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  • KPB & Co Research


For many investors Xerox has been a stalwart of shareholder destruction for decades, so it is no surprise when activist investor Carl Icahn sought to toss the entire board of directors and the CEO out of the company. When the directors found out that were about to lose their jobs, they found a white knight to buy the company and save their jobs. Carl Icahn block the proposed transaction and replaced the management team, which set off a war between the white knight and Icahn. For the time being it appears that both parties are playing a game of attrition. 

Tension Building Up

The ink is barely dry on the deal signed between Xerox (NYSE: XRX) and activist investor Carl Icahn, and already there are more battles on the horizon. The entire board of Xerox Corp was booted out by Carl Icahn a few weeks ago, after they signed off on a value destroying transaction whereby Fujifilm would acquire a majority stake in Xerox without paying any cash up front. The battle went to court, where the Judge ruled in favour of Icahn and provided a damning statement on the failure of Xerox's CEO to look out for shareholder interest. The result was the termination of the deal, and now Fujifilm is suing to recover expenses incurred for due diligence. The lawsuit will not go through without a fight though, as Carl Icahn, after successfully forcing Xerox's CEO to give up an US$18 Mn severance package, has clearly expressed an intent to hold both Xerox's CEO, and Fujifilm accountable for their mis-deeds.

Fujifilim is seeking damages of US$1Bn, in a law suit brought against Xerox. Following Fujifilim's US$1Bn lawsuit against Xerox, Xerox's CEO  John Visentin is now playing offensive. Perhaps Fujifilm bite off more than it can chew, as the new management team at Xerox seems determined to use their leverage to their advantage. In a letter to Fujifilm's CEO, John Visentin outlined Xerox's intention to sever ties with the company after a 50-year joint venture agreement, and to take immediate steps to enter into the Asian market (previously both companies operated in Asia through their joint venture). The letter also emphasized that a merger with Fujifilm is unlikely given the growing accounting scandal at FujiFilm.

Tactical Manoeuvre

In our view, these developments are trademark Icahn tactical manoeuvring geared towards changing FujiFilm's calculus. Dissolving the joint venture is potentially devastating to Fujifilm as Xerox currently accounts for a significant portion of its revenues. In addition, if Xerox were to move into the Asian market, Fujifilm could potentially face the added challenges of heightened competition. As such, Fujifilm is heavily incentivized to reach a new agreement. The other piece to the puzzle is that the accounting scandal limits the options that Fujifilm has to resolve the issue. The balance of forces therefore put Icahn and Xerox in a strong position to argue for an all cash offer from Fujifilm, or from possibly a third party or an affiliate of Fujifilm.

Final remarks

The stage ​is set for a consideration of an offer from a third party or Fujifilm. In addition, with Icahn fully in control of the company, and a CEO in place who has a track record of driving cost out of businesses, there is also the possibility that Icahn may seek to squeeze additional value from the business by embarking on an efficiency program. The company also has US$1Bn in free cashflows which provides the wiggle room to pursue multiple acquisition to drive both top line and bottom line growth. 

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