Fuji Xerox Acquires Xerox

January  31, 2018
Flash # 2018.01.31

By Ed Crowley, Chief Thought Leader

Highlights of the Deal

Fujifilm Holdings is taking over Xerox, Xerox will be rolled into the existing Fuji Xerox company. In a rather creative deal, Fuji Xerox will raise $6.1B (USD) in bank debt to buy back the 75% ownership position that FujiFilm currently holds in Fuji Xerox. Then, Fujifilm will use the $6.1B proceeds from selling their 75% stake in the former FujiXerox to buy 50.1% of the shares in the new Fuji Xerox company. The deal is expected to close by August, 2018.

This is a brilliant deal for FujiFilm.  They gain control of the combined resources of the former Xerox and Fuji Xerox, but FujiFilm doesn’t incur any debt in the process. Rather, the debt is held by Fuji Xerox, while FujiFilm controls Fuji Xerox with 50.1% of the shares in the company. In effect, this ends Xerox’s tenure as an independent company.

Jeff Jacobson (Xerox’s current CEO) will become CEO of Fuji Xerox. As part of the deal, Xerox shareholders will get a special cash dividend of $2.5B. Fuji claims the combination will allow the firm to achieve $1.7B in cost savings, and has already announced plans to shed 10,000 Fuji Xerox employees (over one-fifth of the workforce).

Why Did This Happen?

This comes as both firms are seeing a decline in their core MFP/Copier business due to declining pages. This is reflective of a business model challenge for the entire industry. As the pages decline, top line revenue and high profit supplies margins will decline. It’s not happening in every segment (there is still growth in some wide format and other specialized segments), however, it is an over-riding trend that is reshaping the industry.

Neither firm has been able to improve operational efficiency fast enough to make up for declining page volumes. This fundamental shift in hardcopy pages to digital formats is accelerating, creating pressure across the imaging industry. This is a fundamental industry shift which the industry is reacting to by trying to cut sales, marketing, and R&D expense, but, without changing the fundamental business model that exists today.

For example, historically, high profit margins from supplies have allowed imaging firms to have relatively inefficient operations such as using large people based ‘reactive’ service organizations to respond to fleet service needs. This is an outdated model. Most imaging devices are digitally connected and remotely monitored. This means that service costs could be dramatically cut through predictive and prescriptive service optimization technology. However, few firms (HP being an exception) are deploying this technology.

Icahn, Xerox’s largest shareholder (holding 9.72% of the company’s shares) and activist shareholder Darwin Deason had been pushing for change at Xerox, including a change in the CEO. They managed to get part of their wish – a change in control of the company, however, they did not manage to push Jeff Jacobson out since he continues as CEO of Fuji Xerox. The special cash dividend means that while Carl Icahn will receive $243M in cash, while still holding his shares in (now) Fuji Xerox, and, he still holds his shares in Conduent which were acquired before the Xerox / Conduent split.

Our Assessment

While most imaging firms recognize the trend in declining pages and overall shrinking of the industry, (in the executive conference rooms if not in public statements), they continue to operate as if they have decades to change their business model and find new sources of revenue growth. The historical incredibly high profitability of the imaging industry has created a certain level of complacency. In a mature industry like the imaging industry, this can be deadly. This should be a wakeup call for firms to radically change their business models.

For most of the industry, making the shift to predictive and prescriptive management practices has been incredibly slow, despite the fact that the imaging industry is one of the largest IoT industries in the world. Increasingly, the winner’s in the industry will be firms that leverage predictive and prescriptive technologies (and no, you can’t do this with a spreadsheet!) into their operations and drive to entirely new levels of operational efficiency and cost savings.

While Icahn didn’t get everything, he wanted (specifically a management change at Xerox), he is getting a nice payday and he did drive some level of change at Xerox. In discussions with institutional investors, private equity firms, and hedge funds, I have increasingly seen a high level of dissatisfaction with the level of change taking place at imaging firms as the industry matures and shrinks. Many are writing this off as a ‘bad investment’ sector. I expect to see more calls for executive management change as investors in the sector become increasingly active and dissatisfied with the rate of change in the industry.

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