US ICON TURNS JAPANESE

Fujifilm CEO Shigetaka Komori discusses confidence and concerns following transformational deal for Xerox.

It’s very miserable to get defeated. ... Life is a battle, between countries and between companies. ... It is a fight against hardship and a fight against your own weakness We have about 300 subsidiaries ... [but] this is the first time we have acquired a large corporate icon. Managing people who are very proud could be a challenge. ... Japanese often hesitate [to say what needs to be said]. You have to have strength

When Fuji Films of Japan took majority control last month of the US copier maker Xerox, its decades-long partner, it achieved its long-held goal of making and selling office equipment throughout the world under one roof.

For Shigetaka Komori, the company’s 78-year-old chairman and CEO, it was a dream come true. It was something he thought he would never be able to accomplish during his lifetime. A Nikkei reporter recalls hearing him lamenting about 10 years go, “If I were 10 years younger, I would have considered buying Xerox.”

On Feb 1, the day after the milestone deal closed, the Nikkei Asian Review caught up with Komori, who is also a close friend of Prime Minister Shinzo Abe. His remarks in the interview show his confidence as well as his concern about taking over the storied American company:

“The New York Times and The Wall Street

Journal do mention that an American corporate icon is being acquired by a Japanese company,” he said. “But neither of them described it in any negative way. The tone of their articles is one of inevitability, or of looking to Fujifilm for innovation.”

Japanese corporate managers remain sensitive to American pubic opinion about acquiring well-known US companies, especially one that so penetrated the lives of Americans that its name became a verb. The headline-making acquisitions by Japan Inc of Columbia Pictures and Rockefeller Center in the 1980s fuelled a trade war between the two countries.

Komori has reason to worry about a backlash. The takeover deal was announced the day after President Donald Trump’s first State of the Union address, in which he called for putting America first, fixing “bad trade deals”, protecting American jobs and rebuilding US industry. Being a personal friend of Abe might also add to Komori’s sense of alarm.

“We have about 300 subsidiaries, with 177 located overseas. We have been managing all of them. But this is the first time we have acquired a large corporate icon. Managing people who are very proud could be a challenge. ... Japanese often hesitate [to say what needs to be said]. You have to have strength.”

Japan’s corporate history is littered with stories about foreign takeovers going awry. The most recent example may be Toshiba’s disastrous acquisition of the US nuclear-plant maker Westinghouse Electric, whose collapse last March brought the venerable Japanese industrial group to the brink of its own bankruptcy.

‘MAKE MONEY BY SPENDING’

Komori, who has led Fujifilm for the past 18 years, is confident of commanding the respect of Xerox employees.

“In the capitalist economy, you make money by spending it. Paper profits are unusable, no matter how big they are. ... The latest scheme will allow us to take control of Xerox without spending a penny. In exchange, we give up a 75% stake in Fuji Xerox.”

Fujifilm will “spend” the unrealised profit on its 75% stake in their 56-year-old joint venture, Fuji Xerox — estimated to be worth ¥671 billion (US$6.1 billion) — to acquire 50.1% of Xerox, accomplishing the acquisition without a cash outlay.

But the deal can also be looked at as Fujifilm ceding its control over the rapidly growing Asia Pacific region to Xerox for a 50.1% stake of the US company. “About 50% of [new Fuji Xerox] profit will belong to outsiders,” one analyst said. “It is also unclear if Fujifilm can integrate a giant like Xerox smoothly.”

For now, the move is being received positively in the market. After falling 8.3% on the news, Fujifilm shares rallied 10.8% in the next couple of days, though they have since eased back to around ¥4,550, where they traded just before the deal was announced.

Ryosuke Katsura, a senior analyst at SMBC Nikko Securities, said in a research note: “We think the absence of a cash outflow will be viewed positively,” adding that “the stock market had harboured concerns about a cash outflow of ¥1.2 trillion to ¥1.3 trillion if Xerox had embarked on a tender offer”.

“The worst-case scenario of a merger between Xerox Corp and HP has been avoided,” Katsura added in the note.

Komori had explored various possibilities of unlocking those gains, including taking Fuji Xerox public.

“I’m not worried about Carl Icahn,” he said, referring to the famed American activist investor who holds shares in Xerox and believed the company could have got a better deal. “Xerox will be paying a special cash dividend. With his 10% stake, he will be receiving close to ¥30 billion. That will probably satisfy him. ... I am happy to meet with Icahn.”

The deal calls for the US company to pay $2.5 billion in cash dividends to current shareholders. Komori thinks this will go a long way toward winning over Icahn, the largest Xerox shareholder, who holds a 9.7% stake.

He and fellow activist Darwin Deason have been campaigning for the ouster of Xerox CEO Jeff Jacobson. Some speculate that the pair might conclude that Fujifilm’s offer is too low and decide to launch a campaign to block the tie-up.

Komori remains confident about obtaining support of the existing shareholders, including Icahn.

