Paper Jam! How Carl Icahn And a Billionaire Partner Blocked Xerox’s Merger with Fujifilm

May 21, 2018, 10:30 AM UTC

Carl Icahn typically works alone. The dark prince of corporate raiders shuns the usual clutch of outside attorneys, investment bankers, and PR firms that rival activists assemble for their assaults. Instead, Icahn relies on an in-house team of fewer than a dozen financial analysts and lawyers, a brain trust that toils alongside their controversial, 82-year-old boss on the 47th floor of Manhattan’s General Motors Building. But that’s just his support staff. As for partners, well, what’s the point?

Icahn, whose Icahn Enterprises ranks No. 136 on this year’s Fortune 500, hardly needs any financial backing. He commands a war chest in cash and securities of more than $30 billion. Neither does he crave any counsel from peers on strategy. Icahn prides himself on personally composing the notorious attack letters he sends to boards of directors, piling on outraged barbs to skewer “ostrich” directors “with their heads in the sand” or those who’ve agreed to sell their companies “for a bowl of porridge.”

Photo Illustration by Iamalwayshungry; Icahn: Neilson Barnard—Getty Images for The New York Times; Komori: Akio Kon—Bloomberg via Getty Images

It was certainly Icahn’s intention to go it alone again when, in late 2015, he identified Xerox as a target. The once-great company was an ideal candidate for Icahn. It consisted of two divergent businesses, both of which were performing poorly—its traditional office products franchise, and a large division that provided back-office bill-paying and data processing services to companies and governments, a field called business process outsourcing (BPO). Icahn reckoned that he could clean up by prodding Xerox to spin off its BPO arm. Instead of a muddled mass no one wanted to buy, Xerox would split into two pure-play companies—either of which could be a takeover target at a fat premium. If buyers didn’t show up right away, Icahn figured he could improve performance by installing new management and profit by driving up each company’s stock price.

“Xerox was one of the worst-run companies I ever saw,” Icahn tells Fortune. “Both sides of the business were being mismanaged. It was a no-brainer to split it up and bring in new management. Xerox was doing nothing with a great brand—how many companies have a name that doubles as a famous verb?”

Icahn got his way when, at the beginning of 2017, Xerox spun off the BPO business as a new company called Conduent. And so far that half of the deal has proved a winner: Conduent has flourished, and its solid stock performance has generated a return of more than $100 million for Icahn.

Fujifilm chairman and CEO Shigetaka Komori has hungered to buy Xerox for decades.Akio Kon—Bloomberg via Getty Images
Akio Kon—Bloomberg via Getty Images

But Icahn’s crusade to cash in on Xerox, where he’s the largest individual shareholder with 9.2% of the stock, has proved to be one of the most complicated of his half-century career. It’s been so challenging, in fact, that Icahn has made an exception to his usual rule and teamed up with a partner: Darwin Deason, a feisty 78-year-old who sold the outsourcing business that now constitutes most of Conduent to Xerox in 2010 for $6.4 billion and remains Xerox’s third largest shareholder. Except in age and wealth, the two men are the oddest of pairings. The 6-foot-4 Icahn, who’s never lost his thick Queens accent despite a Princeton education, is a creature of Wall Street, and the quintessential deal junkie. The compact Deason—who in both tenacity and appearance resembles a bulldog—is a business builder who grew up on a farm in Arkansas. With a combined age of 160 and combined Xerox holdings of 15.2%, they make a formidable duo.

Icahn and Deason joined forces to block what each regarded as a terrible deal: the planned $6.1 billion acquisition of Xerox by Japan’s Fujifilm. And on May 13, they won a significant victory in their battle when the Xerox board announced that it was pulling out of the agreed-upon merger with Fuji. In blocking the purchase, they appear to have outmaneuvered a foe whose power and savvy rivals theirs—Shigetaka Komori, Fujifilm’s CEO and chairman. Until Icahn and Deason teamed up, it appeared that Komori, 78, would cap his career by capturing an American icon on the cheap. Komori, who played American-style football at the University of Tokyo, is a self-described business “warrior” who’s one of Prime Minister Shinzo Abe’s closest friends and favorite golfing companions.

