, the company went on an acquisition spree, gobbling up document- and workflow-centric software developers including Perceptive Software, Brainware, Pallas Athena, and ReadSoft. That binge culminated in 2015 with the $1 billion acquisition of Kofax. Ultimately, the Kofax acquisition may have been a bridge too far, financially. It appeared at the time that Lexmark had to seek a deep-pocketed purchaser to stay solvent. Enter the Chinese consortium in 2016, which sold off the entire software division—reportedly for less than what Lexmark had paid for Kofax alone—to Thoma Bravo.
Thoma Bravo folded the Perceptive offerings (including the former Brainware and Pallas Athena products and technologies) into its ECM holding, Hyland Software, and kept the combined Kofax/ReadSoft as a standalone business in its investment portfolio. (Scuttlebutt at the time indicated that the Hyland CEO wanted nothing to do with trying to ingest a potentially money-losing ECM company into the successful Hyland business.) In the intervening years, Kofax itself has been doing some shopping, acquiring workflow software and print management providers including Top Image Systems, PSIGEN Software, and most notably the Document Imaging Division of Nuance Communications (makers of Equitrac, eCopy ShareScan, Autostore, PaperPort, OmniPage, and more).
Paul Rooke Was Right
Entire books could be written about what went awry with Lexmark’s diversification strategy—too much debt load to service, failure to integrate the two sides of the business, etc.—but with the benefit of hindsight, it seems as if Rooke’s vision to lessen the company’s dependence on print hardware was prescient. The office document imaging hardware market has continued to contract. While our print volume forecast shows office print bouncing back from pandemic-induced lows, we predict it will never return to pre-pandemic levels. Commensurate with that, our A3 office forecast shows that most segments in the A3 space will continue to contract. Oki Data has already exited the US office document imaging hardware market, and as our financial analysis of the leading document imaging OEMs shows several many of the major players are surviving on single-digit profit margins. Add in chip shortages and supply-chain woes, and the print hardware market is a tough place to make a decent living unless you are providing A4 inkjet devices to newly homebound workers. Witness: Epson and HP are doing just fine (that is, until everyone who needs a printer has one).
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Kofax: Right Place, Right Time
Meanwhile, all things to do with digital transformation continue to explode. Our Document Solutions Forecast 2020-2025 predicts that the pandemic and here-to-stay hybrid workforce have only accelerated the adoption of paperless solutions that enable workers to access content and business-critical workflows no matter where they are working. Kofax has that in spades. The company’s offerings also hit on other hot-button buzzwords, incorporating Artificial Intelligence (AI) to enable Robotic Process Automation (RPA) in a customer’s document stream.
Given the current appetite for technology companies among private equity firms and other potential acquirers, Thoma Bravo would be crazy not to sell at this juncture.
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