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Deason, Icahn at odds with Fuji Xerox merger

Investors Carl Icahn and Darwin Deason are opposing the proposed merger of Fuji Xerox and Xerox, detailing in an open letter – reprinted below – their points. Also, Deason filed a lawsuit on February 13 seeking to enjoin the transaction, terminate the Xerox/Fuji joint venture lock-up and joint venture agreements and pursue strategic alternatives for Xerox. Defendants in the suit included Ursula Burns, former CEO of Xerox and Jeff Jacobson, Xerox’s current CEO and the announced CEO of the new Fuji Xerox (to be formed via the buyout).

The various announcements about this are reproduced below:


Xerox’s Two Largest Individual Shareholders Oppose Fuji’s Scheme to Take Control of Xerox “Without Spending a Penny”

New York, New York, February 12, 2018 – Today Carl Icahn and Darwin Deason released the following open letter to the shareholders of Xerox Corporation (NYSE: XRX):

Fellow Shareholders:

Last week, Xerox and Fuji announced a scheme to transfer majority ownership and control of Xerox to Fuji in a transaction that dramatically undervalues Xerox and disproportionately favors Fuji. The transaction has a tortured, convoluted structure, but it was best summarized by Shigetaka Komori, Fuji’s Chairman andCEO, when he boasted to the Nikkei Asian Review that the “scheme will allow us to take control of Xerox without spending a penny.”

It really is a remarkable achievement by Fuji. Without putting up any cash, they will acquire majority control and ownership of a venerable American icon. In exchange, we – the existing Xerox shareholders – will receive (1) an additional, indirect 25% interest in a Fuji subsidiary that just last year disclosed a $360 million accounting scandal caused by a “culture of concealment”[i] and Fuji’s failure to have adequate management systems and (2) a one-time special dividend financed with our own assets.

There are a number of critical facts that we – the existing Xerox shareholders – must keep in mind as we evaluate this transaction. As a starting point, we must understand that if this deal is consummated we will no longer be Xerox shareholders. Rather, we will be passive minority owners of a Fuji subsidiary – virtually powerless with respect to the future direction of our investment, with no opportunity to ever receive a true control premium for our shares. The structure reminds us of a timeless anecdote about two brothers who are bequeathed a vast estate. The older brother receives a 50.1% controlling stake and an instruction to keep the interests of his younger brother in mind. The younger brother receives a 49.9% minority stake and assurance that his older brother has been directed not to abuse his controlling position. Fast forward a few years, and you’ll find the older brother living in a mansion and driving a Rolls-Royce while the younger brother lives in a shack and drives an old beat-up hatchback. Like the younger brother in that anecdote, we are similarly being asked to hope against hope that the meager minority protections negotiated by the Xerox Board of Directors will be sufficient to protect us against tyranny and abuse by our new controlling stockholder Fuji. However, we believe the history of interactions between Fuji and Xerox – until recently shrouded in mystery – should make all Xerox shareholders extremely skeptical that oppression of the minority will not occur in the future. Additionally, last year’s massive accounting scandal at Fuji Xerox should make us all extremely nervous (to say the least) about trusting Fuji with our capital.

Beyond the issues of control and governance of our investment going forward, the fundamental economics of this transaction also disproportionately favor Fuji at our expense. When we sketch out the financials of the deal, this is our conclusion: we – the existing Xerox shareholders – are selling approximately $535 million of normalized annual recurring cash flow[ii] for about $1.25 billion[iii]. In other words, we are selling control of Xerox for a cash flow multiple barely exceeding 2.3x. In addition, we are also surrendering half of all potential future dividend growth. When considered with these economics in mind, the transaction looks like another depressing display of incompetence by a Xerox Board of Directors with no real skin in the game.

