By Dana Mattioli, David Benoit and Drew FitzGerald 

Xerox Corp. will split itself in two and give several board seats to activist investor Carl Icahn, reversing an effort by the century-old company to marry business services with its copiers and printers.

Xerox will divide into two publicly traded companies: one containing its office machines and another housing its services operations, according to people familiar with the matter. The company is expected to make the announcement Friday when it is forecast to report a fourth straight year of declining profits and sales.

The split unravels Xerox's biggest ever acquisition, the 2010 purchase of Affiliated Computer Services Inc. for about $6 billion, which pushed Xerox deeper into providing bill processing, managing call centers and other back-office services to government agencies and corporations. The split would follow a similar move by rival Hewlett-Packard Co. last fall.

As part of the move, billionaire Mr. Icahn will get three seats on the services company's board, the people said. Mr. Icahn in November disclosed a stake in Xerox and said he would seek talks with the company about its future. With an 8.1% stake in the company, Mr. Icahn's hedge fund is now the second-largest shareholder after index giant Vanguard Group.

Xerox, which generates about $20 billion in annual sales, has a market value that is less than half its annual sales. The shares lost a quarter of their value last year and have shed an additional 13% so far this year, ending Thursday at $9.23.

In October, after years of sales and profit declines, Chief Executive Ursula Burns said the company was conducting a strategic review of its operations. And a month later Mr. Icahn revealed his stake. The two have since held talks about the breakup plan, the people said, and both sides largely agreed.

Mr. Icahn has had several successful engagements with companies in the midst of breaking up in recent years, including at eBay Inc., Manitowoc Co. and Gannett Co.

Xerox would continue a trend in corporate America in which diversified companies are splitting into more highly specialized pieces. H-P split into Hewlett Packard Enterprise Co., which is focused on servers, professional services and software, and HP Inc., which sells personal computers and printers. Online-auction pioneer eBay spun off its PayPal payments-processing unit in 2015.

The separation would unwind what had been Ms. Burns's signature deal, one that she started pursuing shortly after being named Xerox's CEO in 2009. The ACS acquisition was a way to shift the company's focus from document handling to a range of services for business and government customers. The deal jolted Xerox's corporate identity, adding 74,000 new ACS employees to a workforce of 54,000, and turned it into a company with $22 billion of revenue practically overnight.

Ms. Burns is a Xerox veteran who joined the company as an engineering intern in 1980 and worked her way to the top. While Xerox took on debt to buy ACS, she defended the deal as a way to deliver more consistent revenue streams that would offset shrinking profits in the hardware business.

Even after announcing the strategic review in October, Ms. Burns stood by the structure of keeping its two units under the same roof. "We do see, to date, strategic value in having these two businesses together," she said in October. "As you go through the review, that's one of the things that we'll validate."

But that formula has been sputtering. While Xerox's services business has grown in past years, it hasn't earned enough to counter the slide in its traditional hardware operation. The company has warned its document division revenue could fall as much as 7% in 2015, excluding the impact of exchange rates.

Splitting Xerox's printer business from its service divisions could undo gains from the ACS deal, including cost savings, Piper Jaffray analyst George Tong said. He warned "it's a very big transaction to manage" fraught with risk, though he said Mr. Icahn could help guide the process.

Dallas-based ACS was a pioneer in the business of shipping back-office work to countries with cheap labor such as Mexico and Ghana. About 40% of its business is with government entities, such as state Medicare and Medicaid agencies.

But contract hiccups in recent years have hurt growth from the same sectors that were supposed to save Xerox. The company last year booked $146 million in write downs after it acknowledged it couldn't handle some state Medicaid contracts.

Founded in Rochester, N.Y., at the turn of the last century, Xerox got its big break from a Queens, N.Y.-based inventor Chester Carlson, who produced the first xerographic image in 1938. Using that technology, Xerox brought its first automatic commercial copier to market two decades later and sold shares to the public in 1961.

For decades, Xerox built its business by inventing new machines--such as the photocopier and the laser printer--and pushing companies to buy more office machines supplied with pricey ink and toner. Its success funded its famed Palo Alto Research Center, whose work included Ethernet technology and an early prototype computer with a graphical user interface and mouse. But it endured bruising battles with U.S. and overseas rivals that triggered layoffs and restructurings. In 2000, it slashed its dividend in the face of huge losses and heavy debt.

The company, which is now based in Norwalk, Conn., and employs 140,800 people around the globe, had a bruising year in 2015. In October, Xerox forecast revenue would fall 3% in 2015, excluding currency fluctuations, after a 10% decline in the third quarter.

"We know that we have a lot of work to do," Ms. Burns said in October.

Write to Dana Mattioli at dana.mattioli@wsj.com, David Benoit at david.benoit@wsj.com and Drew FitzGerald at andrew.fitzgerald@wsj.com

 

(END) Dow Jones Newswires

January 28, 2016 20:07 ET (01:07 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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