Xerox has had a lawsuit filed against them by one of its biggest individual shareholders, Darwin Deason.
The lawsuit claims the Xerox/Fuji transaction was the result of a “fraudulently concealed…lock-up agreement” which was “never disclosed to Xerox's shareholders before the signing of the Xerox/Fuji transaction.”
Deason also teamed up with Carl Icahn, another major Xerox shareholder, to release an open letter strongly opposing Fujifilm’s plan to take over Xerox, “without spending a penny.”
The letter urges “fellow shareholders” to “not let Fuji steal this company from us,” calling the deal that gives Fuji a 50.1% stake and Xerox the remaining 49.9% stake a “transaction that dramatically undervalues Xerox and disproportionately favors Fuji.”
Xerox’s Board of Directors has responded to both the lawsuit and the letter.
Xerox calls Deason’s lawsuit “allegations without merit” against which “the company will vigorously defend itself.”
Xerox stated: “It is unfortunate that Mr. Deason is seeking to interfere with Xerox shareholders’ right to decide and is relying on meritless legal claims.”
“Xerox has fully disclosed the joint venture agreements, and the company will respond to Mr. Deason’s legal claims through the appropriate legal channels in due course.”
Regarding the letter, the company decided “not to engage in a public debate,” but to respond to each of the five major claims from the letter in writing.
CLAIM #1: The Transaction undervalues Xerox and favors Fujifilm
In their letter, Icahn and Deason say Xerox investors are “selling control of Xerox for a cash flow multiple barely exceeding 2.3x.”
Xerox calls this “suspect math” and an analysis that is just “plain wrong.”
Xerox Board of Directors responded by saying, “Xerox shareholders receive in the Transaction a $2.5 billion dividend at closing; 49.9% of the combined Xerox and Fuji Xerox; and 49.9% of the benefit of the value created from at least $1.7 billion of annual cost savings, including $1.25 billion in cost synergies that are only achievable via this Transaction.”
CLAIM #2: Xerox should terminate the Fuji Xerox joint venture agreements.
Xerox Directors call Icahn and Deason's urge to free Xerox from the “shackles of the Fuji Xerox joint venture” an unviable strategy.
Xerox Directors state, “The joint venture between Xerox and Fujifilm has existed in various forms since 1962. The current structure dates to 2001, when Fujifilm acquired additional shares in the joint venture to bring its ownership to 75%.”
“The agreement is a binding legal document that cannot be simply wished away, renegotiated or dissolved because Mr. Icahn and Mr. Deason desire it so.”
CLAIM #3: Xerox shareholders will become passive minority owners, with no opportunity to receive a control premium.
Xerox responds to this claim, stating: “Xerox’s Board negotiated strong minority protections to ensure that the rights and value of current shareholders remain protected after the Transaction closes.”
“These were detailed in our February 9 presentation to shareholders and include, among other things, that the combined company Board will initially consist of 12 directors, including seven designated by Fujifilm and five independent directors designated by the current Xerox Board.”
“The five independent Xerox designated directors will serve for five years or select their replacements,” Xerox’s statement continues.
“Thereafter, they may be replaced by independent directors selected by Fujifilm and reasonably acceptable to the then-serving independent directors.”
“In addition, the Transaction includes extensive contractual provisions that protect the existing Xerox shareholders. Among other protections, these provisions limit the ability of Fujifilm to engage in interested party transactions and to obtain disparate consideration in connection with a future sale.”
CLAIM #4: Projected synergies can be realised without consummating this Transaction.
Xerox responds to this claim, stating, “As we made clear numerous times in our disclosures, of the $1.7 billion in total annual cost reductions by 2020, $1.25 billion is related to what we can achieve only by integrating the two companies, while the remaining $450 million comes from a Fuji Xerox-specific cost reduction program.”
“All of these amounts are incremental to Xerox’s ongoing Strategic Transformation.”
CLAIM #5: Xerox’s revenue and margins have continued to decline in the last three years.
Xerox’s Board of Directors state, “Xerox recently announced that margins increased from 12.5% in fiscal year 2016 to 12.8% in fiscal year 2017. Moreover, the margins we have recently delivered are the highest the Company has seen in years.”
“Only one other company in our industry has been able to consistently demonstrate double-digit margins.”
Xerox concludes their response statement by labeling Deason and Icahn’s suggested plan forward for Xerox, which they outlined in the letter, as “highly irresponsible” and “unlikely to succeed.”
Xerox reiterates that the combination of Xerox and Fuji Xerox “will create a stronger, more competitive company with enhanced growth prospects.”