Refuting Icahn, Deason, New Xerox Shareholder Letter Lays Out Benefits of Proposed Merger with Fuji Xerox
The Xerox Board of Directors has issued a letter to Xerox shareholders, urging them to approve the proposed merger of Xerox with Fuji Xerox at an upcoming Xerox shareholders’ meeting in May 2018 – and to reject the arguments of activist investors Carl Icahn and Darwin Deason, who have vigorously opposed the merger, with Deason filing a lawsuit to stop the merger, and another to enable him to appoint a new Xerox board.
Under the proposed merger, Fujifilm – Xerox’s longtime joint partner in Fuji Xerox – would gain a controlling 50.1 percent of shares in the new merged company, which would have dual headquarters, one in the United States and one in Japan. Current Xerox CEO Jeff Jacobson would be president of the new merged company.
Among the key arguments that the Xerox board makes in favor of the merger are:
- Xerox shareholders will be owners of a larger, stronger, more valuable, and more competitive company with better growth opportunities.
- The agreement includes ownership safeguards for current Xerox shareholders.
- The merger will generate some $1.25 billion in annual cost savings.
- The new company will create an industry leader with $18 billion in revenue that’s better positioned to capture growth opportunities by leveraging both companies’ strengths, with direct access to high-growth markets in Asia-Pacific, giving Xerox global reach for the first time in its history.
- The merger is expected to result in at least $1.0 billion revenue expansion opportunity for the combined company.
- Xerox will have offerings in market segments where it’s currently under-represented, such as high-speed inkjet and low-end A3 printing and imaging systems.
- The new merged company will enable Xerox and Fuji Xerox to optimize their global manufacturing, distribution, and R&D centers, as well as eliminate duplicative costs for corporate and support functions.
- Via this strategy, the Xerox board expects the combined company to return to revenue growth by 2020, faster than Xerox could achieve on its own.
The letter is as follows:
“Dear Xerox Shareholders,
On January 31, 2018, Xerox announced its plans to combine with Fuji Xerox – the joint venture Xerox and Fujifilm established in Asia 56 years ago – to create a global leader in innovative print technologies and intelligent work solutions.
As a result of a comprehensive review of the Company’s strategic and financial alternatives, Xerox’s Board and management strongly believe that the combination with Fuji Xerox is the best path forward to create value for Xerox and its shareholders:
- The combination creates significant immediate and long-term value for Xerox shareholders;
- Xerox shareholders will be owners of a larger, stronger and more valuable company with enhanced prospects for growth and value creation;
Xerox and Fujifilm are already closely aligned, and both have demonstrated track records of success in transformation;
- The agreement establishes strong governance and ownership safeguards for current Xerox shareholders; and
- The existing Fuji Xerox joint venture has been integral to Xerox’s competitiveness for many years, and the combination will optimize the benefits of this partnership for our Company.
The Transaction Creates Significant Immediate and Long-Term Value for Xerox Shareholders
The Transaction provides Xerox shareholders with significant value both at closing, which is expected to occur in the second half of 2018, and over time. This includes a substantial cash dividend that will be paid to Xerox shareholders contingent upon consummation of the Transaction, as well as the upside of a significant investment in a larger, stronger and more competitive company.
Our partner in the Fuji Xerox joint venture, Fujifilm, will own the other 50.1 percent of the combined company. Fujifilm will also consolidate the same share of the debt associated with the special dividend paid to Xerox shareholders at closing, but will not receive any portion of this payment.
The relative ownership of the combined company is favorable to current Xerox shareholders and implies an over 15 percent premium relative to Xerox’s unaffected stock price of $30.35, which was prior to media reports about a potential transaction on January 10, 20182.
In addition, Xerox and Fujifilm teams have already identified $1.25 billion in annual cost savings opportunities from combining the two companies, demonstrating the highly synergistic attributes of this Transaction.
As shown in the chart below, this compelling shareholder value equation represents an illustrative total value of approximately $45 per share for the combined company.
Importantly, this does not reflect the value creation or multiple expansion opportunity over time that we believe should result from the combined company’s enhanced revenue profile, global reach, scale and greater competitiveness.
Shareholders Will Be Owners of a Larger, Stronger and More Valuable Company
The Transaction will create an industry leader with $18 billion in revenue that is better positioned to compete and capture growth opportunities in the marketplace by leveraging the global reach, scale, technology and innovation strengths of the two companies. With direct access to high-growth markets in Asia Pacific, Xerox will operate as a truly global platform for the first time in its history.
Beyond the $1.25 billion in cost synergies described above, we believe the combined company will have an improved revenue profile based on significantly strengthened manufacturing, distribution, innovation and R&D strategies, as well as improved cost competitiveness across global markets. This is expected to result in an at least $1.0 billion revenue expansion opportunity for the combined company. We believe the improved revenue trajectory will increase the valuation of the combined company, while enabling the vast majority of the cost savings to flow to the bottom line.
