(Editor’s note: Frank has the last word in the fifth installment of The Cannata Report’s series on Xerox.)
Our esteemed editor-in-chief suggested we might have made a mistake in our previous installments in this series on Xerox when theorizing that current Xerox management has one objective and that is to either sell the company whole or carve it up into pieces.
Scott is a seasoned veteran journalist in this industry so his point of view must be considered. And it is always a good thing to have a difference of opinion as it causes you to review your rationale for writing what could only be construed as a negative piece about a company. Scott posed the question so let me continue to offer more detailed evidence as to why I believe we did not make a mistake in our original commentary.
We refer to our thesis that current Xerox management has demonstrated a lack of knowledge on maintaining MIF (machines in field). The critical factor is that Xerox has an annuity business model. Without a competitive 95% retention rate the company will see an erosion in sales. Evidence of this can be found in Xerox’s first quarter report that indicated equipment sales were down 9.5%.
The company can easily argue it must make dramatic changes to become profitable. That takes time and is generally not conducive to business as usual. And it is not how they are doing it, rather what they are doing. When you start by absorbing Global Imaging Systems (GIS)—the company responsible for half of Xerox’s imaging profits for at least the last three to four years—into XBS, that is a bad idea.
Follow that by terminating some of GIS’s core company presidents who have built the companies they were managing, and terminating some vice presidents not based on competence or contribution but their level of compensation.
Rather than having the best and the brightest help build a newer, stronger, and more viable Xerox, the company has weakened its position by reducing the talent level at a time when they desperately need all the talent they can muster
Over the course of 40 years we have observed that when outsiders enter the imaging industry lacking an understanding of the business model, it’s reasonable to assume they will fail.
However, if Xerox’s objective is to sell the company in pieces or in parts, a short-term strategy to achieve a temporary level of profitability to facilitate a sale does makes some sense.
The outcome of the suit between Fujifilm and Xerox will go a long way towards defining what will happen. For purposes of discussion, let us assume the initial ruling for Xerox will be upheld.
Let’s review the lawsuit that is currently pending between the two. In this case, we reference a June 18, 2018, Wall Street Journal article titled “Fujifilm Sues Xerox for More than $1 Billion After Cancelled Merger” by Cara Lombardo.
Xerox reached a truce with activist investors Carl Icahn and Darwin Deason last month (May 2018) to terminate the deal it had in place with Fujifilm, but it is still fighting with Fujifilm over the soured merger the pair sought to prevent.
Fujifilm’s federal lawsuit, filed in the Southern District of New York, alleges Xerox unlawfully terminated an agreement to combine with Fuji Xerox, a joint venture between the two companies, due to pressure from Messrs. Icahn and Deason, who argued the deal undervalued Xerox.
Japan-based Fujifilm said by settling with the activists, Xerox prevented other shareholders from having a say on the deal. “It is inconsistent with shareholder democracy to allow Carl Icahn and Darwin Deason, minority shareholders with only 15% of Xerox’s shares, to dictate the fate of Xerox,” Fujifilm said in a statement.
Xerox said in a statement it remains “extremely confident” its actions were valid. “Xerox will vigorously defend its decision and pursue any and all remedies available to Xerox arising from Fujifilm’s mismanagement and misconduct,” the company said.
Xerox in January 2018 struck the complex merger deal with Fujifilm, which would have traded Xerox’s 25% ownership of their 60-year joint venture to Fujifilm for 49.9% of a new company that would have combined all of Xerox with the joint venture. Xerox shareholders would also have been paid $2.5 billion in aggregate via a special dividend.
Xerox said it opted to back out of the deal with Fujifilm because the Japanese company didn’t deliver Fuji Xerox’s audited financial statements by April 15, and there were material deviations in the audited financials when compared with the unaudited financials. Fujifilm, meanwhile, says the financial statements were delivered on time and satisfied the terms of the deal.”
At some point the antagonists will go to court. The outcome could possibly leave Fujifilm in a position to buy a controlling interest in Xerox. If Xerox’s claim of misconduct is upheld, the agreement in place will continue to provide the company with products for at least the next four years.
Based on a reliable and well-positioned source, “Used machines manufactured by Fuji carry a significantly higher price that those manufactured by Xerox in international markets.”
The decision to sell to? Xerox dealers at a price lower than that transferred to XBS will expose the Xerox MIF to dealers who will be ready willing and able to take advantage of the situation.
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