The Xerox board’s decision to back out of the merger—a move that Fujifilm says it will contest—is just the latest twist in one of the wildest, most unpredictable Wall Street showdowns in years. And the anatomy of the conflict, extensively revealed in court records as well as testimony at trial by the main participants, exposes one of the most naked accounts of governance gone awry in corporate history. This two-year melodrama features a bitterly divided board and a former CEO who, days before he was scheduled to be fired, appeared to have saved his job by delivering a deal so favorable to Fuji that the Japanese giant could hardly say no—only to see the agreement fall apart under pressure from Icahn and Deason.

Carl Icahn insisted any purchase had to come with a premium for shareholders.Brendan McDermid—Reuters
Brendan McDermid—Reuters

“The stuff that went on behind the scenes at Xerox is so crazy you’d be amazed to see it on [the TV series] Billions,” says Icahn. “If it hadn’t actually happened, I wouldn’t have thought it was possible.”

It might seem ironic that Xerox, an American icon that time forgot, stands at the center of one of the most contentious takeover battles of the current millennium. But Xerox remains a big player in a giant industry—the $180 billion worldwide printing and documents field. Even after spinning off Conduent, Xerox is still big enough to rank No. 291 on this year’s Fortune 500 list with $10.3 billion in sales. And its still-powerful brand and potential to expand into the fast-growing business of industrial printing give Xerox viable turnaround prospects.

The deal for the company nixed by Icahn and Deason amounted to the sale of the majority ownership in Xerox to an existing joint venture with FujiFilm called Fuji Xerox—a business that exclusively makes and sells Xerox products in Asia, and manufactures most of the office copiers that Xerox sells in the rest of the world. Xerox shareholders would have held 49.9% of the new Fuji Xerox, and Fuji would have held the controlling 50.1% stake. Fuji would have put none of its own cash into the deal. Rather, it would have merely contributed its majority share in the existing joint venture. Xerox shareholders would have received a $2.5 billion one-time dividend—not paid by Fuji, but financed by adding the equivalent amount of debt to the new Fuji Xerox.

Icahn and Deason charged, correctly, that this complex transaction would have enabled Fuji to take full control of Xerox while paying little or no premium. Great for Fuji—not so great for Xerox shareholders. Most takeovers include a “control premium” of at least 20% to 30%. And ceding control to Fuji meant that Xerox’s owners would have no sway over management decisions—an unacceptable outcome for Icahn. “It was not just a sweetheart deal for Fuji,” says Icahn. “You’d be trading full ownership of this great company to be in the minority forever. No matter what Fuji did with the business, your 49.9% is going to be completely powerless.”

Billionaire Darwin Deason, Xerox’s third-largest shareholder, filed a pair of lawsuits to stop the merger with Fujifilm, and won both.Courtesy of Darwin Deason
Courtesy of Darwin Deason

The two angry billionaires fought the deal in their own ways. Icahn deployed his preferred plan of attack, the proxy battle. Deason pledged to back Icahn’s slate of four new directors, but also went his own way by fighting in the courts. He brought two sweeping lawsuits through his attorneys at King & Spalding, unveiled in February and March. The first claimed that because Xerox had concealed a poison pill provision, the company was obligated to grant Deason’s demand to extend the nominating deadline so that he could replace the entire board. The second, brought against both Xerox and Fuji, charged that Xerox’s board and CEO blatantly violated their fiduciary duties by negotiating a deal that promoted their own interests, while sticking Xerox shareholders with a bad deal, and accused Fuji of conspiring in a quid pro quo—the CEO delivers a bargain price, and Fuji puts him in charge of the new Fuji Xerox.

