by John McIntyre
Well, the headline is a teaser for something you surely already know – Fujifilm acquired print and copy icon Xerox, and then will merge it with longtime Xerox engine and manufacturing partner Fuji Xerox, creating the largest player in the print/imaging industry with annual combined revenues of $18 billion. In a prepared statement, the firm explained that Fujifilm will own 50.1 percent of the combined company, and made the case for the integration of the two operations:
“The transaction builds on the 56-year collaborative history between Fujifilm and Xerox to create a global leader in innovative print technologies and intelligent work solutions with enhanced scale and innovation capabilities.” The company announced that the new Fuji Xerox’s board of directors will include 12 members; seven will be appointed by the Fujifilm board, five independent directors will be appointed from the Xerox board, and Shigetaka Komori, chairman and CEO of Fujifilm and chairman of the existing Fuji Xerox, will serve as chairman of the board. The company will maintain its NYSE listing, which means it will have to report its operations, so the success of this move will be out in the open for everyone to see.
Technically, the announcement stated that it will combine the two companies by making Fuji Xerox a 100 percent subsidiary of Xerox, and Xerox will change its name to “Fuji Xerox” (now known as the “new Fuji Xerox”). The statement also says the combined company will continue to use the “Fuji Xerox” and “Xerox” brands within its respective operating regions (so for simplicity’s sake, within this piece we will continue to refer to the entity now known as the “new Fuji Xerox” but operating under the Xerox brand as “Xerox”). For the print/imaging industry, this is only the latest domino to fall in an overdue consolidation of the OEM end of the industry, all while the BTA and dealer channel has been in an all-out consolidation phase for several years. And it ain’t over yet, folks.
The Xerox/Fuji Xerox merger is interesting because in many ways it mirrors the recently concluded HP/Samsung printer group acquisition – which also defined the biggest overall imaging industry player until this latest move by Fujifilm. There are several similarities in the two acquisitions as both are multi-purpose acquisitions, and several pressing issues are addressed for Xerox and Fuji Xerox much as the Samsung move did for HP.
- Vertical integration – The Xerox/Fuji Xerox merger cements a new low-to-mid-class engine and manufacturing source for Xerox, because many of the models in those performance ranges currently sold by Xerox are manufactured by Samsung – now HP. Replacing a large swath of its office products, many of which are new offerings, with clean-sheet replacement designs that are likely substantially different in overall architecture, from a new source, is an enormous task that would severely challenge any company in the industry (I wouldn’t want to be tasked with that job). The Xerox/Fuji Xerox consolidation almost certainly means Xerox will be sourcing the successor models to the existing Samsung-made machines from Fuji Xerox, preventing Xerox from possibly considering an alternative low-cost OEM engine source such as Oki or Brother. Acquiring the Samsung printer unit gave HP vertical integration, with more design involvement and in-house laser manufacturing, which it will use to produce differentiated MFPs.
- Since Xerox will be sourcing these successor models from in-house Fuji Xerox, Fuji Xerox’s manufacturing and production volume will increase, likely lowering per-unit costs, and improving its overall financial picture — which will be, of course, a consolidated financial sheet with Xerox. One downside is that the deal may jeopardize any existing OEM manufacturing agreements Fuji Xerox has — which would reduce production volumes. For HP/Samsung, the loss of Xerox (and possibly others) as an OEM buyer is significant but expected – so HP has to make up for that lost volume by selling HP-branded, Samsung manufactured units.
- Since Xerox will be sourcing these successor models from an in-house source, Fuji Xerox will no longer be forced to include an OEM manufacturing and marketing profit margin, also probably helping to lower Xerox’s acquisition costs for these new models. This structural benefit should apply to the HP/Samsung merger as well.
- As an in-house design and manufacturing source, Fuji Xerox should be able to work better with Xerox on new model design as well as incorporating any technology assets it has in its IP portfolio – which will also now be shared completely. The Fuji Xerox engine design and manufacturing team can combine the marketing design requirements of the far-flung Xerox and Fuji Xerox sales subsidiaries and channels in a unified process. Again, this organizational benefit should apply to the HP/Samsung merger as well.
One could speculate (something analysts have to do since we often don’t know exactly what goes on behind the curtain) that the HP/Samsung merger – and thus the immediate necessity for Xerox to find a new OEM supplier for a major portion of their mainstream product line – triggered Fujifilm to make the Xerox deal. At the same time, Xerox’s management and board of directors were under tremendous and bare-knuckled pressure from activist shareholders (Carl Ichan, et al) to increase shareholder value and replace what they characterized as a legacy of lethargic, cowardly and insular Xerox leadership: “old guard’ [Xerox] directors – who have historically lacked the intestinal fortitude to challenge and demand accountability from Xerox management … [Xerox CEO] Jeff Jacobson … 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.” Under the terms of the announced agreement, Xerox shareholders will receive a $2.5 billion special cash dividend, or approximately $9.80 per share, funded from the combined company’s balance sheet. For several days after the merger announcement, reports surfaced that Ichan, who owned about 10 percent of the firm, sold a half-million Xerox shares, worth about $40 million (the $9.80 cash dividend was worth about $5 million by itself to Ichan). The day before the announcement, Jan. 30, Xerox closed at $32.68 a share — the close on Jan. 31 rose to $34.13 (4.4 percent increase in one day) — but then the stock nosedived over the next week to about $31 after the Ichan selloff, and likely because other shareholders guessed that this was a good profit-taking opportunity. Seeking Alpha is reporting that Icahn sold 1.6 million shares of Xerox, selling hundreds of thousands of shares every day since the announcement, though Seeking Alpha notes that despite the selloff, Icahn and Associates still hold over 20 million shares, and are still Xerox’s biggest shareholder. And, likely to Ichan’s chagrin, Jeff Jacobson remains CEO of the Xerox/Fuji Xerox entity.
