Xerox Corp (XRX) Splits Under An Agreement With Activist Investor Carl IcahnVW Staff
Xerox Chairman & CEO Ursula Burns spoke with Stephanie Ruhle and David Westin on Bloomberg TV’s “Bloomberg <GO>” to discuss that in an agreement with investor Carl Icahn, Xerox will split into two publicly traded companies.
Xerox, With Icahn, To Split Into Two In Push Toward Services
Xerox Chairman & CEO Ursula Burns on Icahn’s involvement in the decision to split, Burns said: “The board did its analysis and came to its conclusion without speaking to Mr. Icahn at all. Fortunately when we did speak to him, as you know he’s a large holder of our shares, he agreed with the outcome we reached.”
On Icahn’s involvement going forward, Burns added: “On a go-forward basis he will be involved from a perspective when the company separates into two; he will have some governance input into the services business. Will not be engaged with the document technology business or with current Xerox business at all.”
On Xerox’s debt after the split, Burns said: “Most of the debt on our balance sheet is debt that is associated with Xerox having a financing business…So most of the debt will go over to the document technology business. So the debt is securitized with equipment that are in customer’s sites. Our services business will have a level of debt as well, but nothing as high as I said as the document technology business.”
On the impact on Xerox’s workforce, she said: “Every year Xerox has to drive automation, innovation and to drive productivity in its’ workforce. 2016 will be absolutely no different and our technology business will have to continue to automate…Our workforce will shrink very likely but it does every year as it becomes possible to do more with less. Small percentage, I think less than 1-2% of our employee base will be impacted.”
On her role, Burns said: “As far as my role as we go forward, I actually purposefully took this discussion off the table.” She did this “by basically saying I’m not going to think about it. It’s not part of the decision-making process. The decision-making process has to be about the business. Once we decide, which we have, now myself and the board, I’ll come forward with recommendations about leadership and we’ll start having that discussion.
The impact of the strong dollar, Burns said: “The strengthening of the dollar actually will be a benefit for us in that business infrastructure, a little bit of a pressure there. So the way that the macro economy is changing, having these two businesses that are fit and focused can actually move relatively quickly around these changes.”
DAVID WESTIN: As we’ve said this is a big day for Xerox. The company beat fourth quarter profit forecasts and announced it’s splitting into two different companies. One that will manage it’s hardware operations and another that will house it’s services business.
For more let’s bring in Xerox Chairman and CEO Ursula Burns. And first Ms. Burns welcome to Bloomberg GO and thank you very much for joining us on this big day for you.
URSULA BURNS: Thank you for having me.
WESTIN: Let me start with, I think, the first question which is what brought you to this stage? What made you decide that this was the best thing for your company? This is a big decision and to what extent was it outside factors? And what extent did Mr. Icahn play in it?
BURNS: It is a big decision for our company and it’s a decision driven from analysis of what’s happening in the market, what’s happening around the world. What customers, investors, and quite frankly our employees are actually driven by. Our board entered with me and my management team in an analysis in early October. And we looked at structural options and portfolio options and capital allocation options for the business. Deep analysis, we had great advisors who were helping us. And we came to the conclusion that given the strength that both of these businesses have, combine that with changes in the marketplace, with changes in the industry, competitor set, that it’s probably best for us, it’s best for us to be separate companies not together. We have two great Fortune 500 size companies after we separate. A document technology business and a services business.
Interestingly enough we came to that conclusion and what’s been reported is that this was driven by Mr. Icahn. Interestingly enough it was not. The board did its analysis and came to it’s conclusion without speaking to Mr. Icahn at all. Fortunately when we did speak to him, as you know he’s a large holder of our shares, he agreed with the outcome we reached.
On a go-forward basis he will be involved from a perspective when the company separates into two; he will have some governance input into the services business. Will not be engaged with the document technology business or with current Xerox business at all.
As I said I’m pleased with the fact that we came out in a place that’s strong for the business and it happened to align with what Mr. Icahn wanted to do as well.
WESTIN: So just to pin that down, to what extent did you bring Mr. Icahn into your strategic review to consult with him as opposed to go through the strategic review, come up with an answer, present it to him and just get his reaction?
BURNS: We never brought him into the strategic review. We did the whole review, came up with an answer and then spoke to him about it at his request. That was the way that the process was operated.
STEPHANIE RUHLE: So can you just walk us through, with this split, services was your big push. So help us understand why the split, why it makes sense if services was your growth area?
BURNS: Right services is clearly a topline growth area. And before I get too much into the details on services, I want to spend a little bit of time, 30 seconds, on our document technology business. We are the number one provider of document technology solutions around the world. We hold #1 market share from an equipment share perspective. We have leadership solutions. It’s a very, very high profit margin business for us. It throws off a large amount of cash and it has segments that we invest pretty intensely in to actually help to transform that, actually present pockets of growth. That business not growing that much on the topline competitive we are unbelievably strong and we are global in, and actually require some invest, will be one side of the business. It has a completely different kind of operating model than our services business.
