Xerox Holdings Corporation · NASDAQ:XRX
Xerox — Proxy Contest (April 2018)
44 slides from Xerox's proxy contest presentation, Apr 17, 2018
Slide 1: Disclaimer
Disclaimer SECURITY HOLDERS ARE ADVISED TO READ THE PROXY STATEMENT AND OTHER DOCUMENTS RELATED TO THE SOLICITATION OF PROXIES BY CARL ICAHN, DARWIN DEASON AND THEIR AFFILIATES FROM THE SHAREHOLDERS OF XEROX CORPORATION IN CONNECTION WITH THE PROPOSED TRANSACTIONS BETWEEN XEROX CORPORATION AND FUJIF
Slide 2: About Us: Carl C. Icahn
About Us CARL C. ICAHN Famed Activist Investor and Proponent of Shareholder Rights Responsible for creating hundreds of billions of dollars of shareholder value over the last 40+ years at a large number of companies, including (just to name a few): Apple (improved capital allocation) eBay (spun off
Slide 3: About Us: Darwin Deason
About Us DARWIN DEASON Entrepreneur, CEO, pioneer, innovator, and one of the founding and driving forces in the BPO, Technology Outsourcing, and ATM Networking industries CEO and founder of two of the most innovative companies in the business services industry, achieving over 90% recurring revenue,
Slide 4: Table of Contents
Table of Contents EXECUTIVE SUMMARY 6 SECTION I. UNDERPERFORMANCE, MISMANAGEMENT AND POOR GOVERNANCE AT XEROX 7 SECTION II. THE PROPOSED TRANSACTION WITH FUJI – GIVING AWAY CONTROL WITHOUT A PREMIUM 15 SECTION III. OUR PLAN FOR XEROX – A BETTER, BRIGHTER FUTURE AS A STANDALONE COMPANY 26 SECTION IV.
Slide 5: Executive Summary
Executive Summary SECTION I. UNDERPERFORMANCE, MISMANAGEMENT AND POOR GOVERNANCE AT XEROX Poor shareholder returns 1, 3 and 5 year total shareholder returns significantly lag peers and broader benchmarks Phantom “cost cuts” Xerox touts ~$1.2B in “cost cuts” over the past two years, but only ~$30M of
Slide 6: Section I: Underperformance, Mismanagement and Poor Governance at Xerox
SECTION I. UNDERPERFORMANCE, MISMANAGEMENT AND POOR GOVERNANCE AT XEROX Poor shareholder returns 1, 3 and 5 year total shareholder returns significantly lag peers and broader benchmarks Phantom “cost cuts” Xerox touts ~$1.2B in “cost cuts” over the past two years, but only ~$30M of those “cuts” flow
Slide 7: Xerox shares have significantly underperformed benchmarks and peers over five years
Xerox shares have significantly underperformed relevant benchmarks and peers over the last five years The primary reason Xerox’s stock price increased at all in the recent past is due to the Conduent spin-off, which was completed at Icahn’s urging Five Year Total Shareholder Return Current 2018E P/E
Slide 8: Operating margin bridge and cost savings
2016 Adjusted Operating Margin per page 37 of Xerox 2017 10-K 2017 Revenue Decline - calculated by applying 2017 adjusted operating margin to revenue decline of $506M from 2016 per page 63 of Xerox 2017 10-K 2017 Fx Impact - negative transaction currency impacting margin per page 38 of Xerox 2017 10
Slide 9: $1.23B of cost cuts but only ~$30M of margin improvement
Source: Xerox 2017 10-K $1.23B of “cost cuts” but only 30 bps or ~$30M of margin improvement In fact, only $30M of management’s apparent $1.23B of “cost cuts” over the past two years flowed to the bottom line Select Xerox Financials Fiscal Year Ending December 31, (USD in millions) 2015 2016 2017 Re
Slide 10: Xerox's disgraceful governance record and concealed lock-up
Xerox also has a disgraceful governance record – the Company concealed the “crown jewel” lock-up it gave Fuji at least 17 years ago and now claims that the lock-up prevents anyone other than Fuji from buying Xerox The proposed transaction is the result of an improper and fraudulently concealed “crow
Slide 11: Xerox never thoroughly explored other buyers or used its leverage over Fuji
But we believe Xerox never thoroughly explored transactions with other buyers or tried to capitalize on its obvious points of leverage over Fuji Last year’s massive accounting scandal at Fuji Xerox almost certainly gives Xerox the right to terminate the JV agreements for material breach Alternativel
Slide 12: The experts agree with us
and the experts agree with us! The Xerox Board claims the proposed transaction with Fuji followed a “comprehensive review” and “careful consideration of all alternatives available to the company”1 But Columbia Law School professor and world renowned corporate governance expert John C. Coffee Jr. rev
Slide 13: Should we trust current management and board?
