Xerox to Split Into Independent Document, BPO Companies

Xerox split will create an $11 billion document technology company and a $7 billion business process outsourcing company.

CIO growth

Xerox today announced that it will split into two independent publicly traded companies, one focused on document technology and the other on business process outsourcing (BPO).

The move comes as a result of the company's review of its portfolio and capital allocation options announced in October 2015, Xerox said. Some observers say the announcement highlights the ongoing challenges channel firms continue to face as businesses look to migrate more of their operations to the cloud.

The Xerox board of directors unanimously approved the company's plan to break in two.

"Today Xerox is taking further affirmative steps to drive shareholder value by announcing it will separate into two strong, independent, publicly traded companies," said Ursula Burns, chairman and CEO of Xerox, in a statement "These two companies will be well positioned to lead in their respective rapidly evolving markets and capitalize on the opportunities that now exist to expand margins and increase market share."

Burns added that she believes the extensive structural review Xerox conducted over the last few months has produced the right path forward for the company.

"We will now position the companies for success and execute our plan to separate them in the shortest possible timeframe while continuing to focus on achieving our 2016 goals," she said.

The document technology company will continue to compete in document management and document outsourcing with approximately $11 billion in 2015 revenue. It will provide technology, solutions and innovations that optimize document management in an increasingly interconnected, digital world. Its strong profitability and free cash flow generation will enable significant capital return and provide for selective investments in attractive growth areas, Xerox said.

The BPO company will help improve the flow of work by offering its expertise in managing transaction-intensive processes and applying innovations to automate and simplify business processes. With approximately $7 billion in 2015 revenue—more than 90 percent of which is annuity-based—the company is focused on growth markets including transportation, health care, commercial and government services. As an independent company, BPO will continue to adapt to the changing needs of its clients, further refine its portfolio of services, and pursue significant growth and margin expansion opportunities, Xerox said.

The leadership and names of the two companies will be determined as the separation process progresses, the company said.

In November, investor activist and corporate shakeup artist Carl Icahn, who holds more than 8 percent of Xerox, began to press the company for change, calling for "improving operational performance and pursuing strategic alternatives," according to an SEC filing.

Reports indicate that Icahn orchestrated a deal where his interests will have three board seats on the BPO company once it has spun off.

However, despite reports of Icahn's influence over the company, Xerox CEO Burns told CNBC this morning that he had nothing to do with the company's decision to split.

"We're happy that he is in support of it, but he had nothing to do with the initiation, the contemplation, the analysis or any discussion around the deal," Burns told CNBC's "Squawk Box," regarding Icahn. "We are happy that he is in agreement with it, but he did not drive it, as is being reported in the news."

In it press release announcing the split, Xerox said today's market realities require greater agility and flexibility, the ability to innovate and adapt technology to address clients' fast-evolving needs, and a more focused and efficient approach to operations and capital allocation. As a result, it has become increasingly clear that the document technology and BPO businesses serve distinct client needs, have different growth drivers, and require customized operating models and capital structures. Thus, the separation of the two businesses will enhance their competitive positions and create significant value creation opportunities.

Xerox also announced a three-year strategic transformation program targeting a cumulative $2.4 billion savings across all segments. The program is inclusive of ongoing activities and $600 million of incremental transformation initiatives. The company expects $700 million in annualized savings in 2016.

"A core tenet of the strategic transformation we are embarking on today is changing and improving the way we operationalize our businesses," Burns said. "We have identified a plan to deliver cumulative reductions of $2.4 billion over the next three years as part of this process. I have instructed our teams to begin work immediately to deliver the efficiencies needed to achieve our goal."

Meanwhile, Xerox will begin the process to separate into the two companies while it finalizes the transaction structure. The company's objective is to complete the separation by year-end, subject to customary conditions, receipt of regulatory approvals, tax considerations, securing any necessary financing and final approval of the Xerox board. Until the separation is complete, Xerox will continue to operate as a single company with business as usual.