Services business growing topline transition’s happening very quickly. Software as a service, cloud computing, mobility. This whole idea that the world is getting significantly smaller. Health care has changed. We provide solutions to all of these markets. And the topline is growing and investments are going to be higher in that business to drive that topline growth. Return to shareholders will be through a different model, our technology business will be a high cash return to business to our shareholders. Today we provide about 50% of our free cash flow to shareholders. And our tech business will probably continue that way and then services will be more about investing and investing for growth and globalizing that business.
We started that path seven years ago and we made some progress. But we still have some, a ways to go there.
RUHLE: Then if you could break that down for us in terms of innovation because even if you’re in that number one position, if you are in a low growth or dare I say, diminishing industry, where do you innovate? I look at IBM and HP, two companies looking for their next level of innovation. Where do you find it truly?
BURNS: Your (INAUDIBLE) are still around some pockets of growth in printing, particularly high end color printing, around inkjet solutions. We’re investing quite a bit there to actually help to transform that market. And it’s about what we call document outsourcing or workflow and workflow automation. Those are two segments of our business in the technology side that require innovation, that require investments to differentiate yourself and are growing.
At the same time there are segments that are declining and overtime the segments that are declining will get small enough and the segments that are growing will get large enough and the math works out that you’ll grow over time. You can’t take your eye off of the fact that this is a very high profit business, throws off a large amount of cash that allows a very shareholder-friendly return model and investment.
WESTIN: Ursula as you look forward to these two separate businesses, part of what each leader will have to look at is their capital structure. Overall Xerox has a fair amount of debt I think it’s fair to say. I think according to the Bloomberg it’s about $7.6 billion, something like that. How do you anticipate assigning that debt to the two different entities?
BURNS: Most of the debt on our balance sheet is debt that is associated with Xerox having a financing business. And that financing business is to finance equipment in our document technology end of the business. So most of the debt will go over to the document technology business. So the debt is securitized with equipment that are in customer’s sites. Our services business will have a level of debt as well, but nothing as high as I said as the document technology business.
We expect the document technology business to be investment grade. We’re managing the balance sheet in the separation to assure that that happens. So that we can continue to actually add this and support this investment grade rating and financing business that we have.
RUHLE: How do you get yourself out of that hardware technology business and up into the cloud?
BURNS: Yeah so most of the workflow solutions and workflow automation processes that we offer in the document technology business is about this: it’s about enabling globalization and mobility of workers. So how do you actually take your information that you carry around with you in a digital format and actually render that in a printed format? How do you do that in a secure way? How do you do that in a point of need way? In a personalized way, et cetera?
And so we operate in the cloud as a service provider to the document technology solution set that we provide to customers. On the services side it’s very different interestingly enough.
BURNS: The services side is very different in that we actually provide some cloud solutions but more importantly we actually render our solutions and our communications infrastructure the intelligence behind our customer care infrastructure behind our transaction processing infrastructure sits in the cloud.
So instead of us, Xerox, earlier this year sold it’s information technology outsourcing business. And now we are a customer of cloud solutions so that we can actually render our solutions to customers.
WESTIN: So Ursula take us back, because in 2010 you made a large acquisition with Affiliated Computers. And from your point of view that was a sensible thing to do. You could put these things together and the sum would be greater than the parts.
You said in your first answer there were changes in the marketplace. Explain those changes in the marketplace that make that not such a good idea today.
BURNS: Right. I think that first of all I said this to somewhere else, that 7 years in business is like 7 years in a dog’s life right?
BURNS: It’s 50 years; a lot has changed since then. And I’ll give you two examples. One is health care. And we started with the Affordable Care Act. We moved from the Affordable Care Act which was to outcomes based medicine. Now many people are shifting to Medicaid as a foundational delivery infrastructure for their health solutions.
During that change a lot has happened around consolidation of health care providers, insurance companies, consolidators, insurance and providers consolidating. We’re a solution provider to the health care industry both government and commercial health care. And those changes in this very short amount of time, just who are customers are, how big they are, how consolidated they are, the regulations around how they operate their business, we’ve had to make significant changes to provide solutions to them. And the profitability and business mix of that has had to change.
Another one is in customer care. Where we answer phones for people. It’s now moved more from just simply answering the phones to providing them with analytics and information about how they can make their, our customers can make their businesses better. We’ve had to invest quite a bit into analytics and just smart processing and software as a service, and service as a service to our clients.
Those investments and that move was literally nascent seven years ago and in some cases didn’t exist. And what we’re seeing now is an acceleration towards just a completely different set of markets. The dollar has strengthened pretty significantly. And it’s changed competitive landscape around the world for our technology business.
