Deason, Icahn, Urge Xerox Partnership with HP, Apple, Others, Monetization of IP

On April 17th, activist investors Carl Icahn and Darwin Deason, seeking to stop Fujifilm’s acquisition of Xerox for $6.1 billion and the creation of a new combined Xerox-Fuji Xerox, released a detailed presentation, Rescuing and Revitalizing an American Icon, that presents alternatives to the proposed deal.

The two first charge that: Xerox shareholder returns have been below that of peers and relevant benchmarks; that $1.2 billion of cost cuts didn’t “actually flow to the bottom line;” shameful mismanagement of the Fuji relationship; a concealed “crown jewel” lockup buried in JV agreements from shareholders for at least 17 years; failure to leverage the massive accounting scandal that Fuji oversaw at Fuji Xerox; and failure “to leverage the fact that Xerox is likely Fuji Xerox’s largest single customer – 15-20 percent of revenue.”

In sum, the two argue that the proposed deal “dramatically undervalues Xerox” and “disproportionately favors Fuji,” rendering “Xerox shareholders virtually powerless to protect their investment going forward.”

They also charge that Xerox:

  • Failed to capitalize on $20+ billion market opportunity to expand services to the mid-market and small and mid-size businesses (SMBs).
  • Failed to partner with PC manufacturers that have no footprint in the adjacent print space.
  • Failed to develop a coherent, efficient e-commerce, and distribution network.
  • Failed to monetize or commercialize valuable assets and innovations.

As for Fuji Xerox, they also charge that the company has “not yet resolved its $360 million accounting scandal.” They charge that if the “proposed deal closes, Xerox shareholders will be passive minority owners of a Fuji subsidiary – virtually powerless to prevent Fuji from abusing its control.” They also ask “what’s to stop Fuji from shutting down Xerox’s inkjet business just to benefit its competing Fuji Ink business? ” The end result, they argue, may be “a massive value destruction” for Xerox shareholders.

As alternatives, the two propose that Xerox should:

  • Capitalize on untapped value by providing services for the mid-market and SMB product lines, as Xerox currently does with its enterprise product line.
  • Partner with strategic, under-served PC makers, which it says include HP Inc. (noting that HP Inc. sources a significant portion of its A4 and A3 laser-print engines from Canon Inc.), Lenovo, Dell, Apple, Asus, Acer, and/or “Others.”
  • Eliminate the duplicative expenses of Global Imaging Systems (GIS), a Xerox company, “through network and team consolidation.”
  • Simplify the e-commerce and distribution network.
  • “Optimize GIS (Geographic Information System) acquisitions to maximize Xerox sales.”
  • Monetize some of Xerox’s most valuable intellectual property in the digital printing, agile enterprises, personalization at scale, and usable-analytics spaces.
  • Use an industry-leading research and development facility to form partnerships around innovation and development.

The two also urge:

  • A review of the joint venture relationship with Fuji Xerox and pursuit of “strategic alternatives to that relationship” and remove a management team “that has a proven track record of failing to bring cost-savings to the bottom line.”
  • Add another potentially significant revenue stream by monetizing Xerox’s Palo Alto Research Center (PARC), which “continues to produce some of the world’s most valuable intellectual property.”

The complete presentation can be viewed here.

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