Icahn didn’t join Deason’s suits. “I find suing boards distasteful,” he tells Fortune. “Once we’re inside the boardroom, we try to work collaboratively with other directors.” But it was his partner’s assault in the New York courts that laid bare the inside story. The court records exposed a trove of frequently shocking emails, texts, depositions, and internal reports from executives, directors, and financial advisers at Xerox, and top managers at Fuji.

At a trial in Manhattan over two days in late April—the two lawsuits were consolidated and decided together—Xerox’s then-CEO Jeff Jacobson, its chairman Robert Keegan, a dissident director, and its investment banker all gave extensive testimony under oath. This reporter attended the trial and reviewed the more than 700 exhibits, all unsealed by the judge. Fortune also talked extensively with Icahn and representatives for Deason. Xerox and Fuji both declined to make any of their executives or directors available for interviews, citing the litigation. But the testimony, depositions, and emails provide a rare window into the motives and thinking of all the players.

At the conclusion of the trial, Judge Barry Ostrager—himself an esteemed former M&A litigator with more than 40 years in private practice—issued a scalding opinion that granted Deason big wins on both of his suits. He also delivered a stinging condemnation of the role of Jacobson, Keegan, and Xerox’s directors, stating that Jacobson was “massively conflicted” in his negotiations with Fuji because delivering a sweetheart deal promised to save his job. As a result, Ostrager wrote, Jacobson was “in breach of his fiduciary duties,” as was Keegan.

In their legal filings, Xerox and Fuji present a righteous scenario that echoed in the testimony from Jacobson and Keegan. Their attorneys argue that Jacobson, Keegan, and the board pursued a deal with the only logical buyer, when no other acquirers were interested. Fuji argues that Jacobson wasn’t promised the CEO job—a view contradicted by directors—but was simply its top choice as “a talented executive well-suited to achieving the synergies that will benefit shareholders of Fuji and Xerox alike.” Keegan was fully justified in assigning the CEO to negotiate a deal without the full board’s approval, argued Xerox’s attorneys, and Keegan testified that he encouraged the board to reverse its decision to fire Jacobson because his performance suddenly improved in late 2017. In his testimony, Jacobson called the suggestion that he put his or Fujifilm’s interests before those of his shareholders “reprehensible and unconscionable.”

The overwhelmingly pro-Deason decisions kicked off a tumultuous two-week period of reckoning: Xerox first announced a settlement with Icahn and Deason, then withdrew from it and engaged in talks with Fujifilm that turned acrimonious. Then, on May 13, Xerox’s board reversed itself again—coming to terms with Icahn and Deason and announcing that the merger was terminated and Jacobson was out as CEO. Keegan and four other directors also departed, to be replaced with execs chosen by Icahn and Deason. The new CEO is John Visentin, a well-regarded turnaround expert in data processing.

Xerox now says it will field offers from all interested bidders. Meanwhile, Fuji is still battling to revive the original deal and released a defiant statement after Xerox pulled out: “We do not believe that Xerox has the legal right to terminate our agreement, and we are reviewing all of our available options, including bringing a legal action to seek damages.” To understand how the two companies reached such an impasse, it helps to review the history between them.

By the time Icahn zeroed in on Xerox in late 2015, the company had been shrinking for decades. Started as a photographic-paper maker in Rochester, N.Y., in 1906, the company introduced the world’s first high-speed copiers in the late 1940s, and thrived as its hardware formed the essential engine room for document production inside big companies, law firms, and government agencies. But starting in the 1980s, mass adoption of the personal computer sharply curtailed the need for paper printing and copying. As its key patents expired, Xerox faced stiff competition from Japanese rivals Ricoh and Canon, as well as Hewlett-­Packard in the U.S.

To counteract flagging sales in its core franchise, Xerox (now based in Norwalk, Conn.) diversified into such fields as financial services, and most recently, the 2010 purchase of Affiliated Computer Services, the outsourcing outfit founded by Deason. Those businesses fit poorly with making and selling printers and copiers, and Xerox exited most of them—while at the same time engaging in round after round of restructuring. Remarkably, Xerox’s highly lucrative, if shrinking, managed print services franchise—in which it furnishes a full package of hardware, supplies, and maintenance to big companies—combined with constant cost-cutting have kept free cash flow at healthy levels. Hence, Xerox is today a gradually melting iceberg, but far from a catastrophe.

