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Xerox under the hammer – Andy McCourt’s ReVerb

Wednesday, 06 June 2018
By Andy McCourt
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Billionaire Xerox shareholder Carl Icahn reportedly described the industry as ‘a piece of sh*t.’

The storm-tossed recent history of Xerox seems to have entered calmer waters for now, as the shareholder activists Carl Icahn and Darwin Deason have succeeded in getting what they wanted – a free market auction of the USD$7.16 billion market cap. company. This is below half of what Xerox was worth in September 2015, just prior to splitting off its Business Services division, now a separate company called Conduent.

Andy McCourt, Print21.

The concept of auctioning-off to the highest bidder such a large company as Xerox is somewhat foreign to usual business protocols. Companies, unless they are bankrupt and being liquidated, are normally acquired in a take-over bid that can be either friendly or unfriendly. It’s not unusual to see another higher offer or a gazumping of the initial offer by a third party but an out-and-out auction is normally reserved for distressed assets and companies that are in financial difficulties.

But an out-and-out auction of a large company that is, apparently, not under financial stress is strange. It’s no secret that neither Icahn nor Deason want to run Xerox and that the board they have installed is only there to facilitate the auction and extract maximum value for the big shareholders, irrespective of the on-going success of the NYSE (XRX)-listed company.

Can shareholders dictate how a company is run?

The juicy part of Xerox has already been split off with the creation of Conduent (NYSE: CNDT), whose shares are up 19% year-to-date. Xerox’s are down 6%. So, this is looking more and more like a break-up; a raking over the remaining bones of a once iconic company, suffering the ignominy of being auctioned off to the highest bidder, rather than being run with vision, invested in (which Fujifilm promised) and able to come up with the same brilliant ideas that gave us the copier, ethernet, laser printer, GUI and mouse. Yes, they all came out of Xerox PARC research division, an incorporated Xerox company since 2002.

That two activist shareholders in Icahn and Deason, with only around 15% of issued stock, can effectively take over and dictate what happens to a major publicly-listed company and decide to auction it off is unprecedented in company law. Respected US Management Study Guide says (caps theirs):

“However, shareholder ownership does not imply control since the company law makes it clear that only a majority percentage of the shareholders can exercise control. The point here is that, to have effective say over the running of the company, a majority vote of the shareholders is necessary following the democratic norms of participation that govern companies.”

  Harvard Business Review goes further, having published:

“Corporate reality, though, has proved stubbornly uncooperative. In legal terms, shareholders don’t own the corporation (they own securities that give them a less-than-well-defined claim on its earnings). In law and practice, they don’t have final say over most big corporate decisions (boards of directors do). And although many top managers pledge fealty to shareholders, their actions and their pay packages often bespeak other loyalties. This gap between rhetoric and reality—coupled with waves of corporate scandal and implosion—has led to repeated calls to give outside investors even more say.”

 The bloc – backgrounder

‘No stranger to accounting scandals himself’: billionaire investor Darwin Deason.

Deason and Icahn present themselves as hard-done-by investors and maybe they are; but neither are angels of light. Deason repeatedly highlights the ‘accounting scandal’ in Fuji Xerox New Zealand and to a lesser extent Australia under the aegis of Neil Whittaker. He is no stranger to accounting scandals himself, having experienced accusations of back-dating share options in the company he ultimately sold to Xerox: Affiliated Computer Services. Over 60 ACS managers lost their jobs including the CEO Mark King. Known as ‘springloading,’ the back-dating of share options can make large sums of money for those in the game by choosing past low-price dates to acquire stock that then rises in value.

Chairman Deason came out of it relatively unscathed through ‘not knowing’ but settled with the US Securities & Exchange Commission with neither side ‘confirming or denying’ culpability. Deason has often been associated with cyber-intelligence activities and even CIA involvement. Indeed, at the Southern Methodist University in Dallas, there is the “Darwin Deason Centre for Cyber-Security”  https://www.smu.edu/Lyle/Institutes/DeasonInstitute, so it’s safe to assume he is a very smart guy with powerful friends.

There’re even some conspiracy-like stories about Deason and his CIA links: http://www.constantinereport.com/comair-crash-fenton-dawson-acs-cia-torture-scandal-corporate-looting-the-nsa-etc/

Carl Icahn, on the other hand, is just an old-fashioned Wall Street wolf, making his approximately $20 billion fortune by stock plays, corporate raiding, shorting and anything else. The character Gordon Gekko (“Greed is good”) from the film Wall Street is said to be partially modelled on him: https://www.economist.com/node/9176383

He made his first fortune in the 1980s with a hostile takeover of troubled airline TWA, borrowing money to take it private then stripping its assets to pocket around USD$469 million. Lately, he has been an economic advisor to US President Donald Trump.

