Xerox To Split In 2, Give Icahn 3 Board Seats

Just two months after activist investor Carl Icahn announced that he owned more than 7 percent of Xerox stock, his influence is being felt in a big way.

The Wall Street Journal reported Thursday afternoon that Xerox -- whose Global Services division ranks No. 7 on CRN's 2015 Solution Provider 500 list -- will split into two firms: one focused on hardware, the other on services. And, the Journal reported, Icahn will get three board seats at the services company. On Friday morning, Xerox formally announced the split into two public companies. It also annouced the agreement with Icahn.

In an interview with CNBC on Thursday afternoon, Icahn called the split of the company a "major move" that will "greatly enhance shareholder value."

[Related: Could Icahn’s Stake In Xerox Spell Good News For The Channel?]

Icahn said in the interview that he had several meetings with Xerox CEO Ursula Burns and "I … applaud and respect her for doing what she believes shareholders want."

Interviewed on CNBC Friday morning, Burns denied that Icahn forced the company's hand. She said the board of directors had decided to split the company after launching a strategic review in the fall. Earlier this month, she said the board informed Icahn of its plans and that "he was in support of it."

A split of the company would be both surprising and not surprising, said Steve Mairet, operations manager at A1 Tonertech, a Placentia, Calif.-based solution provider and Xerox channel partner.

Xerox has made a lot of changes in the past couple of years that have impacted its dealer channel, especially one in 2014 to move many of its partners away from dealing directly with the vendor and working with distribution instead, Mairet told CRN.

"Now we have to use the distributors," he said. "We have to deal with products that are held more in certain warehouses rather than held by the distributors, and pay more for shipping."

Xerox has also moved to focus more of its business directly on the business user, including cutting margins and sending rebates directly to customers, Mairet said. "It's hard to grow this business," he said. "If the customer pulls out a credit card for the hardware, our margins drop to single digits."

It's also hard for customers, Mairet said. "Customers expect same-day service, or to get their supplies right away," he said. "But this is going away because everyone is working at such slim margins."

Even so, Mairet said, not all the blame can be directed at Xerox. All its competing vendors, including HP Inc. and Sharp, face the same issues, particularly the declining price of hardware, including printers.

Meanwhile, Simon Tutt, president and CEO of DP Solutions, a Xerox hardware and services partner based in Columbia, Md., welcomed the reported split. "It sounds like a good idea to me," he told CRN. "I think IT businesses need to change and adapt, otherwise they go the way of the dodo."

Tutt, whose company has been a Xerox partner for about seven years, typically in print management services, said DP has had a good relationship with Xerox. "Good for them," he said.

Icahn’s firm, Icahn Capital, reported the investment of 7.13 percent in a November filing with the U.S. Securities and Exchange Commission. That came shortly after Xerox announced it had lost $34 million during the third quarter of 2015 amid declining revenue.

In the company’s quarterly earnings call in late October, CEO Burns said the board of directors had approved a review of operations -- including its business portfolio and capital allocation -- in an attempt to grow sales.

"We are looking into what we can do differently," Burns said, adding that the board was to look into many options, but selling the company was not one of them.

The move essentially undoes Xerox's 2010 purchase of Affiliated Computer Services for $5.6 billion, according to Ken Stewart, a print services market analyst with Photizo Group of Mauldin, S.C. While that purchase was not necessarily a bad decision, Stewart said, he thinks Xerox missed the mark on the execution of its services vision.

"I think the strategy was sound to begin with. I think the execution has been flawed since Day 1," he said.

However, Stewart said, he doesn’t believe a radical split of the company into two parts is the right idea, calling it a "bad move." He said Xerox would be better off selling individual business units, as it did when it sold its outsourcing business to French IT services company Atos in 2014 for $1.05 billion.

"I think the carving in two pieces like this will end badly for at least one of the sides, if not both. Unless they got a buyer -- then that would be a different story," Stewart said.

Xerox also announced its fourth-quarter revenue and earnings Friday morning. While revenues fell 12 percent year over year, to $4.65 billion, net income rose 43 percent, to $285 million. The company beat expectations on earnings per share by four cents (32 cents vs. 28 cents), according to Analyst Rating Report.

In its third-quarter report for 2015, Xerox reported that its services division, which accounts for 57 percent of company revenue, dropped 8 percent, or $200 million, from $2.6 billion to $2.4 billion. Meanwhile, revenue in its technology division fell for the fourth consecutive quarter, dropping $200 million, from $2 billion to $1.8 billion.

Xerox stock fell 2 cents per share Thursday on the New York Stock Exchange to close at $9.21. The stock spiked to $9.61 per share just minutes before the closing bell, but then retreated. But in after-hours trading, the stock was down 0.65 percent, according to The Street.

Douglas Grosfield, the founder and CEO of Five Nines IT Solutions, a Kitchener, Ontario-based strategic service provider, said Xerox had little choice but to split in two. "They could keep their head in the sand and do nothing and act like the emperor with no clothes or they can take action like they are doing to address this head on," he said. "This is a smart play to get ahead of the game."

Xerox is one of many legacy technology companies attempting to "reinvent" themselves for the cloud services era, said Grosfield, who sold his solution provider business last year to launch Five Nines IT, which is focused squarely on the recurring-revenue cloud services market.

"The legacy vendors have been holding on to the dinosaur model," he said. "They are still focused on pushing boxes and transactional business. They need to radically change. The only way for Xerox to do that is to split into two companies like they are doing."

Even with a split, Xerox is sure to focus its direct sales efforts on the Fortune 1000 market, leaving plenty of room for strategic service providers to focus on midmarket accounts, said Grosfield.

"They are going whale hunting, while the rest of us are going after smaller fish in the sea," he said. "We are filling our quota every day and the big guys are going home empty-handed."

Sarah Kuranda, Steven Burke, Joseph F. Kovar and Rick Saia contributed to this report.