The breakup of Xerox into two companies reminds me of that dream season of Dallas, the 1980s TV show about the conniving J.R. Ewing and the oil business known for its cliffhanger season-ending episodes.
That’s the season in which Patrick Duffy, who played Bobby Ewing, left the show. In true Dallas fashion, Bobby was killed off. But Duffy changed his mind and wanted to return to the show. How to explain his reappearance? Just say that Bobby’s wife, Pam, dreamed the entire season he was absent. It didn’t really happen.
Since Xerox has to hew to the rules of business and not prime-time soaps, it can’t just explain away its 2009 acquisition of Affiliated Computer Services (ACS) for $6.4 billion as a dream. But with the split it does admit that it was dreaming when it tried to unite its legacy document-technology business with the ACS business-process outsourcing business.
In announcing the split, CEO Ursula Burns said that they are not only two different businesses but that they are headed in different directions.
The Document Technology segment, the descendant of Xerox’s pioneering copier business, is in a more mature, i.e., declining, market. Its profitability will depend more on keeping a close eye on costs than it will on robust growth of equipment and services revenue.
The Business Process Outsourcing (BPO) segment’s market is more dynamic and revenue is expected to grow.
Here’s how Burns put it in a conference call with stock analysts:
“We see the BPO Company as one focused on revenue growth, margin expansion and disciplined investment in attractive, growing markets. Document Technology will leverage its track record of market leadership and strong cash flow generation to sustain an investment grade rating and shareholder-friendly capital allocation plan.”
In other words, BPO is the young up-and-comer with lots of upside while Document Technology is the retiree living on a tidy pension.
The Document Technology company will start with $11 million in revenue (in a $90 billion market, by Xerox’s estimate) and 40,000 employees. It has the biggest market share in equipment sales. Annuity revenue — from ongoing contracts for equipment and services — accounts for more than 70% of its total.
The BPO company, with $7 billion in revenue and 104,000 employees, is in a market that’s growing about 5% a year, according to Xerox’s estimates. The unit is #2 in the BPO market that’s expected to reach $220 billion by 2020, according to the research firm Global Industry Analysts.
After peaking at $22.6 billion in 2011, Xerox’s revenue has faded like the print quality of the 100th copy of a copy. Revenue in 2015 was down to $18.5 billion from $19.5 billion in 2014.
The ACS acquisition was perhaps Xerox’s biggest bid to staunch the digital technology wave that has eaten away at its document business.
But, Burns said, markets and technologies have changed in ways that blunted the impact of the combination. The health care market has been a major market for the BPO segment, and that industry has gone through substantial changes in the past seven years, from the way health care is paid for to consolidations of some of the bigger players.
Xerox maintains the two businesses will be better equipped to compete in their respective markets as separate entities.
The Document Technology business will be disciplined on costs (that is, reduce spending and spend wisely) and look for acquisitions that consolidate its market position. Areas for acquisitions include aqueous inkjet, high-end color printing, and managed print services and workflow.
The BPO segment, Xerox said, has room to grow in building on its leading positions in health care, transportation, and the public sector. The segment has high-recurring revenue and high renewal rates, which boost confidence in building market share and margins.
How the two new companies execute on their plans in the face of intense competition (the likes of Accenture, Genpact, and Convergys for BPO and Canon, Konica-Minolta, and Ricoh for Document Technology) will have much to do with their ultimate fates. Until then, we’re left with a cliffhanger.
Tim Green has covered business, technology and science at newspapers and in higher education. At Hoover’s he covers computers and telecommunications. Follow him on Twitter.