Shigetaka Komori, Fujifilm chief executive, was mistaken in his belief that activist investors such as Carl Icahn would 'naturally come on board'

When Shigetaka Komori revealed Fujifilm Holdings’s $6.1bn bid for control of Xerox, the 78-year-old chief executive was ready to delay retirement by several years to ensure the takeover’s success.

But the transaction is on the verge of collapse after an extraordinary battle pitting the US company against activist investor Carl Icahn and businessman Darwin Deason.

The deal announced in January would have united a company founded in the 1930s as Japan’s answer to Kodak in photographic film with the 112-year-old US copier maker whose products were once so ubiquitous its name became a verb.

It would also have cemented one of the oldest US-Japan corporate partnerships — the Fuji Xerox joint venture, which has grown to generate almost half of Fuji’s revenues, dates back to 1962.

Since Xerox abruptly scrapped the deal late on Sunday, just four days after promising investors it would seek improved terms, Fuji executives have been scrambling to save it, according to people close to the company. 

“Mr Komori hates losing,” one of the people said. “He will not give up easily.”

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People involved in the talks said both Xerox and Fuji had anticipated some shareholder pushback due to the complex and unusual structure that would have allowed the Japanese group to execute the deal without using its own cash. But neither company was prepared for the turmoil that followed.

“There were so many twists and turns that were completely unforeseen,” said another person close to Fuji. “There is not a single person who can give a simple rationale for what happened in the last four months.”

Had the deal had gone through, Xerox would have merged its business with the companies’ joint venture, giving the Japanese company a 50.1 per cent stake in the combined group. Investors in Xerox would have received a $2.5bn cash dividend as part of the deal and the merger promises $1.7bn in annual cost savings over the next several years.

“We don’t want to sing praises for ourselves but I have to say this is such a creative and great scheme,” Mr Komori said when he announced the deal. “I think [activist] shareholders will naturally come on board.”

The two companies had been discussing a merger since March last year but a full takeover was never considered by Fuji, which hoped to invest its cash in other growth areas, according to court documents and company officials. After talks stalled following an accounting scandal at Fuji Xerox, Xerox proposed the new scheme to Fuji in the autumn. 

A messy stand-off was already brewing. A week before Fuji’s January announcement, Mr Icahn and Mr Deason, then the largest and third-largest shareholders with more than 10 per cent of outstanding Xerox shares, had joined forces to lobby Xerox to put itself up for sale. 

Mr Deason has been a shareholder for more than a decade but spoke publicly about the company for the first time in January. In a letter to the board, he demanded that Xerox disclose the details of its joint venture and hire independent advisers to explore its strategic options. 

The duo then called for the exit of Xerox chief executive Jeff Jacobson, whom they described as “neither qualified nor capable of running this company” — an accusation Xerox rejected, saying at the time that it was “confident with the strategic direction in which the company is heading”.

And as soon as the deal with Fuji was unveiled, they immediately slammed it as undervaluing Xerox.

Mr Jacobson declined to comment.

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The debate then shifted from the deal’s valuation to its genesis, focusing on whether Mr Jacobson had conspired with Fuji to push through a deal to save his job. 

In mid-February Mr Deason sued Xerox in New York State court, alleging the deal was a “fraudulent scheme” to give away the American company “for virtually nothing”. 

“If the deal is consummated, Xerox shareholders will be virtually powerless over the future direction of their investment and will have no opportunity to receive a true control premium for the shares,” lawyers for Mr Deason argued in the lawsuit. 

Late last month, after contested proceedings, the court sided with Mr Deason and temporarily blocked the sale, ruling that Mr Jacobson was “hopelessly conflicted” in negotiating the deal. It found that Mr Jacobson was advised in November by Xerox’s chairman that he was likely to be replaced, and he should stop all discussions with Fuji about a transaction. Days later the chairman allowed him to resume talks and the judge alleged Mr Jacobson then rushed to complete a deal. 

