Question

Read the attached articles about the proposed merger of Xerox and Fujifilm.

Utilizing your knowledge of external and internal analysis, business and corporate strategy, and corporate governance, please discuss the following questions:

1. What is the corporate strategy behind the merger of Xerox and Fujifilm?

2. Why did Xerox agree to the merger? Is this a good deal for Xerox? Discuss the benefits and challenges they face with the merger.

3. Why did Fujifilm agree to the merger? Discuss the benefits and challenges they face with the acquisition. Is this a good deal for Fujifilm?

4. If the merger has gone through, how would it have affected Xerox’ business strategy?

5. What was the role of corporate governance in this deal?

Xerox and Fujifilm reopen $6.1bn merger negotiations. Talks come after pressure from activist shareholders Carl Icahn and Darwin Deason FT.com Eric Platt in New York APRIL 27, 2018 Xerox and Fujifilm have reopened negotiations on their $6.1bn merger that could lead to a higher payout for shareholders in the US group, just weeks after an activist investor dragged the Connecticut-based company into court over the terms of the deal. The discussions centre on “a potential increase in consideration” for Xerox shareholders, the company said, but it cautioned that there was no guarantee that any changes would be made to the agreed deal terms. Xerox announced in January that it would merge its business with a joint venture that it operates with Fuji in Asia, giving the Japanese company a 50.1 per cent stake in the combined group. Investors in Xerox were set to receive a $2.5bn cash dividend as part of the transaction, worth roughly $9.80 per share. But Darwin Deason and Carl Icahn, the activist shareholders who hold more than a tenth of outstanding Xerox shares, rebuked the company, saying the proposed tie-up undervalued the company. Mr Deason alleged that the deal was “the product of deceit” in a complaint filed in the Supreme Court of New York in February. His lawsuit against the company is continuing. Mr Icahn has urged shareholders to vote against the deal. The two ramped up the rhetoric earlier this month, characterizing the deal as “value-destroying” and an “insult to long-suffering Xerox shareholders”. Mr Icahn on Thursday urged Xerox shareholders to read a report on the company published by Barclays. “It’s an independent analysis that proves (1) [Xerox] shareholders ‘deserve better’ (2) ‘the current deal undervalues the company (and provides no premium to shareholders)’ and (3) ‘Icahn’s alternatives?.?.?.?would be a better idea in comparison,’” he wrote on Twitter. The company has fired back, saying the pair have been running a “highly disingenuous campaign that distorts and omits key facts about Xerox”. Mr Deason did not comment on the news that the two companies had reopened negotiations. Mr Icahn did not respond to a request for comment. Xerox said: “Consistent with its commitment to shareholder engagement, Xerox has been meeting with its shareholders since the announcement of the transaction.” Fuji added that the deal was negotiated in an “appropriate manner, based on fair valuations from independent experts”. The company said a tie-up was the “best and only plan in creating the future of Xerox. We are also confident that Xerox shareholders judge this the same.” Fuji had envisaged cost savings of as much as $1.7bn as part of a merger with Xerox, which holds a market valuation of $8bn. Analysts with UBS said earlier this year that the deal between the companies “appears to favour Fujifilm shareholders over Xerox shareholders”. But they added that if the cost cuts were achieved, Xerox shareholders stood to earn a premium. Shares of Xerox climbed just over 2 per cent to $31.07 by midday in New York. Carl Icahn’s presentation on Xerox is available here: http://carlicahn.com/wp-content/uploads/2018/04/Xerox-Analysis.pdf U.S. judge blocks Fujifilm, Xerox merger temporarily Reuters, Liana B. Baker, APRIL 27, 2018 / 8:28 PM Fujifilm Holdings Corp’s merger with U.S. firm Xerox Corp was temporarily blocked on Friday following a court ruling, handing its activist investors a win after they sued to stop the deal. The ruling reopened nominations to Xerox’s board on Friday after investor Darwin Deason filed a lawsuit against the company last month opposing the deal and asking to add his own nominees to the board. The preliminary injunction came a day after the companies reopened deal talks on their $6.1-billion merger. They are discussing a higher price after Xerox, under pressure from top investors, asked to renegotiate the terms. Judge Barry Ostrager of the Supreme Court of the State of New York, County of New York, granted the injunctions, saying Xerox Chief Executive Officer Jeff Jacobson sought to conclude the deal even though he was advised to end negotiations. “The facts abduced at the evidentiary hearing clearly show that Jacobson, having been told on Nov. 10 that the Board was actively seeking a new CEO to replace him, was hopelessly conflicted during his negotiation of a strategic acquisition transaction that would result in a combined entity of which he would be CEO,” the decision said. The proposed merger is opposed by Deason and Carl Icahn, two of Xerox’s top shareholders, who have said the agreement dramatically undervalues Xerox. Fujifilm said it would consider all options, including whether to appeal against the decision. “We disagree with and are disappointed by the judge’s ruling,” the Japanese firm said in a statement. “We strongly believe