Managerial Psychology, Failed Alliance-Structures And

Strategic Decisions: The Case Of Xerox, Inc. (2010-2015).

Michael C. Nwogugu
Address: Enugu 400007, Enugu State, Nigeria.
Emails: mcn2225@gmail.com; mcn2225@aol.com
Skype: mcn1112
Phone: 234-909-606-8162; or 1-917-725-0815

Abstract.
During 2009-2015, Xerox, Inc. (“XRX”) operated in a very difficult environment characterized by mature
products, technical insolvency, high perceived risk, low stock prices; failed acquisitions; apparent group-
think; Managerial Entrenchment; apparent lack of coordination among Xerox’s subsidiaries and
managers; and inadequate innovation and insufficient diversification. This article: i) introduces new
theories such as the Cost-Substitution Theory; the Alliance-Dependency Bias; the Recursive Integration
Deficit Theory; the Time-Consistent Recursive Leadership Failure Theory; and the Market-Response
Bias; iii) presents possible solutions to some of the problems that XRX faced during 2012-2013; iv)
explains how XRX’s operations were adversely hampered by strategic alliances and sub-optimal decision
making; but could have been positively affected by a proposed restructuring, improved leadership,
strategic alliances and joint ventures; v) presents evidence of Regulatory Failures; vi) summarizes key
factors that may affect companys’ receptiveness to corporate venturing proposals; vii) summarizes the
implications for Financial Stability and fintech; and explains asset pricing anomalies.

Keywords: Corporate Governance; Leadership; Financial Stability; Operations Strategy; Decision

Analysis; Corporate Venturing; Fintech; Asset Pricing Anomalies; Social Welfare.

1. Introduction.
XRX was a US-based (Connecticut, US) multinational company that produced and sold a range of
printers, multifunction systems, photocopiers, digital production printing presses, software, supplies; does
data processing; and also offers related consulting services. As of FY2012, XRX had 147,600 direct
employees (including approximately 7,100 sales professionals, approximately 11,300 technical service
employees and approximately 100,000 employees at on-site operations or off-site delivery centers).
During 2008-2013, XRX executed a series of ill-advised corporate acquisitions wherein it paid substantial
cash and incurred substantial Goodwill. XRX’s situation in 2012-2014 was similar to what happened to
Encompass Services, Inc. (“Encompass”; a US company) during 1997-2001. As mentioned in Nwogugu
(2005), Encompass executed an Industry Rollup of engineering-services companies through acquisitions
that were financed with mostly debt and cash; and which created substantial Goodwill in Encompass’s
Balance Sheet (in 2000, Goodwill alone accounted for more than fifty percent of Encompass’s total
assets). Encompass also experienced significant post-acquisition integration problems. However, the
stock market did not assign much value to Encompass’s Goodwill, and its stock price declined drastically
during 2000. Encompass subsequently filed for bankruptcy protection in the US Bankruptcy Court during
2002. Around 2015, XRX subsequently announced that it would split into two distinct companies – that is
not covered in this article.
The motivation for, and context of this article are varied, and the issues raised and theories
developed herein are applicable to a wide variety of companies and contexts, and to many countries.
First, the Global Financial Crisis of 2008-2014 illustrated weaknesses in Corporate Governance standards
1
in multinational organizations, and strategic decision-making by Boards of Directors. The rapid growth of
cross-border trade during 1995-2015 has led to the growth of the numbers and sizes of multinational
companies that are often subject to conflicting corporate governance and labor standards. Both individual
and institutional investors around the world are increasingly emphasizing the quality and implementation
of corporate governance standards and Board Dynamics within companies as a major investment criteria.
XRX is a Fortune-500 company and an S&P-500 company and has generated significant controversy
about its poor corporate governance, corporate acquisitions activity and earnings management. Second,
during 1995-2015 and across the world, there were significant increases in the volume of shareholder
activism, corporate strategic alliances and associated litigation (and litigation strategies), much of which
was directed at, or was handled by or was ultimately influenced by BODs of large multinationals such as
XRX – which generated new psychological phenomena. Third, the type of, multiplicity and effects of
Regulatory Failure that were implicit in, and manifested by XRX’s operations is new and had not been
addressed in the literature. Fourth, its conjectured here that increasingly an partly due to deluge of
information and visual cues, managers/executives of large companies seem to be prone to framing effects
and career concerns and Justification and Biases – as was illustrated by XRX’s rejection of the Author’s
proposed transactions. Fifth, the conduct and inertia of XRX’s senior executives and BOD constitute new
psychological and Enterprise-Risk phenomena – and this article develops some managerial psychology
and Corporate Governance theories. XRX’s business operations, litigation strategies, strategies, major
Business Processes and reactions to corporate-venturing business proposals from third parties could have
created Deadweight Losses; all of which have not been fully addressed in the literature. Sixth, the existing
literature does not address the issue of whether the internal corporate governance principles/standards and
Strategic Alliances of large conglomerate multinationals that are financially or operationally distressed
(such as XRX) are Public Goods given the broad geographical scope of their operations. Seventh, in
traditional Financial Stability analysis, there is a huge gap between empirical research (with often
reported latent statistical errors and biases; and which focuses on financial markets) on one hand, and the
analysis of real-sector trends and operations of large companies that have high bankruptcy-risk and or
may substantially affect other companies. XRX had financial stability risks and could have caused or
amplified systemic risks. Eighth, XRX’s refusal or inability to capitalize on its resources and access to
provide fintech products and online financial services during 2010-2015 remains a puzzle (the “Tech
Diversification Puzzle”). Ninth, XRX operations and policies contradicts theories and empirical results in
the academic finance literature and have implications for asset pricing. By addressing the foregoing
issues, this article fills gaps in, and contributes to the Managerial Psychology, Corporate Governance,
Asset Pricing, Strategic-decisions and Corporate Interpreneurship literatures.

2. Existing Literature.
This article intentionally omits a complete Porter-type competitive analysis which is considered
basic and perhaps misleading given the comments in Nwogugu (2005a;b).
Nwogugu (2003), Melendy & Huefner (2011); Claudiu (2013) and Nwogugu (2004) analyzed
corporate governance, corporate finance, policy and strategy issues. Nwogugu (2007; 2009a & 2009b)
studied corporate transactions (strategic alliances; mergers; acquisitions). Karpoff, Lee & Martin (2008a;
2008b) reviewed the consequences of earnings management to firms and managers. Seipp, Kinsella &
Lindberg (2011) and Butala & Khan (June 2008) reviewed some of XRX’s problems. Pathak, Joshi &
Ludhiyani (2010); Bliss, Pottera & Schwarz (2012), García-Pérez, Yanes-Estévez & Oreja-
Rodríguez(2014); and Grechuk & Zabarankin (2014) analyzed corporate strategic decision-making.
Hopfmueller (2010), Nwogugu (2003), Nwogugu (2004) and Woolford (2013) studied the role of Boards
of Directors in enterprise risk management, corporate acquisitions, restructurings and turnarounds.
Robinson (2008); Haeussler & Higgins (2014); De Ridder & Rusinowska (2008); Seale, Arend &
Phelan (2006); Elfenbein & Lerner (2012); Gawer & Henderson (2007); Kloyer (2011); Lerner &
Malmendier (2011); and Ray (2013) analyzed operational within-firm and inter-firm elements of Strategic
Alliances. Owen (2015) analyzed the valuation and capital markets aspects of strategic alliances. Owen &
2
Yawson (2013) analyzed the impact of information asymmetry on strategic alliances during 2000–2008,
constructed a new measure of information asymmetry; and found that Information asymmetry is inversely
associated with cross-border strategic alliances; and that Alliances with publicly listed overseas partners
are driven by economic development. Christoffersen, Plenborg & Robson (2014) analyzed the validity,
similarities and the importance of differences of strategic alliance performance measures used in 167 (one
hundred and sixty seven) empirical studies. Shanley & Yin (2008), Qiu (2010) and Sawler (2005)
compared strategic alliances and mergers.
Bodnaruk, Massa & Simonov (2013) conducted an “experiment” that induces cross-sectional
variation in the cost of the alliance commitment technology and they found a causal link between
governance and strategic alliances (where alliances are a commitment technology that helps a company’
Chief Executive Officer overcome the inability to ex ante motivate division managers). They concluded
that well-governed firms are more likely to use alliances to anticipate and resolve ex post commitment
problems, particularly where the commitment problems are more acute (eg. risky/long-horizon projects;
or the firm is susceptible to inefficient internal redistribution of resources (eg. conglomerates), or when
there are no or few alternative disciplining devices. Bodnaruk, Massa & Simonov (2013) noted that
dominant alliance partners agree to a more equal split of power with junior partners that have better
governance.
McCarter, Rockmann & Northcraft (2010) analyzed public goods whose eventual value is
uncertain when contribution decisions are made; and the effects of outcome-variance on why individuals
contribute and amounts they contribute to a public good (their research is applicable to analysis of
Strategic Alliances and Statutes as public goods). Dey (2010) and Bargeron Lehn & Zutter (2010) studied
the effects of Sarbanes-Oxley on corporate risk taking – some researchers have noted that compliance
with SOX has often resulted in lower corporate investment.

3. XRX’s Implied And Actual Strategic Alliances And Joint Ventures: The Alliance-Dependency Bias.
While some of XRX’s strategic alliances were formal agreements; others could be implied from
the nature of the relationship. XRX’s operations during 2010-2013 were heavily affected by either the
nature (and or the inefficiency of) of its strategic alliances or joint ventures, and in the following ways:
i) The relationships between XRX and its distribution channels (eg. independent dealers; retailing
chains; etc.) were in the form of Strategic Alliances - which had failed. These distribution channels
didn’t generate sufficient revenues for XRX, and didn’t help reduce XRX’s costs or the magnitude
of integration problems at its subsidiaries.
ii) The XRX-Fuji joint venture (between Xerox’s and Fuji (in which Fuji Photo Film Co., was the
majority shareholder, with 75% equity as of 2014) enabled XRX to enter the Japanese market faster
and was deemed by some to be the most successful US-Japanese alliance on record (Xerox was the
supplier and Fuji was the distributor in Japan and Fuji Xerox Co. Ltd. was established in 1962).
iii) Xerox India (formerly Modi Xerox), is Xerox's Indian subsidiary that is a joint venture that was
created between Dr. Bhupendra Kumar Modi and Rank Xerox in 1983.
iv) The relationships among XRX’s various subsidiaries were in the form of Strategic Alliances
(which had failed). That is, there seemed to be low synergies among XRX’s subsidiaries.
v) The relationships between XRX and its external auditors during 2009-2012 was in the form of a
“status-preserving” Strategic Alliance - which had failed. That is, XRX’s external auditors failed to
warn XRX and the general public about XRX’s disclosure and operational problems.
vi) XRX’s cloud services were made possible by Strategic Alliances 1.

1
See: Xerox, EMC, Cisco, and CA Begin Long Strange Trip. Friday, June 20, 2014. http://www.strategic-
alliances.org/blogpost/1143942/190445/Xerox-EMC-Cisco-and-CA-Begin-Long-Strange-Trip. This
article stated in part: “............Xerox was once again at the center of a 2013 ASAP Global Alliance
Summit session. Executives from EMC, Cisco, CA Technologies, and Xerox formed a roundtable titled
“Long Strange Trip: Lessons Learned from a Complex, Multi-partner Cloud Service Alliance” to discuss
3
 vii) The relationships between XRX and some of its suppliers were and remain types of Strategic
Alliances2.
viii) Also, the relationships between XRX and some of its end-user customers (eg. data processing
for financial services companies) were types of Strategic Alliances.
ix) The Xerox-P&G co-innovation partnership and similar partnerships have been used for quasi
R&D and for purportedly improving XRX’s products and services. Defillippi, Dumas & Bhatia
(2014) discussed such partnerships/alliances.
x) Xerox offered numerous partnership programs such as the following: 1) Xerox Business
Innovation Partnership Program; 2) an Authorized Sales Agent; 3) Xerox Premier Partners Global
Network; 4) North American Reseller Sales (NARS). It was also possible for companies/persons to
create their own agency, such as Paper Trail Solutions, in North Carolina and Documaxx, in Texas.

The failures of XRX’s strategic alliances and joint ventures were probably a major motivation for
its earnings management and asset-quality management. As described herein and below, XRX could
have used more effective Joint Ventures and Strategic Alliances to expand its operations, increase
revenues, reduce its costs and realize the values of its Intangible Assets.
This Corporate Intrapreneurship phenomenon wherein a large firm excessively depends on
domestic and cross-border Strategic Alliances that are characterized by control-deficits; low cost-
efficiency; low switching-costs; propensity for low partner-commitment; asymmetric power; numbing of
managerial agility and execution capability; and potentially non-aligned or sub-optimal incentives is
henceforth referred to as the Alliance-Dependency Bias.

4. Asset Quality Management; Earnings Management; And XRX’s Incorrect Treatment Of Goodwill.
As of September 2012 and December 2012, XRX had more than $9 Billion (nine Billion US Dollars) of
Goodwill and more than $2.5 Billion of other Intangible Assets in its balance Sheet (more than most of its
competitors). If investors viewed all or most of such Goodwill and Intangible assets as impaired, then
XRX would be perceived as either technically insolvent or as having very low net realizable value; in
which case its highly unlikely its stock price would have increased even with after additional acquisitions.

how they partnered to bring the latter’s cloud services offerings to market......... Some of Xerox’s most
credible clients said Cisco had a solid channel program, which was critical because Xerox is still
relatively new to bringing offerings to market through resellers. EMC's strong storage capabilities filled a
critical gap in the solution, and the company’s intimate sales model fit in with Xerox’s go-to-market
strategy. CA Technologies brought a “unique application flair” Xerox hadn’t baked into its plan,
according to Bartos. Moreover, each of the four parties shared common competitors........John Hartman,
client executive at Cisco, added that the Xerox alliance team competes internally for its sales people’s
attention because the latter have the option to sell similar offerings through Xerox competitors that are
also Cisco partners—competing against other partners entails walking a “delicate line,” he said. Hartman
and his team put an emphasis on beefing up its collateral, and working very closely with the sales team to
show them Xerox’s value proposition. His philosophy was to address their top-of-mind issues, including
the most pressing question: how do I get compensated? “You can lose them if you don’t give those
details in five minutes up front,” he said..............”
See: Gibbs R & Humphries A (2013). Strategic Alliances and Marketing Partnerships (Kogan Page:
www.koganpage.com; 2013).
See: Manroland China enters strategic alliance with Fuji Xerox China. Monday, September 15, 2014.
http://whattheythink.com/news/70328-manroland-china-enters-strategic-alliance-fuji-xerox-china/.
2
See: INOVA (2015). Xerox: Applying Alliance Management Best Practices to Strategic Accounts.
http://www.inova-software.com/xerox-applying-alliance-best-practices-to-strategic-accounts/.

