Jan 29, 2016
Making a big transformative acquisition is kind of like going to war – it’s expensive and risky and doesn’t always work out like the planners envisioned. CEO Ursula Burns announced that Xerox is retreating from its strategy to transform into a single growth-oriented, business process outsourcing (BPO) and technology company. Xerox intends to create two separate public companies – one focused on BPO and the other focused on Document Technology and Outsourcing – effectively undoing its $6.4B acquisition in 2010 of Affiliated Computer Services (ACS).
Much of Xerox’s vaunted technology never really gave ACS a big cost or innovation advantage over other BPO companies, and ACS never seemed to get much lift from accessing the Xerox customer base, especially outside the US.
Meanwhile the Document Technology business always seemed to get the short end of the stick. R&D budgets were cut, the growing managed print services business was moved over to the Services side of the house (at least for financial reporting purposes), and much of its cash flow was used to fund share repurchases, debt payment, and add-on acquisitions for the Services business. In 2009 (pre-ACS) Xerox had $15.2B in revenue and $485M in income. Essentially all of this business was from document technology and related outsourcing. Six years after the ACS and many other small acquisitions related to BPO, Xerox reported 2015 revenue of $18.0B and $488M income.
Now Xerox says it will split into a document technology and outsourcing company with about 40,000 employees and $11B in revenue and a BPO company with about 100,000 employees and $7B in revenue.
Sell vs. Float
Why float the document technology and related outsourcing business into a new public company versus selling it to a strategic buyer? Xerox has many great assets – brand, technology, field operations, installed base, etc. As a public company, the business will have direct access to capital markets but also increased scrutiny on its operations. Depending on how the company is structured (business units, leadership team), how much debt it carries, commitment to growth vs. generating cash for dividends and stock repurchases, the new company could receive a favorable valuation.
While there hasn’t been much rumor about Xerox shopping its document technology business, Fujifilm would be a logical buyer. Fujifilm has a 75% stake in Fuji Xerox (the principal supplier of office engines to Xerox), a strong presence in the graphic arts market, and high-speed inkjet technology (Dimatix). Perhaps there is a difference of opinion between the Xerox and Fujifilm boards on valuation?
Demanding Year, Resilient Company
2016 will be a demanding year for Xerox as it further cuts expenses, manages through the split, and strives to deliver on its operating plan. The company will likely face a variety of organizational changes, management departures, and customer questions about the future.
Xerox is a resilient company having rebounded from the accounting irregularities of the late 1990’s and the 2001 recession that tarnished its brand and strained its cash position. Strong leadership, loyal employees, and some innovative products (iGen) and smart acquisitions (Global Imaging) enabled Xerox to re-assert itself as the industry leader.
However, after years of diminished R&D spending and increased attention on BPO, the Xerox technology product pipeline is weaker, the company is not a significant player in many of the growth segments of the production printing market (wide format graphics, labels, packaging, textiles, 3D), and its competitors have narrowed the gap in managed services and distribution.
The new document technology and outsourcing company (we hope they call it Xerox) clearly will have a steep hill to climb. Being liberated from the Services business and able to pursue more strategically relevant initiatives may create the kind of lift among employees and customers necessary to get back to its former position.
There are many questions for each company.
Who will be the CEO? How much debt does it carry? What is the business strategy? Growth vs. cash generation? The sooner Xerox answers these questions the sooner it can get back to real business.
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