New York: Xerox Corp., in an agreement with investor Carl Icahn, is splitting into two publicly traded companies—essentially breaking out the operations acquired with its largest-ever purchase five years ago.
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 on 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.
Icahn, the billionaire investor who disclosed a Xerox stake in November that currently stands at more than 8%, will select three directors on the service company’s board, according to separate statement. The new services company will also seek an external candidate to be chief executive officer.
Shares rose 1.8% to $9.40 in pre-market trading, after earlier rising as much as 6.7%. Norwalk, Connecticut-based Xerox fell 13% this year through Thursday.
“This might help the shareholders in the short-term but does not address structural issues facing the company,’’ Anurag Rana, an analyst with Bloomberg Intelligence, said. He wrote earlier this month that Xerox in 2015 had “continued to suffer" from declines in legacy information technology business.
The board decided that the document and service operations had little overlap and require different capital structures and operating models, according to the Xerox statement. Breaking the businesses up would simplify the decision-making process on what areas to focus on and invest in.
Along with the split, Xerox is planning to cut costs over the next three years that will result in $2.4 billion in savings across the two companies, of which $700 million is expected for 2016.
“A core tenet of the strategic transformation we are embarking on today is changing and improving the way we operationalize our businesses," Xerox CEO Ursula Burns said in the statement.
Xerox reported fourth-quarter revenue of $4.7 billion, in line with the average analyst estimate. Profit, excluding some items, was 32 cents a share, beating the average analyst estimate of 28 cents.
Xerox acquired Affiliated Computer Services in 2010 for $6.2 billion, to help the company build its technology services and supplement its declining hardware operations. The deal allowed Xerox to expand into markets including managing and automating electronic payments for governments, processing claims for insurers and even operating parking lot pay stations. Last year, Xerox sold its IT outsourcing business to Atos SE for $966 million. Chief executive officer Ursula Burns said at the time the divestiture would allow the company to focus on building out the two other services.
Xerox reported full-year revenue of $18 billion. Sales from services, which includes business process and document outsourcing, fell 4.7% to $10.1 billion. Document technology revenue dropped 12% to $7.4 billion.
ACS reported $6.5 billion in sales and $349.9 million in net income for the year ended 30 June, 2009, the last full year before being acquired. At that time, about 40% of the company’s revenue came from providing the business process outsourcing and IT services to government clients, which included servicing student loans for the US federal government.
ACS was then also the only servicer for the portion of federal loans originated by the government, about one-fourth of the volume. After the education department switched to originating loans itself in July 2010 instead of using private lenders, competitors took away ACS’ dominant position, and the company no longer services new loans.
Lazard Ltd. and Goldman Sachs Group Inc. advised Xerox on the split. Bloomberg