Xerox, With Icahn, to split into two in push toward services

(Bloomberg) — Xerox Corp. (NYSE:XRX) is splitting into two publicly traded companies – essentially breaking out the operations acquired with its largest-ever purchase five years ago, and investor Carl Icahn will be given three board seats.

The division will create an $11 billion document technology company that includes the namesake copier and scanner hardware, and a $7 billion provider of services to government and industries such as health care and transportation, Xerox said Friday in a statement. Leadership and the names of the two companies will be determined in the future, according to the statement, and the move is expected to be completed by the end of this year.

In the health insurance world, Xerox has been best known as the parent of Affiliated Computer Services (ACS), a company that acquired the old Buck Consultants and Kwasha Lipton benefits services businesses. ACS has been  a major state Medicaid administration systems provider. It also set up an enrollment system for Nevada’s state-based Patient Protection and Affordable Care Act (PPACA) insurance exchange.

See also: Nevada to dump exchange vendor

Icahn, the billionaire investor who has been building a stake in Xerox since November and now holds more than 8 percent of the company, will select three directors on the service company’s board, according to separate statement. That business will also seek an external candidate to be chief executive officer.

The shares were up 3.7 percent to $9.59 at 9:37 a.m. in New York, after rising as much as 6.7 percent in pre-market trading. Norwalk, Connecticut-based Xerox fell 13 percent this year through Thursday.

“Short-term Xerox should get some boost,” Anurag Rana, an analyst with Bloomberg Intelligence, said. “The long-term value for these companies will be how it redefines its services in a cloud-first and mobile-first world. Xerox is not known to be at the forefront of those movements.”

Moody’s Investors Service said Xerox’s corporate debt ratings are on review for a possible downgrade, reflecting the view that the split will result in two smaller companies with less business diversity and profitability than the current combined business.

Little overlap

The board decided that the document and service operations had little overlap and require different capital structures and operating models, according to Xerox. Breaking the businesses up would simplify the decision-making process on what areas to focus on and invest in.

“Technology will be high cash return to shareholders,” CEO Ursula Burnssaid in an interview Friday with “Bloomberg Go.” Document technology will likely return 50 percent of free cash flow to shareholders, which is in line with what Xerox currently does, she said. “Services will be more about investing and globalizing the business.”

Burns emphasized that Xerox made the decision to split before talking with Icahn.

When the 79-year-old billionaire took a stake in Xerox in November, he said he intended to speak with executives and the board to improve operational performance and pursue strategic alternatives. Xerox was then already in the midst of a broad-based review of structural options for the company’s business portfolio and capital allocation.

Icahn “will have governance input into the services business and will not be engaged with the services business or the current Xerox business at all,” Burns said, adding that Icahn had no input in the strategic review. “We came out in a place that’s strong for the business, and it happened to align with what Mr. Icahn wanted as well,” she said.

Icahn rebranded himself as an activist investor and outspoken shareholder advocate after gaining fame as a corporate raider in the 1980s. In recent years, he has taken stakes in technology-related companies including Apple Inc., EBay Inc., and Netflix Inc., and agitated for changes such as share buybacks and spinoffs, which he argued would create shareholder value.

Icahn led a lengthy fight at EBay, agitating for the Internet marketplace to spin off payments unit PayPal Holdings Inc., which it eventually agreed to do. In November, Icahn Associates Corp. disclosed it had sold the EBay stake and reported a 3.8 percent holding in PayPal. At Apple, Icahn was outspoken in demanding more cash be returned to shareholders, and the tech giant subsequently increased its dividends and stock buybacks.