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Xerox and Fujifilm: contrasting fates of long-term partners

Tie-up mooted amid shareholder pressure on US photocopier maker

NEW YORK -- Xerox is reportedly in talks over a deal with Japanese camera-to-medicines manufacturer Fujifilm Holdings, which could include a change of control at the U.S. photocopier maker.

The Wall Street Journal report sent Xerox shares up 5% to close at $31.86 on Thursday in the U.S., recovering to the level of Oct. 26, when the price fell sharply following disappointing July-September earnings results. Even though a full takeover of Xerox by Fujifilm is not on the table, according to people familiar with the matter, the market welcomed the report of a possible change in the status quo in Xerox.

"Xerox desperately needs new leadership," Carl Icahn, the biggest shareholder in Xerox and well-known activist shareholder, wrote in a letter to Xerox shareholders on Dec. 12.

Icahn, a long-time holder of Xerox shares, has been demanding the separation of office equipment and tech services in an effort to turn around its sluggish stock price. Many investors, including institutional investors, agreed with Icahn's argument, resulting in a separate listing of the current Xerox and tech service company Conduent last January.

Carl Icahn, well-known activist shareholder   © Reuters

However, sales at Xerox fell 5% to $2.49 billion in the July-September quarter, and its net profit remained flat at $184 million owing to heavy restructuring.

Xerox's earnings have remained stagnant since peaking in 2011, due to sluggish copier demand, among other factors. According to analysts' forecasts compiled by QUICK FactSet, the company's sales are expected to decline for the eighth straight year through to 2019.

Xerox has not commented on the report, but an alliance with the Japanese company may give Xerox management a response to Icahn's demands.

Xerox and Fujifilm have been partners for over a century. They jointly established Fuji Xerox in 1962 as a 50-50 joint venture. Fujifilm subsequently increased its stake in the venture in 2001 to 75%, while Xerox still owns 25%. While more offices go paperless in the U.S., Fuji Xerox conducts business in China and the Asia-Pacific region, which can still expect steady copier demand.

Xerox could benefit from Fujifilm Holdings' financial strength to shore up capital investment and research and development.

However, an alliance with Xerox does not seem to bring much benefit to Fujifilm Holdings or Fuji Xerox.

Copier market decline

The U.S. copier market is on the decline. Xerox, which used to have a technological edge on Fuji Xerox, is far behind Fuji Xerox when it comes to development and production of low-end copy machines in Asia. Some Xerox products are exported by Fuji Xerox.

Fujifilm Holdings looked at tie-ups, including acquisition of Xerox, in 2007 and 2008, but the efforts did not work out. It boosted its influence on the management of Fuji Xerox, which came under its umbrella in October 2006, and tried to increase synergy as a group.

Fujifilm Holdings was also accused of failing to supervise Fuji Xerox in the wake of accounting scandal at the joint venture's overseas subsidiary, which emerged last year. How to govern Fuji Xerox has long been a problem for Fujifilm Holdings.

Shigetaka Komori, former president of Fujifilm Holdings

After the Xerox buyout plan fell through, Fujifilm announced the acquisition of Japanese drugmaker Toyoma Chemical in February 2008, obtaining a foothold in the drug discovery business. "We will not buy a business that is not related to our core business," Shigetaka Komori, then-president of Fujifilm Holdings, said at the time.

As demand for its core photographic film declined sharply due to the rise of digital cameras, Fujifilm shifted its focus to other growth areas. The company now produces liquid crystal materials, including TAC film, and some pharmaceuticals.

Its information segment, including liquid crystal materials and pharmaceuticals, logged an operating profit of 93 billion yen ($836 million) this fiscal year, generating half of the company's total profit.

While Fujifilm overcame the rapid decline in photographic film demand by transferring its core technology to other areas, it is unknown whether Xerox has such innovative power.

"I fear [Xerox's fate] could turn out like that of Eastman Kodak," Icahn wrote a letter to shareholders in December.

Kodak, like Xerox, was founded in Rochester, New York. Kodak, a longterm arch-rival of Fujifilm, filed for bankruptcy protection in January 2012, without being able to break its dependence on photographic film, in which it once held the biggest share of the global market. Tech service company Conduent, which was spun off from Xerox, is small and has bleak prospects. Xerox's chairman Robert Kegan and chief executive Jeff Jacobson are both originally from Kodak.

In contrast with Xerox stock, Fujifilm shares traded slightly lower, falling 0.9% to close at 4,683 yen in Tokyo on Friday.

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