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XRX illustrates the problems inherent in goodwill/intangibles accounting regulations - see the comments
in Nwogugu (2015a;d).

As of December 2012 (and in some instances, up to 2015):

i) For a long time, XRX’s stock price was less than its book-value (XRX’s Price/Book-value ratio
was about 0.76 in 2013), and at relatively low Price/Sales ratios. According to Yahoo Finance,
during 2010 to Jan. 2015, XRX’s minimum P/BV ratio was 0.6485, while its maximum P/BV ratio
was 1.467; and its average P/BV ratio was 1.071. www.vuru.com noted that as of 2017, XRX’s
common stock was over-valued by about 80% (http://www.vuru.co/analysis/XRX?newUser=true).
ii) Xerox's share price declined by about 40% (forty percent) during 2010-2012 which indicated
that: 1) the market didn’t have any confidence in XRX’s acquisitions of companies during 2010-
2012; or in XRX’s rate of innovation and approaches to product markets; 2) the stock market did
assign much value to XRX’s significant Goodwill (US$9 Billion as of September 2012); 3) the
stock market believed that XRX may have intentionally over-valued the companies that it acquired
during 2010-2012. XRX’s stock seemed risky to the credit-sensitive investor; and very un-
appealing to the traditional growth-oriented investor and value-investors. Furthermore, given that
during 2012-2014, XRX had about 1.27 billion shares outstanding, and there were only about 35.5
Million XRX shares short, and XRX had an average daily trading volume of 10.7 million shares, it
seemed that most XRX shares were held by institutional investors (87.7% of investors) who had
already sustained substantial paper losses and couldn’t sell (because there were few buyers) or were
not willing to sell their XRX shares (in order not to realize losses).
iii) While printing equipment/products accounted for more than fifty percent of XRX’s revenue as
of 2010-2012, that sector was mature and contracting, and was deemed by many investors as a non-
growth business, and was characterized by significant multi-pronged competition (based on price,
quality; service; and perception); well capitalized international competitors (eg. Japanese firms such
as Canon; etc.), and susceptibility to technological changes (software; internet; hand-held devices;
entertainment systems; new printing technology; etc.).
iv) As of 2012, XRX already had reasonable distribution networks for large companies; and should
have improved their services and distribution for small and medium enterprises (SMEs).
v) XRX’s average quarterly revenues and EPS declined during 2009-2012.
vi) XRX’s Operating Cash Flow and Free-Cash-Flow were very erratic (substantial variability)
during 2009-2012.
vii) XRX’s Gross Margins were relatively very low (less than 35% in Q3-2012) – which indicates
that XRX may have cost-management problems and or substantial overhead costs.
viii) Unlike similar large companies, XRX had very low dividend yields (about 2.30%). XRX’s
businesses were not generating sufficient cash flow to support that amount of dividends that will
result in a substantial per-share valuation and or increase in XRX’s share price.
ix) XRX’s Net Tangible Assets was extremely low (about $350 Million as of September 30, 2012)
– and Net Tangible Assets is a widely-followed measure of solvency and value-investing. This
implies that any future debt-financed acquisitions by XRX will probably reduce its stock price and
credit ratings substantially.
x) While printing equipment/products account for more than fifty percent of XRX’s revenue, that
sector is mature and contracting, and is deemed by many investors as a non-growth business, and is
characterized by significant multi-pronged competition (based on price, quality; service; and
perception); well capitalized international competitors (eg. Japanese firms such as Canon; etc.), and
susceptibility to technological changes (software; entertainment systems; new printing technology;
etc.).
xi) More than 70% (seventy percent) of XRX’s businesses were mature, commodity, low-margin
businesses, for which achieving product/service differentiation is or may be difficult; and XRX’s
businesses were not and are not perceived as “growth” businesses.

5
 xii) XRX’s accounting methods resulted in a situation where both the book values of XRX’s leased
assets and the corresponding present values of its lease-receivables were recorded in its balance
sheets – this was a form of double-counting which inflated XRX’s assets.
xiii) During FY2012, XRX and its affiliates generated 1,900 new patents, and had at least 11,500
active US patents. However, in XRX’s hands, these patents didn’t generate sufficient earnings and
didn’t seem to have much value (as implied by the stock market). As of December 2012, XRX had
incurred more than $3 Billion of Accumulated Deficits (Negative Retained Earnings) – which was
clear evidence that XRX had low earning power.

Given XRX’s operating environment, the low post-acquisition performance of companies that
XRX purchased during 2000-2014, and XRX’s inadequate responses to industry competition, the
foregoing facts were evidence of that XRX should have written down its Goodwill and Intangible Assets
to zero or near-zero. XRX was probably reluctant to write-down its Goodwill and other Intangible Assets
and to eliminate double-counting of its leased assets because doing so could have rendered XRX
technically insolvent – that is, its liabilities would have exceeded its assets.

5. The US SEC’s 2002 Charges Against XRX.

In 2002, the SEC filed civil fraud charges against Xerox3 after a two year investigation into its
accounting practices. In the CFO Magazine article “Xerox: New Lease on Life,” Craig Schneider stated as
follows:
“.........The commission alleged that Xerox management accelerated the revenue recognition of leasing
equipment over a four-year period by more than $3 billion (three billion US Dollars), and inflated pre-
tax earnings by $1.5 billion, to meet or exceed Wall Street expectations and hide its true operating
performance.............”

Butala & Khan (June 2008) stated in part: “................The accounting and ethical issues at Xerox
in the late 1990s were many and highly interesting. It appears that Management at Xerox Corporation
faced with strategic mistakes and a tough economic environment including Japanese competition
resorted to creative accounting practices to meet financial targets and Wall Street expectations. This case
presents a brief history of Xerox Corporation going back to 1906 when Xerox was founded in New York.
This is followed by a discussion of Xerox's corporate culture in the 1980s and 90s and the SEC
investigation of its accounting practices in the 1990s. The focus of the case is the actions of an assistant
treasurer, James Bingham, one of several finance managers that top management used to guide Xerox
through tough economic times and help make financial results go their way. Mr. Bingham, at least
initially, viewed helping management meet financial targets as a challenge. However, in due course he
realized that all he is doing is help mask bigger and bigger problems that would lead Xerox in only one
direction - bankruptcy...........”

6. XRX’s Misplaced Acquisitions Of Companies.

3
See: Kay, J. (July 1, 2002). Xerox restates billions in revenue: yet another case of accounting fraud.
https://www.wsws.org/en/articles/2002/07/xero-j01.html. April 11, 2002.
See: Niemeier, C. & Berger, P. (Jan. 2003). “Xerox Settles SEC Enforcement Action Charging Company
With Fraud”. Securities & Exchange Commission, Washington, D.C.www.sec.gov. January 29, 2003.
See: “SEC charges KPMG and Four KPMG Partners With Fraud in Connection With Audits of Xerox”
http://www.sec.gov/news/press/2003-16.htm. October 2003.
See: “Corporate Greed at its Finest: An Analysis of the Xerox Accounting Scandal”. Canadian Student
Business Review, May 5, 2015. http://www.csbusinessreview.com/the-blog/2015/5/5/corporate-greed-at-
its-finest-an-analysis-of-the-xerox-accounting-scandal.

6
 In November 2006, Xerox completed the acquisition of XMPie; the leading provider of software
for cross-media, variable data one-to-one marketing, and solutions to help businesses create and manage
highly-effective direct marketing and cross-media campaigns.
In February 2010, Xerox completed the acquisition of Affiliated Computer Services, a services
and outsourcing company, for $6.4 Billion – XRX paid 4.935 Xerox shares and $18.60 cash for each
share of ACS ($63.11 per share).
In May 2011, Xerox acquired NewField IT for an undisclosed sum. NewField IT developed the
Asset DB toolset which is widely used across the managed print services (MPS) market.

During 2012, XRX acquired the following companies:

• Wireless Data Services (a telecommunications technical support and consultancy firm
headquartered in the U.K.).
• Lateral Data (a leading e-discovery technology provider based in the United States).
• LaserNetworks Inc. (a Canadian provider of MPS solutions that include print device tracking,
centralized service and supply management and document routing).
 XL World (a multi-lingual customer care firm based in Italy).
 R.K. Dixon (a leading provider of IT services, printers and MPS, with locations in seven cities
in Iowa and Illinois).
• Some office-products distributors in Wisconsin, California and Illinois (USA).

In December 2013, XRX sold its Oregon-based solid ink product design, engineering and
chemistry group and related assets (that were previously acquired from Tektronix) to 3D Systems for
$32.5 million in cash. In December 2014, Xerox sold its IT Outsourcing business that it had acquired in
2009 (from Affiliated Computer Services) to Atos for US$1.05 billion.
XRX’s corporate acquisitions during 2008-2012 erroneously focused on “accretive acquisitions”
(as clearly stated in its annual reports, Form-10Ks and Form-10Qs) and on services companies that only
broadened XRX’s geographical scope (but not its Earning-Power, technological capabilities; or asset
quality). The objectives of some of those acquisitions (horizontal integration and geographical scope)
could have been achieved through strategic alliances. This corporate intrapreneurship phenomenon
wherein during a long period of time, a mature multinational company focuses on horizontal integration
and “accretive acquisitions”, does not comply with accounting rules that have implicit managerial
discretion; and expects and hopes for positive responses from the product-markets, labor markets and the
stock market is henceforth referred to as the “Market-Response Bias”. Unfortunately for XRX, globally
and after the 2000 crash of US technology stocks, many successful investors were not focusing on EPS
(particularly for mature companies) and used other popular valuation metrics. Furthermore, the broadened
geographical scope (gained through XRX’s acquisitions) did not ensure market penetration, customer
retention/loyalty or sustainable revenues/profits for XRX. Hence, it’s doubtful that there were any short
term and long term benefits of such acquisitions.
During 2010-2014, some of XRX’s subsidiaries seemed not to have strategic synergies – that is,
they couldn’t or didn’t want to benefit from each other’s activities, and or couldn’t or didn’t want to
jointly implement expansion initiatives, and or couldn’t share resources. This was partly attributable to
the selection and structure of companies that XRX acquired during 2009-2013; and post-acquisition
integration problems; and perhaps internal politics (few of the former senior executives of the acquired
companies were appointed to senior executive positions at XRX’s corporate headquarters). Many of the
companies that XRX acquired during 2008-2013 continued to operate as distinct subsidiary-companies of
XRX. Its notable that during 2009-2013, there was Management Entrenchment at the senior levels in
XRX; and XRX’s operating performance worsened or remained stagnant as it executed more acquisitions
– which implies that XRX’s poor integration of an acquired company probably affected the integration of
subsequently acquired companies. This corporate intrapreneurship phenomenon was evidenced by XRX’s
poor operating performance during that period, and is henceforth referred to as the Recursive Integration
Deficit Theory.
7
 See Nwogugu (2009a); Nwogugu (2009b); Shanley & Yin (2008), Qiu (2010) and Sawler (2005).
Its conjectured here that instead of executing these acquisitions, XRX could have achieved the same or
similar benefits by executing strategic alliances or joint ventures with those companies (either as a “final-
state” transaction; or as an “intermediate-step” before an acquisition) – which in turn would have
precluded the use of cash for payment in acquisitions (instead of paying down XRX’s substantial debts);
XRX’s post-acquisition integration problems and the large Goodwill in XRX’s Balance Sheet (which
investors under-valued). That is, significant transaction costs, uncertainty costs and the pre-event and
post-event economic/social/psychological/regulatory costs could have been substantially optimized and
reduced by substituting the form and accounting of the transaction. This is henceforth referred to as the
Cost-Substitution Theory.

7. XRX’s Misplaced Focus On Earnings Per Share (EPS); And The Resulting Errors.
XRX’s corporate strategic focus on “Expanded Earnings per share” during 2009-2015 (see page-11 of
XRX’s 2011 Form-10K) was gross misplaced, and caused XRX to implement the wrong strategies such
as its Share Repurchase program and inefficient acquisitions of other companies (horizontal integration).
Investors don’t value all companies based on EPS alone, and investors use other metrics such as Adjusted
Free Cash Flow (FCF), EVA and Operating Cash Flow; particularly whereas in this case, the company
and the industry are mature and industry revenues are declining.

8. XRX’s Misleading Indicators Of Annuity Revenue.

As of 2012-2013, about 52% of XRX’s revenues were from Services (outsourcing Services;
healthcare claims reimbursement; automated tolling and parking Transactions); and 84% of XRX’s
revenue was annuity based (the remaining 16% was generated from equipment sales). XRX’s FY2012
revenues could be categorized into three classes:
i) Services: $11.528 Billion (Business Process Outsourcing (“BPO”), Information Technology
Outsourcing (“ITO”) and Document Outsourcing (“DO”).
ii) Document Technology: $9.462 Billion (the sale of products and supplies, and the associated
technical service and financing of those products.
iii) Other: $1.400 Billion (revenue from paper sales, wide-format systems, network integration
solutions and electronic presentation systems from Global Imaging Systems (“GIS”)).

