Xerox to Negotiate More Favorable Fujifilm Deal

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The Xerox Board of Directors today published a public letter to its shareholders seeking to reassure shareholders and “set the record straight” concerning its ongoing dispute with activist investors Carl Icahn and Darwin Deason, who together hold about 15 percent of Xerox total shares.

The board stated that it will resume discussions with Fujifilm regarding a potential merger of Xerox with Fuji Xerox (Xerox’s decades’ old joint venture with Fujifilm), but “on superior terms to the transaction announced” in January 2018, a complicated transaction that calls for Fujifilm gaining a controlling 50.1 percent interest in a combined Xerox-Fuji Xerox, and under which Xerox shareholders would receive $28 per share. In contrast, Icahn and Deason said this week that they would be open to an all-cash transaction of $40 or more per share.

The board said it would also pursue its appeal of a New York State Supreme Court’s ruling in the Deason litigation, which Xerox believes was wrongly decided and will be reversed.

Strategic Review Process and Cooperation with Icahn

The board stated that in the fall of 2015, the Xerox Board began a strategic review of the company’s business portfolio and capital structure. This resulted in the company’s January 2016 announcement that it would spin-off its business-process outsourcing segment, later named Conduent. The Xerox board pursued this transaction, with input from Icahn, because it says the spin-off was in the best interests of shareholders. It also stated that the transaction “generated significant shareholder value, with approximately $3.0 billion in market capitalization created to date across the two companies.”

The board also said that, throughout the period, it “maintained a constructive dialogue” with both Icahn and Deason. For instance, the board stated it reached a settlement with Icahn under which Icahn’s designee, Jonathan Christodoro, served as an observer on the search committee to identify new CEOs for both Conduent and Xerox. The Xerox Board subsequently agreed to add Icahn’s designee to the Xerox Board.

The board also stated that it amicably resolved litigation brought by Deason, allowing his preferred stock ownership to be split between Xerox and Conduent.

After the Conduent spin-off was completed, the Xerox Board, continued to evaluate ways of enhancing shareholder value, including:

  • Exploring strategic and financial options to enhance Xerox’s standalone trajectory; and
  • Engaging with multiple third parties to assess potential transactions.

The Fuji Xerox Merger

Following this strategic review, the board decided to pursue what it believed was the most attractive option available, combining Xerox with Fuji Xerox.

The board reiterated some of the benefits of the proposed merger, stating that the merger would:

  • Create a global leader in innovative print technologies and intelligent work solutions with $18 billion in revenue;
  • Deliver $1.7 billion in annual cost savings, including $1.25 billion in transaction synergies; and
  • Accelerate revenue growth through enhanced global reach, scale, innovation and customer value.

Since the announcement of the transaction, Xerox’s senior management team has had more than 100 meetings with investors, who it stated, clearly believe that there is a compelling strategic rationale for combining two longtime partners Xerox – and Fuji Xerox (which began as a joint Xerox-Fujifilm venture in 1962 ) with competitive strengths.

The board stated it will secure improved financial terms to obtain shareholder support for the Fujifilm deal, and that “the recent financial performance and accounting issues at Fuji Xerox are important considerations in evaluating a potential combination.” These accounting issues involve Fuji Xerox New Zealand and Australia overstating revenues by $450 million over a period of five years.

In the letter, the board stated that while “Mr. Icahn and Mr. Deason have every right to express their views about Xerox and its board,” the board is “prepared to defend every decision we have made.” It notes, however, that it does not believe that Icahn and Deason have the right to speak for all Xerox shareholders, or deprive any Xerox shareholder of their right to be heard.

Icahn and Deason’s Personal Attacks

In the letter, the board noted that Icahn and Deason have targeted management and the board with “personal, unsubstantiated attacks that we believe have been damaging to Xerox.” (Editor’s note: Deason and Icahn have referred to the Xerox Board as a “lame duck board,” referred to Xerox CEO Jeff Jacobson as a “lame duck CEO,” and began a Twitter campaign using those terms.)

