What’s Next for Xerox? Private Equity Sale, Competitor Sale, or Icahn Plan?

This week’s surprise announcement from the Xerox board  was that its initial agreement with Carl Icahn and Darwin Deason was back. The agreement calls for an end to the contentious Fujfilm deal, the resignation of Xerox CEO Jeff Jacobson and the majority of the Xerox board, to be replaced with Icahn-friendly board members and Icahn consultant John Visentin, who says he will immediately begin looking for strategic alternatives to the Fujiflm deal.

The agreement was made official by Xerox yesterday with Visentin officially taking the helm at Xerox as CEO and Keith Cozza, CEO of Icahn Enterprises, officially becoming chairman of the Xerox board.

“Stategic Alternatives”

Alternatives could include selling Xerox to a private-equity firm or to a competitor (HP Inc. is rumored to have expressed interest last year). Neither Deason nor Ichan have ruled out a bid from Fujifilm – but instead of the $28 per share that Xerox shareholders would receive under the previous now-dead deal, they’ve asked for cash offers of $40 per share or more. This could be a problem, as Xerox’s is currently trading at about $28 per share.

Meanwhile, Fujiflm itself could have problems. While the agreement announced this week ends litigation against the Xerox board, a New York State Supreme Court judge castigated Fujifilm as an “aider and abettor” of an allegedly improperly negotiated deal with Xerox, and litigation against Fujifilm isn’t over. For its part, Fujifilm also threatened legal action over the aborted deal – reportedly, it may argue that it’s owed a $183 million termination fee. Xerox, however, argued this week that it was entitled to cancel the deal because Fujfilm didn’t come clean about the Fuji Xerox New Zealand and Australia accounting scandal, in which the subsidiary massively over-stated revenues.

Also on the legal front, this week, a securities law firm representing several pension funds, alluded to certain provisions within Xerox’s contract with Fujiflm for its joint Fuji Xerox venture that may hamper the sale of Xerox: the result may be more litigation to break these provisions.

What are these provisions about? Back in January 2018, when Xerox announced the proposed deal with Fujiflm, Xerox disclosed that, for over 17 years, it had kept secret a special provision in its joint venture and technology agreements with Fujifilm under which, if Xerox were to sell more than a 30 percent stake in itself to a competitor, Fujifilm could cancel the joint venture and appropriate the rights to Xerox’s brand and technology in Asia and the Pacific Rim – in other words, could lock-up Xerox’s “crown jewels.”

What Happens Next?

The new Icahn-Deason-Visentin regime at Xerox appears anxious to sell – to either private equity or Fujfilm – if the price is right of course (at least $40 per share). But the May 13th agreement sent Xerox’s stock price falling from about $30 per share to $28 per share.

Icahn has confirmed that Apollo Global Management has expressed interest in Xerox, and also said: “We — on the other hand — have been approached by pretty much every major financial sponsor, and they have all expressed interest in Xerox.” As noted, HP Inc. reportedly contacted Xerox about a possible merger, but under the Fuji Xerox joint venture provisions, Xerox is prohibited from selling more than 30-percent of itself to a competitor, and HP Inc., of course, would certainly be considered a competitor.

While the new Xerox board was scheduled to meet this week to discuss alternatives, Icahn’s previously published report, “Rescuing and Revitalizing an American Icon,” may provide some clues about what will happen next if Xerox isn’t sold. The plans advises Xerox to:

