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NEW YORK/TOKYO -- U.S. copier and printer maker Xerox said Sunday that it is terminating a Jan. 31 deal to sell a majority stake to its long-time business partner Fujifilm Holdings, causing a major upset to the Japanese company's plans to strengthen its overseas operations.

Xerox said it has reached an agreement with Carl Icahn and Darwin Deason, two activist investors opposed to the Fujifilm deal. Xerox is now overhauling its board by removing six of its 10 board members and appointing five new ones.

Among the outgoing directors is Jeff Jacobson, the chief executive behind the Fujifilm deal. He will be replaced by John Visentin, who has held positions at IBM and Hewlett-Packard and was a consultant for Icahn in his fight against the Fujifilm deal.

The new board plans to meet immediately and begin a process to evaluate all strategic alternatives to maximize shareholder value, Xerox said.
The U.S. company said it made the decision after Fujifilm failed to deliver audited financials, which it said has limited its ability to consummate the transaction.

It was not immediately clear how the Japanese company will respond to the latest twist in the months-old takeover battle. Fujifilm shares rose 1.3% to 4,295 yen in Monday morning trading on the Tokyo Stock Exchange.

The January deal called for Xerox to give Fujifilm a 50.1% stake in exchange for full ownership of their 56-year-old U.S.-Japanese joint venture, Fuji Xerox. Xerox shareholders were also offered a special cash dividend worth $2.5 billion.

Xerox provides services in Asia through Fuji Xerox, as it focuses on Europe and North America under the partnership arrangement with Fujifilm. It was hoped that the takeover would integrate the operations of Fujifilm and Xerox more closely, streamline their operations, and unify product development and marketing.

Icahn and Deason, who together own more than 10% of Xerox, have been fighting against the sale of Xerox to Fujifilm, saying the deal sharply undervalues the U.S. company.

Icahn hailed Sunday's decision, saying, "We are extremely pleased that Xerox finally terminated the ill-advised scheme to cede control of the company to Fujifilm."

"With that behind us and new shareholder-focused leadership in place, today marks a new beginning for Xerox," he added.

Fujifilm has argued that it has offered a sufficient premium for Xerox shares and has been reluctant to raise the offer price significantly for a U.S. company that has been struggling to grow out of its legacy printer business in the paperless age. Fujifilm argues that the combination would allow major cost-cutting and facilitate collaboration toward growth in emerging markets.

The combination has not been received positively everywhere. Moody's Investors' Service, for one, has placed Fujifilm debt on watch for downgrade, noting that the acquisition would increase its exposure to the declining paper document business.

The board's sudden agreement with Icahn is likely to leave the Japanese company puzzled. Icahn previously said that Jacobson was demanding a large separation package in exchange for resignations, and some are speculating that the board members are now being offered attractive retirement deals by Icahn.

Fujifilm is suing to stop a takeover of the board by Icahn and Deason and has requested that Xerox's board fulfill the agreement reached in January. Fujifilm could take fresh legal action to block the latest decision.

Another possibility is Fujifilm raising its bid for Xerox. Icahn and Deason have said they would consider an all-cash bid of at least $40 per share in what would be a 43% premium to the Japanese company's offer.

Nikkei staff writer Mitsuru Obe in Tokyo contributed to this article.

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