XRX’s revenues for FY2012 were generated from the U.S. ($14.701 Billion), Europe ($5.111 Billion)
and other areas ($2.578 Billion). However, XRX was not generating sufficient cash flow to
simultaneously repay its substantial debt and pay sufficient dividends – and this seems have affected its
stock price. Some of XRX’s FY2012 key indicators of “annuity-revenue” growth can be very misleading
and do not consider “aggregate profitability”, lifecycle-profitability and non-cash maintenance costs; The
indicators were as follows:
a) The number of page-producing Machines-In-The-Field (“MIF”).
b) Page volume and the mix of color pages.
c) Services signings growth (the Y-O-Y increase in estimated future revenues from contracts signed
during the period as measured on a trailing 12-month basis).
d) Services pipeline growth, which measures the year-over-year increase in new business
opportunities.

9. XRX’s Customer Financing Programs.

During 2010-2015, XRX financed a large portion of purchases by its direct channel-customers
through bundled lease agreements. The sources of capital that supported XRX’s customer financing
programs were a combination of cash generated from operations, cash on hand, proceeds from capital
market offerings and the sale of selected U.S. finance receivables. As of December 31, 2012, XRX had
$5.3 billion of finance receivables and $0.5 billion of equipment on operating leases; and maintained an
assumed 7:1 leverage ratio of debt to equity; and a significant portion of its $8.5 billion of debt was
8
associated with its customer financing programs. Its these leases that provide most of what XRX refers to
as “annuity revenues”. The reality was that XRX’s customer financing programs exposed XRX to the
operational and financial risks of its channel partners – risks for which XRX may not be adequately
compensated by the interest-rates implicit in its leases.
In its FY2012 Annual Report, XRX acknowledged that its revenues that were related to the
following areas involves significant judgments and estimates:
• Bundled Lease Arrangements
• Sales to Distributors and Resellers
• Services – Percentage-of-completion

Also, XRX’ customer financing programs provides opportunities for earnings management
through the manipulation of: i) discount rates for leases; ii) estimates of beginning-values and residual-
values of leased assets; iii) balance sheet accruals for credit losses; iv) present values of lease payments;
v) credit losses and default rates.

10. Leadership Deficits And Management Entrenchment At XRX.

There seems to have been an issue of Management Entrenchment at XRX; and during 1960-2015, most of
XRX’s CEOs served for more than six contiguous years as indicated by the table below.

Table-1: Chief Executives Of Xerox Corporation.

Name Title Tenure

George C.
President 1906–1912
Seager
Gilbert E.
President 1912–1938
Mosher
Joseph R.
President 1938–1946
Wilson
Joseph C. President 1946–1966
Wilson CEO 1961–1967

C. Peter
CEO 1968–1982
McColough

David T. Kearns CEO 1982 – July 31, 1990

August 1, 1990 – April
Paul A. Allaire CEO
6, 1999
G. Richard April 7, 1999 – May 10,
CEO
Thoman 2000
May 11, 2000 – July 31,
Paul A. Allaire CEO
2001
Anne M. August 1, 2001 – July 1,
CEO
Mulcahy 2009

9
 Ursula M. Burns CEO July 1, 2009 – 2017
Source: Wikipedia.

Also, during 2008-2014, XRX appeared to suffer from a leadership deficit and poor planning wherein:
i) Some of XRX’s top executive officers such its CFO resigned and went to other companies.
ii) XRX didnt have an effective incentive system for its employees and managers.
iii) XRX’s inability to adequately integrate its acquired subsidiaries was reflected in its poor
operating performance; and there didn’t seem to be much cooperation among some of its
subsidiaries in terms of cross-selling, joint promotions and bundled services.
iv) During the last few decades and up to 2014, XRX was not able to leverage and commercialize
innovations developed by PARC4 (its California research center), many of which were spun off into
new and subsequently successful companies (XRX was granted some equity in those companies).
XRX never seemed to be able to leverage its portfolio of more than 11,500 patents that in its hand
that patent portfolio didn’t generate much value. Given that XRX’s portfolio of more than 11,000
(eleven thousand) patents didn’t have much value in XRX’s hands, it could have executed a sale-
leaseback of its patent portfolio – in one or more transactions that would enable XRX to have non-
exclusive use of all or part of the patent portfolio.
v) XRX had too many employees (compared to similar companies).
vi) XRX may not have determined or chosen the appropriate mix/combinations of services that it
rendered to corporate customers and government agencies. For example, on or around Feb. 17,
2015, XRX announced that it would discontinue some of its government healthcare solutions,
concentrate more effort on its existing software; and record a charge of approximately $145 million
(or $0.09 a share after tax) which will result in second-quarter earnings of $0.09 to $0.11 per share.
vii) XRX’s acquisition related costs (ie. transactions costs; integration costs; opportunity costs; etc.)
were significant; and there seemed to be low synergies.
viii) During the last few decades, XRX was not able make crucial changes in its strategy to adapt to
changing demographics, the internet and the business environment.
x) As explained above, the perceived benefits of most of XRX’s acquisitions during 2009-2013
could have been replicated by executing low-cost strategic alliances or joint venture with the same
target-companies.

Collectively, this phenomenon is attributable to the confluence of several factors including but
limited to selection, rotation and development of executives; poor strategic planning; detrimental internal
politics and communications; managerial inertia; ineffective incentives; poor capital allocation and
“transferable utility/disutility in the form of managerial psychology. Its notable that these leadership
deficits seemed to persist over time and under different XRX CEOs and Boards of directors – which
suggests that XRX’s culture, XRX’s business processes and overall resistance to change may have also
been important factors that continually propelled such leadership deficits. This phenomenon is hereby
referred to as the Time-Consistent Recursive Leadership Failure Theory.

11. XRX’s Stock Repurchase Program Was Error.

As of 2011-2012 and 2014-2016, XRX’s stock repurchase program had not increased its stock
price; and was a mistake because the cash spent should have been used to reduce XRX’s debt. Unlike
XRX, most companies that execute share-repurchases have minimal debt, low/moderate Intangible Assets
(as a percentage of their total Assets) and growth prospects. XRX’s implementation of a stock repurchase
program instead of paying down its debt may have sent the wrong message to investors, and affected the
value of its assets, especially its intangible assets (because XRX stock repurchases reduce cash that XRX
could have used to realize and leverage its Intangibles).
4
See: Satell, G. (March 21, 2015). How PARC Saved Xerox.
http://www.forbes.com/sites/gregsatell/2015/03/21/how-parc-saved-xerox/.
10
Table-1: XRX’s Dividends.

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Dividends Paid 0 154.00M 149.00M 230.00M 287.00M 324.00M 352.00M 400.00M 388.00M 331.00M

Shares Outstanding 953.78M 885.47M 879.52M 1.35B 1.39B 1.33B 1.27B 1.20B 1.08B 1.02B

Dividend Paid Per Share 0 0.17 0.17 0.17 0.21 0.24 0.28 0.33 0.36 0.32

Stock price at Year End 15.14 7.27 8.35 11.26 7.96 6.69 12.15 14.01 10.72 8.73

Dividend Yield 0 2.39% 2.03% 1.51% 2.60% 3.64% 2.27% 2.38% 3.36% 3.70%
Source: http://www.vuru.co/analysis/XRX/dividendsBuybacks.

12. XRX’s Problems With Fuji And Its New Zealand Subsidiary.
XRX owns about 25% of the equity of Fujifilm Holding Corp. (FHC). In 2017, FH announced
that losses stemming from "inappropriate accounting" in the South Pacific may be as much as US$340
million, and blamed its own internal controls and oversight by management, top executives and its board.
As a result, six FHC board members were removed and the pay of the entire board as well as Chairman
and CEO Shigetaka Komori, its President and COO Kenji Sukeno were reduced.
In Q1-2017, XRX announced that it took a US$30 million charge related to its New Zealand
subsidiary which pertained to leasing agreements by XRX’s Australian and New Zealand units.
During 2017, XRX completed a one-for-four reverse stock split which reduced its outstanding
shares of common stock by roughly 1.31 billion to 437.5 million.

13. Macroeconomic Issues.

13.1. Implications For Financial Stability.

XRX posed substantial financial stability risks because: i) its operations affected tens of millions
of people in the US and other countries; ii) XRX serviced consumer loan portfolios of financial
institutions, and XRX provided software that was used by individuals and companies in internet
transactions (payments; purchases; entertainment; mobile services); iii) XRX was technically insolvent
and so any material bad news about XRX or any announcement or acknowledgement of its insolvency
increased the probability of a sudden and material decline of its stock prices and the stock prices and
perceived prospects of other technology companies; iv) many companies relied heavily on XRX’s
services; v) XRX was technically insolvent during 2010-2014 and that could have had a contagion effect
on the credit ratings of telecomm and technology companies that were perceived to be in the same sector
or related industry sectors.
XRX was a important participant in global credit chains wherein it provided and also obtained
trade credit (where such borrowing was partly based on its reputation and perceived solvency). Such
credit chains were a major source of capital for many companies and financial institutions, but they
increased the probability of domino-effects in both the real and financial sectors. See the comments about
credit-chains in Boissay (2006). XRX had substantial debt; and any perceived insolvency and or business
contraction of XRX could trigger an industry-wide credit crunch and or hyperinflation for some
products/services in some countries. Contrary to the literature and as shown during the global financial
crisis in 2008-2010, multinationals are not entirely immune from financial crises. XRX’s earnings
management and reluctance to comply with accounting regulations was in line with the “Bad News
Hoarding” theory in the literature – see Jin & Myers (2006) which has spawned a new line of empirical
research focused on identifying corporate activities and/or firm characteristics that cause or facilitate bad
news hoarding and thus, predicts stock price crashes. Using a large sample of U.S. headquartered firms
11
during 1987-2011, May & Boehme (May 2016) found that multinational firms have greater stock price
crash-risk than domestic firms; and that the difference in crash risk between multinational and domestic
firms is most acute among firms with weaker corporate governance mechanisms (ie. weaker shareholder
rights, less independent boards, and less stable institutional ownership).
Given the rapid increases in the types and volumes of strategic alliances and joint ventures (JVs)
around the world during the last twenty years, like swaps/derivatives, alliances/JVs form financial
networks that increase interconnectedness and the risk of domino-effects in both the real and financial
sectors – and that is often omitted in both financial stability analysis and asset pricing models.
A significant percentage (more than 20%) of XRX’s total assets (as of 2012-2015) was in the
form of Goodwill. First, that is an example of the inefficiency of current Goodwill/Intangibles accounting
regulations – Goodwill is opaque and the accounting disclosure does not capture the true risk of XRX’s
assets and businesses. As mentioned herein and above, XRX should have written-down such goodwill.
XRX’s “Goodwill” as reflected by its assets actually contains human capital; contracts; software;
marketing rights; distribution rights; etc.. See the comments about goodwill/intangibles accounting and
Financial Stability in Nwogugu (2015a;d) and Nwogugu (2007). Secondly, it also poses a significant
financial stability risk because: i) the accounting disclosure of goodwill does not capture the true risk of
XRX’s assets; ii) the failure to classify XRX’s intangibles/goodwill as identifiable Intangibles (such as
human capital; marketing rights; Apple’s contracts; etc.) actually increases the probability that XRX’s
stock-price will decline substantially and that there will be significant differences of opinion among
market-participants about XRX’s Goodwill/intangibles in general, and the possibility of existence of such
identifiable intangible assets – all of which increases financial instability, systemic risk, market volatility,
and volatility-spillovers; iii) the under-valuation of identifiable intangibles increases the probability that
XRX’s stock-price will decline substantially and that there will be significant differences of opinion
among market-participants about XRX’s intangible assets in general; iv) since most banks don’t accept
goodwill as loan collateral, the accounting model and existence of significant goodwill (as disclosed in
financial statements or as measured by stock market value) weakens the perceived viability of an issuer’s
bonds.
The US FSOC may have hesitated to take-over XRX (pursuant to the Dodd Frank Act’s
provisions) because of the reach and business impact of XRX and the possible negative information
effects on financial markets and asset markets. XRX was evidence of the failure of the Dodd Frank Act -
see Nwogugu (2015b).
Karpoff, Lee & Martin (2008a;b); Kim, Li & Zhang (2011a;b) and Kim & Zhang (2013; 2014)
analyzed financial stability issues that arise from financial reporting opacity, earnings management
(which affects incentives), tax avoidance and or asset quality management (which affects incentives).
The significant differences between the book and market values of tangible assets (such as real
estate) can significantly increase: i) the risk of collapse of asset markets (such as real estate and the
secondary markets for equipment parts); ii) disagreements among investors about equity values and
hence, stock market volatility. These issues are not addressed properly by the current accounting model.
Employee Stock Options (ESOs) can significantly increase disagreements among investors about
the values of firms’ human capital and equity; and the current accounting model (IASB/IFRS) increases
such uncertainty and equity volatility. ESOs are intangibles (as ruled by at least one US Federal Court of
Appeals; and as stated in the business/economics literature) but are not governed the goodwill/intangibles
accounting regulations (IASB/IFRS). Its well established in the finance/economic literature that ESOs can
increase the propensity for managerial risk-taking, which in turn, can increase financial stability risks. See
Nwogugu (2004) and Kim, Li & Zhang (2011b).
As mentioned herein, the relationship between structural changes and Financial Instability is
symbiotic.

13.2. Implications For Systemic Risk – Failure Of The Dodd Frank Act.
XRX caused systemic risks because: i) its operations affect tens of millions of people in the US
and other countries; ii) it provided software used by individuals and companies in internet transactions,
12
iii) any material bad news about XRX or any announcement or acknowledgement of its insolvency will
probably have material negative effect on its stock prices and also on the stock prices and perceived
prospects of other technology and software companies; iv) many companies rely heavily on XRX’s
services; iv) XRX was technically insolvent and that may have a contagion effect on the credit ratings of
telecomm and technology companies.
The US FSOC may have hesitated to designate XRX as “non-financial SIFIs” because of its reach
and business impact and the possible information effects. XRX is evidence of the failure of the Dodd
Frank Act - see comments in Nwogugu (2015b).

