How much credit do activist investors deserve for Xerox’s breakup decision?
When Xerox announced on January 29 its plan to split into two independent companies, you could envision activist hedge funds carving another notch in their belts. After all, the strategic move seems to align with major structural changes that Carl Icahn has been pushing for since his 13D filing in November showed he owned more than 7.1 percent of the company’s outstanding shares. Accompanying that news in late January was the announcement of an agreement with Icahn under which he will be granted three of the nine board seats of the business process outsourcing company once the separation has been completed.
CEO Ursula Burns ordered a comprehensive review of the company’s strategic options in October 2015, several weeks before Icahn’s 13D filing, which showed he had become Xerox’s second largest shareholder. Burns called for the review after Xerox reported its first quarterly loss in five years. As of October 26, the day of her announcement, Xerox shares had lost 24.9 percent of their value since the start of 2015.
Icahn was probably influential in getting Xerox to review whether its acquisition of its business services division has been successful or not, says Jason Schloetzer, associate professor of account at Georgetown University’s McDonough School of Business.
‘Most of the business that was just split off [Burns] had just acquired less than two or three years before,’ Schloetzer says. ‘I imagine that during the integration process it started to became apparent that it just wasn’t going to go smoothly, and since the integration hadn’t fully occurred, it was certainly easier to split that business off again, and [Icahn’s] arrival probably increased the pressure to do so.’
The business services division also happens to be the part of Xerox on whose board, once this business has been separated, Icahn will have three seats. That tells Schloetzer that the corporate raider is ‘obviously more interested in the business services aspect than he is in the printer and copier and document management aspects’ of Xerox.
While Icahn filed a 13D in November, ‘we don’t know when Icahn began building his position and if [he] had reached out or had discussions with management prior to filing a 13D,’ says Steven Balet, managing director of FTI Consulting’s strategic communications segment. In many cases, ‘activists reach out to companies prior to filing a 13D, even prior to building up the position necessary to file a 13D.'
Although shareholder activism likely deserves some credit for Xerox’s breakup decision, Balet notes that corporate ‘boards are doing a much better job of looking at their companies [the way] an activist would look at it [before an activist approaches]. That may have spurred some of it.’
Market gossip and comments addressed to senior management at non-deal roadshows may also have had a hand in Xerox’s decision, Balet says. ‘It’s a confluence of influences which are [motivating] not just Xerox but many other companies [that] have proposed spinoffs prior to activist involvement.’ There are also instances where an activist comes forward only after a spinoff has been announced, he adds.
Schloetzer and others believe there will be an effort fairly quickly to shop the business services operations around to potential strategic buyers with the aim of selling it. ‘The academic data suggests that really the only time that activist hedge funds make any sort of significant money off their transactions is when the business is either sold or significantly restructured,’ Schloetzer says. ‘I think that’s why you see these takeovers or selling of the business occur relatively quickly after the activist gets involved and try to split off a more lucratively growing portion of the business.’
Icahn’s recent attempts to get other companies he’s targeted to make changes have been slower to show results. Some intransigent directors on eBay’s board resisted his demands, but ultimately the company did spin off PayPal early last year. ‘Maybe it didn’t happen quite as quickly as he had hoped and maybe it was a much more negative public battle, but in the end PayPal is a separate company,’ Schloetzer says.
The international mining company Freeport McMoRan and insurance behemoth AIG continue to oppose Icahn’s breakup recommendations, but last year Freeport granted him two seats on its board.
‘It will be interesting to watch AIG over the next six months to see what happens,’ says Schloetzer. ‘To see if some multi-member wolf pack comes in and tries to break it up, like we’ve seen Lion Point Capital engaging Allied Financial [to do].’
Wolf packs comprised of multiple activist investors have become increasingly popular in recent years and make it that much harder for target companies to rebuff their combined efforts. 'They must be a frequent [player] in these types of breakups or significant events because it’s surprising that an activist who owns six or seven percent of a company’s shares can be so successful in getting a company to split up,’ Schloetzer says.