Fujifilm Holdings Corporation. [TYO: 4901.T] – Market Cap as of 23/09/2019: USD 18.93bn (JPY 2.056tn)

Xerox Holding Corporation. [NYSE: XRX] – Market Cap as of 23/09/2019: USD 8.44bn


On Tuesday, November 5th 2019, Fujifilm announced it will acquire Xerox’s 25% stake in the joint venture Fuji Xerox. The $2.3bn deal marks the end of one of the oldest US-Japan corporate partnerships and will grant full ownership of Fuji Xerox to the Japanese photography and imaging giant. Fujifilm will thus be retracting its $6.1bn bid for Xerox, which failed after facing opposition by the photocopier makers famed activist investors Carl Icahn and Darwin Deason.

About Fujifilm

Fuji Photo Film Co. was founded in 1934 in Japan as a result of a government plan to establish a domestic photographic manufacturing industry. Initially, the firm focused on producing photographic, motion-picture and X-ray films and after World War Two it diversified into the X-ray diagnosis, printing and electronic imaging fields. In 1962, Fujifilm and Xerox Limited created the joint venture Fuji Xerox. Starting in the 1950s, Fujifilm expanded its presence overseas by establishing production and sales bases outside Japan. At the brink of the century, Fujifilm fiercely competed with its US rival Kodak for dominance in the camera film market. While Fujifilm enjoyed near-monopolistic power in Japan, Kodak’s leading position in the US was undermined when Fujifilm sponsored the 1984 Los Angeles Olympics and established a film factory in the US, thus gaining considerable market share. The digital revolution of the 21st century was largely anticipated by Fujifilm, which as early as the 1980s began implementing reforms aimed at drastically drifting away from film and into digital as well as developing new business lines. Although Kodak too recognized the inevitable change, it did so much less effectively which finally lead to the American company filing for bankruptcy in 2012. In 2006 Fujifilm announced it will be establishing a holding company Fujifilm Holdings Corp, with Fujifilm and Fuji Xerox becoming its main subsidiaries. On January 31st 2018, Fujifilm announced that for $6.1bn it would acquire a 50.1% controlling stake in Xerox; however, the acquisition failed when activist investors Carl Icahn and Darwin Deason criticized the deal for undervaluing Xerox.

Fujifilm offers a wide range of products and services ranging from photographic film to fine chemicals and has a network of 283 subsidiaries globally. The three main business areas of Fujifilm Holdings are: Document Solutions (accounting for 43% of revenue), Healthcare & Material Solutions (accounting for 41% of revenue) and Imaging Solutions (accounting for 16% of revenue). In FY 2018 Fujifilm Holdings recorded JP¥2400bn (around $23bn as of March 2018) in revenue and had a 5% operating profit margin. The company is headquartered in Tokyo and trades on the Tokyo Stock Exchange, its CEO is Shigetaka Komori, and as of 2017, it employed around 80 thousand people.

About Xerox

Xerox was founded in 1906 in Rochester, New York as The Haloid Photographic Company and originally focused on manufacturing photographic paper and equipment. The founder of Xerox, Joseph C. Wilson, after inheriting the Haoild Company from his father became inspired by the innovations of Chester Carlson, who invented a process for printing. In 1946, the two signed an agreement to develop Carlson’s novelty into a commercial product, calling the new system xerography which means “dry writing” in Greek, which later resulted in naming the company Xerox. After nearly 15 years of developing the technology and testing the market, in 1959 the company came to prominence with the introduction of Xerox 914. The 914 became so popular that it was called “the most successful single product of all time”. In 1961, it amassed Xerox a staggering $60m in revenue which due to an innovative marketing campaign grew to $500m in 1965. The 1960s marked the dominance of Xerox in the photocopier market resulting in the company being listed on the New York Stock Exchange in 1961. The company embarked on substantial expansion operations by opening new offices and acquiring numerous businesses in the fields of optics, computers and data science. After years of record profits, in 1975, Xerox had to resolve an antitrust case with the FTC, which forced the licensing of the company’s entire patent portfolio to its competitors. Within four years of the anti-trust suit, Xerox’s share of the US copier market dropped from nearly 100% to below 14%. In the 1990s the company turned to developing digital photocopiers and revamped the entire product range which once again gave Xerox a technical edge over its competitors. In this time, Xerox also worked to provide services to companies such as supply, maintenance, user support and configuration. In the first years of the new millennium, a new CEO Anne Mulcahy launched an aggressive turnaround plan that returned Xerox to year-round profitability, decreased debt, increased cash and investment in R&D. In 2010s Xerox spun off a few of its units such as their IT Outsourcing business and business service unit. In May 2018, it was announced that Xerox’s CEO and Chairman and four other directors would resign as a result of an internal feud with activist investors Carl Icahn and Darwin Deason regarding the investors’ opposition to a Fujifilm acquisition bid.