13.3. Implications For Fintech And Banking Services.

Given its global reach, current services, relationships with financial institutions, channels and
access to capital, XRX was and remains an ideal candidate for rapid expansion into fintech and online
banking, either through strategic alliances with fintech companies and or financial services companies, or
by in-house development of such capabilities. XRX’s channels (own stores; alliances with distributors
and retailers; access to consumers) are very much amenable to agent-banking and investment services.
XRX services a large portfolio of consumer loans for financial institutions. XRX also has in-house
capability for software development and management.
That XRX has not seriously pursued fintech and online financial services as of 2017 (ie. payment
systems; AI-based financial advisory services; online lending; etc.) remains a major puzzle (the
“Diversification Puzzle”) and may be attributed to: i) the decision to focus on core technology/telecomm
business; ii) issues about potential conflicts and competition with XRX’s existing customers; iii) concerns
about regulation; iv) the fact that Google, Amazon and Apple have also not chosen to pursue internet-
based financial services; v) the perceived degree of consumer and corporate acceptance of fintech and
internet banking. However, that may change in the near future as internet banking becomes more
mainstream – in such case, XRX may become one of the “new banks” and may be able to operate with
much lower cost-to-income ratios and higher profitability than traditional banks and financial services
companies.

13.4. Implications For Monetary Policy Transmission And Economic Growth.

Given XRX’s position in various industries, any perceived or actual financial distress of XRX can result
in increases in interbank rates and lending rates, and increases in implied interest rates in trade credit.
Such trends can have spillover effects in the real estate market and consumer loans market. XRX’s capital
structure and financing policies indicates that its less likely to transmit government monetary policies (or
behave in ways desired by policy regulators) than the average multinational or middle-market company.

13.5. Structural Changes.

The industries in which XRX competed went through substantial structural changes during 2010-2016
and in ways that are not easily detectable by traditional econometric models. See Nwogugu (2005a;b).
Clearly one interesting observation is that structural changes can have significant effects on Financial
Stability, and vice versa (actual or potential Financial Instability can cause industry relationships, norms,
competition and regulations to change significantly). Also the rapidly increasing use of employee stock
options (ESOs) (and equity-based incentives) among both US and foreign companies is a significant
structural change that has major implications for managerial risk taking and Financial Stability. See
Nwogugu (2004b).

13.6. Regulatory Failure, Regulatory-Capture And Regulatory-Fragmentation That Can Have Significant
And Negative Macroeconomic, Psychological And Political Effects.
XRX’s problems are evidence of Regulatory Failure, Regulatory-Capture and Regulatory-Fragmentation
that have negative effects. This includes the following failures:

13
1) the Sarbanes-Oxley Act of 2002 (USA) – these regulations should include more stringent
accounting requirements, minimum corporate governance standards and penalties for non-
compliance with accounting and or internal control rules.
2) the Dodd-Frank Act of 2010 (USA) and the US FSOC’s “Non-bank SIFI Criteria”– efficient
regulation would have required the early identification of a broader group of troubled and or
non-compliant companies (companies that don’t comply with accounting and corporate
governance standards but whose operations affect more than two million people/customers).
3) Goodwill/Intangibles accounting regulations (both US GAAP and IFRS/IASB) – these should
require mandatory write-downs of impaired intangibles; mandatory and post-acquisition
classification of goodwill and other intangibles as identifiable intangibles; that goodwill
should not exceed a specific percentage of a company’s intangible assets; and government
evaluation of companies whose intangible assets exceed a specific amount or a specific
percentage of their total assets.
4) The rate-setting mechanisms for benchmark interest rates (eg. for LIBOR/SHIBOR;
EURIBOR; etc.). Most firms that execute strategic alliances or joint ventures do so partly to
reduce their capital/cash requirements. Since Strategic Alliances and JVs are pervasive in
modern economies and are financing tools, they should be reflected in rate-setting
mechanisms. Also, it can be reasonably inferred that Strategic Alliances and JVs can dampen
monetary policies under some conditions including but not limited to the following: 1) there
is asymmetric power among alliance/JV partners which increases uncertainty that is or can be
directly proportional to the volume of activity in the alliance; 2) the alliance-partners’ costs
don’t vary substantially with volume or interest expense - most or a substantial percentage of
alliance-costs are fixed costs; 3) costs and the allocation of costs are fixed in time or place; 4)
alliance termination costs are asymmetric, substantial and are mostly fixed costs; 5) the costs
of scaling the alliance/JV or amending the alliance agreement are significant and are mostly
fixed costs; 6) one or more alliance/JV partners is a major player in an industry that affects
many people and or companies; 7) the strategic alliance or JV creates irreversible changes in
one or more of the alliance-partners’ operations; 8) one or more of the alliance/JV partners
owe relatively low amounts of debt; 9) one alliance/JV partner that has low debt implicitly
finances the other alliance-partner; 10) the strategic alliance or JV reduces customers’ need
for loans/debt to finance their operations; 11) the alliance/JV reduces (or prevents increases
of) end-customers’ need to borrow money and or reduces their debt levels.
5) The US, European, And Asian securities regulations – which should require more stringent
monitoring of compliance with accounting regulations.
6) Auditor Liability-Allocation mechanisms/rules – which should be codified and allocate more
liability to external auditors, the Boards of directors and executives of auditee-companies.
7) US Bankruptcy laws - which don’t require preemptive intervention for most types of private
and exchange-traded companies and medium and large companies whose operations affect
many people and other companies.
8) Failure of the regulation of credit rating agencies (CRAs) – effective CRA regulations
should require mandatory ratings of all exchange-traded companies and some private
companies (whose sales revenues exceed a specific amount) by at least four licensed credit
rating agencies; and should provide adequate incentives to ensure objectivity and truth in
credit ratings.
9) Regulatory Capture – wherein: i) corporate lobbying is successful to the detriment of Social
Welfare; ii) companies and their legal and or accounting advisors figure out ways to
circumvent, denigrate, dampen or take advantage of regulations/statutes and or to influence
regulators (in most cases to the detriment of social welfare).
10) Regulatory Fragmentation – wherein: i) laws/regulations that are intended to achieve the
same or similar objectives are codified in different statutes (and at various levels – ie. State,
local and or federal governments) that in some cases, may or often conflict; and or ii)
14
 enforcement and or rule-making efforts in both the public and private sectors are diffused
among various parties (some of which may not have the adequate resources or knowledge),
and or iii) government regulatory agencies have overlapping functions and or jurisdictions
(eg. the US FCC and US FTC).

Papaikonomou (2010); Nwogugu (2010/2013); Nwogugu (2015a;b;c;d), Nwogugu (2014); and

Nwogugu (2008) discussed these statutes and regulations. Young (Feb. 21, 2013) noted that the annual
cost of regulations imposed by various US federal government agencies could be classified into various
groups5. Note that a portion of the above-mentioned regulatory costs can be attributed to Regulatory
Takings. Nwogugu (2012) introduced new types of Takings. The factors that often discourage or preclude
firms from filing lawsuits to challenge such Takings include but are not limited to the following: i) fear of
retaliation by regulators, and imposition of additional costly regulations; ii) lack of organized industry-
wide efforts to curb Regulatory Takings; iii) perceived costs of litigation including the opportunity costs –
5
The groups are as follows:

Group-F5 (Greater Than $100 billion per year):

 Environmental Protection Agency (EPA): $353 billion
 Health & Human services (HHS): $184.8 billion
 FCC and Telecom Regulation: $142 billion
 Department of Labor: $116.3 billion
 Financial Regulation (several agencies): $102.5 billion

Group-F4 ($10 billion - $100 billion per year):

 Department of Transportation: $61.8 billion
 Department Of Homeland Security (DHS): $55.32 billion

Group-F3 ($5 billion - $10 billion per year):

 Energy Department: $9.809 billion
 US Department of Agriculture (USDA): $9.05 billion
 Department of the Interior: $5.2 billion

Group-F2 ($1 billion - $5 billion per year):

 Department of Education: $3.302 billion
 Housing & Urban Development (HUD): $1.827 billion
 Department of Commerce: $1.801 billion
 Department of the Treasury: $1.32 billion
 Department of Justice: $1.25 billion

Group-F1 (Less Than $1 billion per year):

 U.S. Access Board (ATBCB): $851 million
 Nuclear Regulatory Commission: $414 million
 FERC: $336 million
 CPSC: $193 million
 Equal Employment Opportunity Commission (EEOC): $121 million
Source: Wayne Crews, “Tip of the Costberg”; working paper.

15
on customers; stock prices; suppliers, employees; etc.; iv) the perceived influence of the Executive
Branch of the US government on the federal judiciary (eg. some federal and state judges were selected
from, or had been affiliated with, or had practiced law before government agencies in the Executive
Branch of the US federal government; v) government’s statutory immunity (government agencies and or
their staff); vi) statutory limitations on damages/recoveries from lawsuits; vii) procedural requirements of
litigation (ie. the tort claims act; section 1983; etc.).

14. Neoclassical And Behavioral Asset Pricing Anomalies, And Some Asset Pricing Implications Of
Corporate Policies - XRX’s Operations/Policies Contradicts Theories And Empirical Results In The
Literature.
Maksimovic & Phillips (2008) analyzed the effects of industry life-cycle stages on within-
industry acquisitions and capital expenditures by conglomerates and single-segment firms, and found that:
i) after controlling for endogenity of organizational form, there were greater differences in acquisitions
than in capital expenditures, which were similar across organizational types (acquisition accounted for
36% of the growth recorded by conglomerate segments in growth industries; versus 9% for single-
segment firms); ii) in growth industries, the effect of financial dependence on acquisitions and plant
openings is mitigated for conglomerate firms; iii) organizational forms' comparative advantages differ
across industry conditions. None of these theories were applicable to XRX – financial dependence and
financial condition hampered XRX’s expansion of its physical plant; and XRX organizational forms
didn’t result in much variations in its comparative advantages across industry conditions.
Rhodes-Kropf & Robinson (2008) attempted to introduce a new merger theory that combines
search, scarcity, and the matching of assets and relates incomplete contracts theory to empirical
regularities in the market for mergers and acquisitions; and noted that: i) high M/B (market-to-book)
acquirers usually don’t acquire low M/B targets and merging companies combine with firms that have
similar M/B ratios; ii) the ‘like buys like’ phenomenon is a natural consequence of a prediction from the
property rights theory of the firm that complementary assets should be placed under common control; iii)
empirical studies confirmed that asset complementarity is important, and there were small differences in
the M/B of targets and acquirers; and the difference in M/B ratios increase when discount rates are high
and valuations are low. Unfortunately, this theory is flawed and limited because it doesn’t account for
firms’ reluctance or in ability to merge when there are abundant “similar” companies and other favorable
and usual conditions for mergers or acquisitions exist. Also, based on its preferences for Accretive-EPS
mergers/acquisitions, during 2009-2014, XRX acquired companies whose Price/Book ratios were
different from those of XRX.
Maksimovic & Phillips (2001) observed that there is an active market for corporate assets (volume
was about seven percent of plants in peak expansion years) and that: i) the probability of asset sales and
whole-firm transactions is related to firm organization and ex ante efficiency of buyers and sellers; ii) the
timing of sales and the pattern of efficiency gains suggests that the transactions that occur (especially
through asset sales of plants and divisions), tend to improve the allocation of resources and are consistent
with a simple neoclassical model of profit maximizing by firms. These theories were not applicable to
XRX which sold assets and some of its subsidiaries during 2008-2014.
The Jovanovic & Rousseau (2002) Q-theory of mergers proposes that the same factors that cause
firms’ direct investments also drive their decisions about merging with other firms, and mergers are
macroeconomic sense as devices for capital re-allocation which is needed as new disruptive technologies
emerge. Jovanovic & Rousseau (2002) proposed that when newer firms acquire older firms, the transfer
of management skills and technological adaptability of the acquirer to the target’s assets facilitates their
transition back to the technological frontier. Jovanovic & Rousseau (2002) tested the main implications
of the Q-theory of mergers for United States and seven continental European countries in both the
domestic and cross-border cases; and found that i) European firms, tend to use mergers and acquisitions
to make large increases in their capital stocks, that this choice is more sensitive to the acquirer’s Tobin’s
Q than its direct investment, and ii) that mergers raise the efficiency of target assets. The Jovanovic &
Rousseau 2002) Q-theory doesn’t apply to XRX because the factors that drove XRX’s direct investment
16
during 2009-20915 didn’t cause XRX to merge with or acquire companies during 2009-2015. XRX’s
mergers/acquisitions during that period were primarily for achieving “accretive EPS” and other
accounting benefits.
Gorton, Kahl & Rosen (2009) introduced a theory of mergers that combines managerial merger
motives and a regime shift, wherein anticipation of the regime shift can lead to defensive mergers (firms
acquire other firms to avoid being acquired themselves) or positioning mergers (Mergers may also allow a
firm to position itself as a more attractive takeover target and earn a takeover premium); and the
profitability of acquisitions depend, on the distribution of firm sizes within an industry; and other factors.
The Gorton, Kahl & Rosen (2009) theory is ineffective because it doesn’t consider: i) strategic alliances
and joint ventures as substitutes for mergers/acquisitions; and ii) antitrust issues; iii) the extent of post-
merger integration problems which can be significant.
Erel, Liao & Weisbach (2012): i) noted that 96% (67%) of the deals ($ value) involve a private
target, 26% (15%) involve private acquirer, and 97% (70%) have either private acquirers or targets; ii)
analyzed a comprehensive sample of 56,978 cross-border mergers between 1990 and 2007 to determine
the factors that cause or increase cross-border mergers ; iii) noted that geography, the quality of
accounting disclosure, and bilateral trade increase the likelihood of mergers of countries based in two
countries; iv) found that Valuation can also motivate mergers - firms in countries whose stock market has
increased in value, whose currency has recently appreciated, and that have a relatively high market-to-
book value tend to be purchasers, while firms from weaker-performing economies tend to be targets.
These theories and empirical results cannot explain why XRX didn’t or couldn’t execute a sufficient
volume of “efficient” mergers/acquisitions during 2005-2015 to improve its stock prices, market
coverage, financial stability and operations.
The existence and structure of XRX’s strategic alliances (including distribution agreements) also
invalidates theories in Allen & Phillips (2000). Contrary to Matthews & Robinson (2008), the types of
strategic alliances discussed and proposed herein and below can significantly and efficiently broaden the
boundaries of the firm and improve profitability.