Based on this record, should we really trust that Xerox’s current management and board have negotiated a transaction that maximizes shareholder value? History tells us the answer is NO Current Xerox Leadership’s “Accomplishments” Shareholder returns below peers and relevant benchmarks $1.2B of “cost
Slide 14: Section II: The Proposed Transaction with Fuji
SECTION I. UNDERPERFORMANCE, MISMANAGEMENT AND POOR GOVERNANCE AT XEROX SECTION II. THE PROPOSED TRANSACTION WITH FUJI – GIVING AWAY CONTROL WITHOUT A PREMIUM Highly unusual structure Tortured and convoluted transaction structure in which Fuji will acquire a 50.1% controlling interest in Xerox Skewe
Slide 15: Tortured and convoluted transaction structure
Current Structure Post-Transaction Structure Step Two of Proposed Transaction Xerox Shareholders Xerox Fujifilm Fuji Xerox JV Xerox Shareholders Fujifilm 49.9% 50.1% 75% 25% Step One of Proposed Transaction The proposed transaction has a tortured and convoluted structure that results in Fuji acquiri
Slide 16: Value per share in the proposed transaction
Per page 18 of Xerox’s 2017 10-K Per page 4 of “Xerox Responds to Carl Icahn and Darwin Deason Open Letter” presentation filed with the SEC on February 13, 2018 Assumes 60% of $1.7B of proposed synergies are achievable, consistent with analyst reports Represents the $2.5B dividend less 49.9% of the
Slide 17: Xerox's analysis values Fuji Xerox at 7.5x and Xerox at 5.0x EBITDA
...in large part because Xerox’s analysis values Fuji Xerox at a lofty 7.5x 2018E Adjusted EBITDA and Xerox at a paltry 5.0x 2018E Adjusted EBITDA Based on $30.35 unaffected share price as of January 10, 2018 Includes Net Debt exclusive of Finance Receivables Debt Proposed Transaction Significantly
Slide 18: Fuji Xerox premium not justified: smaller market, lower margins
Represents Total Addressable Opportunity per page 23 of Xerox presentation filed January 31, 2018 Represents CAGRs from 2016 – 2020 per page 23 of Xerox presentation filed January 31, 2018 Per page 23 of Xerox presentation filed January 31, 2018 Per page 19 of Xerox presentation filed February 9, 20
Slide 19: Fuji Xerox $360M accounting scandal remains unresolved
And Fuji Xerox still has not resolved its recently disclosed $360M accounting scandal, which was caused by a “culture of concealment” and Fuji’s failure to have adequate subsidiary management systems How could Xerox possibly justify valuing Fuji Xerox at an enormous premium when this massive account
Slide 20: Illustrative equity values at various multiples
Illustrative Fuji Xerox Equity Value at Various Multiples Illustrative Xerox Equity Value at Various Multiples $9.6B 2018E Revenue2 $1.2B 2018E Adj. EBITDA2 A B C A B C $10.0B 2018E Revenue2 $1.75B 2018E Adj. EBITDA2 Applying the same multiples to Xerox that the Board applies to Fuji Xerox would res
Slide 21: A more realistic view of synergy value
A More Realistic View of Synergy Value Per page 6 of “Xerox Responds to Carl Icahn and Darwin Deason Open Letter” presentation filed with the SEC on February 13, 2018 Assumes 60% of $1.25B of transaction cost synergies per Xerox presentation dated February 9, 2018 are achievable See Xerox 2017 10-K
Slide 22: Net cash flow multiple received is 2.3x
On a net cash flow basis, the multiple Xerox shareholders receive in the proposed transaction is an outrageously low 2.3x Equal to (i) the $2.5B special dividend minus (ii) ~50% of the $2.5B of debt incurred to finance that dividend (since Xerox shareholders will own ~50% of the company incurring th
Slide 23: Xerox shareholders will be passive minority owners of a Fuji subsidiary
In addition, if the proposed deal closes, Xerox shareholders will be passive minority owners of a Fuji subsidiary – virtually powerless to prevent Fuji from abusing its control For example, Fuji competes directly against Xerox in the market for high-end inkjet products What's to stop Fuji from shutt