that all Xerox shareholders should be able to decide for themselves the operational, financial, and strategic merits of the transaction. Xerox said it disagrees with the ruling and “will immediately appeal the court’s decision”. “The company strongly believes that its shareholders should be allowed to exercise their right to vote on the transaction and decide for themselves,” the company said. It added that it believes a combination with Fuji Xerox is the best path forward to create value for shareholders. “The Xerox board undertook a rigorous process to reach its decision to approve the proposed transaction, including a comprehensive review of the company’s strategic and financial alternatives, as well as potential transaction structures in its negotiations with Fujifilm over a 10-month period.” Deason said in a statement that he is “grateful the court acted to protect the shareholders of Xerox.” In February, Deason asked a court to block the merger with Fujifilm Holdings, arguing the U.S. photocopier maker’s board had failed shareholders by approving a deal that undervalues the company. Icahn and Deason, who own a combined 15 percent of the U.S. printer and copier maker, have called the deal structure “tortured” and “convoluted”. Law firm King & Spalding represents Deason while Paul Weiss represents Xerox. Xerox CEO Exits in Settlement With Activists; Fujifilm Deal at Risk New board is expected to consider alternatives to transaction; Icahn, Deason have sought to kill it WSJ, By David Benoit, Updated May 2, 2018 12:18 a.m. ET Xerox XRX 2.67% Corp. said its chief executive, Jeff Jacobson, is resigning in a settlement with two of the company’s biggest investors, Carl Icahn and Darwin Deason, a pact that shakes up the majority of the board and puts its transaction with Fujifilm Holdings Corp. at risk. The new board, whose majority is backed by the activists, is expected to consider alternatives to the deal with Fujifilm, a complex transaction that sells the majority of Xerox to the Japanese company by combining with a joint venture the two operate in Asia. Messrs. Icahn and Deason have been seeking to kill that deal, saying it undervalues Xerox and had alleged Mr. Jacobson quickly negotiated the transaction in an attempt to save his own job after his board had instructed him to stop the talks. Xerox has acknowledged it launched a CEO search last year. Xerox chose to settle with the activists after a judge last week temporarily blocked the Fujifilm transaction, siding with Mr. Deason in a lawsuit and saying the talks were conflicted by Mr. Jacobson’s tenuous position. Seeking a settlement would avoid a distracting fight over its board and uncertainty about the future of the deal, Xerox’s existing board said Tuesday. The settlement effectively ends a legal fight with Xerox and its investors as well as a potential proxy fight that would have sought to remove the entire board, by giving Messrs. Icahn and Deason six of what will now be nine seats. Together, the two billionaires control about 15% of Xerox as the first- and third-largest investors. Keith Cozza, who is chief executive of Mr. Icahn’s public company, will be named chairman of Xerox. Xerox will name as chief executive John Visentin. Xerox had considered Mr. Visentin as the leading candidate to replace Mr. Jacobson last year before it ended its search and reaffirmed faith in him, The Wall Street Journal has reported. Mr. Visentin is a former executive at several technology companies and had been working with the activist investors at Xerox. The settlement doesn’t include pending litigation Mr. Deason has against Fujifilm. The judge also criticized Fujifilm’s actions in his opinion halting the deal. That pending litigation could give the new Xerox board some leverage in discussions with Fujifilm. Fujifilm, which wasn’t immediately available to comment, has defended the transaction and said it was negotiated fairly. Xerox had previously defended Mr. Jacobson and said that he had won over the board by hitting earnings and financial targets, and that the whole board believed the Fuji- film deal was the best option. But the judge’s opinion last week left the board in a bind: Xerox would have to fight two big investors over its board without being able move forward with its deal or negotiate an improved offer from Fujifilm. The judge has to sign off on the settlement. Seven of the old board members will resign, including Chairman Robert Keegan, who approved Mr. Jacobson’s negotiations, and lead director Ann Reese, who also approved of his talks with Fujifilm. Xerox and Fujifilm have been in discussions about renegotiating the deal, but Fujifilm will now face a new board led by a team that wants to not only end the sale but also potentially cancel the 50-plus-year joint venture, Fuji Xerox, that is at the heart of their relationship. Xerox had asked Fujifilm to sweeten the deal, but in its statement Tuesday night, Xerox said Fuji had yet to make an improved offer. Fujifilm owns 75% and Xerox 25% of their joint venture in Asia. Under their prospective deal, that joint venture would be folded into U.S.