Could Icahn's Stake In Xerox Spell Good News For Channel?

Carl Icahn's $34 million investment in Xerox could be good news for the company’s channel partners, according to one partner, and two analysts who cover the services and printer giant.

Icahn, one of the country’s most renowned activist investors, declared earlier this week that he owns more than 7 percent of Xerox stock. In a filing with the U.S. Securities and Exchange Commission, his company, Icahn Capital, said it intends to sit down with Xerox representatives to discuss potential operational improvements and strategic alternatives, as well as possible representation on the company’s board.

"This guy focuses on taking advantages of the companies he invests in," said Steve Jenkins, the president of Xerox channel partner Precision Document Solutions, based in Carrollton, Texas. "I think he will focus on how Xerox can take better advantage of its success… I think there is a huge undervaluation there."

[Related: Activist Investor Icahn Buys 7 Percent Stake In Xerox]

With Icahn having declared such a substantial stake in the Norwalk. Conn.based company – whose Global Services division ranks No. 7 on CRN’s 2015 Solution Provider 500 - Jenkins believes a positive shift looms for the channel.

The channel is Xerox's "biggest lever," Jenkins said, explaining that it allows the company to penetrate markets that the multi-billion-dollar solution provider would otherwise not be able to crack. "I am hopeful that the company will put much more resources into the channel … I think they could get a lot more leverage out of it.’

Jenkins said that although Xerox has done a good job with its channel so far - he said his company has had large success with Xerox’s printer-application platform - he thinks the company could do more to leverage the technology and improve its channel further by being more consistent in its pricing and more aggressive with more of its initiatives, something he thinks Icahn can influence.

"I believe that they [Xerox] have tended to do more of a toe-dip as opposed to jumping in the water," he said, "I think Icahn will certainly be a meaningful driver to more aggressive strategies."

Jon Reardon, a technology services analyst with InfoTrends, of Weymouth, Mass., said he believes Icahn will drive more aggressive, growth-driven strategies for Xerox.

"This may be an event trigger that will push Xerox to see if there is a way to be more agile," he said.

Specifically, Reardon said, he thinks Xerox may focus on its distribution to the SMB market via the channel.

"I think they have always played in the enterprise space," he said. "But in the SMB market, the opportunity was much more grand, not only in the U.S. but … all around the world."

Reardon said a focus on the SMB market will be a good move for the company, and although the market is constantly changing, to be successful, Xerox will have to put more resources into building its distribution channel "right" to be more successful.

Reardon said Xerox has not been blind to the changes it has to make, but he added that there may be a feeling in the market that the company has been moving slowly, an issue Icahn may look to fix by trying to make the company leaner.

"The concept is the company has to grow leaner in order to be more agile… I would say, whenever you have an activist investor, it’s the swizzle stick. It's going to mix things up," he said.

According to Ken Stewart, a senior analyst at Photizo Group, who covers the managed print market, Icahn's history shows he’s not afraid to mix things up.

"In my eyes, he is not someone that enjoys the status quo," Stewart said. "I think he might want to shake up the management of the company and help it capitalize on its assets."

That includes Xerox's channel, Stewart said. In the company’s third-quarter report, he said, Xerox reported that sales in the SMB market grew four times faster than that in the enterprise market.

If Icahn pushes Xerox to drive into higher margins, the company may steer away from its health care offerings, Stewart said.

"Xerox has taken a hit in its … Medicaid business and it has some significant exposure when contracts go south (via litigation) or platforms fail. I don't like the business from a risk-exposure standpoint, and the customers are very prickly," he said in an email response to a question from CRN

"I wonder if Xerox wouldn’t be better off running the other direction and investing further in other verticals," he said.

Icahn's influence could push Xerox toward areas where it’s currently seeing success – such as Insurance claims processing, Stewart said.

Xerox said it lost $34 million in the third quarter. Also, Chairman and CEO Ursula Burns said the board of directors has approved a review of operations -- including its business portfolio and capital allocation -- in an attempt to grow sales.

"The channel is looking really good," Stewart said. However, if there is a change at Xerox, the company might look toward further improvements to its channel, such as refining its channel support programs to drive growth in what is now a lucrative market.

Xerox has shifted its focus away from hardware over the last few years, adding digital, outsourcing and managed print services across a number of vertical industries.

Stewart said he thinks Icahn may try to steer the company away from lower-margin verticals and toward others that will improve shareholder value.

"Based on where [Icahn] has been in the past, I think he is going to have a potent discussion with Xerox about driving shareholder value. I've got a feeling that he is going to want them to drive into higher margin business," he said.

In a recording on his website, Icahn said he has "one of the best records on Wall Street (in) working on broken companies, or companies with great potential that just have problems."

However, Icahn has been portrayed both positively and negatively, characterized as both a force for activist shareholders, or - as Michael Dell called him in an interview with CRN in 2014 after Icahn tried to take over Dell - "a bad guy."

For many years, Icahn has bought large stakes in companies in order to force change, according to Investopedia.com. That included a takeover of Trans-World Airlines - which eventually declared bankruptcy - and profiting from large investments in such companies as Texaco, Nabisco, Blockbuster Video, Time Warner Cable, Netflix, Apple and Ebay. Icahn has claimed credit for Ebay's 2014 decision to spin off PayPal and Apple's 2015 decision to increase its stock buyback program.

The company has been moving toward those areas, Stewart said, but with some prodding from Icahn, the process might be accelerated.

"Xerox has been trying to make the necessary changes for some time, but it's almost like they have their foot stuck on the pressure plate of a land mine--they aren't sure what the next step is." he said. "Icahn might just try and force them off."

PUBLISHED NOV. 25, 2015