Carl Icahn is at it again, attacking another company controlled by professional corporate managers. This time it is venerable Xerox, the company that invented photocopying. Icahn accumulated almost a tenth of the company’s shares before CEO Ursula Burns buckled under and agreed to the aging greenmailer’s demands to break up Xerox. Icahn has lost about $120 million on his shares since announcing his intention to gain seats on Xerox’s board of directors, signaling some doubt on Wall Street as to the value of a breakup. But it is full steam ahead for Icahn, who shows no signs of backing down from his investment.
Xerox has arguably never been the same since the FTC wrested an anti-trust consent decree from CEO Archie McCardell in 1975, probably in order to avoid a breakup of the company. While management saved itself, it was at the price of the company’s core copier business, which largely evaporated by 1980. McCardell is credited, however, with funding a number of copier innovations and making large inroads into a the high volume printing industry heretofore dominated by offset press operators. It was a move that succeeded in delaying much of the damage done by the consent decree. Fellow executive David Kearns took over from McCardell and continued Xerox’s effort to innovate its way out of its competitive woes, belatedly leveraging technology invented by its PARC R&D unit to create a sweeping line of desktop computers, typewriters, word processors, presentation machines, and specialty copiers. Kearns also continued to diversify, buying an insurance company (Crum & Forster) as the core of an attempt to go into financial services like Jack Welch was doing at General Electric.
By the time Kearns retired in 1990, Xerox had become a huge and unwieldy conglomerate. He had succeeded in preventing the company from appreciably shrinking in enterprise value, but at the cost of tremendous inefficiencies in management and product development. Kearns’ successor, Paul Allaire (another insider), had little appetite for empire building and quietly shed many of the investments that Kearns had made. This included the non-copier office equipment, which was ignominiously shelved while Allaire made use of splashy marketing and advertising campaigns to burnish the company’s brand. Xerox went into an accelerated decline. An Allaire protoge, Anne Mulcahy, took over after his nine year run. Although Mulcahy spurred a renewed interest in innovative products at Xerox, the company showed little overall improvement during her nine year tenure.
Burns took over in 2009. She was Allaire’s executive assistant for his stint as CEO after laboring anonymously in various low level corporate staff positions for ten years. Burns had never worked in Xerox’s main engineering and manufacturing facilities located in Rochester NY (the corporate HQ is in Stamford CT), but in 1999 she was inexplicably promoted from executive assistant to vice president for global manufacturing. A year later Mulcahy, fresh off being selected as CEO, promoted Burns again to senior vice president and named her chief of staff. When Mulcahy stepped down, Burns was named CEO by the Xerox board. That’s right…an executive who had no experience managing, who had no experience in the field, who had no experience as an engineer, who was essentially a PowerPoint jockey, was now running the company that founder Joseph Wilson originally grew into a technological and manufacturing marvel.
Burns knew one thing…there was no hope of rebuilding Xerox into any semblance of its former glory. So her first act was to buy Affiliated Computer Services, a large government contractor that made its living outsourcing IT operations. It was a move that Kearns would have approved of (and probably did…he died in 2011). ACS had tremendous upside opportunity in terms of growth, and it was a liquidity machine that dispensed billions in operating cash. The problem was that Wall Street never rewarded Burns’ diversification effort with a lasting increase in the stock price, which languished as it had during Mulcahy’s tenure.
Enter Carl Icahn. Taking a chunk of Xerox shares, he demanded board seats and the breaking up of Xerox’s imaging equipment and services businesses. And Burns, rather than risking a proxy fight and the possibility of an ignominious firing, agreed to repudiate her entire diversification strategy.
Icahn once famously told a bankruptcy judge that the reorganizing company’s CEO was a “nice guy”, but he certainly “wouldn’t want him to be running any company”. One wonders what Icahn thinks of Burns, who spends a significant amount of time giving speeches and sitting on the boards of Fortune 500 companies and presidential commissions since being named Xerox CEO. Icahn isn’t saying anything publicly, but he really doesn’t have to. He’s letting his money do all the talking