-based Xerox, and Fujifilm would own 50.1% of Xerox. Current Xerox shareholders would also be paid a $2.5 billion special dividend. ‘Rogue Executive’ Led Xerox Into Fuji Deal, Complaint Claims Bloomberg, By Ed Hammond, April 19, 2018, 11:25 Xerox Corp. was a company racked by infighting, rogue decision-making and dishonesty as it raced to sell itself to Japanese rival Fujifilm Holding Inc., according to claims detailed in new court filings. The amended complaint, filed Thursday in state court in Manhattan by investor Darwin Deason, contains at least portions of correspondence, some previously redacted, among Xerox board members, executives, their counterparts at Fuji, and their advisers. Taken collectively, they lay out a breakdown of corporate governance norms. At the heart of Deason’s complaint is the accusation that Xerox Chief Executive Officer Jeffery Jacobson acted without authorization to strike a deal with Fujifilm that preserved his job at the expense of shareholder value; an allegation Xerox has labeled “highly disingenuous.” Xerox has asked a judge to deny Deason’s request for a court order blocking the merger. ‘Sleepless Nights’ The revised complaint includes text from what it says is a Dec. 7, 2017, letter written by Xerox director Cheryl Krongard to the company’s chairman Robert Keegan, titled “4 sleepless nights”. In that letter, Krongard called Jacobson a “rogue executive” who disobeyed the board to secretly negotiate a deal with Fujifilm. In the letter -- purportedly sent less than two months before Xerox agreed to the deal -- Krongard also writes: “This board exhausted every ounce of patience and coaching to make our current CEO a success. We then decided, unanimously, for a variety of reasons, he was not the leader we need.” Krongard adds that the company had identified a CEO replacement who, she says, Keegan had said was “head and shoulders better than Jeff”. The letter continues: “Jeff was told by you, as directed and supported by the board, that the board was disappointed by his performance and would likely look at outside talent. Additionally, you told him in no uncertain terms, that he was to discontinue any and all conversations with FX and F regarding Juice. He blatantly violated a clear directive”. Project Juice was the code name given to deal discussions, while F and FX refer to Fujifilm and the Fuji-Xerox joint venture, respectively. ‘Rogue Executive’ Later on, Krongard writes, “Jeff has put us, and mostly you, in a horrible situation. He is asking us to lie! In my most heartfelt and emotional outreach to you, I implore you not to let this happen! Were it I, I would contact Shigetaka Komori [Fujifilm CEO] personally and bow as low as possible (figuratively) and tell him of our rogue executive’s behavior and beg his forgiveness. Simultaneously, we need to get new leadership ASAP.” Jacobson kept his job and, according to the complaint, Krongard didn’t receive a response to her letter. Requests for comment from Jacobson and Krongard, a former Apollo Management LP senior partner appointed to Xerox’s board in December 2016, were referred back to Xerox. “As is absolutely clear from the record, Jeff Jacobson has always conducted himself with the utmost integrity as CEO and in negotiations with Fujifilm,” according to a statement from Xerox’s board and provided by a spokesman. “At no point did he exceed the authority granted to him by the board’s chairman or the full board. The allegations by Mr. Deason to the contrary are part of his effort to distort the facts.” “Mr. Deason and his lawyers are well aware that Ms. Krongard in her sworn testimony stated that, after sending Keegan a letter expressing concern about Jacobson’s conduct, she became aware that Jacobson had in fact previously received Mr. Keegan’s express permission to negotiate with FujiFilm,” the statement said. Second Guessing In a court filing Thursday, Xerox asked a judge to throw out Deason’s claims against it, Jacobson and its directors. New York law doesn’t allow Deason to second-guess the board’s business judgment, Xerox said in the filing. “It is crystal clear that even if Jacobson (the only inside director on the board) were conflicted -- and he was not -- any such conflict did not infect the decision of the nine outside directors who approved the transaction,” Xerox said in the filing. “Deason’s grab bag of other arguments amounts to no more than Monday morning quarterbacking,” it added. ‘Short Stick’ Deason said Thursday in a statement that the defendants are continuing to hide “incredibly harmful facts” contradicting public statements. “As they say in Texas, Xerox and Fuji are ‘swinging a short stick hard’ in this case,” he said. “A whitewash defense won’t work here given the hundreds of documents, text messages and emails from the directors, Mr. Jacobson, and Fuji.” Krongard’s letter is among scores of text messages, emails and handwritten communications said to be exchanged in the months leading up to the Xerox-Fujifilm deal that are referred to in the revised complaint. In some, activist investor Carl Icahn, who has joined forces with Deason to block the merger and seek changes at Xerox, is called “crazy” by Jacobson and a “mutual enemy”. In others, Fujifilm’s Komori is referred to as a “warrior” by Jacobson and as having “terribly scolded” one of his subordinates. A Fujifilm spokeswoman referred to a previous statement in which she said that Deason’s amended complaint “reflects the biased, arbitrary, and inaccurate view of Mr. Deason’s attorneys.” She said the Xerox agreement was “negotiated at arms-length between independent parties with the advice of third party professionals. A representative for Icahn didn’t immediately respond to requests for comment. Deal Terms Under the terms of the deal, announced in January, Xerox, which has a market value of $7.7 billion, will first merge with a joint venture that the company operates with Fujifilm in Asia. Current Xerox shareholders will receive a cash dividend of $9.80 