XRX’s corporate policies and the foregoing issues have obvious implications for asset pricing in
terms of the following:
i) the appropriate risk premia of conglomerates, technology companies, multinationals and real estate;
ii) valuation of the equity of XRX and its subsidiaries;
iii) the development of factor models;
iv) the inclusion of corporate governance; compliance-risk; managers’ policies about goodwill/intangibles
accounting; accounting disclosure risk (whether investors perceive earnings management and or investors
reactions to rumours of earnings management), specialized business structures (such as strategic alliances;
joint ventures; etc.); business process quality and default-risk in asset pricing models.
v) the effects of structural changes in industries and collateral impact on related industries.
vi) The differences between the book and market values of tangible assets (such as real estate) can distort
asset pricing models.
vii) the effects of employee stock options (ESOs) are intangibles and a major element of human capital,
and affect managerial risk-taking, corporate policies and the firm’s opportunity-set
viii) managerial cognition and Framing Effects in corporate transactions (ie. acquisitions; asset
dispositions; etc.).
ix) many accounting variables used in asset pricing studies (such as ROE) are grossly inaccurate and
misleading – as explained in Nwogugu (2007b).
x) the impact of corporate strategy on real estate and asset prices and vice versa.

Chandra & Thenmozhi (2017), Baker, Wurgler & Yuan (2012), and Cronqvist & Siegel (2014)
analyzed behavioral asset pricing and investor sentiment. The findings of May & Boehme (May 2016)
and Jin & Myers (2006) suggest the use of alternative measures of crash risk and controlling for known
determinants of crash risk identified in prior studies – and in addition, these factors, the scope of
17
multinational operations and the crash-risk factors mentioned in Kim, Li & Zhang (2011b) and Kim &
Zhang (2013; 2014) should be included in asset pricing models. See the comments about
goodwill/intangibles in Nwogugu (2015a;d) and Nwogugu (2007a) which also introduced some asset
pricing anomalies.
Clearly, investor sentiments affected XRX’s corporate policies – XRX’s pattern of restructuring
charges, poor accounting disclosures and earnings management can be partly attributed to XRX’s
estimates of investors’ reactions to its operating performance, and to the large numbers of its institutional
investors. More importantly, during 2011-2015, XRX’s stock prices were anomalies because they didn’t
reflect the risks inherent in XRX’s operations, compliance with regulations, accounting disclosures, use
of alliances/JVs and future prospects.
The following are some conjectured behavioral biases and anomalies: i) investors tend to include
a premium in the stock prices of large exchange-traded multinationals and technology companies
regardless of their operating performance, compliance risk and accounting disclosure simply because of
their size, annual revenues, product/services breadth and international operations; and ii) investors are
more likely to have positive expectations and assign positive future prospects to large exchange-traded
companies and technology companies, than to smaller and non-technology exchange-traded companies
(distinct from the size premium); iii) investors’ excessive reliance on corporate financial statements
(especially financial statements prepared by the big-four accounting firms) and on compliance by
exchange-traded companies, and such reliance sometimes increases as the size and perceived influence of
the company increases; iv) investors are more reluctant to assign discounts to the stock prices of
exchange-traded large companies or technology companies, than to exchange-traded small companies and
non-tech companies; v) the social capital generated by companies because of their multinational
operations and being in the technology industry may increase their appeal to investors, and may reduce
regulators’ willingness to prosecute them for offenses; vi) the social capital generated by companies
because of their multinational operations and being in the technology industry may increase their appeal
to investors, and may reduce regulators’ willingness to prosecute them for offenses; vi) that XRX has not
seriously pursued fintech and online financial services (payment systems; AI-based financial advisory
services; online-lending; etc.) remains a major puzzle (the “Diversification Puzzle”) and investors are less
likely to deduct a discount from stock prices of multinational enterprises and technology companies for
the Diversification Puzzle, than for non-MNEs and non-technology companies.

15. Xerox’s Potential Strategic Options As Of February 2013: Acquisitions, Joint Ventures And New
Ventures.
This section introduces some of the many strategic options (developed and proposed by the Author to
XRX and discussed with one of its Vice Presidents in Spring 2013, and to which XRX had not responded
as of Spring 2015) that Xerox could have implemented during 2013-2015 in order to reduce risk; improve
its operations, diversify its revenue-sources and create shareholder value. Under this proposal, XRX and
the Author were to form a new joint venture entity (“XZXJV”). The proposed transactions involved
industry rollups; Sale-Leaseback6 transactions; Equity Carvouts and joint ventures. Yin & Shanley

6
See: IRC Sections 162; 163; 167; 465 & 470 (US Internal Revenue Tax code).
See: Frank Lyon Co. v. United States, 435 U.S. 561 (1978), rev'g, 536 F.2d 746 (8th Cir. 1976). This case
marked a major turning point in litigation about sale-leaseback transactions.
See: Hilton v. Comm'r, 74 T.C. 305 (1980), aff'd, 671 F.2d 316 (9th Cir. 1982).
See: Levi v. Comm'r, 91 TC 838 (1988).
See: Kirchman v. Commissioner, 862 F.2d 1486 (11th Cir. 1989).
See: L. W. Hardy Co. v. Commissioner, 52 T.C.M. (CCH) 1540 (1987)
See: Casebeer v. CIR, 54 T.C.M. (CCH) 1432 (1987), aff'd, 909 F.2d 1360 (9th Cir. 1990).
See: Torres v. Commissioner, 88 T.C. 702 (1987).
See: James v. Commissioner, 87 T.C. 905 (1986), aff'd, 899 F.2d 905 (10th Cir. 1990).
18
(2008), Qiu (2010), Nwogugu (2007b) and Sawler (2005) compared strategic alliances and mergers.
Nwogugu (2009a) analyzed the choice between strategic Alliances and mergers/acquisitions. Nwogugu
(2009b) introduced new antitrust detection models. Klein, Rosenfeld & Beranek (1991); Perottia &
Rossetto (2007); Thompson & Apilado (2009); and Damaraju, Barney & Makhija (2015) analyzed Equity
Carve-outs and divestitures. Fox (1993), Ashiya (2015), Nwogugu (2008b) and Ling (2012) studied sale-
leaseback transactions. Nwogugu (2003), Nwogugu (2007a) and Nwogugu (2009) studied corporate
transactions.
XRX’s implied rejection of the Author’s offer can be construed as evidence of the following:

See: Gilman v. Commissioner, 59 T.C.M. (CCH) 465 (1990), aff'd, 933 F.2d 143 (2nd Cir. 1991).
See: Shriver v. Commissioner, 54 T.C.M. (CCH) 1422 (1987), aff'd, 899 F.2d 724 (8th Cir. 1990).
See: BB&T Corp. v. United States, 523 F.3d 461 (4th Cir. 2008), aff'g, No. 1:04CV00941, 2007 WL
37798 (M.D.N.C. Jan. 4, 2007).
See: I.R.S. P.L.R. 200346007 (July 9, 2003).
See: IRS FSA 199927039, 1999 WL 481993 (July 9, 1999).
See: AWG Leasing Trust v. United States, 592 F. Supp. 2d 953 (N.D. Ohio 2008).
See: Rev. Rul. 2002-69, 2002-2 C.B. 760.
See: I.R.S. Notice 2005-13, I.R.B. 2005-9, February 11, 2005.
See: I.R.B. Notice 2005-29, I.R.B. 2005-29, March 10, 2005.
See: I.R.S. P.L.R. 200821032 (Feb. 14, 2008).
See: IRS Coordinated Issue Paper, "Losses Claimed and Income to Be Reported from Lease-In/Lease-Out
Transactions, UIL 9300.07-00" (Oct. 17, 2003), Doc 2003-22889 (38 original pages), 2003 TNT 204-12
(LILO Coordinated Issue Paper).
See: Kies, K. (Feb. 2004). ‘Leave Us A Loan': A Rebuttal to Claims that Defeasance Invalidates Lease
Transactions. Tax Notes, at 763.
See: Yeo S (Feb. 2015). Analysis: Leases, nominees and SDLT. Tax Journal.
http://www.kpmg.com/UK/en/IssuesAndInsights/ArticlesPublications/Documents/PDF/Tax/WTM-
articles/tax-journal-analysis-leases-nominees-SDLT.pdf.
See: CBRE – Case Studies. http://www.cbre.us/o/chicago/teams/net-leased-team/Pages/sale-leaseback-
case-studies.aspx . This website contains summary case studies of sale-leaseback transaction that were
executed by the following companies - Zurich Financial -
http://www.cbre.us/o/chicago/AssetLibrary/Sandquist_Case_Study_Zurich.pdf; Stanley Tool works -
http://www.cbre.us/o/chicago/AssetLibrary/Sandquist_Case_Study_Stanley_Tool_Works.pdf; Ace
Hardware - http://www.cbre.us/o/chicago/AssetLibrary/Sandquist_Case_Study_Ace_Hardware.pdf;
Rockwell Automation - http://www.cbre.us/o/chicago/AssetLibrary/Sandquist
%20_Case_Study_Rockwell_Automation.pdf; Amcol International -
http://www.cbre.us/o/chicago/AssetLibrary/Sandquist_Case_Study_Amcol.pdf.
See: Sears and GGP announce $330M JV, sale-leaseback of 12 properties. April 02, 2015.
http://www.rejournals.com/2015/04/02/sears-and-ggp-announce-330m-jv-and-sale-leaseback-of-12-
properties/. This article stated in part: “..........Sears Holdings Corporation and General Growth
Properties, Inc. announced that they have entered into a real estate joint venture (the “JV”) under which
Sears Holdings has contributed to the JV, twelve Sears Holdings properties located at GGP malls,
involving both existing Sears Holdings stores and certain property leased to third parties occupying
former Sears Holdings stores. As part of the transaction, GGP has contributed cash to the JV, and the JV
has leased back the existing Sears Holdings stores. The transaction is designed to unlock real estate
value and enhance financial flexibility for Sears Holdings while at the same time providing the JV the
opportunity to create additional value through re-development and re-leasing of up to 50% of each
property..............”

19
i) Framing Effects – the reality was that all the alternatives offered by the Author were functional and
economic equivalents of traditional expansion strategies; but on an after-tax basis and in the context of
risk-control, were much more effective and profitable than internal initiatives and traditional transactions.
ii) Justification – managers increasingly tend to seek justification for their actions.
iii) Managers’ Time-Valuation Divergencies – managers’ scales and “Absolute-Values” for the valuation
of time in transactions analysis differs from their valuation of time with regards transaction outcomes,
rewards, and internal opposition.
iv) Selective Risk-Taking – managers’ risk taking is conjectured to vary with the context, familiarity with
proposed transaction processes and estimated/expected rewards from deviation from standards.
v) Structurally Imposed Cognition Limits - Inability to visualize cross-functional synergeries – in this
case, how the real estate strategies could affect operations, corporate financing and employee responses,
and whether the proposed concepts could be applied to other corporate assets and divisions of XRX. This
can be caused by organization structure, reporting lines; policies and procedures; internal politics; etc..
An excerpt from the Author’s proposal to XRX is in Appendix-1 herein and below.