What about Fujifilm?

So, the kind of businessmen now calling the shots at Xerox cannot be expected to enthusiastically come up with new technologies nor have an interest in our industry. Indeed, according a memo by ousted CEO Jeff Jacobson, Icahn and now-Xerox-board-member Jonathan Christodoro, described ‘the industry’ as follows: “The discussion centred around Icahn and Christodoro’s view that the industry ‘was a piece of sh*t’ and the Xerox business was not driving value,” Jacobson wrote.

It’s all here in one of the best updates on the situation by Bloomberg’s Drake Bennett: https://www.bloomberg.com/news/features/2018-05-24/how-not-to-negotiate-a-6-1-billion-deal

There’s no denying the Fujifilm proposed takeover was very smart and beneficial to Fujifilm Holdings, I wrote about it in February: https://print21.com.au/stunningly-brilliant-deal-andy-mccourt-on-fujifilms-xerox-takeover/152084

However, I would say that Fujifilm and the Fuji Xerox joint venture part of the Xerox structure is the dialysis machine that has kept Xerox’s kidneys functioning for the past two decades. Remove it and the patient will get very sick indeed – or die.

Fujifilm makes most of the sellable tech that Xerox offers. It is in control of the largest market on Earth – Asia Pacific, having boosted its 50% jv share to 75% in 2001 when Xerox was on the verge of bankruptcy. It was Fujifilm’s money that saved the company. Forbes magazine sums it up here: https://www.forbes.com/2002/11/06/1106soapbox.html#1116b2c5486f

If Deason and Icahn think that Xerox can prosper without Asia Pacific (especially China) and without Fujifilm, they must have rocks in their heads. Of course, they don’t – they know the score precisely and just want out of their holding positions for as much as possible. Maybe Fujifilm should have upped their offer but instead have opted for a legal challenge to the Icahn-Deason putsch. Maybe the poker game they are playing is to force Fujifilm’s hand because they know that no one in their right mind would buy Xerox without its major supplier and business partner locked in.

Likely bidders

Who would bid at an auction for Xerox?

  • Apollo Global Management – private equity buy-out firm closely linked to the Icahn-Deason bloc. Expect a colossal break-up if this happens.
  • HP – Did express interest early on in a call to Jeff Jacobson but was rebuffed. Slotting HP tech into Xerox to replace Fujifilm would have its appeal but what about the jv in Asia Pacific?
  • Konica Minolta – would love to own Xerox and its channels I am sure and, as the arch-combatant with Fujifilm from photographic days, would delight in removing them. But again -what about the 75/25 jv in Asia Pacific?
  • Canon – Bought Océ in 2010 and maybe this has not gone as well as hoped for. They could be nervous bidders.
  • Other private equity – such as Danaher Corporation who are an exception to the ‘breakup and loot’ model. They run companies successfully, including Esko, X-Rite, AVT, Leica Microsystems, Pantone and Videojet in our industry.

Unless Fujifilm’s court action succeeds, Xerox is headed for auction. Let’s all hope that the ‘Going-going’ does not literally end in ‘Gone.’

Update: In its latest filing this week with the New York State Supreme Court, Fujifilm has slammed the ‘self-serving’ settlement that saw the entire board ousted and replaced by Icahn-Deason friendly members. It also claims the termination of the deal is ‘in violation of a valid contract authorised unanimously by the [Xerox] board.’ 
Word on the street is that Fujifilm Holdings will seek damages of up to $245 million if the deal is eventually stymied. This will get uglier.

3 Responses to “Xerox under the hammer – Andy McCourt’s ReVerb”

  1. June 06, 2018 at 9:55 pm,

    Des King
    said:

    Andy McCourt: nobody writes it better

  2. June 06, 2018 at 11:46 pm,

    Who Wantstoknow
    said:

    Mmmm, I know of a certain sales meeting that encouraged the sales team to watch and learn from The Wolf from Wall Street. It goes all the way to the top.
    “Carl Icahn, on the other hand, is just an old-fashioned Wall Street wolf, making his approximately $20 billion fortune by stock plays, corporate raiding, shorting and anything else. The character Gordon Gekko (“Greed is good”) from the film Wall Street is said to be partially modelled on him: https://www.economist.com/node/9176383

  3. June 14, 2018 at 10:43 pm,

    said:

    As a rather small Xerox customer, I have seen the decline in the past few years. Their analysts strategically plotted to meet budget targets in the print industry by making changes that cost us (the customer) thousands, just to see the results NOT be there. Another personal association, just a few weeks ago, showed once again the need for cash/capital. They are pulling out the stops in their need for money. With how they treated me as a customer, I actually (for once) have a smile on my face when I think of Xerox and their situation.

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