The acquisition of Xerox and the Xerox/Fuji Xerox merger comes at a very heavy price for 10,000 Fujifilm employees, as the company announced it would shed 10,000 jobs out of an employee base of about 46,000 in the merger, streamlining and reorganization process— which would have been pretty big news if it wasn’t overshadowed by the Xerox acquisition. When a company that large downsizes by more than 20 percent it is a major event, and laying off people in Japan is no easy feat. Fujifilm touted the cost saving benefits that it expects to come with the move, saying the merger would result in at least $1.7 billion in total annual cost savings by 2022 – adding that the targeted cost savings represent approximately 10 percent of the total cost base of the new Fuji Xerox, boosting profit margins in that period. Specifically, the firm claimed that of that total $1.7 billion figure, $1.25 billion is attributable to the merger itself. The company also said it will immediately commence a cost reduction program at the combined Fuji Xerox entity, which is targeted to generate approximately $450 million of cost savings on an annualized basis, which it says are additive to Xerox’s ongoing “Strategic Transformation” cost-cutting initiatives. But the $1.7 billion in savings over four years is offset by approximately $1.4 billion in one-time merger and restructuring costs, mainly in the first three years. So, considering a projected $1.7 billion in savings over four years (a little over $400 million annually), split between U.S. Xerox and Fuji Xerox units, looks like maybe about $200 million for each unit – though Fuji Xerox will likely be hit with the biggest portion of the cost reductions. Minus the one-time merger and restructuring costs, the $300 million net benefit is only $75 million per year, or maybe $38 million per annually for each Xerox/Fuji Xerox. Nice, but not earth-shattering.
The Xerox/Fuji Xerox merger is entirely logical – and one wonders why it didn’t happen sooner. The handwriting spelling out “maturity” has been on the office print/imaging wall for quite a while. The company ticked off a long litany of benefits and advantages that result from the combination – most of which have been apparent to industry observers.
Again, the specter of a combined HP/Samsung unit, armed with newly designed and differentiated MFPs and low CPP color MFPs, and HP’s takeover of considerable Samsung existing MFP market share and presence in higher-growth regional areas – with a renewed focus on capturing pages from the very office customers that Xerox and FujiXerox value so highly – could have been the nudge that Fujifilm needed to pull the trigger on the deal. Or, maybe it was the pressure from Ichan that led Xerox to entice Fujifilm to make the deal. Regardless, with a flat to slightly declining overall market as the backdrop, no OEM brand can afford to lose major chunks of customers and their profitable pages to any competitor – least of all to the 800-pound gorilla that dominates the standalone, non-contractual printer side of the business. Xerox/Fuji Xerox was going to have to defend those pages against HP’s assault every day, and against all the other OEMs too, and it seems logical that a combined Xerox/Fuji Xerox will be better positioned to withstand and engage in that battle.
The fallout and next dominoes to fall from the merger will play out over the next year or two. What might those be? Speculation of course:
- Xerox/Fuji Xerox will eventually unify their brand name to one or the other. Your guess is as good as mine.
- As explained previously, Xerox/Fuji Xerox will have to transform considerable segments of its office product lines fairly quickly away from any Samsung-sourced engines, all while big layoffs and cost cutting are happening inside Xerox/Fuji Xerox. Xerox noted, as part of its huge new product rollout in 2017, that it wasn’t cost-competitive in some A4 segments, but that the new lines were more competitive and it expected growth from those offerings. New product development costs are likely to rise in the combined Xerox/Fuji Xerox if only because the shift from Samsung to Fuji Xerox as the engine/manufacturing source is inevitably going to cost money – one way or another.
- The merger may force Xerox/Fuji Xerox to consolidate or thin out its product lines or exit segments where it is less competitive, or those that offer thin to no profit margins. Lower-end A4 and non-contractual printer offerings are possibly areas where the firm may decide it should de-emphasize its presence.
- An obvious sales and marketing benefit is that as one company, Xerox/Fuji Xerox will be better positioned to bid and deliver improved, integrated service and support to major corporate customers with large, scattered international operations and installed bases of equipment — another necessity to better fend off HP. This benefit also applies to any major resellers/dealers with international operations and/or customers that buy Xerox.
Things are bumpy out there in the office imaging space now – and it’s just going to get bumpier. By combining Xerox and Fuji Xerox, Fujifilm has effectively fastened and tightened its seatbelt against the inevitable rough ride ahead.
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