Slide 24: Plausible worst-case scenario
Just imagine the most plausible worst-case scenario – the result will be massive value destruction for Xerox shareholders Do you really believe the new Fuji controlled board will look out for the best interests of Xerox shareholders if management can’t achieve the synergies or (like in the past) can
Slide 25: Section III: Our Plan for Xerox
SECTION I. UNDERPERFORMANCE, MISMANAGEMENT AND POOR GOVERNANCE AT XEROX SECTION II. THE PROPOSED TRANSACTION WITH FUJI – GIVING AWAY CONTROL WITHOUT A PREMIUM SECTION III. OUR PLAN FOR XEROX – A BETTER, BRIGHTER FUTURE AS A STANDALONE COMPANY Four Part Plan to Increase Shareholder Value Unlock growt
Slide 26: Four-part standalone strategy
As an alternative to the proposed value-destroying deal, Xerox could create tremendous value through a four-part standalone strategy Unlock Growth Through New Adjacent Services and Partnerships Capitalize on untapped value by providing services for the Mid-Market and SMB product lines, as Xerox curr
Slide 27: Growth through Mid-Market and SMB services
Note: All numbers are current Xerox revenue numbers except excludes ~$500MM in “Other revenue” which includes paper sales in developing countries and network integration solutions Per page 19 of Xerox 2016 Investor Day Xerox can achieve growth by capitalizing on the large white space opportunity to
Slide 28: Partnering with PC manufacturers
and by partnering with major PC manufacturers that have no footprint in the adjacent print space Note: Data includes desk-based PCs, notebook PCs and ultramobile premiums (such as Microsoft Surface), but not Chromebooks or iPads Source: Gartner (millions) Global PC Shipments and % Market Share1 Micr
Slide 29: Drive cost savings by optimizing Global Imaging Systems
Xerox can drive cost savings by optimizing its wholly-owned subsidiary, Global Imaging Systems (GIS), which currently markets and sells competitors’ products, often in over-crowded markets, to the detriment of Xerox Xerox acquired Capital Business Systems in 2015 GIS Company Competitors Featured Yea
Slide 30: Rationalizing the e-commerce and distribution network
Direct from Xerox Direct from “online partner” “Find a sales location” Mix of GIS and multi-branded dealers Direct to Resellers Link to Resellers: “Compare online prices ” while at the same time, driving more cost savings by rationalizing its confusing online e-commerce and distribution network Cons
Slide 31: Simplifying distribution channels
and simplifying its distribution channels towards end-to-end sellers and PC companies, which will decrease distribution expense without losing reach Xerox Channels Direct 200+ wholly-owned subsidiaries Partner Networks Independent Agents – Focused in N.A. dedicated to Xerox products Concessionaires
Slide 32: PARC Ventures innovations and outcomes
PARC Ventures Innovations Outcome Licensed PARC’s natural language processing platform to develop breakthrough search engine Acquired by Microsoft in 2008 for ~$100M Based on PARC's foundational research in amorphous silicon (a-Si); spun out by PARC in 1996 Acquired by Siemens Medical, Phillips Medi
Slide 33: A history of driving away valuable assets and employees
A-Si & large-area electronics Collaborative filtering Context-aware services Corporate ethnography Digital rights management Digital x-ray imaging Electronic reusable paper Embedded data glyphs Encryption systems Ethernet & distributed computing Fiber optics Graphical user interface (GUI) Informatio
Slide 34: Re-evaluate the Fuji Xerox relationship: Fuji needs Xerox more