Xerox’s partnership with Fujifilm dates to 1962, when Xerox and Fuji formed an alliance to manufacture and sell Xerox office products in Fuji’s home market of Japan. For 39 years, Xerox and Fuji were equal partners, each holding 50% of the shares. Then came a pivotal moment in the year 2000. A botched restructuring of its sales force hammered Xerox’s revenues, and it was drowning in debt. As Xerox stood on the brink of bankruptcy, CEO Paul Allaire rushed to raise cash by selling assets. First, Xerox sold its China franchise, which it owned independently, to Fuji Xerox for $550 million. Then in early 2001, it pocketed $1.3 billion in exchange for 25% of Fuji Xerox—giving Fuji a 75%, controlling stake in the joint venture. As a result, Xerox now owns just one-fourth of the vehicle with exclusive rights to make and sell its products in the $35 billion Asia and the Pacific Rim markets. And as Xerox weakened, Fuji got stronger. Under Komori, it avoided Kodak’s fate by successfully diversifying from photographic film into such growth fields as medical equipment and cosmetics. The sales assured that Fuji would benefit disproportionately from growth in Asia, even though Fuji Xerox relied heavily on Xerox’s patents and engineering.

The damage to Xerox, however, extended far beyond its diminished share of sales and profits. The 2001 transaction included a new agreement called the Joint Enterprise Contract or JEC, that outlined the governance rights of the two partners, and established severe penalties that would be triggered by a sale of Xerox. It’s the combination of the JEC, and a second pact—the Technology Agreement or TA—that puts Xerox in a real bind. Each TA runs for five years; the current one, approved by former CEO Ursula Burns in 2016, expires in March 2021. Under the two agreements, if Xerox is sold, it not only loses its governance rights, it can’t regain its brand name in Asia until the TA expires, and doesn’t get it back exclusively for another two years.

Icahn pressured Xerox CEO Ursula Burns to split the company and spin off its outsourcing business. She did at the beginning of 2017 and stepped down as chief executive.Eric Piermont—AFP/Getty Images
Eric Piermont—AFP/Getty Images

What would this mean for a potential buyer? If the JEC and TA went unchallenged, a rival or private equity firm that buys Xerox would have no say in running Fuji Xerox and would be unable to independently and exclusively make and sell Xerox products in Asia until early 2023.

Together, the two agreements add up to a crippling so-called poison pill for Xerox—making a sale to a partner other than Fuji extremely difficult. Incredibly, the existence of the provisions was never disclosed publicly until Xerox and Fujifilm announced that they were merging on Jan. 31. By that time, Icahn and Deason were already fuming.

Icahn had been trying to install new leadership since he first got into Xerox’s stock. “I wanted new, competent management at both Conduent and Xerox,” says Icahn. “I told Burns I didn’t believe she should run either one.” (Burns declined to comment for this story.) In mid-2016, Icahn reached an agreement with the Xerox board that he reckoned would smooth the way to naming an outside CEO. He signed both a “standstill” pact, under which he pledged not to challenge the Xerox board in a proxy fight, and a nondisclosure document that entitled him to inside information that he was obligated to keep secret. In exchange for those concessions, Xerox agreed to name an Icahn lieutenant, Jonathan Christodoro, first as an observer to the board, then as a full member starting in mid-2016. But in June, Burns announced that her No. 2, Jeff Jacobson, would succeed her as CEO. He was exactly what Icahn didn’t want. “Jacobson was an acolyte of Burns,” says Icahn. “He was part of the team that badly hurt Xerox.”