Specifically, the revenue and cost synergies identified through this combination include:
- Developing a more complete and competitive product portfolio, with enhanced offerings in areas where Xerox is currently underpenetrated such as high-speed inkjet and low-end A3;
- Streamlining global R&D, product rollout and marketing strategies to deliver best-in-class solutions with greater coordination, efficiency and improved time-to-market;
- Leveraging Xerox and Fuji Xerox’s integrated delivery and servicing capabilities to improve our solutions architecture and expand client relationships globally;
- Transforming small and mid-sized business (SMB) strategy by expanding our channel reach and increasing cost competitiveness through cost synergies;
- Creating an integrated global manufacturing, distribution and R&D platform by applying best-in-class practices; and
- Optimizing the global footprint of manufacturing, distribution and R&D centers, and eliminating duplicative costs at corporate and support functions.
In addition to the $1.25 billion of cost synergies related to these actions, there is a separate cost reduction program already underway at the existing Fuji Xerox joint venture, which is expected to deliver $450 million in annual cost savings over the next two years. This brings the total annual cost savings target for the combined company to over $1.7 billion to be completed by 2022, with approximately $1.2 billion achievable by 2020:
By capitalizing on these opportunities, the combined company is expected to return to revenue growth by 2020, faster than Xerox could achieve on its own, and deliver industry-leading operating margins in the high teens by 2022.
As a result, the combined company’s operating leverage is projected to drive free cash flow in excess of $2.0 billion. This will enable us to support investments in innovation, strategic growth initiatives and attractive capital returns over time.
As both Fujifilm and Xerox have previously communicated, the combined company will maintain a commitment to return at least 50 percent of free cash flow to shareholders – in line with Xerox’s current capital return policy. This future capital return policy is in addition to the $2.5 billion special dividend that will be paid to Xerox shareholders at closing.
While Xerox has been successfully executing its strategy to improve its revenue trajectory and expand margins, we believe the future value potential of the combined company, driven by the substantial revenue and cost synergy opportunities, exceeds what would be achieved as a standalone company.
The synergies from bringing together two highly complementary businesses will be a leap forward on our path to become the industry leader and enhance shareholder value.
The proxy statement we will file in due course will include additional disclosures regarding the financial profile of the combined company, which we believe will reinforce the compelling value of this Transaction.
Xerox and Fujifilm Are Already Closely Aligned, and Both Have Demonstrated Track Records of Success in Transformation
Our longstanding relationships with Fujifilm and Fuji Xerox provide this combination with greater execution certainty than most M&A transactions. The companies have a long history of working together and know each other well. The combined company will have an experienced leadership team, led by Xerox’s CEO Jeff Jacobson, entirely committed to realizing the full value potential of the new company.
As evidenced by the proven track record of decisive actions at both Xerox and Fujifilm, the combined company will also build on a strong legacy of significant recent transformations at both companies:
The Transaction Agreement Establishes Strong Governance and Ownership Safeguards for Current Xerox Shareholders
Strong governance protections for current Xerox shareholders have been built into this Transaction, including:
- 5 independent Xerox designated directors that will serve or select their replacements for 5 years; after 5 years, those 5 board seats may only be replaced by other independent directors, if reasonably acceptable to the then-serving independent directors;
- An independent Audit Committee as required by the NYSE standards;
- An independent Conflicts Committee, the majority of which will comprise Xerox designated directors for 5 years; the Committee will oversee any proposed transactions including those with Fujifilm to ensure the terms are fair to the combined company and no less favorable than arm’s length terms; and
- Other provisions limiting the ability of Fujifilm to engage in interested party transactions and to obtain disparate consideration in connection with a future sale.
Existing Fuji Xerox Joint Venture Has Been Integral to Xerox’s Competitiveness, and the Combination Will Optimize the Benefits to Xerox
For 56 years, Fujifilm and Xerox have jointly owned and operated the Fuji Xerox joint venture. This partnership is among the most successful cross-border collaborations between the U.S. and Japan, and has existed in its current form (25% owned by Xerox, 75% owned by Fujifilm) since 2001. Xerox has significantly benefited from this relationship over the years.
Today, Xerox sources more than two-thirds of its equipment products from Fuji Xerox, including the vast majority of the office equipment sold to enterprise customers. Fuji Xerox designs and manufactures this equipment using the shared IP that the two companies have developed together over the decades.
It is important to note that Xerox, in its sole discretion, determines the volume of business it conducts with Fuji Xerox and is not subject to any minimum purchase obligations under the existing supply agreement. In fact, Xerox at times solicits other proposals to determine which supplier best meets the Company’s requirements in terms of cost, quality and pricing. Based on this ongoing sourcing analysis, we believe it is highly unlikely that Xerox would be able to achieve attractive pricing and terms with alternative suppliers.
