Wednesday, August 18, 2010

Is Electronics For Imaging (NASDAQ:EFII) A Buyout Target?

Electronics For Imaging (NASDAQ:EFII), a Foster City, California based company that makes printing software and hardware, has received interest from financial sponsors but is focused on executing on its strategic plans in the hope this will increase its market value according to company management. The company appears to be struggling with driving sustainable growth partly due to having been stuck in the printing industry that was hit hard by economic recession.

The company has $490 million market capitalization and $200 million in cash. It is speculated that the board is currently reviewing its strategic options to boost enterprise value including buyouts by management or private equity. It is believed the board may be interested in a buyout proposal exceeding $600 million. EFI reported $ 400 million in revenue and a $2 million net loss in 2009.

EFI’s largest customer was my old employer Xerox in the digital color production business. In the past five years, EFI has diversified away from the Fiery printer controller business, which now makes up just 45% of revenue. The company moved into inkjet printing, where it targets the enterprise market for such applications as wide-format printing, packaging and low-end banner printing.

While these markets have lower margins than the traditional Fiery printer controller business, the market is underpenetrated and the growth prospects look promising. Inkjet now makes up 43% of the company’s revenues.

What makes EFI an attractive buyout target is the Fiery unit that is a “cash cow” business with high margins, slow mid-single digit growth and provides the capital for investment in the inkjet business. The inkjet business is expected to grow about 15% annually. EFI also generates 12% of its revenue from the ERP business for commercial printer dating back to the PrintCafe acquisition.

One of the ways EFI could deploy cash smartly is through small complementary technology acquisitions. The company will continue to focus on software as a service (SaaS) and on-premise software targets to add functionality for its printing business customer. According to the management, they plan to make one to three small accretive acquisitions per year.

Spreadsheet and analytics software could both be complementary to its ERP software products. EFI will also continue to seek buys in Western Europe where it estimates it only has about 15% market share. In the US its market share is upwards of 60%. EFI acquired UK-based enterprise resource management software company Radius Solutions in April.

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