Xerox Copies HP, Completes Spinoff Of BPO Business Conduent

We want to introduce a new author to the site. The Limey is a sell side equity analyst based in London and is also (more importantly) a long time reader of this site. The Limey will look at spinoff situations in Europe and elsewhere. 

Xerox (XRX) completed the spinoff of its business process outsourcing (BPO) division Conduent (CNDT) last Tuesday, with shareholders receiving 1 share in CNDT for every 5 XRX shares held. Here’s the spiel from Xerox CEO Jeff Jacobson:

Today is an historic day for Xerox. The successful completion of the separation sharpens our market focus and commitment to our customers…I am confident the transformational actions we are implementing position Xerox for long-term success and unlocks shareholder value

Jacobson will continue as CEO at Xerox while Ashok Vemuri joined last year from IGATE to run Conduent. Like most BPO businesses, Conduent’s is very difficult to describe succinctly, as the company itself aptly demonstrates:

Conduent offers leading capabilities in transaction processing, automation, analytics and constituent experience with 93,000 employees in more than 40 countries. We’re changing the way businesses and governments interact with their citizens, customers and employees. Our clients rely on us to operate core parts of their business, managing interactions with those they serve with speed, accuracy and modern, personalized services.

The market celebrated the split by sending Xerox shares up 20% to $6.89 on its first day of trading, no doubt helped by the announcement of a $1.8bn cash transfer to Xerox from Conduent. Investors weren’t so kind to CNDT, however, which sank by 8% on its debut to close the day at $13.72. Both stocks have since rallied modestly; original Xerox shareholders still owning both stocks post-split have realised a total gain of 14% (as of last Friday).

How did the spinoff come about?

Xerox originally acquired Affiliated Computer Services (ACS, now Conduent) in 2010 when it was fashionable for hardware companies to diversify into services, essentially buying a revenue stream at a time when the economy was hurting sales of their core product. Services businesses were growing and Xerox was battling the demise of paper printing. The ACS business was also much less capital intensive than Xerox’s core model of leasing hardware to customers. All told, it seemed like a smart move.

Unfortunately, things didn’t go according to plan; Xerox hasn’t posted a year of growth since the acquisition, with both the hardware and services businesses reporting declining revenues in 2016. A classic case of corporate diworsification, then?

Shareholders voted with their feet; Xerox stock lagged the S&P 500 by 68% between the closing date of the ACS acquisition and December 31, 2015. Responding to activist pressure from Carl Icahn, Xerox announced in January 2016 that it would split itself into two publicly listed companies to allow each business to better focus on its own challenges and, hopefully, return to growth. As Vemuri told Fortune earlier this week:

That construct of combining hardware with services didn’t necessarily pan out. So, it was thought that our two companies would be better served if they were sliced off and were allowed to control their own destiny and serve their own clients, their own market, their own technology, etc.

By taking a page straight out of Hewlett Packard’s playbook (see their 2015 spinoff of Hewlett Packard Enterprise), Xerox hopes that both businesses will flourish independently. Only time will tell whether they are right.

Disclosure: Author holds no position in any stock mentioned