The purported justification for the paltry (and downright offensive) cash flow multiple is $1.7 billion in projected total cost savings that we will supposedly realize as minority owners of a Fuji-controlled Xerox. However, as they sang in Porgy and Bess, “it ain’t necessarily so.” In order for the projected synergies to be realized, Fuji will need to smoothly integrate Xerox, and if history is any guide, that integration will be anything but smooth (as the Nikkei Asian Review pointed out after interviewing Komori, “Japan’s corporate history is littered with stories about foreign takeovers going awry.”). Xerox itself acknowledges in the press release announcing the deal that we should not assume that the projected synergies will ever be achieved,[iv] and the reality is that the most readily achievable synergies – the ones we can actually be confident will be realized – are cost savings that could and should be achieved without consummating this transaction. To wit, it is common knowledge that the Fuji Xerox joint venture has yet to undergo any sort of significant restructuring (which, in and of itself, casts further doubt on Fuji’s management capabilities), and as a result, there is substantial low hanging fruit that could be captured with a thorough cost cutting program at that level, which would benefit both Fuji and Xerox independently without this transaction. But even if you assume we are 100% wrong about the projected synergies – even if you assume that all of the purported synergies will be achieved and would not otherwise be possible in the absence of this transaction – that still cannot possibly justify giving away control (which we cannot emphasize enough, can only happen once) without receiving a premium.

Sadly, as we all know, this is not the first time Xerox has negotiated a dreadful deal with Fuji. In connection with the deal announcement, Xerox finally disclosed the agreements governing the Fuji Xerox joint venture – agreements we believe they have intentionally withheld from shareholders for years despite clear legal rules requiring disclosure.[v] Even a cursory review of these documents lays bare a critical fact that Xerox has hidden from its investors and the market for the last 17 years (yet, curiously enough, now uses to justify why we have no choice but to accept this deal) – the joint venture agreements severely limit Xerox’s ability to pursue transformative strategic transactions (both on the buy side and sell side). That critical fact is the primary reason why last year’s massive accounting scandal at Fuji Xerox is so significant – it presents by far the best opportunity to date (as far as we can tell) Xerox has ever had to get rid of this albatross. Because the myriad failures at Fuji that led to the massive accounting scandal almost certainly rise to the level of being a material breach of the joint venture agreements, Xerox could and should exercise its rights to terminate the agreements effective immediately, thereby gaining for itself unfettered access to a $36 billion Asia-Pacific market, including sole right to use the Xerox name and intellectual property in the region. It would be catastrophic for Fuji’s printing business and a fantastic opportunity for Xerox to expand for its own benefit.

Nevertheless, as has been the case at Xerox throughout the past two decades, rather than pursue something challenging that could yield tremendous returns, the Board of Directors appears to have taken the path of least resistance and acquiesced to Fuji based on the advice of self-interested executives and advisors. But we demand – as is our right – accountability for these decisions. We demand complete and detailed disclosure of the advice given to the Board of Directors regarding terminating the joint venture, including copies and detailed explanations of all financial models and projections contemplating Xerox operating independently in a growing Asia-Pacific market. We demand complete and detailed disclosure of the efforts taken by Xerox to terminate (or even renegotiate) the terms of the joint venture as a result of last year’s massive accounting scandal at Fuji Xerox. We demand complete and detailed disclosure of the steps taken by Xerox and its advisors to solicit and evaluate indications of interest from parties other than Fuji during the 46 days they spent negotiating this transaction, including a description of the feedback received from each contacted party regarding the change of control provisions in the joint venture agreements.

Despite decades of mismanagement, Xerox is still an iconic brand with a valuable portfolio of over 12,000 patents and an impressive list of loyal customers. As the original pioneer in the copier space, the Company has historically been #1 in terms of market share across multiple segments in an $85 billion addressable market, including large enterprise Managed Print Services (MPS) and Centralized Print Services, A3 Multi-Function Printers (MFPs) and Production Cut Sheet (Color and B&W). However, because of poor corporate management and a “do nothing” Board of Directors, Xerox has failed to keep pace with the market. Consumers and businesses have changed. Digital adoption has paved the way for increased collaboration between people and groups. The way we share information has evolved, and instead of leading the digital transformation, Xerox’s complacency has provided an opening for competitors to eat away at its market share in A3 MFPs and high-end production, while Xerox chased the A4 MFP market, where it had to play catch-up to stronger and more established competitors. That critical error has been evident over the past three years as revenue and margins have continued to decline.

