On November 23rd, hedge fund manager Carl Icahn disclosed that his firm has acquired a 7.13% stake in Xerox. According to a 13D filing, Icahn now owns 72.2 million shares in the company active in business process and document management solutions. The filing states that the position was built in the believe that Xerox is undervalued. Icahn is likely to show his activist-approach at Xerox as well and intends to have discussions with Xerox’ board ‘relating to improving operational performance and pursuing strategic alternatives. The hedge fund manager may seek a board representation.
After the news, the shares jumped by almost 10% in afterhours trading. Once more it was proven that this may be a false signal, since shortly after the opening bell, the shares dropped and traded even lower than before the news. That’s of no concern for Mr. Icahn, since he’s there for the long run. His move comes at a remarkable moment, since Xerox in October announced it is reviewing its structural options. Since the activist investor is often aiming for structural changes, he is certain to stir things up at Xerox headquarters. This could come at the expense of CEO Ursula Burns, who recently came under finder among shareholders due to the poor performance on the stock market. Xerox shares are down almost 25% year-to-date. The company is standing still or worse with revenues declining in the next few years. The company is certainly not expensive, with a 2016 price-to-earnings ratio of 10.5. Price to sales stands at 0.6, but the company is not expected to grow. This may explain the relative low valuations.
From shareholders’ perspective, things need to shake up at Xerox to unlock shareholder value. The company is seeking to grow in the services segment. During Q3, more than halve of the company’s revenue growth was attributable to services. Xerox sees opportunity in improving operations in the healthcare business. In addition, the company is looking to grow it Transportation revenues, where it sees opportunities in solutions to solve mobility issues. For instance, electronic tolling (detection systems) and parking services (smart grid) are part of Xerox’ product portfolio. The company once known for its copiers and printers processes USD 5 billion per year in electronic toll payments.
It will be interesting to see which line Mr. Icahn will take in its approach towards Xerox. Will he push the company to spin off divisions? The cashflow of the company is relatively healthy, is he looking for better allocation? Time will tell whether Icahn can help change things around or that Xerox is simply another value trap.
Apart from the fundamental story, the position building of Carl Icahn came at an interesting point from a technical point of view. The stock just hit a 61.8% Fibonacci retracement (see chart below), by many traders seen as a key reversal level. It is now up to Xerox and Icahn to prove whether this level can prove its importance.
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