Over the years Xerox has grown into one of America’s most prominent companies. It ranks number 318 on the Fortune 500 list, owns over 18000 active patents and has a presence in 160 countries. Xerox manufactures and sells a wide range of office equipment including printers, scanners and other multifunction systems that scan, copy, print, fax and email. Equally important to its products in terms of generating revenue, Xerox offers a wide variety of services and solutions for businesses ranging from hardware maintenance to on-demand marketing campaigns. In 2018, Xerox recorded $9800m in revenues and had a 3.8% operating income margin. The company is headquartered in Norwalk, Connecticut and is traded on the NYSE under the ticker XRX and is also a component of the S&P 500. Xerox employs around 27 thousand people and is led by John Visentin as CEO and Keith Cozza as Chairman.

Industry Overview

In 2018 we saw the printing industry facing the stark realities of digital disruption. While HP, with global printer market share exceeding 22%, continues to strengthen its lead in an increasingly commoditized market, the traditional copier companies such as Konica Minolta, Ricoh and Xerox take differing approaches to preserve relevance. With their market shares being less than 5% for each and clear dominance of HP and Canon, their operating profits are driven by the office and professional print business. Konica Minolta is counting on its Workplace Hub pro platform to extend IT services reach in the Server Message Block market (SMB provides shared access to files, printers, and serial ports between nodes on a network), Ricoh is maintaining focus on a broad range of print, workplace and IT services, while Xerox is driving its connected multi-functional printers (MFP) business.

This year, print and digital convergence is driving an increased demand for integrated document workflow. In 2018, the turnover in the printer, scanner and multi-function device market was projected to be $57bn according to Statista. On the other hand, the market is expected to amount to approximately $54.6bn by 2021, indicating a decline. Despite the rapid adoption of digital and mobile technologies, many businesses still depend on print to some extent. Quocirca’s Global Print 2025 study revealed that 64% of businesses believe that printing will remain important to their daily business even by 2025. The reasons for this is an ongoing need for physical signatures and receipt of paper communications from suppliers, along with the preferences of customers and employees. These create a significant opportunity for managed print services (MPS) providers to offer integrated paper and digital workflow services.

In 2018, some rudimentary voice recognition capabilities emerged for smart printers and MFPs, and the further development of these is expected to be seen from 2019 onwards. Firms like HP and Xerox managed to establish capabilities, but the Quocirca’s study predicts that the momentum will largely depend on partnerships with companies like Google and Amazon, possibly with the use of the latter’s Alexa for business. For traditional print manufacturers developing capabilities in this area will be crucial.

It’s worth noticing that MFPs and increasing adoption of digitalization efforts on a global scale are pushing for further maturation of the single-function printer (SFP) market. However, what gives hope for SFPs is the fact that they still provide a lower-cost option for customers interested in printing.

Another important prospect for the print industry will be offering services that are more relevant to the smart workplace. This creates an opportunity for industry players to position their products and services as a means of helping businesses achieve efficiency. Printing in the workplace may be gradually decreasing, but it is not disappearing and suppliers that are best positioned to succeed will be extending their offerings and software competencies to serve broader IT requirements. It can be observed that the print and digital worlds become more and more closely intertwined.

When we think about print, the most current topic is undoubtedly 3D printing. The global 3D printing market size was estimated to be $9.9bn in 2018 and is expected to reach $34.8bn by 2024. However, the market is consolidated and there are 5 dominating players (Stratasys Ltd. being number one) from which none of them is the traditional copier company. Nevertheless, HP joined the market in 2016 by launching its first 3D printer Jet Fusion 3200 and has high hopes of further development. Xerox formally announced their intent to join the 3D printing industry in October 2018. This announcement was followed by the acquisition of Vader Systems and the company’s liquid metal jet technology, then a 3D printing trade show debut in April 2019.

With the market being saturated and at the same time looking for expansion, the M&A activity is increasing. The talks between 2 giants, Xerox and HP, are happening right now, and while the first offer was rejected by HP, there is a room for discussion according to both sides.

Deal Structure

The deal between Xerox and Fujifilm is a messy one. It involves Xerox selling to Fujifilm their 25 per cent stake of the Fuji Xerox cooperation for $2.3bn, giving an end to one of the US-Japan corporate partnerships founded in 1962. The joint efforts of Fuji Xerox consist in $14.784bn worth of assets (FY2018), which are mainly non-current, such as receivables due after one-year, goodwill, and various investments in affiliates. Fujifilm says that after the sale, it managed to increase Fuji Xerox’s profitability through job cuts and various restructuring plans. In fact, Xerox sold 25 per cent of the company for $2.3bn, which accounts for about $3.7bn of total assets and potential future growth.