per share. Tokyo-based Fujifilm will ultimately end up owning 50.1 percent of the combined entity, which expands the joint venture to encompass all of Xerox’s operations. Months earlier, as the terms of the deal were outlined, executives at Xerox shared concerns. The new complaint lays out how, in a July 16, 2017 email, Bill Osbourn, Xerox’s chief financial officer, wrote to Bob Brody, the company’s head of competitiveness and performance optimization. “They clearly didn’t understand the economics of the transaction. Will be interesting to see how the Board responds,” Osbourn writes, without explaining who “they” are. Two days later, Brody emailed Jacobson directly to say: “For what it’s worth I think this 51% plan doesn’t work and the assumptions and math are shaky”. It’s not clear from the complaint what Jacobson’s response was, if any. Full Takeover Krongard had also raised earlier concerns. In a Dec. 4 email to three fellow directors, according to the complaint, she said she could “argue strongly that we are not acting in our shareholders’ best interest in this transaction. No premium, minority position, no governance and a base case from the LRP [Long Range Plan] which comprises fictional numbers”. Perhaps the most stunning accusation in the complaint concerns an email Jacobson received from Xerox employee Tetsuya Shiokawa on July 26, 2017, in which Shiokawa told the Xerox boss that Fuji’s preferred deal structure was a full takeover of the U.S. company, though Xerox’s share price at the time was a “little too high.” He outlined a scenario in which Fuji would team up with a private equity firm to acquire all of Xerox. Deason alleges in the complaint, which doesn’t reference a response from Jacobson, that Jacobson failed to communicate that conversation to Xerox’s board or the company’s financial advisers at Centerview. Fujifilm Nears Deal With Xerox Xerox shareholders would own just under half of new company WSJ, By Dana Mattioli, Dana Cimilluca and David Benoit, Updated Jan. 30, 2018 8:17 Xerox Corp. XRX 2.67% is nearing a deal with Japan’s Fujifilm Holdings Corp. FUJIY -0.99% that would mark the end of the independence of the stalwart of 20th-century American industry. The deal would combine Xerox with a joint venture the company has with Fujifilm, and the U.S. company’s shareholders would own just under half of the resulting entity, according to people familiar with the matter. As part of the deal, to be announced as soon as Wednesday, Xerox shareholders would get an implied premium for their stock and some cash, one of the people said. Xerox shares would continue to trade following the transaction, should it be completed. As of Tuesday, Xerox had a market value of $8.3 billion. The talks could still fall apart or the terms could change. Earlier this month, The Wall Street Journal reported that Fujifilm and Xerox were discussing an array of possible alternatives that may or may not have included a change of control of Norwalk, Conn.-based Xerox. The expected deal caps a years-long decline at Xerox, which has been beset by a decrease in office printing and copying as more functions move online—and more recently by a campaign by activist shareholders. It would put control of the company in the hands of a competitor that has successfully diversified away from printing and copying and another of its signature busines By combining, the companies believe they can cut costs to combat declining demand, a task that could be made easier by the fact that they already know each other from their longtime joint venture. It is that venture, Fuji Xerox, that would be combined with Xerox in the deal. Xerox has been under pressure from two of its biggest investors, who together own about 15% of the company and want it to make major changes including re-cutting the joint venture and to explore other potential deals. Carl Icahn, Xerox’s biggest investor, and Darwin Deason, third-largest, joined together this month and called on Xerox to fire Chief Executive Jeff Jacobson and find a new owner. Mr. Icahn is seeking to change the board of directors, two years after he settled another fight with the company. It isn’t clear what impact the deal with Fujifilm might have on the activists’ campaign. Xerox was founded in 1906 in Rochester, N.Y., as a maker of photography paper. In 1947, it entered an agreement that gave it a license to develop a xerographic machine. Xerox and Fujifilm struck the joint venture 55 years ago. It sells copiers and printers in the Asia-Pacific region. Three-quarters-owned by Fujifilm, it has about $10 billion in annual sales. Xerox dominated the copier market for decades, but by the 1970s new competitors from Japan chipped away at its empire after U.S. antitrust regulators forced it to license its patent portfolio. The Fuji Xerox joint venture helped the company fend off Canon Inc. and other rivals with low-end copiers, but by the end of the ’90s, the rise of email and desktop printers had upended its market and forced several painful restructurings. Last year, Xerox broke itself in half, spinning its business-services operations into a new company dubbed Conduent Inc. The legacy company returned to its roots focusing on printers and copiers, an industry facing upheaval and an uncertain future. Fujifilm, based in Tokyo, got its start in film and cameras and now derives most of its revenue from document services—copiers—and health care, including everything from in vitro diagnostic systems to pharmaceuticals and skin-care products. Its market value is about $22 billion

