Xerox: It Didn’t Have To End This Way

Xerox recently announced the sudden departure of chief executive Jeff Jacobson, a
shakeup of two-thirds of its board, a lawsuit by the largest individual shareholders, and
a potentially failed merger with joint venture partner, Fujifilm, which a judge
proclaimed was “massively conflicted.”

Then the next day, the company reversed itself and reappointed the CEO and the original board, and began to renegotiate the deal with Fujifilm. While shareholders twist in the wind, the board and CEO get to hide behind corporate indemnity while waiting for a “Hail Mary” according to the CEO, and competitors are already targeting the company’s customers and employees. 

It didn’t have to end this way. 

The company that Steve Jobs credited with the inspiration for the Apple Mac after he
toured  Xerox PARC (Palo Alto Research Center), now sits ignominiously on the selling
block for the sole purpose of fetching the highest bid. 

The company’s troubles began long ago as a succession of once glorified CEOs failed to
address the company’s lackluster performance in a world dominated by more nimble
competitors. Those earlier chief executives acted as caretakers, waiting for a rich
retirement that allowed them to pass along festering problems to a successor. 

Only in appointing Jeff Jacobson, a long time Rochester Xerox and Kodak executive
who came equipped with a law degree and an Ivy League education, the board failed to
recognize that nimble corporate governance is now part of the core skillset of the
CEO.  

“The ending to the Xerox roller coaster is not far off, and it will begin with the phrase ‘you can’t make this stuff up.’”

Shareholder lawsuits reveal that inside Xerox has had a culture of poor corporate
governance, was tone-deaf ear to shareholder activists (who owned 15% of the
company) and convened a board hopelessly broken by divided loyalties. For
example, not long before the blow-up the board initiated a search in
anticipation of firing the CEO, only later to side with him in contradiction to the shareholder activists.

The legendary investor, Carl Icahn, didn’t buy his way into Xerox because he liked
making Xerox copies, but because he likes making money. Icahn told the CEO, Jeff
Jacobson, only one year into the job, sell the company or find other work. The board
agreed with his poor assessment of Jacobson’s performance and began a search for a
new CEO at the time, which it disclosed in a subsequent proxy filing.

But Jacobson saw the timing was constricted and chose to do a deal of convenience
with his joint venture partner, Fujifilm. The terms included a large cash payoff for
shareholders, perhaps a modern form of ‘greenmail,’ which Icahn and Deason felt was
inferior. But then when they he learned Jacobson would emerge as the merged entity’s
CEO, it sounded fishy to the Wall Streeters, and they he told Jacobson to pack his bags
and return home.

At first, the board sided with Icahn. On Nov. 10, it informed Jacobson the board was
“disappointed by his performance,” and that he was to “discontinue any and all”
communications with Fuji. At that point, according to the lawsuit, a new CEO candidate
was named.

But Jacobson went forward with the deal and flew to Japan anyway, thinking this might
be his only chance to save his job. He pushed Fujifilm to perform, citing Icahn’s impatience, which was an understatement. He also feathered his own nest by telling the bankers that, according to Fujifilm, his role was paramount in making the deal happen. Then he sat back and waited for the term sheet to be signed on November 30.

When it arrived, the board chose to keep Jacobson in the job, as it appeared he would
meet financial targets. Mr. Jacobson texted a Fujifilm executive, saying, “we will finish
our mission and win,” which even Jacobson told his chairman was a “Hail Mary.”

Once the Fuji deal was announced, the other largest individual shareholder, Darwin
Deason and Carl Icahn teamed up and sued in New York Supreme
Court, to fight what they called a “complex deal that would cede control of Xerox to
the Japanese company.”

While former (and now current) Xerox chairman, Robert Keegan, defended the deal on
the ground that “Mr. Jacobson was fully authorized (by the board) to engage in
discussions with Fujifilm,” the Judge considered the merits of the deal conflicted. He
issued a preliminary injunction to temporarily stop the deal in its tracks. In in New
York Supreme Court, he said of the deal, saying it was “largely negotiated by a
massively conflicted CEO in breach of his fiduciary duties to further his self-interest.”

After the deadline passed for the company to negotiate an agreement with the
shareholder activists, Icahn and Deason, Xerox subsequently reappointed
its former CEO and board, and has already started renegotiating its deal with Fujifilm.

According to informed sources, the companies are considering “adding $5 a share to
the $2.5 billion special cash dividend of roughly $9.80 per share that Xerox
shareholders would receive as part of the deal.”

The ending to the Xerox roller coaster is not far off, and it will begin with the phrase
“you can’t make this stuff up.”