Xerox to End Fujiflm-Fuji Xerox Partnership, Source Products from Other Vendors

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The rift between Xerox and Fujfilm continues to widen with lawsuits, and more, with today Xerox publishing a letter written by Xerox CEO John Visentin to Fujifilm Chairman and CEO Shigetaka Komori stating that Xerox will not renew its joint partnership in Fuji Xerox with Fujifilm when the partnership agreement ends in 2021. The contentious letter also states that it’s Fujilm who is the “bad actor” in the ongoing rift between the two companies, who together have jointly operated Fuji Xerox for decades, with Fujifilm owning 75 percent of the Fuji Xerox, and Xerox owning 25 percent of Fuji Xerox.

Last week, Fujifilm had filed a breach-of-contract lawsuit in New York State Supreme Court seeking $1 billion in damages. In that lawsuit, Fujifilm contends Xerox unlawfully scrapped the sale of Xerox to Fujilm for $6.1 and the merger of Xerox with Fuji Xerox, Xerox’s decades-old joint venture with Fujiflm.

In the letter, new Xerox CEO Visentin also blasted Fujifilm’s hopes that it may still come to a deal with Fujifilm: “Therefore, your expectation – as expressed to the Japanese media – that Xerox will come to Fujifilm with a new proposal for a combination transaction is simply delusional. It will not happen.”

In the letter below written by Visentin, Visentin, among other things, says that Xerox will end its Fuji Xerox joint venture with Fujifilm, and source its products – presumably printers and copier/MFPs and other products – from other vendors.

Cites Fuji Xerox Australia Accounting Scandal for Scrapping Deal

Visentin also wrote: “Fujifilm should realize that the internal accounting issues at Fuji Xerox were a result of their mismanagement, which made it impossible to close the announced transaction. We cannot stand by and let them further harm our iconic brand. The (Fujifilm) lawsuit is nothing more than a desperate and misguided negotiating ploy to save their takeover attempt, which to this day remains enjoined by order of the New York State Supreme Court (see Judge Refuses to Lift Injunction Barring Xerox-Fujifilm Deal), and could take our focus away from serving our customers.”

“Our focus is on running the business in the service of our thousands of customers and partners and delivering exceptional value through market-leading servicesproducts and delivery capabilities.

“Fujifilm’s actions have forced us to move forward on several fronts to protect our supply chain. First, we will start, in a material way, to source products from new vendors. Second, we will build partnerships with companies that are aligned with the Xerox mission to provide world-class technology and solutions. Third, we currently believe Xerox will be much better served by not renewing our Technology Agreement with Fuji Xerox when it expires. We will detail for our shareholders the enormous opportunity for Xerox to sell products directly into the growing Asia-Pacific market with sole and exclusive use of the valuable Xerox name, and a more efficient, better managed supply chain than exists with Fuji Xerox today.”

“Xerox is a proven technology innovator and an exceptionally resilient company; we remain steadfastly focused on creating shareholder value through our renowned innovation capabilities, globally recognized brand, and leading market presence.”

The letter also states that Fujifilm, as 75-percent owner and controlling partner of Fuji Xerox, “has concealed from Xerox the true extent of a massive and ongoing accounting fraud at Fuji Xerox caused by Fujifilm’s own gross mismanagement” (referring to a massive accounting scandal at Fuji Xerox Australia and New Zealand):

“The mismanagement and resulting accounting fraud have weighed heavily on our dealings and have cost us both a significant amount of time and money. Along the way, there were multiple material breaches by Fujifilm and/or Fuji Xerox of important provisions contained in the Share Subscription Agreement and the various Fuji Xerox joint venture agreements that have made clear your lack of good faith.”

Visentin also accuses Fujifilm of overlooking other accounting fraud at Fuji Xerox in other regions: “By way of example, a material portion of Fuji Xerox’s revenue comes from China, which inexplicably has never been formally investigated for the types of accounting fraud that are rampant throughout Fuji Xerox’s other territories despite clear indications of questionable accounting practices. You have also failed to prove to us that all of the outright corruption and fraud at Fuji Xerox have been uncovered and remediated, and reports continue to indicate that the internal controls over financial reporting at Fuji Xerox are woefully ineffective.

“Simply put, Fujifilm has failed to prepare Fuji Xerox to comply with the laws and regulations applicable to U.S. public companies, and, as you and your advisors are surely aware, it would likely take years for any such compliance capability to be achieved. In other words, Fujifilm was and is completely incapable of consummating the transactions contemplated by the Share Subscription Agreement. You know it, and I know it.  In light of Fujifilm’s numerous contractual breaches and continued misconduct and bad faith in its dealings with Xerox (among other things), Xerox does not currently plan to renew the Technology Agreement when it expires in 2021.”

Refutes Xerox Dependence on Fuji Xerox Products

The letter also blasted Fujilm’s remarks published in the Nikkei Asian Review that “Xerox, which heavily relies on product supplies from [Fuji Xerox], is unlikely to survive on its own in a shrinking global office equipment market.” Visentin stated: “Nothing could be further from the truth. In fact, it is actually Fuji Xerox, which is responsible for nearly half of Fujifilm’s total revenue, that could potentially suffer ruinous consequences from the loss of over $1 billion of revenue from Xerox, its single largest customer. And legally, there is nothing Fujifilm can do to stop that from happening. The New York State Supreme Court has already enjoined Fujifilm from taking any action toward consummating the ill-advised takeover, and it follows that no court would allow Fuji Xerox to take adverse, punitive actions toward Xerox’s supply chain as we begin sourcing away from Fuji Xerox, which we are clearly permitted to do.”

Visentin’s letter concludes: “Xerox will continue to evaluate all of its legal, commercial and operational options with respect to Fujifilm and Fuji Xerox and will pursue and protect, and hereby reserves, all of its rights and interests under the Technology Agreement and otherwise to the fullest extent of the law.”

Our Take

It’s surprising how far this saga continues to play out and how two investors (Icahn and Deason, who together own about 13 to 15 percent of Xerox shares) managed to take over Xerox management, with the remaining Xerox shareholders seemingly having little say.

The well-being of Fujifilm aside, it seems:

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  1. Xerox absolutely needs Fuji Xerox’s presence in Asia-Pacific, which is one of a handful of growing worldwide markets for imaging.
  2. If Xerox allows the Fuji Xerox agreement to expire as it says it will, is Xerox capable of filling the void and establishing a channel in Asia-Pacific?
  3. Where is Xerox going to source the manufacturing of the AltaLink and VersaLink copier/MFPs that are now supplied by Fuji Xerox?
  4. Will Xerox make its security and workflow technology available to a Chinese printer and copier manufacturing company? Several sources exist and most of them are already manufacturing for major Xerox competitors. Perhaps Japanese companies such as OKI or Kyocera could fill the void, that is, if they have the manufacturing capacity and are willing to alienate their own dealer networks. Remember when Sharp, Toshiba, and Samsung used to be the go-to firms for third-party copiers? Those days are long gone for various reasons.

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