16. Evidence; And Theories Of Corporate Governance, Strategic Decisions And Corporate
Intrapreneurship.
Yin & Shanley (2008) developed some testable management strategy theories. XRX’s Corporate
Governance, Business Policy, finance and Strategy problems were evidence of the following:
i) The Dynamic Coordination-Gaps Theory – refers to: 1) Intra/Inter jurisdictional
Coordination-Gaps in enforcement of laws/statutes, which often increases enforcement and
monitoring costs; and 2) Coordination-Gaps among BODs, executive management teams,
shareholders and regulators of the company; and or among Strategic-Alliance/JV partners .
ii) The Sub-optimally Exercised Time-Varying Asymmetric Power Theory – among shareholders,
BODs and executive management teams; and or among strategic-alliance/JV partners. Such
Asymmetric Power is not necessarily bad (and can increase Social Welfare), but when its
exercised in sub-optimal ways or for meaningless purposes, it can reduce Social Welfare.
iii) The Sub-optimal Investment Theory – sub-optimal investment (cash; human capital;
technology; etc.) in both corporate governance structures, Strategic Planning and competitive
intelligence which eventually causes non-random repeating patterns of poor strategic decisions;
and weakens incentive systems and compliance by employees. Such sub-optimal investment is
typically not properly identified or effectively resolved by management and the BOD; and or
there are communication gaps and inadequate execution directives between the BOD and
management. Note that there is a difference between “sub-optimal investment” and “inadequate
investment”.
iv) Complex “higher-order behaviors” by BODs and executives, which degrade or can degrade
existing strategic planning processes, corporate governance standards and strategic alliances; and
can distort individual and group risk preferences. Bernard (1926b) distinguished between
“Primary” and “Derivative” Attitudes and Ideals. Bernard (1936) analyzed conflicts between
“Primary Group Attitudes” and “Derivative Group Ideals”. “Hullian Theory” in psychology also
distinguishes between “direct” and “derivative” human (individual and group) behaviors. Deck
& Schlesinger (2014); Noussair, Trautmann & Kuilen (2013) and other articles have analyzed a
few higher-order risk preferences.
vi) Corporate Governance Statutes And Corporations’ Strategies/Mechanisms/Alliances As Non-
Public Goods (that may be created, diminished or amplified by Political Influence And Lobbying)
– the “use-value” and potency of Corporate Governance statutes ad mechanisms seem to, or can
decline as more persons/companies use such statutes and mechanisms; and or when there is
increasing complexity of the Strategy-spaces of many of the users of such statute/mechanism.
Thus, Corporate Governance statutes (such as SOX) and mechanisms are or can be Non-Public
Goods. Similarly, the legality and potency of the announced or un-announced strategies or
20
“mechanisms” or Strategic Alliances of large/medium companies (or groups of similar small
companies) can decline as more persons/companies are subjected/exposed to such strategies,
alliances and or mechanisms; and or when there is increasing complexity of the Strategy-spaces
of many of such companys’ customers and or suppliers. Thus, the strategies, mechanisms,
Strategic Alliances and internal Corporate Governance principles of large multinational
companies (or groups of similar small/medium companies) are or can be Non-Public Goods.
viii) Enforcement Leakages – when statutes don’t require that regulators take preemptive or
investigative action to forestall misconduct and or reduction of Social welfare; and or when
existing statutes don’t reduce or increase enforcement costs.
ix) Sub-Optimal Compliance And Litigation Strategies can adversely affect or can affect the
company’s stock-prices, employees, customers and suppliers. Hence, corporate Litigation
Strategies are an important aspect of overall Corporate Strategy. Corporate Litigation Strategies
are or can be influenced by 1) human biases; 2) knowledge deficits; 3) internal communication
deficits; 4) internal controls; 5) internal or external collusion (intentional or un-intentional); 6)
criminal misconduct; 7) external pressures (such as meeting analysts’ EPS estimates or
shareholders’ demand for greater dividends); 8) difficulties in either assessing the markets’
technology needs and or in incorporating strategy into innovation processes and development of
technology; 9) economic and psychological costs of innovation, strategy development and
implementation; 10) impact of innovation and strategy development on managers’ compensation
and career progress; 11) managers’ perception of apprehension; 12) availability of insurance; 13)
managers’ perceived impact of guilty pleas or settlements or court awards on their career
prospects; 14) the company’s financial condition and access to capital; 15) perceived impact of
litigation on customers and suppliers.
x) Strategy Permeation Deficits Theory – the formulation and or execution of strategy from the
BOD to the senior executives to middle managers is distorted or interrupted by any of the
following: 1) human biases; 2) knowledge deficits; 3) internal communication deficits; 4) internal
controls; 5) internal or external collusion (intentional or un-intentional); 6) criminal misconduct;
7) external pressures (such as meeting analysts’ EPS estimates or shareholders’ demand for
greater dividends); 8) difficulties in either assessing the markets’ technology needs and or in
incorporating strategy into innovation processes and development of technology; 9) economic
and psychological costs of innovation, strategy development and implementation; 10) impact of
innovation and strategy development on managers’ compensation and career progress.
xi) Deadweight Losses in the pricing, demand and supply of prosecutorial/enforcement litigation
(which may be caused or amplified by Political Influence and Lobbying). Hines (1999) and Lind
& Granqvist (2010) discussed Deadweight Losses.
xii) Deadweight Losses in the trading of securities of securities of the company (and perhaps the
securities of other companies in the same industry sector).
xiii) There are adverse effects of Managerial Entrenchment; BOD Entrenchment; and Quasi-
managerial Entrenchment (managers’ philosophies and methods are entrenched by BOD reliance,
long term transactions; Policies & procedures; organizational culture and fear of change).
xiv) Among managers of some exchange-traded companies, there is generally low concern for
Social Welfare and for regulations that don’t require frequent reporting/filing; and the effect of
quarterly financial reporting remains a dominant factor in both the operations, strategies and
financial reporting of some exchange traded companies.
xv) Value Chain Paralysis Theory – the firm’s innovation processes and strategies are not
sufficiently translated into value-increasing tasks, actions and compliance (that don’t reduce
Social Welfare).
xvi) Super-Additive Value Chain Dominance Theory – wherein a firm’s dominance of its value
chain increases and increases at a faster rate than the firm’s expansion rate and or the complexity
and economic costs of regulations. In the case of Sub-Additive Value Chain Dominance Theory, a
firm’s bargaining power and influence in its value chain declines at a faster rate than the rate at
21
 which the company expands and or the rate at which regulations become more complex and
economically burdensome.
xvii) Value Chain Alliance Volatility Theory – wherein one or more Strategic Alliances fail or
produces volatile outcomes (in terms of costs; prices; time; employee effort/motivation;
efficiency; etc.) because of asymmetric power in the Alliance; inadequate and or ineffective
incentives; and or partner dependence.
xviii) Value-Chain Execution Gaps – wherein critical elements of the value chain that could be
filled/completed by strategic alliances or joint ventures are instead left open or are inadequately
addressed. The results can include lost revenues; uncertainty, unsustainable business models;
value-extraction (ie. a company cannibalizes other companies in its value chain and reduces
overall social welfare – eg. Apple; Google; Alcoa; Xerox; etc.); high costs; etc..
xix) Welfare-Reducing Value Extraction Theory – wherein one party to a Strategic Alliance or JV
extracts value from the other party/parties by imposing costs; creating or fostering harmful
asymmetric power/control in the relationship; increasing the other partys’ switching costs;
shifting fixed and or variable costs to the other parties; fabricating or increasing the perceived
demand for its products/services; etc..
xx) The Policy-Dampening Alliance Theory - It can be reasonably inferred that Strategic
Alliances can dampen monetary policies under some conditions including but not limited to the
following: 1) there is asymmetric power among alliance partners which increases uncertainty that
is or can be directly proportional to the volume of activity in the alliance; 2) the alliance-partners’
costs don’t vary substantially with volume or interest expense - most or a substantial percentage
of alliance-costs are fixed costs; 3) costs and the allocation of costs are fixed in time or place; 4)
alliance termination costs are asymmetric, substantial and are mostly fixed costs; 5) the costs of
scaling the alliance or amending the alliance agreement are significant and are mostly fixed costs;
6) one or more alliance-partners is a major player in an industry that affects many people and or
companies; 7) the strategic alliance creates irreversible changes in one or more of the alliance-
partners’ operations; 8) one or more of the alliance-partners owe relatively low amounts of debt;
9) one alliance-partner that has low debt implicitly finances the other alliance-partner; 10) the
strategic alliance reduces customers’ need for loans/debt to finance their operations.

17. Conclusion.
XRX most probably engaged in earnings management and asset-quality management during 2009-2015
in order to shore up its balance sheet; hide its technical-insolvency and the under-performance of its
recent acquisitions; boost or support executive compensation; maintain employee moral; retain the limited
flexibility to respond to competitive challenges; and maintain its relationships with customers and banks.
More importantly, during 2009-2014, XRX’s strategic alliances and joint ventures either failed or under-
performed – due to a combination of the types of alliance/JV structures; the management of alliances/JVs;
the incentives embedded in or implied by the Alliances/JVs; the competitive environment; etc..
Unfortunately, XRX did not develop or implement many strategic options that were feasible and available
as of 2012-2015. XRX didn’t capitalize on significant opportunities in fintech and online financial
services. XRX was a substantial financial stability risk and had systemic risk potential. The implications
of XRX’s problems are that: i) the nature, objectives and enforcement of regulations have to be changed
and more effective penalties have to be implemented; ii) the social and psychological effects of business
regulation within and outside the workplace has become more important; iii) companies need to better
coordinate their decision making processes, growth initiatives, Corporate Governance policies and risk-
management methods into a coherent and dynamic system; iv) companies and the government should
develop better ways of identifying and managing managers’ human biases.

22
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Appendix-1.

An excerpt from the Author’s proposal is as follows:

“.............This document summarizes the terms of a proposed joint venture (the terms are negotiable). XRXJV,
Inc. (“CCSJV”) is a proposed joint venture holding company that will be jointly incorporated by XEROX
(“XRX”) and XYZ, Inc. (hereafter, “XYZ”; a company that will be incorporated by Mike Nwogugu), to execute
various ventures in the US and foreign countries. Some of the ventures that will be executed by CCSJV are
summarized below, and each such venture will be executed by one XRXJV subsidiary (each, a “JV-
Subsidiary”), which may also create its own subsidiaries. XRXJV and each JV-Subsidiary will be listed on a

27
stock exchange (eg. London AIM; Dubai Exchange; Singapore Exchange; Deutsche Bourse, BOVESPA;
NASDAQ OMX; etc.) as soon as is practicable in order to provide liquidity and access to capital, and to
facilitate transactions. XRXJV will be structured so that it will not be consolidated on XRX’s books, but XRX
will have an option to acquire a majority equity interest in most of XRXJV’s subsidiaries (with cash and or
XRX’s stock) after two years.

XRX will invest capital ($25-$30 Million) in XRXJV, and will be granted the following:
a) 19% (nineteen percent) of “founders’ shares” of Common Stock of XRXJV; and
b) The right to receive 19% of the quarterly consolidated Pre-tax Income of any XRXJV JV-Subsidiary, if any;
in addition to any declared dividends; and
c) Up to 33% of seats of the Board of Directors of XRXJV; and
d) Information rights (quarterly un-audited financial statements; and annual audited financial statements; real
time view-only access to general ledger; minutes of board meetings; and quarterly access to all contracts); and
e) A bar on issuance of additional shares of XRXJV without the written consent of XRX.

The initial investment by XRX will be used for the following expenses:
a) General and administrative expenses – office costs; FF&E; salaries, employee costs; supplies; rent/utilities;
travel/lodging; subscriptions; conferences; memberships; professional fees (accountants, lawyers; due diligence
companies), filing fees and permits; etc..
b) Human Resources expenses and recruiting fees.
c) The cash component of acquisitions, if any.
d) Seed capital for the new ventures.

XRXJV will allocate some of its overhead costs to each JV-Subsidiary based on the volume of activity. If after
24 months, XRXJV does not complete sufficient volume of acquisitions, then XRXJV will attempt to raise
more cash and modify its acquisition model, and then proceed.

XYZ’s role will be to:

a) Develop and coordinate the execution of the strategic plans and acquisition models for XRXJV and its
subsidiaries – including negotiating, structuring and closing acquisitions/mergers and joint ventures.
b) Coordinate HR and recruiting of staff for XRXJV and its subsidiaries.
c) Oversee the post-acquisition integration of acquired companies, including cost-reduction programs, and
implementation of ERP systems and Activity-based costing.

XRX will grant to XRXJV, a six-year blanket Exchange-Right, which will entitle each holder of whole or
fractional shares of XRXJV’s Common Stock to exchange such shares for whole/fractional shares of XRX’s
Common Stock on the following conditions:
a) Only after the third anniversary of the date of incorporation of the applicable XRXJV subsidiary to
which such person is affiliated;
b) Only after the applicable XRXJV subsidiary has completed acquisitions of at least two companies
with combined annual sales revenues of at least $___ Million;
c) The exchange ratio will be based on the relative ratios of the 12-month trailing EBITs of XRX and
the XRXJV subsidiary.
d) The Exchange Ratio will be at an implied premium of at least 10%-40% over XRX’s Book-value
per share as of the most recent fiscal quarter (based on Form-10Q).
e) The holders of XRXJV’s founders’ shares may exercise the Exchange Right only after one
XRXJV JV-Subsidiary has completed the acquisition of at least two companies with a combined annual
sales revenues of at least $_____ Million.

XRXJV will grant to each JV-Subsidiary, a blanket six-year Exchange-Right, which will entitle each holder of
whole or fractional shares of each JV-Subsidiary’s Common Stock to exchange such shares for whole/fractional
shares of XRXJV’s Common Stock on the following conditions:
a) The Exchange Right will be exercisable until the fifth anniversary of the date of acquisition by the
JV-Subsidiary or date of issuance of stock by the JV-Subsidiary.
b) The exchange ratio will be based on the relative ratios of the 12-mont trailing EBITs of XRXJV
and the JV-Subsidiary.
28
In the proposed acquisitions describe below, the main payment currencies are the shares of XRXJV and XRX.
Where absolutely necessary, the JV-Subsidiary will use proceeds of asset-backed loans (secured by the target-
company’s assets) as consideration. ........

.........14.1. Strategic-Option #1 - Acquisitions Of Public And Private Advertising Companies (Primarily

Through Non-Cash/Low-Cash Acquisitions).
Incorporation of a new subsidiary of XRXJV that will acquire private and publicly-traded Advertising
companies in the US, Mexico, South America, Asia and CEE countries, through non-cash transactions (ie. Earn-
outs; stock-for-stock; stock-for-asset). XRX will have the option to acquire a controlling equity interest in this
entity after two years, for a relatively small payment. The Opportunity/Rationale was as follows:
i) Since post-merger integration can be problematic, and will involve cost management issues and may
result in litigation, its more efficient to manage the acquisitions in a separate entity, and then transfer the
combined company to XRX after the acquisition/merger issues are resolved.
ii) The global advertising industry remains fragmented.
iii) There can be substantial opportunities for economies-of-scale, cost savings, and knowledge effects.
iv) Advertising services will complement XRX’s existing marketing services.
v) The shares of many publicly traded advertising companies are trading at prices that below Book-value.
vi) The private-market value of advertising companies are relatively low; and the proposed XRXJV
subsidiary can provided needed liquidity, exit and access to capital for owners and advertising firms.
vii) Advertising companies have substantial influence on the demand for paper, printing equipment and
document management services and BPO (ie. marketing campaigns; print advertising; salesforce
coordination; overall strategy; etc.). Advertising companies also require BPO services (and can
recommend BPO services to their clients).

14.2. Strategic-Option #2 - Acquisition Of Public And Private Loan-Servicing Companies And Retirement-Plan
Administration Companies (Primarily Through Non-Cash/Low-Cash Acquisitions).
Incorporation of a new XRXJV subsidiary that will acquire: a) private and publicly-traded loan-servicing
companies in the US, Mexico, South America, Asia and CEE countries, primarily through non-cash
acquisitions; and b) acquire 401K and retirement Plan administration companies in the US, Mexico, South
America, Asia and CEE countries primarily through non-cash acquisitions; c) acquire “busted” Asset Backed
Securities Trusts in the US and Europe through non-cash exchange offers. XRX will have the option to acquire
a controlling equity interest in this XRXJV subsidiary after two years, at an EBITDA or FCF multiple of
between ___X and __X. As mentioned above, XRX will grant blanket Exchange-Rights to only XRXJV, and
XRX JV will also grant blanket Exchange Rights to each JV-Subsidiary, so that the JV-Subsidiarys’ seller-
acquirees and or joint venture partners can swap first into shares of XRXJV’s shares, and then subsequently
swap into XRX’s shares at a premium over the Book-value or market price of shares of XRX’s Common Stock
(or greater prices). The Opportunity/Rationale was as follows:
i) The loan-servicing and plan-administration industries are highly fragmented industries, that provide
commodity services.
ii) There can be significant opportunities for economies of scale, cost savings, automation and knowledge
effects.
iii) The proposed entity can provide substantial consumer information that can be used in XRX’s
marketing services. Loan-servicing and plan-administration will complement XRX’s existing services.
iv) Since post-merger integration can be problematic, and will involve cost management issues and may
result in litigation, its more efficient to manage the acquisitions in a separate entity, and then transfer the
combined company to XRX after the acquisition/merger issues are resolved.
v) The shares of many publicly traded financial services companies are trading at prices that significantly
below their Book-values.
vi) The private-market values of loan servicing companies are relatively low; and the proposed XRXJV
subsidiary can provided needed liquidity, exit and access to capital for owners and loan-servicing firms
and plan-administration firms.

