The auction process for Xerox has begun following the victory of shareholders over the Xerox board last week.
Darwin Deason and Carl Icahn have appointed a new board led by John Visentin as CEO to run the company during the auction process. This would take 90-120 days according to Darwin Deason speaking to Bloomberg last week.
There has already been interest from private equity firms, not least Apollo which is close to Visentin and has made no secrete of its interest. Deason declined to name others, saying also that competitors have shown interest and that Fujifilm is welcome to bid, providing it increases its offer close to the $40 a share that Deason and Icahn have said represents a fair 25-30% premium over the $32 share price when the original deal with Fujifilm was announced in January. “That might be the best thing to do,” he says. “We have some interest from other competitors that might be interesting going forward.”
But if no satisfactory offer is received, the business could continue as a standalone company, for a least a year or two. “We did not come into this to run Xerox,” Deason says. Visentin is a crown jewel of a CEO capable of doing this.
However, the sticking point remains the joint venture deal and how it can be unravelled. At its simplest it provides exclusivity to Fujifilm to use the Xerox name and to distribute its products throughout Asia. Fujifilm is 75% owner of this business. At this level it is not unlike the shared ownership for Europe between Xerox and the Rank Organisation which was settled in the 1980s.
However, Fuji is a major supplier of technology to Xerox and delivers many of the desktop engines and light production presses to Xerox. This includes the newly launched Iridesse, a co development between engineers in the US and Japan. Xerox is solely responsible for the iGen series and Nuvera mono presses.
Icahn has proposed replacing Fujifilm’s engines with those of a rival supplier, though it is hard to think of a major digital press supplier that would be willing to take on the task.
The preferred approach is to renegotiate the terms of the joint venture “from a position of strength rather than one of weakness” and to seal a deal with Fujifilm that will leave the pair, who own 13% of Xerox’s shares well rewarded for their intervention.
The new board will also consider the position of Parc, the Californian research unit that in the past has given rise to the Mouse and the icon led graphical user interface. This is called a great asset and the company is berated for failing to make the most of this asset. But then, according to Deason, Xerox has been a uniquely badly managed business.
“I have never seen anything like this,” he said, “every rock we turned over there another bad email, another bad text.”
Visentin, Deason explains, is “ready to go to work”. That will involve setting up a data room where prospective buyers can come in and examine documents before committing themselves to a bid. “We have had some significant conversations,” says Deason. “These auctions in my experience run for 90 to 120 days. We set up the data room and get the companies that are interested into that data room. It takes a little time: say 90 days, maybe a little more.”
The prospective purchasers will be looking over a business that has a brand stronger than any of its competitors, some of which are now larger than the original copier company. A merger with Fuji Xerox would have propelled the combined business into top slot.
As it is HP is reckoned to be the biggest supplier of printers to printing presses, followed by Canon and Ricoh. Then come Xerox and Fuji Xerox with Konica Minolta behind. However, the Japanese rivals have a wider footprint than just printing machines: medical imaging for Canon for example, textile printing for Konica Minolta. Direct comparisons are difficult. None is enjoying a halcyon period.
FujiXerox is closing manufacturing facilities and cutting 10,000 jobs ahead of the merger, aiming to save ¥50 billion a year by 2020. In 2017 it reported a decline in sales of MFPs and office equipment to Asia and Oceania while revenue from Europe and North America, where most products are sold through Xerox, are described as favourable. Revenue fell just 1.1% to ¥783.7 billion. What is already Fujifilm’s biggest division would have become larger still with the formal tie in with Xerox.
It is not accepting its fate lying down. The company has announced legal action to thwart the new Xerox board. And Fujifilm CEO Shigetaka Komori is unused to be beaten. Fujifilm will be in pole position to buy Xerox, though with a very structure to the intricate deal initially proposed.
Canon is the largest competitor outside HP and meets Xerox on most fronts, large format inkjet being the exception where Xerox is only a minor participant currently. It too has found growth hard to come buy as office printing stalls. Nevertheless is its projecting revenue of ¥1,939 billion for the current financial year. It points to a shift towards higher end printers and notes the sale impact of its ImageRunner Advance C5500 light production press and VP i300 cutsheet inkjet press. It does not break out the figures for the production print sector.
Ricoh does. Commercial print delivered ¥185.9 billion of revenue in the 2017/18 financial year, the same as the previous year and delivering a healthy operating profit. Office printing accounted for sales of ¥1144.0 billion, down 1.9% and office services ¥447.9 billion. Reorganisation in the US hit the revenue in the office sector in particular, falling 5.2% while European sales grew 4.6%, helped by the exchange rate.
The fastest growing company is Konica Minolta, albeit the smallest of the Japanese companies (discounting Brother and Sharp which are much smaller). In the last financial year, office products delivered ¥583.8 billion in sales, a 4.6% rise while professional print achieved sales of ¥214.2 billion.
Each of the Japanese companies has declared visions of where they see their future and where printing fits into this vision. Other than Fujifilm, none has expressed any desire for the sort of $6 billion deal that would acquire Xerox. Rather smaller tactical or strategic acquisitions to secure a piece of technology or distribution have been the order of the day.
None has been linked to Xerox, other than by Icahn saying that technology provided by FujiXerox might be sourced from another supplier. Instead US pundits have pointed to HP, ignoring the fundamental difference in technology platforms.
It at least would have the resources for a deal; Kodak, which is Xerox’s neighbour in Rochester, would not, even if it had the inclination. EFI has the resources, but its future lies in inkjet, not electrophotographic printing. The technology that Xerox invented and with which it strode cross most of the globe, may be the biggest issue limiting the pool of potential purchasers.
The new Xerox board is preparing the business for sale with the possibility that a buyer is found before the end of the summer. However, the shareholders want a price close to $40 a share which could prove the sticking point.