Xerox also needs to fundamentally re-evaluate the Fuji Xerox relationship in light of the fact that (A) Fuji needs Xerox much more than Xerox needs Fuji $20.7B $1.8B Fuji FYE 3/2017 Revenue by Segment Fuji FYE 3/2017 Operating Income by Segment Source: Fujifilm and Xerox annual report Note: Assumes
Slide 35: Xerox is likely Fuji Xerox's largest customer
16.9% 16.5% 18.6% 18.8% 17.0% Source: Fujifilm and Xerox annual report Note: JPY/USD exchange rates as disclosed in Fujifilm 2013-2017 annual reports; Xerox inventory purchases calendarized to match Fujifilm reporting period Fuji Xerox Revenue and Xerox % Contribution (USD in millions) Xerox should
Slide 36: Xerox could find other suppliers
and (C) Xerox could find other suppliers for the products it sources from Fuji Xerox HP sources a significant amount of its A4 and a portion of its A3 laser printer engines and laser toner cartridges from Canon Apple sources its display and other semiconductor parts from Samsung Dell sells Microsoft
Slide 37: Path to 2018 Xerox margin improvement
5.6% Margin Redefining the Fuji Xerox relationship based on these realities will allow Xerox to potentially unlock tremendous value (USD in millions) (USD in millions) Fuji Xerox2 GIS6 Delivery1 2017 Xerox Cost Structure Path to 2018 Xerox Margin Improvement 4 Source: Xerox 2017 10-K, unless cited o
Slide 38: Section IV: Comparing the Value Propositions
SECTION I. UNDERPERFORMANCE, MISMANAGEMENT AND POOR GOVERNANCE AT XEROX SECTION II. THE PROPOSED TRANSACTION WITH FUJI – GIVING AWAY CONTROL WITHOUT A PREMIUM SECTION III. OUR PLAN FOR XEROX – A BETTER, BRIGHTER FUTURE AS A STANDALONE COMPANY SECTION IV. COMPARING THE VALUE PROPOSITIONS We believe o
Slide 39: Standalone Xerox value with cost savings at various multiples
Based on current Adjusted EBITDA of $1.75B from page 31 of Xerox presentation dated February 9, 2018 plus $460M of proposed cost savings hitting the bottom line (see slide 38) Includes Net Debt exclusive of Finance Receivables Debt, less After-tax Unfunded Pension and NCI Assumes preferred shares ar
Slide 40: Tale of the Tape: transaction versus standalone value
Comparing (A) the realistic potential value of the proposed transaction to (B) the realistic potential value of Xerox standalone, voting the deal down is a no brainer Tale of the Tape With NO chance of ever receiving a true control premium PLUS the potential to receive a true control premium in the
Slide 41: Vote AGAINST the Fuji/Xerox Transaction and FOR a Board that can Maximize Value
Vote AGAINST the Fuji/Xerox Transaction and FOR a Board of Directors that can Maximize Shareholder Value If you have any questions, please contact the following individuals: Icahn Capital LP Susan Gordon +1 (212) 702-4309 Deason Capital Services, LLC Jennifer Cole +1 (214) 378-3600 Harkins Kovler, L
Slide 42: Vote AGAINST the Fuji/Xerox Transaction
Vote AGAINST the Fuji/Xerox Transaction and FOR a Board of Directors that can Maximize Shareholder Value If you have any questions, please contact the following individuals: Icahn Capital LP Deason Capital Services, LLC Susan Gordon Jennifer Cole +1 (212) 702-4309 +1 (214) 378-3600 Harkins Kovler, L
Slide 43: Icahn Nominee Biographies
Icahn Nominee Biographies JONATHAN CHRISTODORO KEITH COZZA Served as a Managing Director of Icahn Capital LP, the entity through which Carl C. Icahn manages investment funds, from July 2012 to February 2017 and was responsible for identifying, analyzing and monitoring investment opportunities and po
Slide 44: Icahn Nominee Biographies
Icahn Nominee Biographies JONATHAN CHRISTODORO Served as a Managing Director of Icahn Capital LP, the entity through which Carl C. Icahn manages investment funds, from July 2012 to February 2017 and was responsible for identifying, analyzing and monitoring investment opportunities and portfolio comp