Xerox benefits from Fuji Xerox’s superior technology, design and manufacturing expertise, as well as attractive pricing. As a result, our supply relationship with Fuji Xerox has grown and been sustained at mutually-beneficial economics over time.
Xerox’s strategy for bringing innovative, high-quality products to the market – in partnership with Fuji Xerox and other suppliers – has clearly been successful, as evidenced by our #1 equipment revenue market share and industry-leading margins.
The proposed Transaction will also solve for suboptimal aspects of the current joint venture structure by enabling Xerox to:
- Reach revenue growth sooner with access to faster-growing regions;
- Optimize its cost structure through enhanced control over its supply chain; and
- Simplify its financial profile and operations through full consolidation of Fuji Xerox’s income and cash flow.
- Combining Xerox with Fuji Xerox builds upon this strong partnership to create a global platform with enhanced scale, competitive positioning and financial flexibility. The combination presents tangible, achievable opportunities for value creation both in the near and long term.
We will provide more information about our partnership with Fujifilm and the Fuji Xerox joint venture in further communications with our shareholders.
The Combination Is the Best Path Forward for Xerox
Xerox’s Board of Directors, in consultation with world-class financial and legal advisors, explored all strategic and financial options reasonably available to improve the Company’s growth trajectory, better compete in a challenging industry environment, and ultimately create shareholder value. This included options for its standalone business, capital allocation strategy and the current Fuji Xerox joint venture construct, as well as other potential strategic transactions.
Upon thorough evaluation over many months, the Board concluded that the proposed combination with Fuji Xerox is superior to other alternatives and in the best interest of all Xerox shareholders because:
- Xerox shareholders are realizing value based on relative valuation, immediate and certain value provided by the special dividend, and significant upside from an ongoing interest in the combined company;
- The Transaction creates a stronger, larger and more competitive company with an accelerated path to revenue growth and shareholder value creation;
- Substantial cost savings opportunities are unlocked that will drive margin expansion and fund future investments; and
- Shareholders rights and interests are protected in the new company through strong governance measures.
Xerox’s Board of Directors is focused on creating long-term value for the Company and its shareholders. Our Board members are confident in the many benefits of the combination and the bright future Xerox will have as a result.”
1 Based on 254.7 million basic shares outstanding assuming no conversion of preferred shares.
2 Based on $7.0 billion (reflecting 75% of Fuji Xerox implied by the midpoint of 7x – 8x Fuji Xerox 2018E EBITDA per p. 28 of Xerox Presentation as filed on February 9, 2018), 267.4 million fully diluted shares outstanding, and taking into account the ~$9.80special dividend paid to Xerox shareholders at closing.
3 The sum of (a) $13 / share or $7.0 billion (reflecting 75% of Fuji Xerox implied by the mid-point of 7–8x Fuji Xerox 2018E EBITDA per p. 28 of Xerox Presentation as filed on February 9, 2018), multiplied by 49.9% and divided by 267.4 million fully diluted shares outstanding and (b) $10 / share or $8.1 billion unaffected market capitalization for Xerox as of January 10, 2018 less $2.5 billion of additional net debt to fund cash dividend, multiplied by 49.9% and divided by 267.4 million fully diluted shares outstanding.
4 Based on $3.2 billion in present value of transaction synergies (mid-point of 7–8x run-rate synergies of $1.25 billion, multiplied by 49.9% and discounted to the present per p. 29 of Xerox Presentation as filed on February 9, 2018), divided by 267.4 million fully diluted shares outstanding.
5 Reflects share price performance in JPY, including dividends and repurchases for the 5-year period from January 10, 2013 through January 10, 2018 prior to media reports about a potential transaction with Xerox.
- March 2018: Deason Sues to Replace Xerox Board; New Joint Deason-Icahn Letter
- March 2018: Xerox Tells Deason: Forget Nominating Any Board Members
- February 2018:Seeking to Derail Xerox Merger, Deason Demands to Nominate New Directors to Xerox Board
- February 2018: This Week in Imaging: Icahn, Deason Say Sell Xerox to Competitor or PE – But Who Would Buy?
- February 2018: Xerox Responds to Icahn, Deason’s ‘Misguided Campaign’ to Undermine Proposed Fuji Xerox Merger
- February 2018: Icahn, Deason Propose Sale of Xerox to Competitor or Private-Equity Firm
- February 2018: This Week in Imaging: Fujifilm Envisions the New Combined Xerox-Fuji Xerox
- February 2018: Xerox Responds to Deason Lawsuit that Seeks to Block Merger
- February 2018: Deason Files Lawsuit to Block Fujifilm Takeover of Xerox; Xerox Responds to Criticism
- February 2018: Combined Xerox and Fuji Xerox Will Create One of World’s Largest Copier Companies, Says Fujifilm CEO
- January 2018: Xerox and Fujifilm Announce Agreement for Xerox to Merge with Fuji Xerox