  • Capitalize on untapped markets for existing products and services, which includes Xerox expanding its services business into mid-market and small business, a $20 billion market opportunity, while maintaining its $3.5 billion market share in the enterprise segment. Our take: It seems Xerox needs to hold onto and expand its enterprise segment, and protect its production-printing market share from the likes of HP Inc. and Canon. As far as SMBs are concerned, Xerox already has a serious Web store that includes a range of WorkCentre and Phaser B2B products, has a retail presence in superstores (Walmart, Staples, etc..), sells WorkCentre and Phaser products on Amazon, CDW, etc., while most other vendors (especially domestic versions of the Ricoh, Canon. and Konica Minolta, etc. channels) are far worse off here. How is Xerox to expand further into SMB than this, especially with the HP elephant in the room? 
  • Partner with major PC manufacturers that have no footprint in the print space, with companies such as Microsoft, Lenovo, Asus, and Acer, which together hold over 56-percent of global PC shipments but don’t sell printers on their Web sites. Our take: Beyond the razor-and-blades approach, PC companies don’t have the channels in place to support the level of printer sales and service that offices rely on. Dell for instance recently got out of selling Dell-brand printers. All offices are printing less and expanding their digital document workflows, which Xerox has covered in spades. This is more proof that Icahn doesn’t know what he’s talking about.
  • Reduce costs by simplifying the Xerox distribution network, for instance, reducing Xerox subsidiary Global Imaging Systems’ marketing in already crowded markets, which results in duplication of operating expenses. Our take: The key words here are “duplication of operating expenses,” a favorite target of Icahn and his kind, phantom or not. Indeed, within Xerox’s marketing strategies, Global Imaging Systems somewhat overlaps with Xerox direct sales, but it also supplements its comparatively weak (but growing) dealer channel. The net result is that Global Imaging Systems expands Xerox’s presence.
  • Fix Xerox’s “confusing online e-commerce and distribution network” and shift its distribution channels toward end-to-end sellers and PC companies. Our take: What is confusing about it? You can buy a Xerox B2B printer just about anywhere. Moreover, PC companies don’t want to sell printers because they don’t have the channels to support them. Other than HP, what other PC companies also successfully sell printers? This is even more proof that Icahn doesn’t know what he’s talking about.
  • Better monetize Xerox’s intellectual property portfolio; Deason and Icahn say Xerox has failed to capitalize on innovations such as those developed at Xerox’s PARC lab. Our take: This is arguably true, but is an old trope about PARC. The U.S. government doesn’t capitalize on NASA innovations either. Moreover Ican’s hypocrisy shines through, because once private equity gets hold of Xerox, it’s likely that PARC will be one of the first things to go, as one of the most detrimental trends in big business is the neglect of research and development and a desire, for instance, to pawn it off to unpaid university students on the cheap. 
  • Re-evaluate the Fuji Xerox joint venture with Fujifilm. In his litigation, Deason had sought to end the Xerox-Fujifilm joint venture, citing “an improper and fraudulently concealed ‘crown jewel’ lockup agreement … that was never disclosed to Xerox’s shareholders.” Deason said the agreement allowed Fujiflm to keep retain of Xerox’s IP and manufacturing rights in the Asia-Pacific market if Xerox were to be sold to any company but Fujifilm. Our take: Xerox says Icahn has known about this through through his representative, Jonathan Christodoro, on the Xerox board, while Deason had been aware of the agreement when he sold his company, Affilliated Computer Services, to Xerox in 2009. Back when Deason first sued Xerox, Xerox stated: “These documents have since been publicly disclosed. For any of them to assert that these agreements were ‘shrouded in mystery’ is disingenuous, at best.” If Xerox breaks the Fuji Xerox provision, Fujifilm could appropriate the rights to Xerox’s brand and technology in Asia and the Pacific Rim.

In sum, we question both the assumptions and  suggestions presented in Icahn’s Rescuing and Revitalizing an American Icon.

At this point, the new Icahn/Deason regime (new Xerox CEO John Visentin, new Xerox Board Chariman Keith Cozza, and other new Icahn-friendly board members) have said they will immediately explore alternatives to the Fujifilm deal (though not ruling out a higher offer from Fujifilm). But, unless Xerox is willing to hand over rights to its brand and technology in Asia and the Pacific Rim, as specified in the Fuji Xerox joint-venture contract, a buyer for Xerox isn’t likely to be a competitor, but instead, a private-equity firm. If that’s the case, the Icahn-Deason regime could end the Fuji Xerox joint agreement and partner Xerox with a competitor. Stay tuned.

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