At first, however, it appeared that Jacobson, who took over for Burns on Jan. 1, 2017, might deliver the kind of deal that Icahn wanted. The following account is extensively documented in the court records. During Jacobson’s first visit to Fuji’s Tokyo headquarters in early March, Komori and president Kenji Sukeno expressed interest in purchasing 100% of Xerox in an all-cash transaction, and noted that they understood that a typical premium would amount to 30% over Xerox’s current price of $30. On March 16, Jacobson, after consulting with the board, wrote a letter to Fuji confirming that Xerox wanted only an all-cash transaction at an “appropriate premium,” and had no need to do a deal since it was pursuing a highly promising standalone plan that would “drive growth well above our peers.”

Why did Fuji suddenly suggest a 100% deal when it already got most of the benefits from Fuji Xerox, and had never before proposed buying all of Xerox? The answer is probably that Fuji was concerned that, with Xerox now a pure-play in document management post-split, other suitors might pounce. The joint venture agreements provided protection, but it was also possible that they could be circumvented.

But the deal talks were soon derailed by controversy. On April 20, 2017, Fujifilm publicly disclosed a gigantic accounting scandal at Fuji Xerox that, it revealed, would saddle Fuji and Xerox with big losses (although it didn’t disclose an amount at the time). Fuji, who controlled management of Fuji Xerox, delayed filing its quarterly statements for the first time in its 83-year history. Because of the scandal, Fuji informed Xerox that it needed to concentrate on fixing Fuji Xerox and couldn’t proceed with an acquisition.

Meanwhile, Xerox’s board was facing another crisis—of leadership. The directors were already losing confidence in the company’s new CEO. At a board meeting the day the scandal broke, held on the phone, a number of directors skewered Jacobson’s early performance. In his handwritten notes from the meeting that were later submitted to the court, Keegan, soon to replace Burns as chairman, recorded complaints that Jacobson was “too slow on the learning curve,” “a whiner,” “overconfident,” and exhibited “poor listening skills.” Keegan also jotted down a prophetic question, “Do we need him to complete ‘Juice’?” referring to the code name for a Fuji-Xerox transaction.

Monitoring the situation from his sumptuous 203-foot, Italian-built yacht in the Caribbean, Deason was getting worried. He didn’t know about the poison pill provisions, but he was suspicious that Fuji had some kind of a string on Xerox. Deason is every bit Icahn’s match in grit. The day after his high school graduation, he left the farm where he was raised for a job in the mailroom at Gulf Oil in Tulsa. There he hung out with the data processing folks. Moving to Texas, he pioneered the processing of ATM transactions for banks. In 1988 he founded Affiliated Computer Services—a major customer was E-ZPass. He describes the way he ran things thusly: “You’re on a treadmill going 100 mph, so if you’re just going 80, you get thrown off. It’s self-policing.”

In late May, Deason wrote a private letter to Xerox expressing alarm that conditions hidden in the agreements threaten “a potentially major loss in value for Xerox in any change in control of the company.” In response to Deason’s request, Xerox stated that it would only release the agreements if Deason would sign his own NDA. Deason refused, and had little contact with Xerox until January when reports of a possible Fuji deal broke in the Wall Street Journal.

Jacobson claimed in his testimony at trial that, until mid-May, he had no idea the board was dissatisfied with his performance. But he soon learned where he stood with Icahn. The activist invited Jacobson to his penthouse apartment adjacent to Manhattan’s Museum of Modern Art for dinner and some frank talk. According to both Fortune’s interviews with Icahn and Jacobson’s notes and testimony, Icahn told Jacobson that he wanted Xerox sold—and if Jacobson couldn’t sell it, Icahn would push to have him replaced. Jacobson took umbrage with the threat. “I told him the worst thing you can do to me is that I go back to my beautiful wife and beautiful family,” Jacobson testified. (Jacobson declined to be interviewed for this story.) Icahn also expressed extreme disappointment in Jacobson’s “Long Range Plan” for growth, which was targeted at raising EPS by a mere 8% over five years. “I told him, ‘We understand numbers,’ ” says Icahn. “This plan produces no value for shareholders.”

