An announcement last week that Lexmark International Inc., a business solutions company that makes printers, enterprise software and hardware, had hired Goldman Sachs Group Inc. to explore strategic alternatives to enhance shareholder value sent shock waves through the Lexington business community: Lexmark had come to be seen as an inviolable fortress of Lexington prosperity.
What could happen to Lexington if the company split, reduced employment or left Lexington altogether?
Although Lexmark has been on a buying binge over the past few years to broaden the reach of its business information services, Wall Street has been less than appreciative.
During the past year, Lexmark's stock bottomed out at $27.22, with a high at $47.69. On Tuesday afternoon, it was hovering around $32.
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Headquartered in Lexington, Lexmark employs about 2,300 people in Lexington and is one of the area's largest employers.
Some might remember that Lexmark is the product of a corporate split: IBM, which had been in Lexington since 1956, shed the business that turned out to be Lexmark.
In 1990, IBM decided to get out of the printer business. Clayton, Dubilier & Rice, a private New York investment firm that specialized in turning around business divisions bigger corporations discarded, bought the division and appointed Marvin Mann, then with IBM, as chairman and CEO.
Researching what happens to companies that are looking to boost shareholder value and talking with local business leaders and analysts, we've compiled a Q&A about what Lexmark's possibilities are, and if there's reason for concern for Lexington.
Should Lexingtonians worry about Lexmark pursuing "strategic alternatives"?
Many companies go through this same kind of process, said Robert Quick, president and CEO at Commerce Lexington.
"Their process just became very visible," he said of Lexmark.
The Wall Street Journal broke the story about Lexmark's consideration of "strategic alternatives" on Oct. 22. On Oct. 23, the company confirmed it in its own news release.
Such "strategic alternatives" are not uncommon. In fact, Hewlett-Packard is finalizing the spin-off of its Hewlett-Packard Enterprise business this week, leaving behind Hewlett-Packard Inc., with its personal computer and printer business.
Why is it important that shareholders get maximum value out of Lexmark?
Publicly traded corporations operate under a certain amount of risk. The money they make can be used to "retain and reinvest" versus "downsize and distribute."
Lexmark has been on an aggressive acquisition spree during the past five years, most recently in March, when it made its most expansive acquisition ever, paying $1 billion for California-based Kofax Ltd. Lexmark hoped Kofax would increase the competitive edge of its Perceptive Software unit.
But the company's more recent news has been more discouraging. In July it announced a restructuring that eliminated 500 jobs worldwide. And its July quarterly earnings were widely interpreted as disappointing, as were the third quarter earnings announced Tuesday.
In an Oct. 23 news release, Jean-Paul Montupet, Lexmark's lead director, said that the company's stock price did not reflect its value and that the company needed to unlock that value. That suggests the company might be on a "downsize and distribute" path.
How could the company "downsize and distribute"?
Ken Troske, professor of economics and senior associate dean at the University of Kentucky College of Business and Economics, said companies evolve over time.
When a company is charged with "releasing value," shareholder value often goes up because individual areas become more effective when the company is leaner and has fewer employees. Companies might split the existing company into smaller companies with separate management, move employees around, take the company private or change geographic location.
Does that mean Lexmark could leave Lexington?
The company has given little indication that might happen beyond a comment by president and chief executive officer Paul Rooke during an Oct. 27 earnings broadcast that a company sale, spin-off and taking the company private are all possibilities.
It is speculated that the company mightremain in place with its current level of employment. Parts of the company could be sold. Some employees could remain in Lexington with a smaller offshoot of Lexmark.
Lexmark has given no indication when it will decide.
Why is it important to have Lexmark headquarters remain in Lexington?
Troske notes that Lexmark has its headquarters in Kentucky, which sets it apart.
"There are not a lot of companies that have headquarters in Kentucky. ... Lexmark is one of those places that employs those who are doing not only management but also a lot of research and development."
If Lexmark splits up its operations and leaves Lexington, what will happen to the area economy?
Initially, Troske said, there would be a period of change, as employees look for new jobs, move elsewhere or are pursued by other area employers.
"It's not clear it would be a complete disaster for Lexington," Troske said.
Following a transition period, Lexmark employees probably would move on or remain in Lexington and become entrepreneurs, he said.