Refutes Icahn’s Bankruptcy Speculation and ‘Fear-Mongering’

The board stated, however, that after Icahn told the Nikkei Asian Review that a combination of Xerox and Fuji Xerox creates a risk of bankruptcy (see  article here), the board “felt compelled to respond and to point out that Mr. Icahn’s fear-mongering was false and highly irresponsible. We do not wish to be drawn into a public dispute with Icahn and Deason, but will exercise our fiduciary duties at all times to protect the interests of all Xerox shareholders.”

The Deason Litigation and April 27the Lower Court Ruling

As part of this campaign, the board stated that Deason mounted an aggressive legal attack seeking to deprive Xerox shareholders of their right to vote on a the proposed Xerox-Fujifilm transaction, and on April 27th, a New York lower court ruled in his favor.

The board noted that it strongly disagreed with Deason’s case and believe that the court’s “unprecedented ruling disregarded well-settled law and will be overturned on appeal.” In particular:

  • The Xerox Board, exercising its business judgment, and with the advice of its advisors, unanimously approved the Fujifilm transaction because it believed that it was the best option to maximize value for Xerox shareholders;
  • The board’s decision was made after months of diligence and deliberation, including consideration of a number of potential alternative transactions; and
  • The board was aware of the relevant facts, including Xerox CEO Jeff Jacobson’s authorized discussions with Fujifilm.

The Xerox board argues that, in granting a temporary injunction preventing the Xerox-Fujifilm deal, the lower court, “rather than defer to the business judgment of the Xerox Board as New York law requires, the lower court substituted its own subjective judgment about the merits of, and process in approving, the transaction with Fujifilm.” This decision, said the board, “disregarded decades of settled legal precedent and denied Xerox shareholders the ability to decide for themselves whether the proposed transaction is in their own best interests.”

Why Did the Board Enter into Settlement Agreement with Icahn and Deason?

The letter stated that the board decided to enter into a settlement agreement with Icahn and Deason(under which CEO Jacobson and several board members would resign, and the Fujiflm would be renegotiated) because it believed that the lower court’s decision prevented the Xerox board from pursuing an “enhanced deal with Fujifilm and effectively precluded us from securing maximized value for all shareholders.”

The board said that it determined that a settlement with Icahn and Deason represented its best option, as it would:

  • Remove significant uncertainty and business disruption that would result from protracted litigation and continued hostilities with Icahn and Deason;
  • Provide its shareholders, employees, customers, and other stakeholders “with clarity on a path forward and allow Xerox to stay focused on operating its business;” and
  • Allow negotiations with Fujifilm to proceed to secure enhanced terms, unconstrained by the lower court’s ruling.

However, after Xerox announced the settlement, which required Deason to withdrawi his litigation against the Xerox board, Xerox shareholders “spoke clearly and expressed their views” about Xerox’s prospects under an Icahn-Deason regime. Xerox’s share price fell over 12 percent and, in its conversations with our long-term investors, “it became obvious that a number of them were strongly averse to the settlement terms that we entered.”

Then, at a hearing that concluded hours before expiration of the agreement, the lower court made clear that Xerox could, in fact, negotiate alternative transaction structures with Fujifilm.

That afternoon, Icahn and Deason contacted the Xerox Board’s representatives and stated they would let the settlement agreement expire and “go to war” unless Xerox terminated its proposed combination with Fuji Xerox immediately. “The board refused to be pressured into terminating the transaction agreement without careful deliberation and analysis.”

Based on these developments, the Xerox Board concluded that it was in its shareholders’ best interests to allow the settlement to expire in accordance with its terms.

The Path Forward

The Xerox Board stated that it “remained entirely focused on doing what is best for the company and all of its shareholders,” and intends to continue to:

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  • Focus on business stability and operational excellence, ensuring that Xerox remains focused on driving its operational and financial performance. Last week, it announced that it would have reaffirmed its full-year guidance in the normal course of business, absent recent events.
  • Drive shareholder value, and continue to explore options to maximize shareholder value, including securing an increase in consideration from Fujifilm.
  • Ensure that all Xerox shareholders’ voices are heard. The Xerox Board will reopen the window for nominating director candidates at the 2018 Annual Meeting of Shareholders and is appealing the lower court’s decision, which improperly prevents shareholders from exercising their right to vote on the Fuji Xerox transaction.

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