Icahn shared his dim view of Jacobson and his strategy with Keegan. And soon after Keegan decided, according to his testimony, that only one path remained for the board. Xerox “needed to sell post haste.”

Jacobson grabbed the baton, and pushed hard with Fuji to restart talks. To ratchet up the pressure, he invoked the looming threat of Icahn—especially the idea that Icahn might try to end the joint venture, using the accounting scandal as an out. In late June, Jacobson emailed Keegan, “I did play the Icahn card as a reason we need a sense of urgency and they [Fuji] appreciate this.”

Jeff Jacobson took over as CEO of Xerox in 2017 and quickly lost the confidence of both Icahn and the board. He took the lead in negotiating the merger deal with Fujifilm.Imago—ZumaPress

Also in June, Fuji released an independent report on the Fuji Xerox accounting scandal that put the total losses at $360 million, including a $90 million hit to Xerox. The report also assailed a “culture of concealment” at Fuji Xerox, and slammed Fuji for lax oversight. At an earnings briefing on June 12, Komori bowed and apologized for the scandal.

Two watershed moments came in July. The first was a meeting on July 10 at the Manhattan offices of Centerview Partners, Xerox’s bankers, between Jacobson and two leading executives from Fuji. The Fuji camp dropped what should have been a bombshell, stating that a deal for 100% of Xerox was now impossible because Xerox was too expensive—a puzzling assertion, since its stock price was 3% lower than when Fuji expressed interest in a 100% acquisition in March. But instead of maintaining its long-held position that only a 100%, all-cash transaction would work, the Xerox camp voluntarily advanced an extraordinary proposal: Centerview suggested that Fuji purchase just over 50% of Xerox in a deal that, the bankers said, would require no cash outlay.

Centerview had used a similar formula in H.J. Heinz–Kraft Foods merger under which Heinz shareholders owned 51% of the new company, Kraft Heinz. It’s not clear if the idea came from Centerview or Jacobson; Jacobson claims that Centerview introduced the concept. But Jacobson embraced it. The same day, he texted Keegan and director Ann Reese that “I threw a Hail Mary pass. The door is open and we may have a chance.” But he had effectively taken the all-cash buyout proposal off the table.

Because he’d signed an NDA, and could get reports from Christodoro, Icahn soon learned about the 49.9% minority proposal, and he was anything but happy. Icahn’s position was that either Fuji paid what he called “real money,” or as Icahn puts it, “We’d gradually take business away from Fuji Xerox and eventually terminate the joint venture and take back the Xerox name in Asia,” a prospect Fuji obviously dreaded.

Despite Icahn’s constant demands, it wasn’t until mid-October that talks resumed in earnest. At Jacobson’s prodding, Fuji finally hired a financial adviser, Morgan Stanley. Although Jacobson had been Xerox’s sole face in the negotiations, the board made a pivotal decision in late October: It would replace Jacobson with John Visentin, an IBM veteran who’d revitalized document outsourcer Novitex, and whom Icahn strongly endorsed. Vistentin, in fact, was to start work on Dec. 11, the deadline for Icahn to file for a proxy fight.

The board also unanimously decided that Jacobson should halt all negotiations with Fuji. According to testimony from two directors, the board determined that talks should be conducted by Visentin when he took charge. On Nov. 10, Keegan, who’d just recovered from foot surgery, met with Jacobson at Westchester County Airport and told him that the board was seriously considering replacing him. According to both parties, Keegan told Jacobson that no final decision had been made. Christodoro and director Cheryl Krongard, however, insist that the board had indeed spoken.

But Jacobson had an ace to play. Top executives from Fuji were scheduled for a meeting to discuss a deal on Nov. 14 in New York, and Jacobson was slated to meet with Komori in Japan on Nov. 21. When Jacobson informed Takashi Kawamura, Fujifilm’s chief of planning, that the meetings had to be canceled, Kawamura texted back that CEO Komori ”would be very disappointed” if the meetings didn’t go forward, and that the two sides “may lose the momentum of the deal.” Jacobson relayed the news to Keegan.

