INKISH.NEWS -

Is Jeff Jacobson Stupid?

As you have learned over the past weeks, I like to make headlines that make you stop up for a second, and hopefully read further on. So, let's clear that headline right away. I don't know. I don't know him.

The ongoing saga over Xerox's attempt to acquire HP raises a lot of questions and speculations, so I have over the past months been reading and watching films about Xerox, FujiFilm, HP, Carl Icahn, Darwin Deason (sold his company ACS to Xerox in 2010 for 6+ billion dollars), and even more people. These people, for sure, make every trade-media into a tabloid reading experience.

One of the articles I read about, Jeff Jacobson is that he should have proposed an under-valued deal with FujiFilm to secure his future? A short look at Jacobson's CV on LinkedIn he doesn't look to me like a person that needs to secure his job by blindfolding shareholders in a publicly-traded company. And even if he was, I don't think a Japanese company like FujiFilm would stick to Jacobson forever if he weren't able to deliver. So that speculation is in my opinion nothing but an excuse. The deal was however taken to court by Deason, who "partnered" with Carl Icahn to take control over Xerox.

As I have written in several articles over the past year - the methodology that Carl Icahn use to take over companies is more or less the same. Buy large positions of shares. Replace the board of directors, and then work on deals that he announce creates more value to shareholders. Shareholders, of course, demand returns, so initially, the work of Carl Icahn can look interesting from a shareholder perspective. Mergers and Acquisitions are all about creating more value. The value is created with cost-savings, synergies, better management, and maybe a more dedicated focus on shareholder value. Shareholder value also increases when companies choose to buy back shares. This Carl Icahn has also proposed at almost every chance he has had - with companies like Apple, and more.

In the case with Xerox vs HP, the way Xerox has got financing is by taking loans in the billions of dollars. How can a company like Xerox secure loans like this? Well, many analysts have written about the debt ratio of HP and Xerox. HP has a meagre debt ratio, so by securing loans in the low debt ratio by HP, Xerox borrows money guaranteed by HP (if the acquisitions succeed). In short, this means that Xerox wants to buy HP by increasing the debt ration in a merged company. If the synergies and the cost savings succeed in a combined company, the shares may increase, and Carl Icahn and other investors can sell their shares with a premium and leave a combined company with higher debt.

HP executives have warned that this would make the operation more fragile. Think about it. A majority of HP's revenue isn't related to print. A majority of their profit comes from print, so the cost of having higher debt in a market that is decreasing is more expensive products which can lead to lower volume, etc. Am I biased, hell yes. I like Xerox, and I like HP. But a merged company with high debt - I can't see any advantages for other than Carl Icahn and his kinds. Short term gains. Long term effects.

This method is the same, Carl Icahn did with TWA back in the '80s, and that leads to bankruptcy, a 165 million dollars debt and 465 million dollars in profit for Icahn.

There might, however, be more to this story. Why is Xerox so eagerly looking into mergers and acquisitions? Why was FujiFilm a great match - also for the price? Why is HP at all interesting for Xerox?

Xerox and HP are both companies that have a long history, and they have both been able to grow into global companies with strong products, strong business models, strong brands, and products that enable thousands of customers to profit from. Both are very well recognized brands in the printing industry, and both face some of the same problems. The printing market, in general, is a declining market. To secure future products, both companies understand that R&D is a tremendous obligation. FujiFilm comes from the production of films (as you know), but have been through a transformation many years ago, and have come out stronger. So the transformation that Xerox and HP to some extend need to do is starting now. I believe Xerox is weak here. They - as far as I understand - only produce the iGens themselves. They are relying on productions and developments of technology from FujiFilm and HP, and the majority of their business is from the printing industry. So when Carl Icahn believes that the deal with FujiFilm didn't bring enough value to him (or shareholders), the real question is how good a deal is Xerox?

In Europe and the US Xerox is well-known and, of course, Xerox initially won't be affected by the changes. But in Asia, and remember, Asia is the only growth market in the world in print, Xerox is not known. They don't have an organization; they don't have any service technician, etc. FujiXerox will rebrand into FujiFilm Business Innovation Corp (FBI, hmmm), but can continue selling the "Xerox" machines under new names. As far as I can see, they are even able to roll out, Xerox branded devices under their new name in the rest of the world, and Xerox - can most likely do the same. But Xerox can't build an organization in Asia fast - not to speak about production facillities if needed.

So let's take a look at the Xerox office business. Some of the Xerox branded printers, are manufactured by HP.

How the deals are struck and how all this influences Xerox I have no idea about, but from a logical perspective, it seems that Xerox has way more significant potential problems. Jeff Jacobson was maybe smarter than he got credit for by Carl Icahn. Maybe his future was secondary to the future he saw for Xerox as a company. Carl Icahn stated that if the deal weren't terminated with FujiFilm, the faith of Xerox would be similar to the one of Kodak. Jacobson has a past in Kodak, so I believe he wouldn't have any interest in this.

To add something, which I also believe is interesting is that EFI where Jeff Jacobson now is CEO acquired Xerox DFE business in 2017. Does that have any meaning in this story? I can't know, but since EFI almost have a monopoly on DFE's for both office printers, and professional printers, Xerox must be in a complicated situation. Carl Icahn has, in my opinion, not created a long term value for Xerox shareholders. With no market in Asia, and maybe even no production facility to handle production of equipment, Xerox may simply HAVE to succeed with HP to survive? Perhaps it's Carl Icahn and his friends that will be the ones that lock the doors for Xerox and end an era?

Some of the things above are pure speculations, so let's discuss whether these are plausible or just stupid considerations. A finale note, however. HP seems not very interested in being acquired by Xerox, so what they have done in the past weeks is, in my opinion, quite bright. They have started posting films with CEO Enrique Lores explaining the HP values alongside with why they create more shareholder value. I.e., a massive share buy-back program has been introduced. Sixteen billion dollars os shares over three years and new board members. HP will increase its debt ratio to buy back these shares. This is clever, since increasing the debt ratio will effectively make it impossible for Xerox to secure loans that they will need to buy HP.

I believe FujiFilm came out stronger. I believe HP will come out stronger. How do you think Xerox will come out? I am not sure! But if the deal doesn't work out for them, I guess Xerox will have significant problems, all as a result of greed from Carl Icahn and a few investors who have NO what-so-ever interest in the beautiful print that Xerox delivers to millions of customers daily. How sad this is!

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So no, I don't think Jeff Jacobson is stupid. I believe he was suggesting the right thing when suggesting a merger with FujiFilm. The valuation and the deal? I don't think many are in a position to evaluate this from the outside. Carl Icahn tried. I hope he fails!

Feb 29, 2020

Author: Morten B. Reitoft