Nonetheless, there is still great opportunity for Xerox to create enormous value for shareholders, and it does not involve selling control to Fuji without a premium. Rather, it entails freeing the company from the shackles of the Fuji Xerox joint venture and bringing in leadership with the vision and operational expertise to revive the company – leadership that will, among other things, (i) reinvigorate the portfolio towards software, security and services while maintaining the existing dominant market share position by leveraging the company’s strong position in the higher-end enterprise market, (ii) focus the distribution and channel networks to target and grow sales to small and medium sized businesses (the current model creates channel conflict with competing sellers, thereby diluting their differentiation, incurring duplicative operating expenses and sacrificing margin), and (iii) optimize the organizational and operating structure to be more competitive. While the current management team has presented cost-cutting measures to offset the current revenue trajectory of “mid-single digit” annual declines, so far that has not translated into improved operating margins. As a result, there’s likely significant potential for value creation simply by reevaluating the current cost structure and identifying cost savings that will actually impact the bottom line. But beyond portfolio reinvigoration, focused distribution and cost-cutting, Xerox desperately needs (and this is another point that cannot be emphasized enough) leadership that can develop a strategy to commercialize and monetize the intellectual property developed at PARC. Xerox PARC scientists have been responsible for some of the world’s most notable technological innovations, including the modern personal computer, the graphical user interface (featuring windows and icons) and the mouse. Yet Xerox squandered those opportunities, even as the innovations themselves spawned entire new platforms and industries – turning people like Steve Jobs and Bill Gates into household names. New leadership, both in the C-suite and on the Board of Directors, could ensure that those types of opportunities never get squandered again.

However, none of the above-described value creation will be possible if we – the existing Xerox shareholders – allow this Board of Directors to cede control of our company to Fuji. Nor will it be possible if we simply vote the deal down and allow this Board of Directors to remain in control of Xerox. They have proven time and time again to be nothing more than ostriches burying their heads in the sand while the world slowly falls apart around them. They kept Ursula Burns on as Chairman and CEO for years after it was obvious to everyone else that she was not up to the task (indeed in 2014 she was ranked number 4 on Time Magazine’s list of “9 CEOs With the Absolute Worst Reputations”). And when she finally agreed to retire the Board amazingly gave the job to Jeff Jacobson, one of her acolytes. Now, when it should be clear that Xerox must act quickly to remove and replace Jeff Jacobson and move away from Fuji, this Board of Directors has instead doubled-down on both.

To put it simply, the current Board of Directors has overseen the systematic destruction of Xerox, and, unless we do something, this latest Fuji scheme will be the company’s final death knell. We urge you – our fellow shareholders – do not let Fuji steal this company from us. There is still tremendous opportunity for us to realize value on our own if we bring in the right leadership.

Vote against the Fuji scheme to send a clear message that we will not be fooled into giving up control of our company for $9.80 in cash.

Xerox Responds to Carl Icahn and Darwin Deason Open Letter

NORWALK, Conn. —  Xerox (NYSE: XRX) today issued the following letter from its Board of Directors to its shareholders in response to the February 12, 2018 letter from Carl Icahn and Darwin Deason:

The Board of Directors (the “Board”) of Xerox Corporation (“Xerox” or the “Company”) has reviewed the February 12, 2018 letter signed by Carl Icahn and Darwin Deason (the “Letter”). To date, the Board has chosen not to engage in a public debate with our two large shareholders. However, we believe their misleading and inaccurate Letter warrants a written response to ensure the facts are clear for all Xerox shareholders.

The proposed combination of Xerox and Fuji Xerox (the “Transaction”), announced on January 31, 2018, followed a year-long comprehensive and exhaustive review of value-enhancing alternatives available to the Company. That review found that the Transaction, as currently proposed, delivers significantly more value to Xerox shareholders than would be achievable on a standalone basis.

Mr. Icahn and Mr. Deason propose that Xerox shareholders reject this value-creating Transaction in favor of putting Xerox’s future and the investment of its shareholders at risk. Their attacks on Xerox have been premised on removing:

  • a Xerox management team that is successfully improving performance at Xerox, including significant outperformance relative to its own aggressive goals for the Company’s Strategic Transformation;
  • members of a Xerox Board that are taking significant actions to secure the future of the Company; and
  • a Fuji Xerox joint venture agreement with no viable alternatives to account for the value-destruction that would result.

We will take each of the Letter’s mischaracterizations in turn:

CLAIM #1: The Transaction undervalues Xerox and favors Fujifilm.
FALSE. Mr. Icahn and Mr. Deason suggest through suspect math that investors are “selling control of Xerox for a cash flow multiple barely exceeding 2.3x.” This analysis is just plain wrong. As discussed in prior presentations to investors, Xerox shareholders receive in the Transaction (i) a $2.5 billion dividend at closing; (ii) 49.9% of the combined Xerox and Fuji Xerox; and (iii) 49.9% of the benefit of the value created from at least $1.7 billion of annual cost savings, including $1.25 billion in cost synergies that are only achievable via this Transaction. These calculations are highlighted on page 4 in the supporting materials accompanying this letter.