14.3. Strategic-Option #3 - Creation Of A New Company That Will Work With XRX’s Lender-clients To
Convert Existing Loans In XRX’s Consumer Loan-Servicing Portfolio, Into New Forms Of “Investment
Products”.
29
 The venture involves the incorporation of a new XRXJV JV-Subsidiary that will work with lender-clients (of
the XRX subsidiary that services $275 Billion of consumer loans) to convert such loans into various types of
investment products developed by Mike Nwogugu. Various empirical and theoretical research indicate that
consumer debt has substantial adverse psychological effects on both the borrowers and employees of
lenders/servicers - Nwogugu (2012)7 explained some of these issues, and introduced new investment products
that are substitutes for consumer debt. XRX will have the option to acquire a controlling equity interest in this
XRXJV subsidiary after two years, at an agreed upon EBITDA or FCF Multiple. As mentioned above, XRX
will grant blanket Exchange-Rights to only XRXJV, and XRXJV will also grant blanket Exchange Rights to
each JV-Subsidiary, so that the JV-Subsidiarys’ seller-acquirees and or joint venture partners can swap first into
shares of XRXJV’s shares, and then subsequently swap into XRX’s shares at a premium over the Book-value or
market price of shares of XRX’s Common Stock (or greater prices). The Opportunity/Rationale was as
follows:
i) The proposed investments can substantially reduce loan servicing costs and foreclosures in an era of
increasing consumer defaults and global financial turmoil.
ii) The XRXJV subsidiary can earn fees for the “conversion” of the borrowers.
iii) Social welfare can be increased substantially by implementing the proposed “investment” products.

14.4. Strategic-Option #4 - Sale/Leaseback of All of XRX’s Real Estate, And Sale of XRX’s Leasehold-
Interests Through A Tax-Free Exchange.
Incorporation of a new XRXJV Subsidiary which will purchase all of XRX’s real estate in exchange for
consideration (equity in the XRXJV subsidiary and other consideration) and simultaneously lease same back to
XRX in a tax-free transaction; and will also purchase all of XRX’s interests in its leased buildings, in exchange
for consideration (equity in the XRXJV subsidiary and other consideration) and simultaneously sub-lease same
back to XRX in a tax-free transaction. Such transaction will enable XRX to essentially “Step-up” the values of
such assets to market-values (including leasehold interests which are not currently reflected in XRX’s Balance
Sheet), eliminate depreciation charges and carry the assets as an investment. XRX will pay capital gains taxes
only when it sells its shares of the XRXJV subsidiary. The transaction will be structured so that XRX will not
be able to consolidate the XRXJV subsidiary in XRX’s Balance Sheet. The opportunity/rationale was as
follows:
i) This proposed transaction can substantially increase XRX’s Net Tangible Assets, and thus, its
perceived solvency, borrowing capacity and stock price. Like most mature companies, XRX’s real estate
and leasehold interests are recorded at depreciated values that are substantially below their fair-market
values (FMV) – and this transaction will enable XRX to step-up its real estate to FMV. While XRX uses
substantial commercial real estate, such real estate is not a core business of XRX.
ii) The XRXJV JV-Subsidiary will be listed on stock exchanges, and XRX will benefit from selling its
shares of the JV-Subsidiary.
iii) The leases and sub-leases will be structured as bonded NNN-leases which will generate interest tax-
shields and depreciation tax-shields for XRX; and may include buy-back options.

14.5. Strategic-Option #5 - Construction And or Acquisition Of Data/Co-Location Centers.

This venture involves the incorporation of a new XRX JV-subsidiary that will build data-centers and co-
location centers in Africa and Latin America and emerging markets countries. The Opportunity/Rationale was a
s follows:
i) Many companies in Africa and Latin America now use data/co-location centers that are located in the
US or Europe. Safety, reliability, scale and efficiency of data centers remain major concerns in these
geographical regions.
ii) Increasing internet/broadband penetration and the growth of cell phones and digital/cable TV in
Africa, Asia and Latin America, has created demand for more data-centers.

14.6. Strategic-Option #6 - Acquisition And Combinations Of Paper/printing Products companies And Printing-
franchisee Companies (Primarily Through Non-Cash/Low-Cash Acquisitions).
Incorporation of a new XRX JV-subsidiary that would acquire private and publicly-traded commercial printing
companies and printing-franchisee companies in the US, Mexico, South America, Asia and CEE countries,
7
See: Chapters 3, 4 & 15 in Nwogugu M. (2012), “Risk In The Global Real Estate Market” (John Wiley
& Sons; 2012).
30
through non-cash non-debt transactions (ie. Earn-outs; stock-for-stock; stock-for-asset). The primary targets
will be the customer-lists and equipment of these printing/paper companies. Some of the acquired companies
will be completely shut-down and their staff re-assigned to other facility locations – depending on their
profitability, market penetration and location. XRX will have the option to acquire a controlling equity interest
in this entity after two years, at an EBITDA Multiple of between ___X and ___X. As mentioned above, XRX
will grant blanket Exchange-Rights to only XRXJV, and XRXJV will also grant blanket Exchange Rights to
each JV-Subsidiary, so that the JV-Subsidiarys’ seller-acquirees and or joint venture partners can swap first into
shares of XRXJV’s shares, and then subsequently swap into XRX’s shares at a premium over the Book-value or
market price of shares of XRX’s Common Stock (or greater prices). The Opportunity/Rationale was as
follows:
i) The commercial printing industry in North America, Europe and Asia is highly fragmented and had
been shrinking primarily due to technological advances and automation.
ii) There is substantial price based competition.
iii) Consolidation will eliminate redundancies and inefficiencies created by franchising and improper
marketing.
iv) Since post-merger integration can be problematic, and will involve cost management issues and may
result in litigation, its more efficient to manage the acquisitions in a separate entity, and then transfer the
combined company to XRX after the acquisition/merger issues are resolved.

14.7. Strategic-Option #7 - Acquisition Of Exchange-traded And Private Retailing-Chains And Online Retailing
Companies (Primarily Through Non-Cash/Low-Cash Acquisitions).
Incorporation of a new XRXJV subsidiary that will acquire private and publicly-traded retailing chains and
online retailing companies (that sell consumer durables, electronics, office equipment, home repairs, furniture
and office supplies; and factory outlets) in the US, Mexico, South America, Asia and CEE countries, through
non-cash non-debt transactions (ie. earnouts; stock-for-stock; stock-for-asset). Real estate costs account for
more 30%-45% of the operating expenses of retailing chains. By co-locating/co-branding with retailers
(locating two or more brands in one physical store), XRX can increase its exposure, customer traffic and sales
revenues, while reducing combined operating expenses, and restoring profitability of retailing chains. The
global retailing Industry has been undergoing substantial structural changes; driven in part by the internet,
reduced consumer spending, changes in family structure; increased labor mobility, changes in access to capital,
and the increasing number of women-workers. In most developing countries (Brazil; China; India; Latin
America; etc.), retailing remains under-developed, disorganized, inefficient and extremely fragmented; with
various types of middle-men and transportation/storage adding to final costs. XRX will have the option to
acquire a controlling equity interest in this JV-Subsidiary after 2-3 years, at an agreed-upon EBITDA or FCF
Multiple. As mentioned above, XRX will grant blanket Exchange-Rights to only XRXJV, and XRXJV will
also grant blanket Exchange Rights to each JV-Subsidiary, so that the JV-Subsidiarys’ seller-acquirees and or
joint venture partners can swap first into shares of XRXJV’s shares, and then subsequently swap into XRX’s
shares at a premium over the Book-value or market price of shares of XRX’s Common Stock (or greater prices).
The Opportunity/Rationale was as follows:
i) Many retailing chains in many countries are financially and or operationally distressed; and the shares
of many exchange-traded retailing chains are trading at significant discounts to their Book-Values. Many
such retailing chains own under-valued assets (ie. commercial real estate; brands; human capital; under-
utilized assets; inefficient ERP systems; etc.).
ii) There are opportunities to cross-sell and cross-market with acquired retailing chains; reduce XRX’s
sales/marketing expenses; and to leverage customer information available to XRX’s operating
subsidiaries (see the proposed Behavioral Database venture).
iii) Since post-merger integration can be problematic, and will involve cost management issues and may
result in litigation, its more efficient to manage the acquisitions in a separate entity, and then transfer the
combined company to XRX after the acquisition/merger issues are resolved.
iv) An increasing percentage of global retail sales are now completed totally online, and XRX’s
products/services are very amenable to online retailing and online B2B sales.
v) Retailing chains have substantial influence on the demand for paper, packaging products, printing
equipment and digital document management services (ie. marketing campaigns; direct marketing; paper
products, packaging; print advertising; etc.). Retailing chains and online retailing companies also need
substantial BPO services and cash management services in order to reduce their operating costs and the
cyclicality/variability of the revenues and cash flow – and XRX may have excess capacity for such
31
 services. Retailing chains and online retailers can indirectly recommend XRX’s BPO services and
document management services to their customers.
vi) XRX’s current stores/sales-locations can eventually be moved to store locations of the retailing
chains; and the retailing chains can help sell XRX’s products. XRX can also open small representative
offices (500-5,000SF; with sample products) within each such retail-store location.
viii) The target online retailing companies will benefit from XRX’s capabilities in sales/marketing and
the proposed behavioral marketing database.
ix) The JV-Subsidiary can provide liquidity/exit; sales/marketing resources, and access to customers and
needed capital to the targeted retailing chains and online-retailing companies.
x) The targeted retailers are end-user customers that also serve as sales/marketing resources for XRX.
Thus, the acquired retailers will serve as: a) local XRX sales offices; b) local XRX sales staff; c) referral
sources for a broad range of XRX services and products; d) signage source – each retail store will display
the large XRX signage outside; e) clients for a broad range of XRX services and products – which will
reduce variability of XRX’s profits.

14.8. Strategic-Option #8 - Acquisition of Software And Software-Services Companies(Primarily Through

Non-Cash/Low-Cash Acquisitions).
Incorporation of a new XRXJV subsidiary that will acquire private and publicly-traded software (document
management; media; BPO; supply chain; DRM; etc.) and software-services companies (document management;
security; BPO; SAAS; IT consulting; custom application design; development; re-engineering and maintenance;
systems integration; package implementation; and technology infrastructure outsourcing; etc.) in the US,
Mexico, South America, Asia and CEE countries, through non-cash non-debt transactions (ie. Earn-outs; stock-
for-stock; stock-for-asset). XRX will have the option to acquire a controlling equity interest in this entity after
three years, at agreed upon EBITDA or FCF Multiples. As mentioned above, XRX will grant blanket
Exchange-Rights to only XRXJV, and XRXJV will also grant blanket Exchange Rights to each JV-Subsidiary,
so that the JV-Subsidiarys’ seller-acquirees and or joint venture partners can swap first into shares of XRXJV’s
shares, and then subsequently swap into XRX’s shares at a premium over the Book-value or market price of
shares of XRX’s Common Stock (or greater prices). The Opportunity/Rationale was as follows:
i) The global software industry remains fragmented.
ii) The software services sector has been undergoing substantial structural changes; driven in part by the
internet, outsourcing; changes in access to capital; prevalence of short term service contracts; etc..
iii) Many software firms in many countries are financially and or operationally distressed.
iv) The shares of many exchange-traded software companies and software services companies are trading
at significant discounts to their Book-Values.
v) The proposed acquisitions can leverage customer information, and existing IT capabilities available to
XRX.
vi) There can be significant opportunities for economies of scale; reduction of XRX’s sales/marketing
expenses; knowledge effects; cross-marketing and cost reduction by acquiring and combining such
companies.
vii) There may be opportunities to cross-sell and cross-market products and services with IT subsidiaries
and acquired retailing chains.
ix) Since post-merger integration can be problematic, and will involve cost management issues and may
result in litigation, its more efficient to manage the acquisitions in a separate entity, and then transfer the
combined company to XRX after the acquisition/merger issues are resolved.
x) The proposed JV-Subsidiary can provide liquidity/exit, access to customers, and access to capital to
acquired software and software-services companies.

14.9. Strategic-Option #9 - Creation Of A Behavioral Marketing Database.

In 2012, XRX had access to huge amounts of consumer data and business data, and this venture involved the
incorporation of a new XRX JV-Subsidiary that will build a behavioral marketing database, based in part on
business and customer information obtained from various XRX operating subsidiaries (ie. the loan servicing
business; HR Solutions; BPO services, customer care; government services) and from tracking customer traffic
in the internet. XRX will have the option to acquire a controlling equity interest in this JV-subsidiary after three
years, at agreed upon EBITDA or FCF Multiples. XRX will grant blanket Exchange-Rights to only XRX JV,
and XRXJV will also grant blanket Exchange Rights to each JV-Subsidiary, so that the JV-Subsidiarys’
shareholders can swap first into shares of XRX JV’s Common Stock, and then subsequently swap into XRX’s
32
shares at a premium over the Book-value or market price of XRX’s shares (or greater prices). The
Opportunity/Rationale was as follows:
i) This Behavioral Marketing database: a) can complement XRX’s fee-paying marketing businesses; b)
can be leased to third parties for fees; c) can drastically improve XRX’s sales and marketing of its
products and services; d) can drastically improve the marketing and sales of products and services of
companies acquired by XRXJV; e) can reduce XRX’s sales/marketing expenses.
ii) There are significant opportunities for economies of scale, knowledge effects; cross-marketing and
cost reduction by acquiring and combining such companies.
iii) There can be opportunities to cross-sell and cross-market with acquired retailing chains.

