by Amy Weiss
Sounds impressive, but is it really?
The January 31 announcement from Xerox and Fujifilm that they were entering an agreement to combine Xerox with Fuji Xerox was not entirely surprising, considering that rumors had been circulating for most of the month of January, since the Wall Street Journal reported earlier in the month that the two companies were in talks.
Clearly the WSJ was onto something, as shareholders Carl Icahn and Darwin Deason followed that report with a joint statement suggesting, among other things, that the Fuji Xerox joint venture should be terminated or renegotiated to make it more favorable to Xerox and that CEO Jeff Jacobson be replaced immediately. “… if Xerox is indeed exploring a transaction with Fuji that may result in a change of control (which to our view would make sense since we, like many others, believe consolidation in this industry is inevitable), then we implore the ‘old guard’ directors – who have historically lacked the intestinal fortitude to challenge and demand accountability from Xerox management – to not do us all the tremendous disservice of allowing Jeff Jacobson to lead the negotiations. He is neither qualified nor capable of successfully running this company, let alone negotiating a major strategic transaction that will do more than save his own job,” read the pull-no-punches statement.
That last was not to be, however, as the press release issued Jan. 31 made it clear that Jeff Jacobson will serve as chief executive officer of the new Fuji Xerox, with Shigetaka Komori, chairman and COO of Fujifilm and chairman of the Fuji Xerox joint venture, serving as chairman of the board of the new Fuji Xerox. “Now Fuji Xerox will become the largest document solutions company in the world in revenue size,” stated Fujifilm’s press release.
What is a little less clear is exactly what is taking place with this transaction, as there are a lot of moving parts — we have Xerox, the Fuji Xerox joint venture, Fujifilm, and the new Fuji Xerox, along with a lot of numbers, percentages, dollars and yen. So let’s try to break it down.
Just the Facts
- Fujifilm was founded in 1934 in Japan as a photographic film manufacturer.
- Xerox was founded in 1906 in the U.S. as The Haloid Photographic Company; it became Xerox Corp. in 1961.
- Fujifilm and Xerox entered into a partnership in 1962, forming Fuji Xerox as a joint venture in Japan.
- At the time of the Jan. 31 announcement, Fujifilm owned a 75 percent stake in Fuji Xerox.
- Fuji Xerox will buy Fujifilm’s 75 percent stake in Fuji Xerox.
- Fujifilm will use the proceeds from selling the 75 percent stake to acquire 50.1 percent of the shares of new combined company, which will be named “Fuji Xerox.” There will be no cash outflow from Fujifilm.
- Fujifilm will own a majority share of the new Fuji Xerox. Xerox shareholders will receive a $2.5 billion special cash dividend, or approximately $9.80 per share, and 49.9 percent of the combined company.
- The new Fuji Xerox will trade on the NYSE under the ticker XRX.
- The new Fuji Xerox will have dual headquarters in Norwalk, CT, U.S. and in Minato, Tokyo, Japan.
- The new Fuji Xerox will go to market and maintain the “Xerox” and “Fuji Xerox” brands within its respective operating regions.
Fujifilm was good enough to provide a visual aid.
On a very surface level, not much will look different in the U.S. — Fuji Xerox will operate as Xerox, trade as XRX and have Jacobson at the helm. But clearly the changes will go deep. A look at the financial, technology and mainstream press offers a wealth of different takes — perhaps the gloomiest being Bloomberg’s “Xerox Cedes Control to Fujifilm, Ending Its Independence.”
There are layers upon layers to this transaction, of course, and we’ll be taking a deeper dive into some of the implications for the company, the technology and more as time goes on. But Bloomberg’s hand-wringing over the loss of independence aside, it’s really not a huge surprise that Xerox sold — rumors had abounded for quite a while that someone was going to buy the iconic company; the rumored buyer du jour has included almost every major industry OEM.
And it’s clear that the internal workings have been afoot for a while. In the press release, Robert J. Keegan, chairman of Xerox’s Board of Directors, said, “Today’s announcement follows a comprehensive review of our strategic and financial alternatives led by Xerox’s independent directors that began after the separation of Conduent in 2016. Upon careful consideration of all alternatives available to the company, the Board of Directors concluded that this combination is clearly the best path to create value for our shareholders. An attractive, certain cash dividend, together with participation in the future success of the combined company, presents a compelling value equation for Xerox shareholders. We are excited to strengthen our longstanding relationship with Fujifilm as we enter the next phase of Xerox’s transformation journey.”
Clearly things have not been particularly rosy for Xerox since it spun off Conduent and reformed Xerox as a document print/copy and managed imaging services company. In the year since the spinoff, Xerox has seen improved financials, if not terribly strong ones. Its fourth quarter and full-year 2017 results, released the same day as the Fujifilm announcement, showed a company that was delivering on conservative promises. “One year ago, I told the market that to position Xerox for long-term success and deliver shareholder value, we would focus on the growth areas in our industry to improve our revenue trajectory while continuing with our Strategic Transformation initiatives to increase our profitability and margins,” said Jacobson in the earnings announcement — and indeed, fourth-quarter revenues were $2.7 billion, up 0.5 percent (down 2 percent in constant currency). Full-year revenue was $10.3 billion, down 4.7 percent — in line with the company’s guidance of mid-single-digits decline, and an overall improvement from pre-split Xerox (see Senior Analyst John McIntyre’s in-depth look at Xerox’s history, which included several years of negative revenue numbers, here, and his look at the post-split improvements and struggles here).
Fuji Xerox was not without its own problems, the most notable being the accounting scandal in New Zealand and Australia that was at the root of Icahn’s call to end or renegotiate the joint venture. And reports are that Fuji Xerox is cutting 10,000 jobs — noted in the press release as a “cost reduction program commencing immediately at the existing Fuji Xerox joint venture, which is targeted to generate approximately $450 million of cost savings on an annualized basis.”
According to Fujifilm, the new Fuji Xerox is expected to deliver at least $1.7 billion in total cost savings, with $1.2 billion to be achieved by 2020. The transaction is expected to close in the second half of calendar year 2018, subject to the satisfaction of customary closing conditions and regulatory approvals and approval by Xerox shareholders.
With seemingly no cash outlay of its own, Fujifilm was able to acquire Xerox with a $6.1 billion loan that gets repayed immediately. $1.7 billion in cost savings seems like a bold boast and there appears to be some magic in that equation. Where are the savings coming from? We know $450 million is coming from laying off 10,000 workers in the Asia Pacific region. What about the other $1.25 billion? “Synergies that will be achieved through the transaction” isn’t particularly quantifiable. There should be cost savings on the purchase of now internally manufactured engines. What else? Xerox already embarked on major cost cutting measures to presumably get them in shape for a buyer. We look forward to hearing a more detailed breakdown for this number.
Revenue for Fujifilm’s nine months ending Dec. 31, 2017, released Jan. 31, was up 6.9 percent from the previous-year period, however, and in its own press release it stated “The successful closing of this transaction is expected to have a mid-to-long term positive impact on Fujifilm’s consolidated earnings after the new Fuji Xerox becomes a consolidated subsidiary. There will be no impact from the combination to Fujifilm’s consolidated earnings in fiscal year 2017.”
All the players involved in the transaction sound optimistic — which is to be expected in a public announcement of such a big move. What remains to be seen is how well the reality of the next two to four years meshes with the projections. Can Fujifilm find success with this marriage of the firms’ hardware, technology, solutions and global reach? Pretty graphics, fancy words and talk of synergies are one thing, but as we usually say in these pieces, time will tell.