Xerox Corp. is rewinding the clock, splitting off a services business it acquired a little more than five years ago — the latest tech giant taking drastic action to cope with a rapidly changing marketplace.
By year-end, Xerox said Friday in a statement, it will separate into two publicly traded entities: an $11 billion document technology company based around the namesake copier and scanner hardware; and a $7 billion provider of services to government and industries such as health care and transportation.
Investor Carl Icahn, who holds more than 8 percent of the company and has said he would push for operational changes, will select three directors on the services company’s board, according to a separate statement. That business will also seek an external candidate to be chief executive officer.
“Short-term Xerox should get some boost,” said Anurag Rana, an analyst with Bloomberg Intelligence. “The long-term value for these companies will be how it redefines its services in a cloud-first and mobile-first world. Xerox is not known to be at the forefront of those movements.”
Moody’s Investors Service said Xerox’s corporate debt ratings are on review for a possible downgrade, reflecting the view that the split will result in two smaller companies with less business diversity and profitability than the current combined business.
The board decided that the document and service operations had little overlap and require different capital structures and operating models, according to Xerox, which has an operation in Wilsonville, Ore. Breaking the businesses up would simplify the decision-making process on what areas to focus on and invest in.
“Technology will be high cash return to shareholders,” CEO Ursula Burns said in an interview Friday with “Bloomberg Go.” Document technology will likely return 50 percent of free cash flow to shareholders, which is in line with what Xerox currently does, she said. “Services will be more about investing and globalizing the business.”
Burns emphasized that Xerox made the decision to split before talking with Icahn.
When the 79-year-old billionaire took a stake in Xerox in November, he said he intended to speak with executives and the board to improve operational performance and pursue strategic alternatives. Xerox was then already in the midst of a broad-based review of structural options for the company’s business portfolio and capital allocation.
Icahn “will have governance input into the services business and will not be engaged with the services business or the current Xerox business at all,” Burns said, adding that Icahn had no input in the strategic review. “We came out in a place that’s strong for the business, and it happened to align with what Mr. Icahn wanted as well,” she said.
Icahn rebranded himself as an activist investor and outspoken shareholder advocate after gaining fame as a corporate raider in the 1980s. In recent years, he has taken stakes in technology-related companies including Apple, eBay and Netflix, and agitated for changes such as share buybacks and spinoffs, which he argued would create shareholder value.
Icahn led a lengthy fight at eBay, agitating for the Internet marketplace to spin off payments unit PayPal Holdings, which it eventually agreed to do. In November, Icahn Associates Corp. disclosed it had sold the eBay stake and reported a 3.8 percent holding in PayPal. At Apple, Icahn was outspoken in demanding more cash be returned to shareholders, and the tech giant subsequently increased its dividends and stock buybacks.