People close to the Xerox chief acknowledged he had made mistakes during his tenure but insisted that accusations he acted in bad faith were outright false. 

In its appeal against the ruling, Xerox’s lawyers argued that the “unprecedented order further threatens to impose imminent harm on Xerox shareholders by disenfranchising them from their opportunity to vote on a transaction that the board concluded was both value-maximising and the only available option.”

Xerox said Mr Jacobson was fully authorised to engage in discussions with Fuji and Fuji Xerox, while Fuji said no promise had been made to Mr Jacobson that he would remain as chief of the new company. 

The Xerox board ultimately reached a unanimous decision to approve the Fuji deal, and both companies had argued that Xerox shareholders should be able to decide the deal’s merits for themselves. 

Four days after the court ruling, Mr Jacobson agreed to step down in a settlement with Mr Icahn and Mr Deason as Xerox sought to avoid a protracted legal fight. But Xerox reversed the decision two days later, saying its management team would stay since its agreement with the shareholders had expired after Mr Deason failed to drop his lawsuit. 

In a letter to shareholders, Xerox said it had changed its mind after it became convinced its long-term investors were opposed to a settlement with Mr Icahn and Mr Deason. On news of the settlement, its share price dropped 12 per cent. People involved in the talks said the two companies had been discussing an increase in the cash dividend of about $5 per share.

More broadly, Xerox executives were convinced the shareholder revolt was limited to Mr Icahn and Mr Deason, as other investors had communicated their support for the deal.

“Frankly, we’d rather see this deal go through than Icahn wrecking the business and trying to make a quick buck,” said a long-term investor who asked not to be named. 

Mr Icahn and Mr Deason could not immediately be reached for comment.

On Sunday came another abrupt Xerox U-turn, with the company firing Mr Jacobson as part of its decision to terminate the deal and blaming Fuji for not providing an assurance over launching a new round of negotiation.

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Despite a new slate of Xerox directors that will give Mr Icahn greater power to control the company’s direction, people close to Fuji said the company remained open to talks with the new board. 

Still, even as Mr Komori races to salvage the deal, investors will be asking whether it is worth fighting for. 

“In the current situation, the best-case scenario would be that rationality among all parties prevails,” CLSA analyst Claudio Aritomi said. “Both Fuji and Xerox need each other. This is not a point where they should be trying to sweeten the deal.”

Contentious deal: activists and executives fight over Xerox

epa05697903 Jeff Jacobson, the CEO of the Xerox Corporation, visits the floor of the New York Stock Exchange after ringing the Opening Bell in New York, New York, USA, 04 January 2017. EPA/JUSTIN LANE
Xerox chief executive Jeff Jacobson was considered 'hopelessly conflicted' by a New York judge © EPA

Jan 22

Activist investors Carl Icahn and Darwin Deason, the largest and third-largest shareholders in Xerox, join forces to lobby the US printer and photocopier maker to put itself up for sale and replace its ‘old guard’ directors

Jan 30

Xerox agrees a deal that will see Japan’s Fujifilm Holdings take control of its printer and photocopier business, ultimately giving Fujifilm a 50.1 per cent stake in the merged entity

Feb 12

Icahn and Deason urge Xerox shareholders to vote against the Fujifilm deal, calling it the company’s ‘death knell’

Feb 13

Deason files a complaint in the Supreme Court of New York, saying the deal was ‘the product of deceit’

Apr 27

Xerox and Fujifilm reopen negotiations on their merger that could lead to a higher payout for shareholders in the US group

Apr 28

The deal is blocked by New York state judge, in a ruling that found Xerox chief executive Jeff Jacobson was ‘hopelessly conflicted’ and that some board members had acted in ‘bad faith’

May 2

Jacobson and most of the Xerox board agrees to step down

May 4

Xerox makes U-turn of Jacobson and board exit, saying they will now remain because a settlement agreement with dissenting shareholders had expired

May 13

Xerox terminates Fujifilm deal and fires Jacobson

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