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Under its current Reinvention turnaround plan, Xerox (XRX +6%) has been scanning the M&A market for investment opportunities to support long-term growth. In October, the print and digital document products and services supplier announced its $400 mln purchase of Itsavvy, an IT services organization that XRX would bring to its mid-market clients. Today, XRX made another splash in the M&A space, this time significantly bigger, announcing its intent to acquire Lexmark International for $1.5 bln.

In connection with the deal, XRX will slice its annual dividend in half, providing investors with $0.50 per share, a 6.0% annual yield when using Friday's closing price compared to the previous 12.0% yield. The slashed dividend marks the first time XRX changed its annual payout since 2017. Despite the dividend cut, investors are responding positively toward XRX's Lexmark deal today.

• Lexmark International manufactures multiuse printers aimed at business owners and has been a long-time partner and supplier to XRX. The complementary lines of business between the two organizations open the door to significant cost synergies; XRX anticipates over $200 mln of synergies to be realized within two years of transaction close, which is expected during 1H25.
• The addition of Lexmark also allows XRX to bolster its presence in the A4 color market (relatively smaller, less expensive printers) while diversifying its geographical footprint, particularly in the APAC region. The A4 market benefits from the sale of high-margin supplies, such as ink cartridges. As such, XRX expects the transaction to be immediately accretive to its EPS and free cash flow.
• With over half of its annual revenue stemming from supplies, Lexmark has enjoyed stable sales growth this year despite operating in a volatile economic environment. Over the past 12 months, Lexmark has grown revs by 4%. On the flip side, XRX has endured considerable yr/yr revenue compression over that same period, struggling to deliver yr/yr growth since 2Q23.
• Together, XRX and Lexmark delivered over $8.0 bln in trailing twelve-month revenue. Furthermore, including expected run rate synergies, the combined company would have posted adjusted operating margins of 8.4%, significantly better than the 5.2% XRX registered last quarter. Like XRX, Lexmark has streamlined its operations over the past few years, providing a steady boost to its margins. Over a longer timeframe, XRX anticipates the transaction to result in double-digit adjusted operating margins.

Shares of XRX have been in a constant downward spiral this year, tumbling by over 50%, sparked by many hurdles, from a major reorganization to the company's sales team to product launch disruptions. However, part of its reinvention plan was to free up its balance sheet to invest in growth areas. Today's Lexmark deal underscores further turnaround progress by XRX, keeping it on track toward sustained and profitable growth. Management added earlier this month that as the fixes surrounding past setbacks are in place, sales productivity should improve. At the same time, M&A supports growth in areas that should offset a secular decline.