A foundational driver of this Transaction is that combining Xerox with Fuji Xerox will create a company that has a significantly-enhanced competitive position and will, for the first time, be able to fully realize the benefits of industry-leading scale and global reach. Our shareholders will have the opportunity for significant participation in this value creation, which Mr. Icahn and Mr. Deason conveniently ignore.

As shown on page 5 of the supporting slides, additional value is being transferred to Xerox shareholders by virtue of the pro forma ownership achieved in the Transaction. On the basis of implied relative value of Xerox and Fuji Xerox, Xerox shareholders would own 42%-46% of the combined company, compared to the 49.9% they receive in the Transaction. Based on a $9.4 billion equity valuation of Fuji Xerox (implied by the midpoint of 7x – 8x Fuji Xerox 2018E EBITDA), Xerox shareholders are receiving more than a 15% premium to Xerox’s unaffected share price, before any value attributed to synergy realization.

Finally, the assertion that the “one-time special dividend [is] financed with our own assets” is misleading. Although it is not contributing cash, Fujifilm, as owner of 50.1% of the combined company, will bear the debt incurred to finance the dividend as the combined company will be fully consolidated by Fujifilm without receiving any portion of that dividend.

CLAIM #2: Xerox should terminate the Fuji Xerox joint venture agreements.
FALSE. Mr. Icahn’s and Mr. Deason’s suggestion of “freeing the company from the shackles of the Fuji Xerox joint venture” is not a viable strategy. The joint venture between Xerox and Fujifilm has existed in various forms since 1962. The current structure dates to 2001, when Fujifilm acquired additional shares in the joint venture to bring its ownership to 75%. The agreement is a binding legal document that cannot be simply wished away, renegotiated or dissolved because Mr. Icahn and Mr. Deason desire it so.

Through the joint venture, Xerox annually buys approximately $1.6 billion of equipment, parts and consumables, including more than two-thirds of Xerox’s equipment needs. It is important to note that Fuji Xerox is the only potential supplier that is not a direct competitor of Xerox and would therefore be aligned in its interests to provide competitive pricing for those materials.

Walking away from the joint venture would require Xerox to completely rebuild its supply chain and manufacturing infrastructure, which would be extremely expensive, result in significant disruptions to our business and customer relationships, and take years to implement. Ultimately, this would be highly destructive to Xerox’s competitive positioning and shareholder value.

Mr. Icahn knows this because his representative, Jonathan Christodoro, served on the Xerox Board between June 2016 and December 2017. During that time, he and Mr. Icahn had full access to all documents governing the joint venture, as did Mr. Deason at the time he sold his company, ACS, to Xerox. These documents have since been publicly disclosed. For any of them to assert that these agreements were “shrouded in mystery” is disingenuous, at best.

CLAIM #3: Xerox shareholders will become passive minority owners, with no opportunity to receive a control premium.
FALSE. Xerox’s Board negotiated strong minority protections to ensure that the rights and value of current shareholders remain protected after the Transaction closes. These were detailed in our February 9 presentation to shareholders and include, among other things, that the combined company Board will initially consist of 12 directors, including seven designated by Fujifilm and five independent directors designated by the current Xerox Board. The five independent Xerox designated directors will serve for five years or select their replacements. Thereafter, they may be replaced by independent directors selected by Fujifilm and reasonably acceptable to the then-serving independent directors.

Jeff Jacobson will represent one of the seven Fujifilm Board designees and serve as CEO of the combined company.

In addition, the Transaction includes extensive contractual provisions that protect the existing Xerox shareholders. Among other protections, these provisions limit the ability of Fujifilm to engage in interested party transactions and to obtain disparate consideration in connection with a future sale.

Perhaps more importantly, inherent in Mr. Icahn’s and Mr. Deason’s statement is the assumption that Xerox is foregoing a more attractive control premium than an unidentified third party may someday be prepared to pay.

While Fujifilm controls the existing Fuji Xerox joint venture, Xerox has a number of governance rights that it would lose if Xerox were to be acquired by or combined with one of a number of “named competitors.” Indeed, the joint venture would be terminable by Fujifilm in such an event, even though Fuji Xerox’s exclusive distribution rights in Fuji Xerox territories would remain through 2021.