“This deal is a game changer. ... The combination will create synergies and produce cost savings worth $1.7 billion a year. ... It will become much easier to increase market share.

“No company is perfect. Its payroll becomes bloated over time. All organisations need a clean-up from time to time.”

BETTER GOVERNANCE

As the business led by Komori expands, the need to improve oversight has become a priority. The issue came into sharp focus last year when accounting irregularities came to the surface at the Australia and New Zealand subsidiaries of Fuji Xerox, an incident that forced Fujifilm to replace most executives with those of its own.

The latest deal is aimed at further simplifying the complex partnership involving Fujifilm, Xerox and their Fuji Xerox joint venture, allowing them to develop products much faster at lower costs and distribute them to markets around the world.

Under the current arrangement, the operations of Fuji Xerox are restricted to the Asia Pacific region, and those of Xerox to Europe and North America. The combination will allow them to operate as one company and unify product development and marketing.

Cost-cutting is another important task for Komori. The joint venture Fuji Xerox, for instance, had an operating profit margin of 7.7% in the year through March 2017, compared with 9.7% for the office equipment business of rival Canon in the year to December 2017.

In the eyes of Komori, Fuji Xerox has been too reliant on the Xerox brand and “lacks sufficient cost consciousness”. He has already taken measures to rectify the tendency of Fuji Xerox to fall victim to high costs, and is poised to step up reform efforts after the merger with Xerox.

“Demand for copiers won’t disappear soon. There will be demand from emerging economies, such as China and India as well. But this is not a market that will grow 5% a year. Only the strongest company will be able to survive.”

The combination, if approved by US regulators and Xerox shareholders, will create a copier maker on the same scale as industry leader HP, while eclipsing Fujifilm’s domestic rivals Canon and Ricoh.

Not everyone is convinced about the merits of the deal, however. Moody’s Investors Service, for one, placed Fujifilm’s A1 debt rating on review for possible downgrade.

“The review for downgrade reflects the potential that Fujifilm Holdings’ business profile will weaken, due to its larger exposure to the declining document business,” Moody’s said.

While the combination is expected to create synergies, “it is uncertain if these synergies will be enough to overcome the decline in the office printing industry and to achieve long-term revenue growth”, Moody’s added.

Fujifilm plans to cut 10,000 jobs at the Asia Pacific joint venture. Komori took pains to stress that layoffs do not involve the US company.

“I’d like to see a stronger product lineup in the life-science segment. We are looking to take market leadership in the field of regenerative medicine.”

Fujifilm at one time had been a simple photographic film maker trying to challenge the dominance of Eastman Kodak, another American corporate titan. As demand shifted away from film, however, Fujifilm committed large amounts of money to research and development and branched out into new fields. Meanwhile, Kodak filed for bankruptcy in 2012.

The acquisition of Xerox is a step back from recent efforts by the company to diversify into areas of growth, such as pharmaceuticals and cosmetics, as offices in developed markets are cutting down on paper documents. Taking control of Xerox will elevate the Japanese company’s exposure to office equipment, which accounted for two-thirds of Fujifilm’s and Xerox’s combined sales in fiscal 2016.

Komori stressed that his company is not focusing on one or the other, but that it is pursuing growth in all areas. Still, he acknowledged that work remains to be done.

“Of the two things I wanted to do, one was taking control of Xerox. I cannot tell you what the other is. ... [The agreement with Xerox] is like hitting a 250-yard drive. You still have to put the ball on the green and then into the hole, hopefully with one putt.”

‘SPEED, POWER AND GUTS’

Komori is an athlete. He played American football in college and now plays golf with other business executives, and sometimes with Prime Minister Abe, a fellow conservative.

Komori had his worldview shaped in Manchuria, where he was born in 1939. When he was five, Japan was defeated in World War II. His family fled Manchuria amid great confusion.

“It’s very miserable to get defeated. ... Life is a battle, between countries and between companies. ... It is a fight against hardship and a fight against your own weakness,” he said in a previous magazine interview.

He graduated from the University of Tokyo in 1963, having played on the school’s American football team, the Warriors. In a message he later contributed to the team’s website, Komori said, “Like in football, strategy, teamwork, speed, power and guts are important in business.” Those who are afraid to fight, he said, perish.

His aggressiveness and conservative worldview brought him closer to Abe.

After Abe resigned from his previous term as prime minister in 2007 — only one year after taking office — Komori organised a group of business leaders to support Abe, who had found himself in the political wilderness.

That year, Komori was appointed by Abe to the board of the public broadcaster NHK and served as chairman of its management committee, channeling his conservative views into the organisation that was viewed by some as becoming too liberal.

He is already thinking about postponing his retirement, citing the need to see through the integration between Fujifilm and Xerox.

“Will the integration be complete in two to three years? It’s more likely three to four years. I thought I could retire by 80, but I’ll have to be around a little longer,” he said.