So a lot has happened in that time and one of the best things that we have done I think in this strategic review, in this structural review is to take a pause and say, OK what does the world look like today? And let’s not look back 7 years ago. Let’s look forward 7 years. And see whether or not we could actually align our company better to provide better solutions to our customers to provide a better place for our employees to work but also to provide a better investment vehicle for our investors and our shareholders.
And I think that based on where the world is today, having us in two businesses that are fit and focused for their marketplaces is appropriate.
RUHLE: Let’s talk about that specifically where the world is today. And over the next 12 months, it could again change exponentially. You mentioned the strong dollar, a growth area are emerging market countries. In this environment emerging markets are getting hit drastically. If that continues what happens to your businesses there?
BURNS: Right the interesting thing is that our services business benefits a little bit. Our document technology business is pressured a little bit. But one of the things I love about both of these businesses is that they are, they have business models that are flexible and this is one of the things that we’re also driving in the separation is to make sure that we actually heighten our intensity around flexibility. I’m having business models that can respond to the macroeconomic environments.
Our tech business all around continuing to drive automation and solutions around service delivery, around as I said mobility, around how we actually develop a product and an infrastructure that support it. And in our services business, fortunately resource work from around the world and the strengthening of the dollar actually will be a benefit for us in that business infrastructure, a little bit of a pressure there.
So the way that the macro economy is changing, having these two businesses that are fit and focused can actually move relatively quickly around these changes. You said, what you just said in the question, 12 months right? 12 months doesn’t seem like it’s that far away and a lot can change in that time.
And we have to make sure that we continue to refine the business models. Continue to be really intense about moving quickly, about responding very quickly. About having our ear to the ground for both clients, for our investors, and very importantly for our employees.
WESTIN: Ursula let’s talk for a minute about execution, how we go forward from here. What happens? What’s the time horizon? What happens to your workforce and specifically what happens to you in the new world?
BURNS: Well time horizon we’ve done a lot of work fortunately before we announced this and we’re pretty confident that we can get this deal completed, the separation completed in 12 months, by the end of the year.
We have a program management office with the correct level of support and expertise around us to make sure that this complicated separation happens, and happens in a way that doesn’t disrupt clients, delivery and how we actually serve our clients and doesn’t disrupt the vast majority or of our employee base which it will not.
As far as my role as we go forward, I actually purposefully took this discussion off the table. When you’re going through something as dramatic as this, when you have to step back and do a fundamental analysis of your business and your position, the one thing that I did not want to have as a discussion point was what was going to happen to Ursula. So I removed that.
I have a great relationship with the board. Trust, confidence, and we’ve known each other for a long time–
RUHLE: You removed it how?
BURNS: That was off the table.
RUHLE: I don’t understand.
BURNS: Excuse me?
RUHLE: How have you removed that from the table?
BURNS: By basically saying I’m not going to think about it. It’s not part of the decision-making process. The decision-making process has to be about the business. Once we decide, which we have, now myself and the board, I’ll come forward with recommendations about leadership and we’ll start having that discussion.
RUHLE: Then Ursula you have been leading and transforming this company for over a decade. How do you feel about the fact that it’s Carl Icahn who’s dominating the headlines and many people are saying it’s Carl that’s making the change? When we look at what you’ve done to transform this organization.
BURNS: Yeah you know it’s, my first reaction would be frustration. But it really isn’t. At the end of the day, what we’ve done, we’ve done the right thing for the go-forward for this company for sure. I think that the initial reports which were inaccurate and how we got to the decision are masking the fact that the decision is the right decision. And that will come out over time. This discussion helps that.
But how we got there is less important than where we got. And we’re in the right place going forward. Two Fortune 500 strong, fit, focused companies in 2017. And laying a foundation in ’16 that allows that to happen. This helps to make sure that not everything is as it appears in the headlines. I guess having the headlines appear this way make it easier and better to read. But that’s not the way that the work happened at all.
RUHLE: Before we go then, your workforce, if you’re not leaving, consolidation, changes, splitting, what happens to your workforce? Job cuts?
BURNS: Well I think that every year Xerox has to drive automation, innovation and to drive productivity in it’s workforce. So this year will be no different. 2016 will be absolutely no different and our technology business will have to continue to automate. Services business absolutely continue to automate.
So our workforce will shrink very likely but it does every year as it becomes possible to do more with less. We do manage those transitions fairly well I’m proud to say but they will for sure happen. Small percentage, I think less than 1-2% of our employee base will be impacted.
WESTIN: Ursula I worked once for a very wise CEO Tom Murphy of Cap Cities and he taught me, if you’re willing to (INAUDIBLE) the credit, you can get almost anything done which I’ve taken to heart. So that’s Xerox Chairman and CEO Ursula Burns. Thank you for joining us this morning it was great to have you on.