Fujifilm buying Xerox’s stake in FujiXerox – marking the end of an era

FujiXerox was founded 57 years ago, as a sales organization for Xerox in the Asia-Pacific region and increasingly as development and manufacturing operation for many Xerox products. It started out as 50-50% joint venture but with Fujifilm buying half of Xerox’s stake in FujiXerox, Xerox was left as minority owner. Today almost all toner products sold by Xerox are in fact FujiXerox products. Quizzed on that point, Xerox always stated how closely aligned and coordinated development activities between both companies are. In today’s global business the split in distribution regions between Xerox and FujiXerox became more and more of an oddity. Every vendor of a certain size strives to sell global to offset ever increasing product development costs and spread other overhead. In 2018 Fujifilm proposed to take control of Xerox by merging Xerox and FujiXerox and paying out Xerox shareholders. This did not happen and gave way to some protracted dealings between the two companies.

Fujifilm acquiring Xerox stake in Fujixerox

This came to an end now. In an agreement made public on the 5th of November 2019 Fujifilm will acquire the 25% stake Xerox still holds in FujiXerox for a sum of $2.3 billion. The sum paid is remarkably similar to the $2.5 billion which would been paid to the Xerox shareholders, would the original deal have happened. As part of the deal Fujifilm will drop the litigation filed against Xerox after the original deal was cancelled. Both companies have now the opportunity to sell into the other territories and to OEM products to/from other companies.

Fujifilm in its press release is upbeat about becoming the full owner of FujiXerox and singled out 3 strategies: The company plans to strengthen its Document Solution business by offering OEM products to other partners besides Xerox, also in the US and Europe. Furthermore, Fujifilm plans to capitalize on new product opportunities. This strategic option remains somewhat unclear but seems to entail combining FujiXerox and Fujifilm knowhow to offer products into new markets as well as leveraging Fujifilm’s graphic industry access for FujiXerox products. The most tangible strategy is of course realizing cost synergies. While FujiXerox has already been on a cost cutting program recently, Fujifilm expects another ¥10 billion (about $90 million) savings by 2024. Fujifilm also expects ¥1.3 trillion (about $11.7 bn) revenues in the Documents Solutions business in FY 2024 – considerably up from the ¥1 trillion achieved in FY 2018. FujiXerox will remain a separate entity and is set to continue to supply Xerox with printers and serve its existing customer base in Asia-Pacific.

For Fujifilm buying Xerox’s 25% stake in FujiXerox, Xerox receives $2.3 billion.  This represents about 24% of Xerox’s revenue in 2018 or about 2.7 times the profit of FujiXerox in FY 2018. Additionally, the deal relieves Xerox from the burden of a pending lawsuit.

According to Xerox CEO John Visentin the proceeds will be used to pursue acquisitions in “core and adjacent industries”, to pay down $550 million of debt due in December, and to return capital to shareholders. The latter is certainly welcomed by the activist investors Icahn and Deason.

Looking at the last quarterly numbers it seems Xerox has more a revenue challenge than a profitability challenge however. The first three quarter revenues have been down by 5 to 7% compared to previous year’s quarters. This is in line with the revenue declines in the last couple of years. Operating margins have been up however, with an operating margin of 12.1% in Q3 2019 – no mean feat when revenues are declining at the same time. It made Xerox stock one of the S&P 500’s top performers so far this year.

Apart from the one-time payments the main ramifications of the deal are in dissolving the long-standing OEM agreement. Changing suppliers of a wide ranging and well-integrated equipment portfolio is no mean feat. It seems easier to achieve at the low end. Xerox already made a deal with HP for A4 and A3 lower end office printers. On the high end this becomes increasingly difficult. Xerox’s current star product – the Iridesse – is a quite unique product, giving Xerox an edge in the market and would not be easy to replace. Xerox’s own developed top-end color product, the iGen, on the other hand is ageing. The model line is constantly receiving upgrades but has originally been launched in 2002 and further development potential is limited. Even with the latest increases in R&D spend developing a new product line will be a lengthy process. Similar applies to the mid-range Versant products. Xerox still develops high end monochrome devices, but this is a shrinking market. The deal should propel inkjet investments however. The Baltoro launch showed a lot of promise by using Xerox strength in paper handling and colour control and an internally developed inkjet head. In any case the future will require increased R&D spending by Xerox to develop own product lines and add USPs to any future OEMed products.

Even if Xerox manages to buy HP, most of the existing portfolio of products will need to be sourced from outside. Moving forward a careful dance between the two players around products and contracts can be expected. While Xerox still relies on FujiXerox products for the bulk of the portfolio, FujiXerox relies on Xerox as sales channel. Both are free to pursue new OEM opportunities without the previous strictures around their joint venture, but this will take time. It also requires top-notch products to get other companies interested. Likewise, both can sell into the other territories, but setting up new sales organization is costly and time consuming and will most likely include finding suitable partners. There should be some interesting rounds of negotiations ahead where both players will test their strength. Equipment users can look forward to more choice and more R&D spending however.

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