Xerox’s Problems May Be Keeping Suitors at Bay

Matters at Xerox Corp. just get worse each day, and now the $4-billion market value of the near-century-old company--a firm once so venerable that its name became an American verb for making copies--is lower than those of upstarts Amazon.com Inc. and EBay Inc.

With the nation’s largest copier company so relatively cheap, why hasn’t another firm offered to buy it?

Lots of reasons, analysts said. Xerox is saddled with a mountain of debt, is losing money, is in the middle of trying to shed assets to raise cash, has bonds trading at deep discounts in the credit markets and is struggling internally to continue developing and marketing new products amid the company’s disarray, they said.

“If you step in there, what are you going to get your hands on?” said Nick Nilarp, an analyst at the credit-rating firm Fitch IBCA, Duff & Phelps. Potential buyers probably “have a wait-and-see attitude,” he added.

Yet analysts also said Xerox, based in Stamford, Conn., has assets that could appeal to an outside firm and still spawn a buyout deal. Xerox has enormous brand recognition, a huge installed base of customers, considerable technical talent among its 94,000 employees and a global reach that includes joint ventures in fast-growing regions such as Asia.

But those qualities have been overwhelmed by Xerox’s rapid decline. The company has been battered by competition--especially in the market for its most profitable, high-end copiers--from the likes of Canon Inc. of Japan and other rivals.

Xerox also has struggled to evolve from a maker of stand-alone copiers and printers to a top provider of networking imaging products that are increasingly in demand in digital offices. Plus, the company has suffered massive billing glitches that resulted in customers’ delaying or refusing to pay their bills, increasing the number of bad debts for Xerox.

As a result, the company lost $167 million in last year’s third quarter and has predicted an even bigger loss for the three months ended Dec. 31. The company also has exhausted the last of a $7-billion line of credit, putting more pressure on it to divest assets and cut costs to preserve cash.

Xerox overall has about $17.5 billion of debt on its books, and about two-thirds of that belongs to the company’s financing unit, which makes loans to customers to buy and lease Xerox machines, analysts said.

Put another way, Xerox’s debt is four times larger than its stock market value. Xerox’s stock closed Tuesday at $5.88 a share, down 50 cents on the New York Stock Exchange. And the company’s bonds are trading for only 40 to 70 cents on the dollar, Nilarp said.

That debt burden keeps raising speculation that the company might have to resort to U.S. Bankruptcy Court protection to reorganize its debts. Indeed, Xerox denied a report Tuesday in the New York Post that it had retained investment firm Blackstone Group as a bankruptcy advisor, though it confirmed that Blackstone is among several advisors that Xerox is using for overall guidance.

“Xerox has no plans to file for bankruptcy” and currently has $1.4 billion of cash that should meet its “current and anticipated needs,” said company spokeswoman Christa Carone. She declined to comment on whether Xerox has been approached with a buyout offer and added that Xerox “is very much committed to executing its turnaround plan.”

Several investment bankers who specialize in mergers but asked not to be identified said they did not expect a merger candidate to step forward any time soon, because of Xerox’s tarnished reputation and the sense that Xerox is edging close to bankruptcy.

“Everything I hear is that their capital structure has put them in a position where they are having a liquidity crisis,” one banker said. “Their debt securities are trading off dramatically and there is a sense the company is preparing for bankruptcy.”

For Xerox to be more alluring to a buyer, it first must divest its financing division, said David Giroux, an analyst with T. Rowe Price & Associates Inc., a Baltimore-based mutual fund company that owns Xerox stock.

“The critical thing is getting that off of your balance sheet, because you then give yourself time to fix your operations,” Giroux said.

To be sure, there already have been rumors that printer giant Hewlett-Packard Co. and copier rival Canon Inc. of Japan have approached Xerox, but nothing has been announced. Other potential suitors include a German company, Heidelberger Druckmaschinen, which bought Eastman Kodak Co.’s copier business in 1999; Fuji Photo Film Co., one of Xerox’s joint venture partners; and private investment firms that specialize in buying distressed companies.

Giroux discounted Canon as a potential buyer because it could run afoul of U.S. antitrust regulators who might fear that the merger would harm competition in the copier market.

“I would think Fuji would be the most logical candidate,” Giroux said. Xerox already is negotiating to sell half of its 50% stake in Fuji Xerox to Fuji Photo, so “why doesn’t Fuji just buy the whole thing for $5 billion or $6 billion?” he said.

James Chung, head of financial relations at Fuji’s U.S. headquarters in Elmsford, N.Y., declined to comment on Xerox.

On Wall Street there are fundamental questions about the company’s capital structure, coupled with questions about Xerox’s products, other investment bankers said. “The Street’s perception is that the world has passed them by,” one said.

So if a company is interested in buying Xerox, it probably would wait until Xerox enters bankruptcy proceedings, another banker said. “If the bonds are trading at a significant discount to par, it’s very unlikely anyone would buy Xerox pre-bankruptcy.”

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Any Takers?

As Xerox Corp.’s performance has nose-dived, so has its stock price, raising the question of why another company hasn’t stepped forward to buy the nation’s largest copier maker.

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Weekly closes and latest for Xerox on the NYSE

Tuesday: $5.88, down 50 cents

Source: Bloomberg News