Then came another shocking twist: Keegan reversed the unanimous decision of the board and allowed Jacobson to keep talking to Fuji. “I made a battlefield decision,” said Keegan in his testimony. Keegan’s notes show that he clearly believed that, whatever his weaknesses, Jacobson was critical to clinching the merger. Keegan told only the bankers from Centerview and one director, Ann Reese, that he’d allowed the soon-to-be-fired Jacobson to remain point man on the deal.

Given a reprieve by his chairman, Jacobson was getting support and encouragement from Fujifilm. Kawamura sent chummy messages to the CEO touting their alliance against Icahn. “We should be the one team to fight against our mutual enemy,” Kawamura texted to Jacobson on Nov. 12. “We are aligned my friend,” replied Jacobson. The day before Jacobson’s meeting Komuri, Kawamura sent Jacobson a text strongly implying that Komori wanted to help protect Jacobson’s job—writing that Komori “would focus on hearing current situation surrounding you and what we can do.” Jacobson then texted Centerview’s Hess, “Kawamura told me that there is no deal without me.” At his meeting with Komori on Nov. 21, Jacobson proposed that Fuji offer a one-time dividend of $2 billion as part of the deal, hardly a big number.

By keeping Jacobson, Keegan was severely antagonizing his biggest individual shareholder. Icahn was constantly calling Keegan to deliver on installing Visentin as CEO, and according to Icahn, Keegan kept saying the change was imminent. “Keegan talked and talked,” says Icahn. “He kept saying that Visentin was about to take over, but he was just stalling. Meanwhile, Jacobson is conniving behind the scenes. I wish he were half as good at running the company as he was at conniving. I’d have made a lot of money.”

On Nov. 30, Fuji sent Xerox its formal offer, echoing the structure proposed in July, giving Xerox 49.9% of Fuji Xerox, and in addition, the $2 billion dividend Jacobson had suggested. Keegan presented the offer at a board meeting on Dec. 4. Most—if not all—of the directors besides Keegan and Reese were unaware that Jacobson had been meeting with Fujifilm. Several expressed shock that Jacobson had negotiated a transaction when the board had unanimously barred him from even talking to Fuji three weeks before.

Because of his NDA, Icahn was cleared to track board deliberations and he quickly learned of the proposed terms of the deal Jacobson had negotiated with Fujifilm. “That’s when I blew up,” says Icahn. “Keegan keeps saying, ‘Trust me.’ Then I see the deal and say, ‘You came up with this? Are you crazy?’ He tried to flimflam me! We all agreed Jacobson couldn’t run Xerox. How’s he going to run a company twice that size?”

Christodoro resigned from the board in protest on Friday, Dec. 8. His departure freed Icahn from his standstill agreement, and allowed Icahn to name a slate of four directors, which he did on Monday, Dec. 11. According to court documents, Jacobson, Keegan, and executives at Fuji were hoping that the terms would satisfy Icahn, but were also keenly aware he might bolt and launch a proxy battle.

In its presentations to the board, Centerview argued that the transaction presented an excellent opportunity for Xerox to rid itself of Icahn. That’s because transactions recommended by a board almost never lose a shareholder vote. The plan was to hold both the election for directors and the vote on the deal back-to-back at the annual meeting. Shareholders would only support the Icahn slate if they opposed the deal, and according to Centerview, that was highly unlikely. Hence, the best bet was that Icahn would sell his shares before the vote, or face defeat at the annual meeting.

As the proposed transaction careened forward in January, Jacobson appeared to cement his hold on the CEO post of the new Fuji Xerox. On Jan. 16, Kawamura texted Jacobson, “I clearly told Komori to tell Keegan that he wants Jeff to be CEO.” In reality, that’s not quite what Komori requested. Komori had suggested co-CEOs, one to be named by Fuji. But when Keegan demurred, Komori dropped the request. Jacobson maintains that his becoming CEO was not a condition of the deal. But in her testimony, board member Krongard stated that both Centerview and outside counsel Paul Weiss Rifkind Wharton & Garrison told the board that making Jacobson CEO was indeed a requirement. On the witness stand on April 27, Centerview’s David Hess, when he was asked “whether it’s correct Centerview advised the board about whether Mr. Jacobson had to be CEO of the combined company for the deal to proceed,” answered simply, “Yes.”

