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Brilliant deal! Andy McCourt on the Xerox takeover

Friday, 02 February 2018
By Andy McCourt

Global Fujifilm HQ in Tokyo.

The news that Fujifilm will take a controlling interest in Xerox Corp was not entirely unexpected but the mechanism of the deal certainly is. There were a lot of back-stories in play, not the least the unhappy large shareholders of Xerox stock listed on the New York Stock Exchange.

The largest, Carl Icahn with 9.7% together with Darwin Deason, who sold his company Affiliated Computer Services to Xerox in 2010 for USD$6.4 billion and is the third largest stockholder, are about to get a handsome bonus each. The proposed deal includes a USD$2.5 billion special dividend to all shareholders. That equates to around USD$242,500,000 for Icahn Enterprises and about USD$150 million for Deason, who lives mostly on a fabulous 220-foot yacht in the Caribbean when he’s not in Dallas, TX.

As recently as January 17 this year, Deason was quoted in the Wall Street Journal saying: “At a time when the [Xerox] board should be aggressively pursuing our shareholder rights to terminate the Fuji [sic] venture and liberate the company globally, to instead plot in secret in violation of the law to cook up a short-term band-aid is insufficient and unwise in the extreme and warrants shareholder action.” Phew!

Carl Icahn (Image by cnbc.com)

Sheer brilliance in the deal!

Nevertheless, Icahn and Deason plus any other disaffected Xerox stockholders can hardly complain about their recent good fortunes – a big special bonus plus a rising Xerox stock price. Neither did they succeed in ousting Xerox CEO Jeff Jacobson and that may prove to be a very good thing. I have known Jacobson since his Kodak Polychrome Graphics days and he is a battle-hardened leader who knows this industry inside-out.

This is the first part of the brilliance of the deal by Fujifilm Holdings – the disruptive shareholders should now be quieter and content with their massive paydays and are holding stock which, so far is on the rise despite Xerox’s reporting a loss in the last quarter of 2017. Not that Mr Icahn needs the extra millions; his nett worth is reported to be bigger than Xerox’s annual revenue of USD$17 billion.

The second brilliant aspect of this deal is the way in which it is constructed. President Trump may have written the book called ‘The Art of the Deal’ but, providing the Xerox deal passes US securities scrutiny, Fujifilm Chairman Shigetaka Komori should perhaps consider writing ‘The Architecture of a Deal’ to add to his published workInnovating out of Crisis.

The standout aspect of Fujifilm’s leveraged control plan for Xerox (it is not a ‘buy’ until approved by shareholders and the US securities people – which may take months, it is scheduled to complete in July-August); is that there will be no cash outflow from Fujifilm Holdings. How can this be?

No money down

The elegance of this deal is that Fuji Xerox will buy back its own 75% of shares owned by Fujifilm Holdings, for USD$6.1 billion. This money will be sourced from institutional borrowings. The other 25% is already owned by Xerox Inc. Thus Fuji Xerox becomes a 100% subsidiary of Xerox Inc. Maybe for one day anyway.

What happens next is pure magic. Fujifilm Holdings will use its USD$6.1 billion from the sale of its stake in Fuji Xerox (Asia and ANZ) to acquire a 50.1% controlling interest in Xerox and gain seven board seats, with Mr Komori as Chairman. The remaining 49.9% of shareholders will hold stock that is currently appreciating in value. Because of the improved efficiencies in the ‘new’ Fuji Xerox, some analysts have estimated the extra value delivered to shareholders is around a 50%+ premium on current closing share price. This includes the special bonus and the appreciated stock.

Furthermore, these shareholders will receive the one-off special dividend of about USD$9.80 per share; a total of $2.5 billion paid from the newly unified company and financed by Citigroup and Morgan Stanley. The $6.1 billion loaned by institutions to Fuji Xerox for its share buy-back is repaid by the ‘new’ merged Fuji Xerox. Simples!

Fujifilm’s only real outlay, apart from a lot of time and creativity, in this leveraged buy-in is about USD$2.5 million in advisor fees to Mitsubishi UFJ Morgan Stanley Securities and Morgan Stanley. It’s as close to a win-win-win situation as can be in today’s market conditions.

Track record of successful acquisitions

Another advantage that Fujifilm can point to is its track record of responsible acquisition in the USA. In 2006 it acquired the struggling Dimatix-Spectra inkjet division of Markem, which focussed mainly on product marking and encoding. Today Fujifilm Dimatix is the leading supplier of printhead technology for high quality graphic applications and its Samba printheads are to be found in Heidelberg, Landa and Inca machines. This was achieved by investment in R&D and Fujifilm’s belief that inkjet was the way forward in graphic arts.

Printheads without ink are like razors without blade sales, so in 2005 Fujifilm also acquired two inkjet ink companies, Sericol in the UK/global for UV and screen inks and Avecia, a former ICI chemical subsidiary, for dye and pigmented aqueous inks, with manufacturing in Delaware, USA. It is thought that the Delaware plant, now Fujifilm Colorants, makes or has made OEM ink for the ‘big 3’ of Canon, HP and Epson. Because inkjet ink is the most valuable liquid on the planet, secrecy rules.

All of these acquisitions by Fujifilm have proved very successful as it sought to diversify away from photochemical dependence in the digital era. Through a pre-existing agreement with Sericol, Fujifilm also inherited the global sales channel for Inca Onset flatbed UV presses – the world’s most productive.

So, when Fujifilm buys or acquires businesses, it works out very well and there is no reason to expect the Xerox deal to be any different. It invests in R&D, it streamlines, albeit with regrettable job losses and it gets it right with innovative and creative management and strategies.

As a side benefit, the much publicised accounting and HR scandals in New Zealand and Australia with attendant lawsuits both-ways, will no doubt disappear into the mists of time, eventually.

A fresh start in a difficult market

This is a fresh start for Xerox and a purgative for Fuji Xerox; it makes complete sense for all involved – shareholders, customers and the industry in general. There’s a tough road ahead and sadly there will be the loss of some 10,000 jobs in Asia-Pacific and no doubt in ANZ as the synergies of the two organisations fuse together – assuming no roadblocks emerge along the way.

In 1996, I was privileged to visit Xerox’s Palo Alto Research Centre (PARC) in California and was astounded to discover that here, in what amounted to a corporately-funded university, were invented the PC, the GUI, Ethernet, the laser printer, PostScript PDL, the mouse and a host of other IT innovations that we now take for granted.

Xerox failed to capitalise on any of these major innovations and others picked them up, so today we have Apple, Microsoft, Adobe and others. It’s a safe bet that Fujifilm will not let any future innovations of this kind slip through their fingers.

 

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