Xerox - Ghost In The Machine?

Sep. 20, 2019 9:18 AM ETXerox Holdings Corporation (XRX)
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  • Goodwill exceedes $3.8 Billion (Post ACS spinoff) MKT Cap $6.7 Billion.
  • Duplicitous activists entangled in unresolved lawsuit with Fuji.
  • Margins down 38% YOY.
  • Unbilled receivables over $3.4 Billion?

In going thru the 2018 10k and 2019 10Q's in depth as well as reading multiple fascinating articles on Deason/Ichan 's taking majority activist stakes and immediately failing their attempt to sell the company I reference several articles in footnotes at bottom.

Ichan owns 23 Million shares over 10% close to $700 million in a company that Ichan himself claims in the article "that the industry ‘was a piece of sh#t’ he was sorry he’d ever invested in the company and that he wanted out."

Ok - you heard it from the horses mouth Ichan himself , and as Xerox has been oft compared to Kodak and Sears , once iconic companies no more in existence. Who can argue that the print document business is not headed down the same path? In this article I explore some red flags that are black and white in the most recent 2018 10K July 2019 10Q.

First off lets quickly review some history in late 2009 Xerox pays $6.4 Billion for ACS , since spunout in 2016 by Ichan now know as Coduent (CNDT down from $24 to $7 in the last year) current market cap $1.5 billion. And yet Xerox still keeps their internal Goodwill at $3.8 billion, over 50% of their current market cap of $6.7 billion. Why is this , apparently only for the intangible value of the Xerox brand, not for the value of Xerox and ACS brand?

Secondly lets quickly look at Fujifilm( xerox's long term partner) FujifilmAddresses Accounting Problems Between 2010 and 2015 Fujifilm's overseas management have been clouded by bonus incentives as they essentially overstated revenues of $450 Million. So here we have a case where Fuji's salespeople in effort to boost their individual commissionslied about printer sales and services over 5 years and caused a major scandal. Is it fair to say that sales was paid commissions in advance of the clients paying for their printers and post service business? Yes and why does it strike me that Xerox is currently carrying a $3.4 Billion unbilled receivables as a possible red flag?

Next lets simplify as best we can, the structure of failed deal of Xerox attempt to sell itself to Fuji and the subsquent unresolved lawsuit. What interesting here is it according to reports would not have cost Fuji a penny and Xerox would have had to borrow the money to finance the deal and the premium. Read this from the Bloomberg article " The deal the board was being asked to consider had evolved considerably since Komori’s initial overture. Fuji Xerox, the joint venture, would borrow $6.1 billion to buy out Fujifilm’s stake, then Fujifilm would use that money to buy a controlling 50.1 percent stake of Xerox, which would assume control of the former joint venture and pay off the original $6.1 billion debt. Xerox, now a Fuji subsidiary, would borrow additional money to pay its shareholders a special dividend—Xerox’s board managed to bargain Komori up from $2 billion to $2.5 billion, a small concession since Xerox would be borrowing the money. This convoluted approach allowed Fuji to take over the printing company “without spending a penny,”

Now of course Xerox is being sued By Fuji for $1 Billion forwalking away from the deal. Either way Xerox owes $184 million termination fee. Yikes...

Theres more that caught my eye in pursuing the Xerox filings , YOY margins down 38% ?

In closing I question the logic of Xerox's plan to buyback $600 million of there own stock in 2019 , of which they have recorded the amount and prices in their filing , I come up with an average price of $29.5 per share on the first $300 million and higher that $30 on whats been done so far in 2nd half. With a stock price right in line , if the stock drops its appears that they overpaid , lets look at an example of bad logic here with Sears..."Yet Sears spent $6 billion buying back its own shares since 2005 in a futile effort to help support its stock price. The stock plunged more than 99% in value, from a high of $143.91 in 2007 to less than $1 a share a couple of weeks before its bankruptcy filing. In bankruptcy, the shares are essentially worthless."

Look forward to hearing comments and responding to any and all of my analysis of Xerox, I can't say where the stock may go but I do see JPM downgraded the stock from Neutral to underweight with a $30 target after the last earning call , other analyst seem generally Neutral of the name. In closing I would argue that Xerox has multiple competiotors in a rapidly shrinking space of document print industry. Although their head count ( employees )have shrunk from 35,000 to 27,000 I would still state that that is a very large amount of people for a company with a current market cap of under 7 billion?

Pressure is on for Icahn and Deason to produce results at Xerox | Financial Times

How Not to Negotiate a $6.1 Billion Deal -Bloomberg

Pressure is on for Icahn and Deason to produce results at Xerox- Investors may wonder if duo outsmarted themselves to detriment of all company backers

Xerox buys ACS for $6.4 billion

Disclosure: I am/we are short XRX.

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