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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