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Business deals

Stubborn Fujifilm loses out to Icahn in battle for Xerox

A refusal to budge on price was a crucial factor that doomed the deal

The end of the Xerox deal leaves Fujifilm-owned joint venture Fuji Xerox in a tough position without access to major growth markets.

TOKYO -- U.S. office equipment maker Xerox scrapped plans to be bought by Japanese partner Fujifilm Holdings amid a steady drumbeat of criticism from shareholder Carl Icahn, in what amounts to a stinging defeat for Fujifilm CEO Shigetaka Komori.

Under an agreement with activist investors Icahn and Darwin Deason announced on Sunday, six Xerox board members resigned and were replaced by five new directors more closely aligned with Icahn. The departing board members include CEO Jeff Jacobson, a driving force behind the Fujifilm deal.

Komori had sounded upbeat about the acquisition after it was announced Jan. 31, saying it would make Fujifilm "one of the world's biggest document solutions companies," and expressed confidence that Icahn's opposition could be overcome.

But a lack of flexibility in price negotiations -- part and parcel of mergers and acquisitions -- helped doom the deal. Fujifilm refused to accede to Icahn's demands to put a higher value on Xerox, insisting that the initial bid was its best offer.

This stance is intertwined with Komori's personality. The Fujifilm chief, a sportsman who became a devotee of American football in college, insists on fair play above all else. "I have valued doing things the right way, such that no one can complain, and fighting fair and square," he wrote in a book aimed at young businesspeople. To protest Xerox's unilateral decision to scrap the acquisition agreement, Fujifilm said filing a lawsuit was an option.

To Komori, Icahn's persistent criticism of the acquisition in the media and other channels may have seemed like little more than an effort by a greedy investor to inflate the value of his holdings and force Fujifilm to buy high.

But Komori likely underestimated activist shareholders' influence in the U.S. Their proposals in recent years have tended to be realistic ideas aimed at boosting competitiveness, such as restructuring, fiscal reform and governance improvements. Shareholders are often receptive, anticipating that such initiatives will lift the company's value.

Icahn's constant disparagement of CEO Jacobson's qualifications and the board's ability to run Xerox found a ready audience among stockholders frustrated with lackluster share prices.

Activist shareholder Carl Icahn's opposition to Fujifilm Holdings' acquisition of Xerox ultimately helped to torpedo the deal.   © Reuters

Icahn declared victory in a statement on Sunday. "We are extremely pleased that Xerox finally terminated the ill-advised scheme to cede control of the company to Fujifilm," he said, adding that "today marks a new beginning for Xerox." But this may not represent such a clear-cut win for the company.

Despite the growing trend toward paperless offices in the U.S., Xerox expects North American sales to shrink just 2% annually on average over the four years through 2020. The hope was that integrating with the wealthier Fujifilm would help the American company, whose investment capacity has been strained by ongoing restructuring, develop new technology and services to seize business opportunities.

The breakdown of the deal leaves Xerox less likely to get out from under a cycle of contraction. The company's shares tumbled as much as 10% Monday morning.

The change of plans also heightens the uncertainty faced by Fuji Xerox, the Fujifilm-controlled joint venture with which Xerox would have integrated. Fuji Xerox has been hobbled by its territory-based partnership with Xerox, under which the Japan-based venture handles sales only in Japan, China, Southeast Asia and Oceania, while the American company enjoys access to such growth markets as India and Africa. The acquisition presented a rare opportunity to end this system.

This may mark the end of the clash between Komori and Icahn, two venerable names in the business world. With prospects for the office equipment deal looking grim, Fujifilm has indicated it will focus more on medicine, a more promising field. The company announced on Monday plans to spend 60 billion yen to 70 billion yen ($550 million to $640 million) to make drug development unit Toyama Chemical a wholly owned subsidiary. Fujifilm shares closed up 1.6% in Tokyo.

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