Additional terms of the deal in favour of Fujifilm include Xerox selling an additional stake of another joint venture with Fuji Xerox to Fujifilm and Xerox will continue procuring office copiers from Fuji Xerox. In return, Fujifilm is expected to drop the $ 1bn lawsuit against Xerox for damages after the termination of the merger.

Deal Rationale

As anticipated, this deal is quite “messy”, as it’s not a deal of its own. Rather, it’s a consequence of Xerox’s termination of the $6bn merger of the two companies offered initially by Fujifilm. This event was caused by the lobbying of two major activist investors, Carl Icahn and Darwin Deason, who are now deemed to become heads of Xerox’s board. Moreover, this unexpected move initially led Xerox facing a $1bn suit for wrongful termination of the merger, issued by the Japanese counterparty after scrapping of the bid. However, it is not new for Xerox to be involved in messy deals. In 2009, during the acquisition of Affiliated Computer Services, some of Xerox’s board members were ruled by the court to have acted unprincipled while negotiating.

Between vague mission statements, the three companies involved may have been victims of activism. It’s hard to understand if the companies benefitted from recent events. Both firms gave up on a possibly profitable merger which would have allowed the two companies to join efforts and diversify against bigger competitors such as HP. On the other side, Xerox collected cash from a saturated market of which the future is uncertain, and Fujifilm is increasing the profitability of Fuji Xerox which accounted for over 50 per cent of Fujifilm’s revenue in the past.

The two companies are now moving on. Xerox has been looking for a $30bn deal to acquire HP, the three times bigger rival who has been having hard times in the last three years, through cash and financing from Citigroup. While Fujifilm is currently being advised on how to invest their money more profitably than the attempted merger.

As anticipated, the markets of printers, copiers, cameras and other related office equipment and services are reaching an end in its growth. This is suggested by both companies’ volatile revenues, but gradually shrinking. Companies in these markets should either find a revolutionary product to launch or begin thinking about new industries to invest in. However, Fujifilm is now increasing its bets on the printers and copiers market. After completing its ownership of Fuji Xerox, Fujifilm will be able to integrate itself further with its subsidiary and increase overall efficiency. Fujifilm looks forward to innovating the market with artificial intelligence and to integrating different businesses such as medical or educational ones with the document printing business. Moreover, Fuji Xerox will now be able to develop new products independently and sell them to companies other than Xerox, hence widely expanding its sales globally and increasing revenues. Through these improvements, Fujifilm aims to expand the printer market by 30% before 2025. Based on its current strategy, if the market will continue to shrink, Fujifilm will aim to acquire market share to sustain its profitability and keep being the main market player. Perhaps the last one standing.

Market Reaction

After over a 2-year long dispute between the two companies, the predicted reactions to the final deal were uncertain. Fujifilm shareholders had been sceptical about the proposed merger, bringing up the question about the merits of spending such a large sum of money for a business in a saturated market. They would rather approve the company’s investment in other businesses such as pharmaceuticals and cosmetics that the group began when its analogue film business got into trouble back in the day. “Many investors had thought Fujifilm should not buy a company that has little growth potential,” said Mitsushige Akino, chief fund manager at Ichiyoshi Asset Management. “The money should be more wisely spent on other growth areas.”. Moreover, the deal marks a defeat for the personal ambitions of the chief executive of Fujifilm, Shigetaka Komori, whose aim was to put the seal on the oldest US-Japan corporate partnerships. However, Fujifilm investors welcomed the decision and its shares rose 6.7 per cent after the Wall Street Journal reported on the final deal. The Japanese group said it had gained confidence that it could run the joint venture on its own and the Fujifilm share price remain stable.

Xerox shareholders also received the deal pretty well, as the shares rose initially from 36.50 to 36.99 on the day the deal was announced and they continue to rise, and on Thursday being as high as 39.30. It’s not surprising as the transaction means the threat of $1bn lawsuit against Xerox disappears and “These agreements reset our relationship with Fujifilm and provide both companies with tremendous opportunities to grow,” as John Visentin, Xerox’s chief executive, said in an official statement. It also underlines the shareholders’ respect for the activists Carl Icahn and Darwin Deason, and their involvement in the deal with Fujifilm, but may as well show their attitude for Icahn’s case for a Xerox-HP union.


King & Spalding acted as legal counsel to Xerox in connection to the transaction, while Fujifilm used internal advisors




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