In Talks, Fujifilm Outshines Xerox -- WSJ

By Mayumi Negishi and David BenoitFeaturesDow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 12, 2018).

TOKYO -- When Fujifilm Holdings Corp. first started a joint venture in photocopiers with Xerox Corp. more than 55 years ago, the Japanese company was in the shadow of its famous U.S. partner.

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Now, the positions are reversed: Fujifilm has reinvented itself after the demise of its core product and is in good health, while a decline in office printing has left Xerox languishing.

That is the backdrop for deal talks between the two companies that The Wall Street Journal reported could include a change of control at Xerox.

The idea animating the discussions, according to people familiar with the matter, is that their existing partnership could facilitate an integration that has the potential to yield major cost savings. Xerox investors cheered the possibility Thursday, pushing the stock up 5% to $31.86 and its market capitalization to $8 billion.

Fujifilm has been an active deal maker for years, and said in August it planned to spend more than $4 billion over the next three years for acquisitions.

Once known mainly for photographic film and its global battle against Eastman Kodak Co. for consumer sales, Fujifilm today generates most of its more than $20 billion in annual revenue from products other than the one incorporated in its name. It has branched out into medical equipment, such as mammography machines, as well as cosmetics and electronic materials.

Even in photography, it focuses not on film but on hardware, such as high-end digital mirrorless cameras and its analog Instax instant camera, popular at weddings and birthday parties. Its printer and copier business faces long-term decline and yet continues to deliver significant profit.

Fujifilm's alliance with Xerox, called Fuji Xerox, sells its machines throughout the Asia-Pacific region. It was a 50-50 joint venture when started in 1962; but Fujifilm gained control in 2000 when Xerox needed cash and the Japanese company paid $1.3 billion for another 25% of the business.

The joint venture has recently been a source of angst for some Xerox investors.

Last year, billionaire Darwin Deason, the company's third-biggest shareholder, called on Xerox to renegotiate the joint venture after an accounting scandal surfaced at Fuji Xerox, people familiar with the matter said. He also raised concerns about the power that Fujifilm could wield in any deal Xerox sought with other parties, given the importance of the Asian market, the people said.

Mr. Deason was the founder of Affiliated Computer Services, which Xerox bought in 2010, later to be split off as Conduent Inc. He maintains a 6% stake in Xerox.

Carl Icahn, Xerox's biggest shareholder with a 9.7% stake, has also been pressuring Xerox, publicly pushing for new leadership and board changes.

A major deal with Xerox, a more-than-century-old icon of American technology, could enhance the prestige of Fujifilm's chief executive, Shigetaka Komori. The 78-year-old is one of Japan's longest-serving CEOs and a golf partner of Japanese Prime Minister Shinzo Abe.

Analysts said a deeper alliance could bring dividends in the copier business. Given the low prospects for growth, further cooperation between the printer and copier businesses of Fujifilm and Xerox could cut costs to offset falling revenue, they said.

A deal could also help Fujifilm chase the emerging market in commercial digital printing. Manufacturers are starting to shift away from offset printing for product labels and packaging.

Fujifilm's documents division, which includes Fuji Xerox, accounted for 45% of the company's sales and almost 40% of its operating profit in the six months ended September.

HP Inc.'s $1.05 billion acquisition of Samsung Electronics' printer business in November showed how the $55 billion photocopier industry is coming under increased pressure to cut costs and adapt to changing office needs.

Fujifilm as well as Japanese peers Ricoh Co., Canon Inc., and Konica Minolta Inc. are fighting to catch up to HP's fast-growing HP Indigo Division, which controls more than half the digital production of labels for high-volume products such as sodas and bar codes.

Still, any move by Fujifilm to double down on printing could expose it to risks in a declining market. The company said last year that pressures to bolster earnings led to years of accounting irregularities at Fuji Xerox branches in Australia and New Zealand. That caused a nearly 30% fall in profit at Fujifilm's documents division in the six months ended September.

The accounting scandal led Fujifilm executives to say they would keep closer tabs on the joint venture.

Write to Mayumi Negishi at mayumi.negishi@wsj.com and David Benoit at david.benoit@wsj.com

(END) Dow Jones Newswires

January 12, 2018 02:47 ET (07:47 GMT)