We believe the existence of the Fuji Xerox joint venture negatively impacts value in any other merger transaction. More likely, it would simply make such a transaction unattractive to any other strategic buyer. It is also not something that needs speculation: since the public speculation of a potential transaction with Fujifilm on January 10, 2018, no potential strategic buyer contacted Xerox, or its advisors, with any credible proposal or alternatives.

CLAIM #4: Projected synergies can be realized without consummating this Transaction.
FALSE. As we made clear numerous times in our disclosures, of the $1.7 billion in total annual cost reductions by 2020, $1.25 billion is related to what we can achieve only by integrating the two companies, while the remaining $450 million comes from a Fuji Xerox-specific cost reduction program. All of these amounts are incremental to Xerox’s ongoing Strategic Transformation. We are targeting to achieve approximately $1.2 billion of the $1.7 billion total annual cost savings by 2020, and the vast majority of cost savings are expected to flow through to the bottom line.

Both Xerox and Fujifilm have a proven track record of executing significant transformations in the past, and are fully committed to realizing the full synergy upside from the combined company. The current Xerox management team has outperformed its cost transformation targets this past year and will not settle for anything less going forward.

The compelling Transaction synergies extend far beyond typical corporate overhead cost reductions cited in most similar transactions, and are grounded in the highly complementary nature of the two businesses based on detailed, bottoms-up analysis. These include capturing manufacturing efficiencies, optimizing consumables production and integrating R&D capabilities to capitalize on best of breed technologies. Moreover, the combination creates a global industry leader with significant revenue growth opportunities that were far less certain and actionable for Xerox shareholders on a standalone basis, including $1.0 billion in revenue synergy opportunities already identified.

CLAIM #5: Xerox’s revenue and margins have continued to decline in the last three years.
FALSE. Xerox recently announced that margins increased from 12.5% in fiscal year 2016 to 12.8% in fiscal year 2017. Moreover, the margins we have recently delivered are the highest the Company has seen in years. Only one other company in our industry has been able to consistently demonstrate double-digit margins.

As Mr. Icahn is well aware, we have been successfully executing on the comprehensive strategy initially announced in December 2016 – which we note was developed and approved during Mr. Christodoro’s board tenure. We have since overachieved on our Strategic Transformation targets, delivering $1.3 billion of total savings through 2017 and have made significant progress strategically reorienting the revenue trajectory towards growth. Revenue attributable to strategic growth areas increased by 5% in the fourth quarter of 2017 through successful new product launches and channel expansion, particularly in the SMB market.

Our full-year 2017 results clearly demonstrate that the strategy we have implemented is working as we met or exceeded every financial metric we guided to in 2017 – Adjusted EPS was above Xerox’s guidance range; Strategic Transformation was $80 million higher than expected; Adjusted Operating Cash Flow was above the midpoint of Xerox’s guidance range; and revenue was within Xerox’s guidance range.

In conclusion, Mr. Icahn and Mr. Deason fail to provide an actionable plan or any cogent ideas to make their scheme a reality. Following their playbook would be both highly irresponsible and unlikely to succeed, particularly given the terms and constraints of the existing Fuji Xerox joint venture agreement, and the realities of today’s competitive environment.

The combination of Xerox and Fuji Xerox will create a stronger, more competitive company with enhanced growth prospects. The opportunity for Xerox shareholders to benefit from ownership of the combined company, as well as the substantial dividend to be paid upon closing, represents the creation of significant value for Xerox shareholders. The Board remains committed to maximizing value for all shareholders and securing the future of Xerox.


Xerox Responds to Darwin Deason Lawsuit

NORWALK, Conn.–(BUSINESS WIRE)–Xerox (NYSE:XRX) today issued the following statement regarding a lawsuit filed by Darwin Deason on February 13, 2018, in the Supreme Court of the State of New York, New York County.

Mr. Deason’s allegations are without merit and the company will vigorously defend itself.

After having considered all strategic alternatives available to the company, Xerox’s Board of Directors remains steadfast in its belief that the combination with Fuji Xerox is the best path to create value for the company and its shareholders.

It is unfortunate that Mr. Deason is seeking to interfere with Xerox shareholders’ right to decide and is relying on meritless legal claims. Xerox has fully disclosed the joint venture agreements, and the company will respond to Mr. Deason’s legal claims through the appropriate legal channels in due course.