Xerox and Fujifilm announced the merger on Jan. 31. After last-minute lobbying by Keegan, Komori had agreed to raise the dividend modestly, to $2.5 billion. Xerox’s stock traded up modestly at first, then drifted back down as investors drilled into the details. As part of the deal disclosures, Xerox for the first time published the full joint venture agreements—the poison pill. Deason went ballistic and began preparing his lawsuits.

Another disclosure, too, would come back to undermine the merger. In the mad rush to complete the deal, Xerox and Fuji decided not to wait until Fuji Xerox submitted audited financial statements that put a final number on its losses from the accounting scandal. According to Xerox, the transaction’s terms stipulated that if the losses far exceeded those in the unaudited statements, Xerox could cancel the merger. On April 24, Fuji Xerox finally unveiled the audited numbers—and they showed that the losses had jumped from a preliminary estimate of $360 million to a definitive $470 million, a difference of 31%. Xerox’s loss ballooned from $90 million to $118 million. And indeed, Xerox ultimately cited the accounting imbroglio as the basis for nixing the deal.

There was a final bit of drama before the merger agreement fell apart. The narrative is disclosed in the Notice of Termination that Xerox sent to Fuji on May 13. Xerox states that the accounting debacle gave it the right to cancel the deal, because Fuji Xerox both missed the deadline for submitting the audited numbers, and because those numbers diverged sharply from the original estimates.

But the filing also reveals, for the first time, efforts by Jacobson to salvage the deal by getting better terms—even though Xerox was arguing publicly that the existing deal was a winner for shareholders. Jacobson lobbied for a better price during two meetings with Komori in Tokyo during March and April. And Keegan appealed to Komori by videoconference on April 24, two days before the trial began. The day after Judge Ostrager issued his decisions in favor of Deason, Keegan made further entreaties in a letter to his Komori. And on May 9 and 10, Xerox’s bankers and lawyers made their case to their counterparts from Fuji. Xerox’s request: that Fuji add $1.25 billion to the dividend, not by piling more debt on Fuji Xerox, but from Fuji’s own cash horde. That increase would have handed shareholders an extra $5 a share, or around 17%.

Komori wouldn’t bite. He told Keegan he wouldn’t be available to discuss any new terms until the week of May 21. The rift grew deeper when Fuji issued a press release on May 10, stating that it had received no new proposal from Xerox, even though Xerox had been championing the extra dividend as the deal’s salvation. As Xerox states in the Notice of Termination, “That statement was clearly false. It does establish, however, Fuji’s lack of good faith.”

While Fuji fumes, Icahn and Deason are celebrating their victories in court and on the board. With Visentin in place as CEO, they’re hopeful that Xerox’s results will start to improve. And with the merger off, they hope to see a true auction process for the company. If Fujifilm tries to enforce the poison pill to block a deal, it’s likely that Icahn and Deason would use the accounting scandal to challenge the move in court.

Meanwhile, the two partners have a bet to settle. Fortune has learned that Icahn and Deason wagered $50,000—in cash—that Deason would lose his lawsuit to push back the deadline for nominating directors, and the Texan gladly took the bet. “I generally don’t lose a lot of bets. I guess that’s why people say never bet against Carl Icahn,” says Icahn, chuckling. “But I’m happy to lose this one.” Now he and Deason are wagering that together they can finally win big with Xerox.

This article originally appeared in the June 1, 2018 issue of Fortune.

Subscribe to Well Adjusted, our newsletter full of simple strategies to work smarter and live better, from the Fortune Well team. Sign up today.

Read More

CryptocurrencyInvestingBanksReal Estate