The Activists Are Coming

Slow-Footed Xerox Is Deal Bait

Tech laggards need to consider sales before they are cornered.
Photographer: Tony Avelar/Bloomberg
At Closing, January 19th
31.80 USD

Carl Icahn knows what it means to be around awhile, and now he's setting his sights on one of the technology industry's dinosaurs. 

Shares of Xerox rose 8.3 percent after hours after the Great Agitator disclosed he had acquired a 7.1 percent stake in the company and planned to talk with management and directors about “improving operational performance and pursuing strategic alternatives.”

Icahn’s move on Xerox should be a clarion call to other technology laggards: It’s time to take a long hard look at a sale before an investor forces the issue. 

Not so long ago, technology firms were considered relatively immune from shareholder activism because the industry was too unpredictable for outsiders to use the typical financial engineering blueprint of stock buybacks or asset sales. Last year, however, technology companies accounted for 20 percent of the companies singled out by activists, according to Moody’s, the second-most-targeted industry outside of the financial sector.

In a Slump

Shares of Xerox have fallen 21 percent in the last year.

Source: Bloomberg

The inviting tech targets are at opposite ends of the success spectrum. On one end are companies like Apple and computer-chip maker Qualcomm -- both on the receiving end of activist investor prodding -- that have mountains of cash that activist investors believed could be put to better use. Icahn grumbled about Apple’s cash stockpile until the company started giving whopping doses of it back to shareholders.

On the other end are companies like BMC Software, Riverbed, Informatica and Tibco Software that missed one or more waves of tech changes and are struggling to grow again. That has prompted shareholder activists -- most prominently Elliott Management -- to push them to stop spending shareholder money on acquisitions or pet technology products and instead give up and sell. Elliott and other investors have guided those tech dinosaurs into the arms of private equity.  

Xerox fits the growth-challenged bill and could very well be next. Revenue has been shrinking since 2012. Shares have fallen by one-fifth in the last year even as CEO Ursula Burns has been seeking to push the company into higher-profit consulting services. With about $1.3 billion in annual free cash flow and a total debt-to-trailing-12-month-Ebitda ratio of 2.7, there's room for a private-equity firm or other potential buyer to use a sizable chunk of debt to finance a Xerox takeover.

Less Indebted

Xerox has reduced its debt load drastically since 2000.

Source: Bloomberg

Even including the stock's jump in after-hours trading, Xerox is trading at a price-to-earnings multiple of about 14, according to Bloomberg data, well below peers like Accenture at 22.4 times earnings and Computer Sciences, previously mentioned as a buyout candidate, at 25 times. 

It wouldn’t be easy for a lone private-equity firm, given Xerox’s market value of about $11 billion even without a deal premium. Instead, firms would most likely team up or source capital from investors, a common theme in some of this year's biggest leveraged buyouts, including Petco, Veritas and Informatica.

Some technologists, most prominently venture capitalist Marc Andreessen, have argued activist shareholders should stay out of tech companies because firms shouldn't be forced to make short-term decisions in a dynamic industry. It’s a familiar argument against shareholder activists but speaks louder in the fast-moving technology industry.

The activist assault on Xerox is a reminder that, even in the technology industry, if you stop growing you have to look over your shoulders for the agitators like Carl Icahn. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the authors of this story:
    Shira Ovide in New York at
    Gillian Tan in New York at

    To contact the editor responsible for this story:
    Daniel Niemi at

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