14.10. Strategic-Option #10 – Implementation Of A Cost Reduction And Cost Management Program.
This is a proposed cost-reduction and cost-alignment project wherein: a) XRXJV and MCN will provide a team
that will review the cost structure of XRX and its subsidiaries and identify cost reduction and alignment
opportunities; b) oversee the implementation of activity based costing (ABC) in XRX; c) develop and
implement cost reduction programs; d) re-assign affected/laid-off staff to new companies acquired by XRXJV;
e) re-allocate under-utilized FF&E; e) improve the accuracy of the pricing of XRX’s products/services. The
Opportunity/Rationale was as follows:
i) Mr. Nwogugu is an “inactive” CMA/CPA, and has worked on cost analysis projects.
ii) The Cost Analysis project can help achieve goal congruence, increase XRX’s Gross Margins, and
facilitate XRX’s use of pricing as a competitive advantage.

14.11. Strategic-Option #11 - Online/Offline Advertising/Sales Programs.

XRX could have incorporated a new JV-subsidiary that will enter into Strategic alliances XRX’s “consenting”
fee-paying clients (the “Fee-Clients”) for advertising sales by the JV-Subsidiary. The consenting Fee-Clients
are those clients of XRX that agree to have the JV-Subsidiary’s advertising placed on their webpages and in
emails and letters sent to their customers. The JV-Subsidiary will recruit advertising clients. The basic terms of
the proposed strategic alliances are as follows:
a) The JV-Subsidiary’s Advertiser’s banner ads will be placed on XRX’s Fee-Clients’ webpages for
free in exchange for the JV-Subsidiary’s payment of 25% and 15% of the Sub-Ad Fee to the Fee-Client
and to XRX respectively. The advertiser will typically pay advertising fees to the JV-Subsidiary – page-
view fees, clickthrough fees and a sales commission of 5-10% of completed-sales revenues (collectively,
the “Sub-Ad Fee”). If XRX is the advertiser, the Sub-Ad Fee shall not exceed 2.5% of completed-sales
revenues (a maximum of 30% of available advertising spots shall be allocated to XRX).
b) The JV-Subsidiary’s Advertiser’s banner ads will be placed in any HTML emails that XRX sends
to customers on behalf of its fee-paying clients (for free); in exchange for the JV-Subsidiary’s payment
of 20% of the Sub-Ad Fee to each of the Fee-Client and XRX. The advertiser will typically pay
advertising fees to the JV-Subsidiary – ie. page-view fees, clickthrough-fees and 5-10% of completed-
sales revenues (collectively, the “Sub-Ad Fee”). If XRX is the advertiser, the Sub-Ad Fee shall not
exceed 2.5% of completed-sales revenues (a maximum of 30% of available advertising spots shall be
allocated to XRX).
c) The JV-Subsidiary will place its inserts and flyers in letters that XRX will send to
borrowers/payors on behalf of its Fee-clients. The advertiser will typically pay 5-15% of completed-
sales revenues, if any, to the JV-Subsidiary (the “Sub-Ad Fee”). The JV-Subsidiary shall pay 15% of
the Sub-Ad Fee to each of the Fee-Client and XRX. If XRX is the advertiser, the Sub-Ad Fee shall not
exceed 2.5% of completed-sales revenues (a maximum of 30% of available advertising spots shall be
allocated to XRX).

This “advertising-programs” JV-Subsidiary will be different from the JV-Subsidiary that will acquire
advertising agencies, in order to isolate any post-merger integration problems and associated litigation. The
Opportunity/Rationale was as follows
i) XRX’s subsidiaries send substantial emails and physical mail to customers of XRX’s clients; and also provide
internet-based services to such clients. Thus, there are substantial opportunities to generate revenues from
advertising sales (both online and offline advertising).

14.12. Strategic-Option #12 - Acquisitions Of, Or Joint Ventures With Computer Manufacturers.

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XRX could have incorporated a JV-Subsidiary that will seek to: a) enter into a long term joint venture with
XRX and one or more computer manufacturers for the development and production of combined printer/CPU
units; and or b) acquire computer manufacturers and then develop and production of combined printer/CPU
units. Such JV may include an option to acquire the computer manufacturer. The Opportunity/Rationale was
as follows:
i) There may be a viable large group of retail (and even institutional) customers that will prefer to have
their printer combined with their desktop CPU unit, for cost-savings and efficiency. Traditional printers
cost $80-$300, while traditional CPUs cost $150-$300.
ii) Gross Margins and operating margins in the low-end/retail-sector printer sector, and the desktop
computer sector have continued to decline, and there is intense competition from Asian manufacturers.
iii) Consumers are more concerned about efficiency and cost.

14.13. Strategic-Option #13 - Convert XRX’s Existing Goodwill Asset Into “Identifiable” And Or “Tangible”
Assets (And Purchases Of Third-Party Intangible Assets).
In 2012, XRX’s Goodwill asset was more than $9 billion (nine billion UD Dollars) and was required to be
tested annually for impairment. XRX should have tested its Goodwill, and re-classified the Goodwill assets into
identifiable Intangible Assets with indefinite/definite lives (the “New Intangible Assets”). It appears that most
of XRX’s (2012) Goodwill was associated with the acquisition of ACS in 2010. XRXJV shall then incorporate
a JV-Subsidiary that will execute a sale-leaseback of the New Intangible Assets – ie. the JV-Subsidiary will
purchase the New Intangible Assets from XRX, in exchange for shares of the JV-subsidiary’s Stock, in a tax-
free transaction. XRX will then lease the New Intangible Assets back from the JV-Subsidiary for a nominal
amount. The net effects of the proposed re-classification are that: a) XRX will then eliminate the Goodwill
Asset and instead, record a long-term investment asset on its Balance Sheet; b) XRX’s Net Tangible Assets will
increase substantially – and its solvency ratios will improve; c) if XRX makes the proposed lease payments with
its shares, there will be tax shields. This JV-Subsidiary’s regular business will be the purchase (and or
purchase-lease-backs) of third-party intangible assets.
See Sections 167, 1012 and 174 of the US Internal Revenue Code. See Treasury Regulations section 1.167(a)-
3, and Section-1.338. Expenditures associated with some intangibles must be permanently capitalized and
are deductible for tax purposes only on sale of the asset. To obtain a tax deduction for amortizing an intangible
asset, a taxpayer must prove that the asset is not Goodwill, which is not deductible for tax purposes. For tax

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 purposes, to avoid the non-deductible category8,9,10, the taxpayer must show that the asset is “identifiable” and
has a limited and determinable useful life. 

Some possible reasons for the re-classification of XRX’s Goodwill into identifiable (definite-life or indefinite-
life) Intangible Assets include but are not limited to the following:
a) The pre-acquisition asset appraisals were wrong in terms of the dollar-values of assets, intended uses,
actual uses, actual/potential target-customers and the nature of the Reporting Unit’s (ACS) and XRX’s
intangible assets and tangible assets.
b) The post-acquisition uses of the acquired assets (Reporting Unit’s assets) differ substantially from that
stated in the pre-acquisition appraisal(s) or what was contemplated in the acquisition agreement.
c) Immediately after the acquisition of the Reporting Unit (ACS), the nature and target customers of XRX’s
assets and businesses changed the use-value and nature of the Reporting Unit’s intangible assets.

8
On the issue of whether an asset is Goodwill or another asset, see the following US court cases
(available at: http://www.thefreelibrary.com/Deducting+the+cost+of+intangibles.-a012358478): 

1. Right to service mortgage loans: Western Mortgage vs. U.S., 308 F.Supp. 333 (C.D. Cal.;
1969); and First National Bank of Omaha vs. Commissioner(US IRS), T.C. Memo. 1975-67. 
2. Covenants not to compete: Schulz vs. Commissioner(US IRS), 294 F.2d 52 (CA9; 1961); and
Abco Oil Corp. v. Commissioner(US IRS), T.C. Memo 1990-40. 
3. Core deposit intangibles: Mid-Atlantic National Bank vs. Commissioner(US IRS), 52 T.C.M.
(CCH) 2368 (1983); and Southern Bancorporation vs. U.S., 732 F.2d 374 (CA4; 1984); and Banc
One Corp. vs. Commissioner(US IRS), 84 T.C. 476 (1985)(affirmed) 815 F.2d 75 (CA6;
1987); and AmSouth Bancorporation vs. U.S., 681 F. Supp. 698 (N.D. Ala.; 1988); and Citizens
and Southern Corporation and Subsidiaries vs. Commissioner(US IRS), 91 T.C. 463 (1988); and
Colorado National Bankshares vs. Commissioner(US IRS), T.C. Memo. 1990-495. 
4. Customer lists: Sunset Fuel Co. vs. U.S., 519 F.2d 781 (CA9; 1975); and Abco Oil Corp. vs.
Commissioner(US IRS); and Panichi vs. U.S., 834 F.2d 300 (CA2; 1987).  
5. Individual or mass asset: Super Food Services vs. U.S., 416 F.2d 1236 (CA7; 1969); and First
Northwest vs. Commissioner(US IRS), 70 T.C. 817 (1978).  
6. Right to solicit bank customers: Mid-Atlantic National Bank v. Commissioner (US IRS).  
7. Excess earnings an index of goodwill: Banc One vs. Commissioner (US IRS); and Citizens and
Southern Corporation & Subsidiaries vs. Commissioner (US IRS).  
8. Contract to deliver a product: United States Industrial Alcohol Co. vs. U.S., 137 F.2d 511 (2d
Cir. 1943).
 
9
On the determinability of the useful life of an asset, see the following US court cases:
1. Customer lists: Golden State Towel and Linen Service vs. U.S., 373 F.2d 938 (1967) 
2. Network affiliation contracts: Indiana Broadcasting Corp. v. Commissioner(US IRS), 41 T.C.
493 (1964)(reversed) 350 F.2d580 (7th Cir. 1965) 
3. Franchises: Dunn vs. U.S., 259 F. Supp. 828 (W.D. Okla.; 1966)(aff'd) 400 F.2d 679 (CA10;
1968); and Super Food Services, Inc. v.U.S. 
4. Use of hindsight: Southern Bancorporation vs. U.S.; and
Banc One Corp. v. IRS Commissioner(US IRS).
5. Advertising renewal contract: Meredith Broadcasting vs. U.S., 405 F.2d 1214 (Ct. CI.; 1969);
and Birmingham News vs. U.S., 224 F. Supp. 670 (N.D. Ala. 1963) 
6. Terrainable-at-will contracts: Super Food Services, Inc. vs. U.S.. 
7. Self-regenerating asset: Banc One Corp. vs. IRS Commissioner; and AmSouth Bancorporation
vs. U.S.. 
8. Leaseholds: Winn-Dixie Montgomery, Inc. vs. U.S., 444 F.2d 677 (CA8; 1971) 
9. Baseball player contracts: Selig vs. U.S., 565 F. Supp. 524 (E.D. Wis. 1983)(affirmed) 740 F2d
572 (CA7; 1984)
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 d) The structure of the XRX Reporting-Unit (ACS) changed substantially immediately after the acquisition –
during the post-acquisition integration.
e) The companies acquired by XRX during 2010 and 2011 substantially affected the nature of the uses and
value of the intangible assets and tangible assets of the applicable XRX Reporting Unit (the ACS subsidiary)
during and after 2010.
f) The Reporting Unit (ACS) ceased to be a going-concern as part of, or immediately after the
merger/acquisition (ACS was merged into XRX’s merger-subsidiary and ceased to exist). In general, customer-
structure intangibles acquired separately from acquisitions of going-concern companies can be classified as
Intangible Assets and are amortizable; whereas customer-structure intangibles acquired as part of a purchase of
a going-concern company are not amortizable (see:
http://www.thefreelibrary.com/Deducting+the+cost+of+intangibles.-a012358478). Three exceptions to the IRS
position that circumvent the going-concern issue include Citizens and Southern Corporation, and Colorado
National Bankshares, and Donrey, Inc. vs. U.S.. 
g) A substantial portion of the Goodwill asset is attributable to Non-compete Covenants. See Schulz vs.
Commissioner.  Buyers can usually classify a Non-compete Covenant as an identifiable Intangible Asset, and
also amortize the cost of a Non-compete Covenant; but the seller must include gains on the sale of the Non-
compete Covenant in its ordinary income.
h) The Merger Agreement for the acquisition of ACS may have created some assets that were not reflected in
XRX’s consolidated Balance Sheet (but may have been inadvertently recorded as Goodwill). For example, see
the following sections of the ACS Merger Agreement: the “Non- Solicitation By company” clause (Section
4.02); the “Reasonable Best Efforts; Further Action” Clause (Section 5.03); the “Company Stock options”
clause (in Section 5.04); the “Company takeover Law” Clause (Section 5.12)........”

10
On the issue of whether a Reporting Unit is an ongoing business or is discontinued, see the following
court cases (http://www.thefreelibrary.com/Deducting+the+cost+of+intangibles.-a012358478): 
1. Customer structure, not mere subscriber list: General Television, Inc. vs. U.S., 449 F. Supp. 609
(D.Minn. 1978), (affirmed per curiam), 598 F. 2d 1148 (CA8; 1979); Finoli vs. Commissioner(US IRS),
86 T.C. 697 (1986); Manhattan Company of Virginia, Inc. vs. Commissioner(US IRS), 50 T.C. 78 (1968)
(acq.) 1974-2 C.B. 3; Holden Fuel Oil Co. vs. Commissioner(US IRS), T.C. Memo 1972-45 (affirmed)
479 F. 2d 613 (CA6; 1973).  
2. Credit information: Computing & Software, Inc. vs. Commissioner(US IRS), 64 T.C. 233 (1975). 
3. Insurance expirations: Decker vs. Commissioner(US IRS), 864 F, 2d 51 (CA7; 1988)(affirmed) T.C.
Memo 1987-332; Richard S. Miller & Sons, Inc. vs. U.S, 537 F, 2d 446 (Ct. Cl.; 1976). 
4. Subscription list: Houston Chronicle Publishing Co. vs. US., 481 F. 2d 1240 (CA8; 1973)(cert. denied),
414 U.S. 1129 (1974); and Donrey, Inc. vs. US., 809 F. 2d534 (CA8; 1987).

 
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