Xerox does the splits as activist shareholder vision wins the day

The latest enterprise tech firm to ‘do the splits’ will be Xerox, breaking apart its product and services divisions into separate entities after major pressure from activist investor Carl Icahn.

Xerox will split into a document technology company - that will include Xerox's traditional photocopiers - and a Business Process Outsourcing (BPO) company in a bid to make $2.4 billion of savings over three years. CEO Ursula Burns says:

Document Technology, with 2015 revenue of $11 billion, will continue to lead the document management and document outsourcing market, leveraging its superior technology, solutions and innovation capabilities. BPO, with 2015 revenue of $7 billion, and already a leader in the growing market, will continue to pursue growth opportunities by capitalizing on its deep industry expertise, market-leading automation solutions and track record of global delivery excellence.

She adds that there is a clear rationale for the decision to split:

We have two strong businesses each facing different market and client realities. Document Technology faces modest secular declines in its markets while BPO participates in the growing, but rapidly evolving market. The businesses have distinct operating models and cash flow characteristics and very different growth drivers and competition. The Document Technology business is one in which operational discipline and the commitment to transformative productivity is vital to sustaining quality and managing cost in an increasingly interconnected digital world.

BPO, on the other hand, needs to be highly adaptive, able to innovate and adopt technology quickly and shift its portfolio to address the fast changing needs of its clients. We are seeing how new technologies like Software-as-a-Service and robotic process automation are changing the way that services are delivered. Additionally, clients are requiring deep analytics for operational insight and greater personalization. The BPO market is growing at a greater than 5% rate and the majority of the revenue streams are recurring.

Based on this, we concluded that these businesses will be stronger and able to create more value for shareholders, clients and employees as independent companies.

We see the BPO company as one focused on revenue growth, margin expansion and disciplined investments in attractive growing markets. Document Technology will leverage its track record of market leadership and strong cash flow generation to a sustained and investment grade rating and shareholder-friendly capital allocation plan.

No pressure

Burns insists that the move is a result of the “extensive strategic review” that’s been underway for several months and not the result of pressure brought to bear by Icahn, telling the US media:

We're happy that he is in support of it, but he had nothing to do with the initiation, the contemplation, the analysis, or any discussion around the deal. We are happy that he is in agreement with it, but he did not drive it, as is being reported in the news.

But it’s easy to suspect that the lady doth protest too much when it’s learned that the activist investor will nonetheless choose one third of the board of directors of the BPO firm. Icahn said in a statement:

We strongly believe that an independent BPO company with fresh, focused leadership and best-in-class corporate governance will greatly enhance shareholder value.

Burns own future under the new split arrangement is unclear. This is quite deliberate, she insists:

One of the things that was removed from the process early as we went into this…was to move me out of this discussion. The decision about whether or not we split into two companies, or what process we take on a go-forward basis, can’t be based on an individual or with any worry about an individual.

So literally I said, ‘Let us go through this kind of agnostic of individual and let’s manage it from a process standpoint’. Good news is that we did that, I have a great relationship with the Board. My future will be contemplated. I will make some recommendations to the Board and my future will be contemplated as part of those recommendations.

On the other hand, the intention to bring in outside talent to run the spun-off BPO business is set in stone:

The Services leadership will come from the outside. The BPO leadership will come from the outside. I have a President who runs the Services businesses today. He is a very valued member of our company. He does a good job. I hope that he continues to operate in the business on a go-forward basis, but the new CEO of the company will come from the outside.

My take

Burns says:

It’s not like there was a gun to our head. This was about opportunities. It’s not about panic.

But no matter how this is spun, the future shape of Xerox has been carved from Carl Icahn’s idea of what it should look like.

I can’t see Burns sticking around to run the Document Technology business. She’s been a dedicated Xerox employee and leader since she first joined back in 1980 as an engineering intern.

No-one can dispute her loyalty and dedication to the firm or her status as the first - and still the only - African American woman to become CEO of a Fortune 500 company.

But the rise in the firm’s stock price after the break-up plan was announced on Friday shows just how much change was needed at Xerox after some risky rolls of the dice and many years of decline.