Copy cat

Icahn xeroxing the HP break-up playbook for Xerox

This article has beem modified. Please see the clarification at the end

Carl Icahn may be stealing a leaf from the Hewlett-Packard break-up playbook. The activist investor has taken a 7.1 per cent stake in Xerox, contending the $10-billion copier company is undervalued as more companies perform back-office tasks on computers rather than paper. Like HP, its only option may be to spin off assets, an approach that Icahn seems likely to advocate.

Xerox sales fell 12.7 per cent in the year ended last September, and its normalised EBITDA dropped 68 per cent in the third quarter from the same period last year. The company's stock has plunged more than 21 per cent in value over the past 12 months.

The problem is, of course, that fewer customers are using Xerox machines to make paper copies. That's why Chief Executive Ursula Burns bought Affiliated Computer Services in 2009 for $6.4 billion, acquiring a ready-made internet technologies business that accounted for 57 per cent of Xerox's revenue last quarter. That business, however, also posted a quarterly loss of $184 million and a negative profit margin of 7.6 per cent.

Icahn is manoeuvring for a say in the strategic review that Xerox just announced. He will probably favour splitting the paper-copying business from the technology and document-management division, Xerox Services, which could find a more logical home with a higher-margin rival like Accenture. Xerox could then continue to squeeze cash from the fading copier division as it inevitably goes the way of the buggy whip.

If that's the plan, it looks a lot like the strategy pursed by HP. Facing similar digital competition, HP split into hardware and enterprise units last November. Shares of the former - largely engaged in making personal computers and printers - have since edged up about six per cent, benefiting from a leaner business model.

Xerox shares have dropped 1.2 per cent in value since Icahn disclosed his stake, evidence that investors are wary of whatever he has up his sleeve. With current operations unlikely to put the company back on track, however, shareholders might look to HP for a glimpse of what comes next.

CLARIFICATION
This article has been corrected to show that Xerox sales fell 12.7 per cent in the year ended last September, not November, and that the company’s services business lost $184 million last quarter, not $2.4 billion. The errors are regretted.