More questions emerge over the Xerox Fujifilm merger

The ongoing saga of Fujifilm’s planned takeover of Xerox has taken a bizarre twist with an allegation that Xerox had planned to fire its CEO, Jeff Jacobson, though Xerox itself has denied this.

Jeff Jacobson, CEO of Xerox.

The Wall St Journal reported a few days ago that Darwin Deason, the third largest shareholder in Xerox, had amended his previously filed lawsuit against Xerox with an allegation that the Xerox Corporation board had told Jacobson last November to stop negotiations with Fujifilm because it was considering firing him. This lawsuit further alleges that Jacobson instead hurried to put a complex deal in place that would leave him in charge of the company. Robert Keegan, chairman of Xerox, says that Jacobson was “fully authorized to engage in discussions with Fujifilm.”

This lawsuit comes ahead of the next planned meeting of Xerox’s shareholders in May, when they will elect new directors to the board of directors. Xerox is hoping that the shareholders will then follow the board of directors recommendation to accept the proposed $6.1bn deal with Fujifilm. Deason and Carl Icahn, the largest individual Xerox shareholder, have argued against this deal from the start claiming that it undervalues Xerox and that their shares in Xerox will count for less because Xerox itself will be in a minority position with Fujifilm controlling 50.1 percent of the new company.

However, before the meeting and the election of the new directors, those directors must first be nominated but the deadline for doing this passed last December. Deason is suing Xerox for the right to nominate a whole slate of new directors, claiming that there has been a material change in circumstances, which is significant enough to waive the deadline for nominating new directors.

This allegation of material change is based upon a previously secret crown-jewel lock up clause in the existing Fuji Xerox joint venture that prevents Xerox from selling its stake to anyone other than Fujifilm by giving Fujifilm control over Xerox’s intellectual property and manufacturing rights in the Asia-Pacific market if Xerox sells a 30 percent stake to another company. Xerox has said that Deason and Icahn have had access to all this information for some time, saying that Deason’s allegations “are without merit and the company will vigorously defend itself.”

Deason also alleges that the terms of the proposed deal with Fujifilm were only revealed after the nomination deadline. Deason’s lawsuit also alleges a pattern of other failure such as not dealing properly with the recent accounting scandal at Fuji Xerox. In reply, Xerox has stated: “After having considered all strategic alternatives available to the company, Xerox’s Board of Directors remains steadfast in its belief that the combination with Fuji Xerox is the best path to create value for the company and its shareholders.”

Deason and Icahn have been quite open in their intention to nominate new directors, replace Jacobson and cancel the Fujifilm deal. This week, the pair released a new open letter to their fellow Xerox shareholders arguing the need to replace some of the directors and oppose the proposed Fujifilm deal. They write: “Fuji – with the able assistance of Xerox CEO Jeff Jacobson – appears to have been successful in putting one over on the board of directors of Xerox. However, the market cannot be so easily tricked. The closing price of Xerox stock last Friday (April 13, 2018), before many of the sordid details came to light, was $28.17 per share, which is approximately 14% below the closing price on the day prior to the announcement of the scheme and approximately 37% below management’s purported deal value of $45.00 per share.”

Instead they suggest that new management at Xerox could capitalise on untapped value within the company, partner with PC manufacturers and monetize some of Xerox’s intellectual property as well as rethinking the Fuji Xerox joint venture.

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