Answer 1

1. erox has struggled to grow its document technology and related business over the last four years with 2017 revenue ($10.3B) down 19% compared with 2014 ($12.7B). Spurred by activist shareholder Carl Icahn, who owns approximately 9.7% of Xerox shares, Xerox spun off its business process outsourcing business in 2016 to focus on its core. Mr. Icahn has been vocal recently about seeking significant changes to Xerox’ board of directors, senior management, and the Fuji Xerox joint venture with an eye on a potential sale of Xerox in the future.

2.

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.

3.

The grapevine has been ripe the past weeks, but now the news is finally out. Fujifilm has entered into a definitive agreement to purchase the majority holding of Xerox Corporation and will merge Fuji Xerox with Xerox.

The two companies said that Fuji Xerox, a joint venture between Fujifilm and Xerox formed in 1962, will use bank debt to buy back Fujifilm’s 75% stake for around $6.1 billion. Fujifilm will use those proceeds to purchase 50.1% of new Xerox shares. Plans are to complete the deal around July-August of this year.

The new entity, to be called Fuji Xerox, will become a subsidiary of Fujifilm, with dual headquarters in the United States and Japan. It will keep Xerox’s listing on the New York Stock Exchange and will be led by Xerox CEO Jeff Jacobson and Fujifilm Chairman Shigetaka Komori.

4.

FUJIFILM Holdings Corporation (“Fujifilm”) (TSE: 4901) and Xerox Corporation (“Xerox”) (NYSE: XRX) today announced that they have entered into a definitive agreement to combine Xerox and their longstanding Fuji Xerox joint venture. The combined company will be a global leader in innovative print technologies and intelligent work solutions with annual revenues of $18 billion and leadership positions in key geographic regions.           

This proposed combination provides Xerox shareholders with significant cash at closing, as well as a substantial interest in the significantly enhanced combined company. Under the terms of the agreement, Xerox shareholders will receive a $2.5 billion special cash dividend, or approximately $9.80 per share1, funded from the combined company’s balance sheet, and own 49.9% of the combined company at closing. The cash dividend represents more than 30% of Xerox’s unaffected share price of $30.35 based on closing share price as of January 10, 2018. Fujifilm will own 50.1% of the combined company and provide important operational support and transformational leadership.

The transaction has been unanimously approved by the Boards of Directors of both Fujifilm and Xerox. The combined company will be named “Fuji Xerox” and trade on the NYSE under the ticker XRX. The new Fuji Xerox will have dual headquarters in Norwalk, CT, U.S. and in Minato, Tokyo, Japan, with presence in over 180 countries. The combined company will go to market and maintain the iconic “Xerox” and “Fuji Xerox” brands within its respective operating regions.

5. The move is considered a huge win for Carl Icahn and Darwin Deason, who have been attempting to kill the Fujifilm deal, which they believe undervalues Xerox. As Reuters notes, pair of activist shareholders won a court ruling in New York last week, which found a judge referring to Jacobson as “hopelessly conflicted” in his role as CEO.