Xerox Corp to split into two companies in push toward services

Xerox Corp. is splitting into two publicly traded companies C essentially breaking out the operations acquired using its largest-ever purchase 5 years ago, and investor Carl Icahn will be given three board seats.

The division can create an US$11-billion document technology company which includes the namesake copier and scanner hardware, along with a US$7-billion provider of services to government and industries such as health care and transportation, Xerox said Friday in a statement. Leadership and also the names of the two companies is decided in the future, based on the statement, and also the move is anticipated to become performed by no more this year.

Icahn, the billionaire investor that has been building a stake in Xerox since November and today holds a lot more than 8 per cent of the company, will select three directors on the service company’s board, according to separate statement. That business will also seek another candidate to become chief executive officer.

The shares were up 3.7 per cent to US$9.59 at 9:37 a.m. in New York, after rising as much as 6.7 percent in pre-market trading. Norwalk, Connecticut-based Xerox fell 13 percent this season through Thursday.

“Short-term Xerox is deserving of some boost,” Anurag Rana, an analyst with Bloomberg Intelligence, said. “The long-term value of these companies is going to be the way it redefines its services inside a cloud-first and mobile-first world. Xerox isn’t known to be the main thing on those movements.”

Moody’s Investors Service said Xerox’s corporate debt ratings take presctiption review for any possible downgrade, reflecting the vista that the split can lead to two smaller companies with less business diversity and profitability than the current combined business.

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Little Overlap

The board decided the document and service operations had little overlap and require different capital structures and operating models, based on Xerox. Smashing the businesses up would simplify the decision-making process on what areas to pay attention to and purchase.

“Technology will be high money back to shareholders,” CEO Ursula Burnssaid within an interview Friday with “Bloomberg Go.” Document technology will likely return Half of free cash flow to shareholders, which is in line with what Xerox currently does, she said. “Services could be more about investing and globalizing the business.”

Burns emphasized that Xerox made the decision to split before speaking with Icahn.



When the 79-year-old billionaire took a stake in Xerox in November, he explained he intended to consult with executives and also the board to enhance operational performance and pursue strategic alternatives. Xerox ended up being already in the middle of a broad-based review of structural choices for the company’s business portfolio and capital allocation.

Icahn “may have governance input into the services business and will not be concerned with the services business or even the current Xerox business at all,” Burns said, adding that Icahn had no input in the strategic review. “We came out in a place that’s strong for the business, and it became of align using what Mr. Icahn wanted too,” she said.

Icahn rebranded himself being an activist investor and outspoken shareholder advocate after gaining fame as a corporate raider in the 1980s. Recently, he has taken stakes in technology-related companies including Apple Inc., EBay Inc., and Netflix Inc., and agitated for changes for example share buybacks and spinoffs, that they argued would create shareholder value.

Icahn led a lengthy fight at EBay, agitating for the net marketplace to spin off payments unit PayPal Holdings Inc., which it eventually decided to do. In November, Icahn Associates Corp. disclosed it had sold the EBay stake and reported a 3.8 percent holding in PayPal. At Apple, Icahn was outspoken in demanding more cash be returned to shareholders, and the tech giant subsequently increased its dividends and stock buybacks.

Along using the split, Xerox is planning to spend less over the next three years which will lead to US$2.4 billion in savings across the two companies, of which US$700 million is expected for 2016.

Less than 1 per cent to 2 percent of the workforce is going to be impacted by the split, Burns said. The general employee number will shrink, though, consistent with previous years, because “every year, it becomes easy to do more with less,” she said. “Each year Xerox needs to drive automation, innovation and to drive productivity in the workforce.”

Earnings Results

Xerox reported fourth-quarter revenue of US$4.7 billion, in line with the average analyst estimate. Profit, excluding some items, was 32 cents US a share, beating the average analyst estimate of 28 cents. 

Xerox acquired Affiliated Computer Services this year for US$6.2 billion, to assist the organization build its technology services and supplement its declining hardware operations. The deal allowed Xerox to grow into markets including managing and automating electronic payments for governments, processing claims for insurers as well as operating parking area pay stations. Last year, Xerox sold its IT outsourcing business to Atos SE for US$966 million. Burns said at that time the divestiture would allow the organization to pay attention to building out the two other services.

The service operations from ACS “isn’t the sexy business people made it to be 10 years ago,” Rana said. “Lately, there’s been pricing pressure,” as clients want to use more automation and spend less.

Xerox reported full-year revenue of US$18 billion. Sales from services, including business process and document outsourcing, fell 4.7 percent to US$10.1 billion. Document technology revenue dropped 12 per cent to US$7.4 billion.

ACS reported US$6.5 billion in sales and US$349.9 million in net income for that year ended June 30, 2009, the final full year before being acquired. In those days, about 40 percent from the company’s revenue originated from supplying the business process outsourcing and also it services to government clients, which included servicing student education loans for that U.S. federal government. 

ACS ended up being even the only servicer for that part of federal loans originated by the government, about one-fourth of the volume. After the Education Department switched to originating loans itself in July 2010 rather than using private lenders, competitors took away ACS’ dominant position, and the company no longer services new loans.

Lazard Ltd. and Goldman Sachs Group Inc. advised Xerox on the split.

Bloomberg News