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Investors Go Over The Small Print


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What's going on?

A few weeks ago, the once-mighty Xerox photocopier company agreed to sell a controlling stake in itself to Japan’s Fujifilm. Now, several major activist investors are trying to block the deal, claiming that it’s a product of fraud.

What does this mean?

The controversy stems from a joint venture (basically a separate, shared company) that Xerox and Fuji launched decades ago to sell products in the lucrative Asian market. The problem, according to the activists, is that Xerox never told its investors that a 2001 update to the terms of the joint venture effectively blocked any other company from buying Xerox, meaning that when Xerox found itself struggling to adapt to life beyond fax machines, the only willing buyer that it could find was… Fuji.

Fuji negotiated what seems like a plum deal: buying Xerox without having to pay a premium to its share price (as would be typical). Now, disgruntled activist shareholders are trying to block the takeover, claiming that Xerox could have legally voided the joint venture agreement and held a more competitive sale process – one that would have resulted in a higher payout for its investors.

Why should I care?

For markets: Xerox is a troubled company, and this may be its only way out.

The charitable interpretation of this strange affair is that Fuji is the only realistic buyer of Xerox, and that Xerox’s board is trying to do good by its shareholders by selling now, rather than risking Xerox’s ultimate demise.

The bigger picture: Activist investors can benefit other shareholders by sticking up for their rights.  

Not everyone is up for a fight, but a corporate scrap is activists’ bread and butter. It’s not yet clear if Xerox’s board breached its duty to its shareholders by kowtowing to Fuji; nor whether any other company would actually want to buy Xerox. Nevertheless, there appear to be legitimate questions to be asked, and this case could prove a good example of the benefits that activists can bring to the investment community as a whole.

Originally posted as part of the Finimize daily email.

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