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MONDAY BROUGHT YET MORE of all that as Xerox’s long-suffering stock tumbled another 20 percent in value, to $5 per share — the lowest level in 18 years. The trigger this time? News that Moody’s Investor Services has now downgraded $11 billion of Xerox debt to near-junk status, fueling yet more speculation that the company may soon be headed for bankruptcy court.
In the space of not much more than a year, this once-mighty company has become a basket case. We first began warning that Xerox was headed for trouble back in October of 1999 when it missed its third-quarter 1999 earnings numbers and the company’s brass pathetically blamed the Xerox sales force for being lazy.
(Correction: An earlier version of this story incorrectly stated in the previous paragraph that Xerox missed third-quarter 1998 earnings numbers.)
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Since then, there have been the following noteworthy developments:
Xerox’s stock price has fallen from $43 to $5.
The company’s chief executive — a fellow named Thoman — has been fired and replaced by his boss, a chap named Allaire, who was ultimately responsible for everything Thoman did in the first place.
The company has been locked out of the commercial paper market on which it had become dependent to run the business.
Xerox’s Mexican operations have become the focus of an accounting fraud probe by the Securities and Exchange Commission.
The company’s top-line revenue growth has begun to implode, its inventories have ballooned, its cash flow has collapsed, and it has drawn down 75 percent of a 1997 $7 billion revolving credit line with a group of banks in order to stay in business.
Finally, Xerox is now trying to scrounge up day-to-day working capital by selling off assets — the rough equivalent of trying to stay warm in the winter by burning down the house.
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FINANCES DEVASTATED
Xerox Corporation (XRX)
price change
$4.63 -0.125
Full quote data:price-0.125% change:-2.63%volume:10,462,000day high:$5.00day low:$4.56
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Data: MSN MoneyCentral Investor and S&P Comstock
These developments have devastated Xerox’s finances. The company needs to refinance $1.1 billion of its debt by year’s end, which is literally only weeks away, and, thanks to the Moody’s downgrade, it now must refinance an additional $425 million of derivatives contracts and securitized receivables as well.
If Standard & Poor’s now joins in with a downgrade of its own, Xerox will have to refinance an additional $130 million of obligations, bringing the total to $1.655 billion. A refinancing of that magnitude may well exhaust whatever borrowing capacity is left under the company’s $7 billion bank credit line — and these financing calculations don’t include some $2.5 billion of additionally maturing debt in 2001, to say nothing of operating cash flow needs that some on Wall Street are now estimating could run as high as $1 billion by next June.
A report issued Monday by CS First Boston warns that banks, which are already on the hook for $6.5 billion worth of Xerox borrowings that they’ve not been able to resell, may soon be asked to pony up yet more billions for no other reason than to avoid taking a hit on the credit they’ve already extended.
TOP BRASS TO BLAME
Why all this has happened is something that need not concern us here, except perhaps to note that technology is a relentless taskmaster and that no company can rest comfortably on its past accomplishments in a world in which yesterday has become just another word for ancient history. Xerox is in trouble fundamentally because the company’s top brass failed to realize that copying machines have become little more than the buggy whips of the digital age.
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Instead of responding accordingly, the brass simply managed the status quo — while (naturally) cashing their paychecks. Since 1997, Chairman Paul Allaire has taken home a stupefying $28.6 million in pay and perks, and the underlings at his elbows have been equally well-compensated. Allaire’s top aide — the recently ousted chief executive, Richard Thoman — can now look forward to receiving $800,000 a year for life, for simply agreeing to go away.
Whatever that may say about the nature — and priorities — of Xerox’s top management, investors now have a much more immediate question with which to concern themselves: At Xerox’s current price of $5 per share, is there further downside risk to the stock, or has the slide finally come close to bottoming out?
Given the company’s darkening finances and the risk of looming bankruptcy, it is the liquidation value of the balance sheet that represents the real downside protection for investors. Unfortunately, there may not be much protection there at all.
At Xerox’s current price of $5 per share — and with 667 million shares of common stock outstanding — the company has a market value of $3.34 billion, representing roughly a 20 percent discount from the $6-per-share breakup value of the company suggested by the $4.05 billion of book value on the balance sheet as of Sept. 30.
But even that discount may not be enough. Though the company’s ledger as of Sept. 30 shows total assets of $29.3 billion, at least $4.1 billion of the sum consists of goodwill and other intangibles that are of dubious value at best in a fire sale.
Take those doubtful assets out of the picture, and Xerox’s balance sheet shows no book value at all. And that is even before one gets to some $13 billion in finance receivables that the company is trying, without notable success, to sell. The receivables are certainly worth something, but just as certainly they are not worth the full value being shown for them on the balance sheet.
STOCK HEADING TO ZERO?
Add it all up and, in a worst-case scenario, Xerox’s stock price, having fallen in the last 14 months from $43 to $5, could now finish the downward journey and continue to tumble all the way to zero.
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Any value greater than nothing represents a bet by investors that Xerox will in fact continue as a going concern without wiping out the shareholders in a bankruptcy reorganization first. With Wall Street now looking for somewhere around 66 cents per share in year-ahead earnings for the company, Xerox at its current price of $5 per share is thus selling for a forward price/earnings multiple of 7.6, or about half the price of your average, garden-variety water utility. Is that cheap? Maybe … and then again, maybe it’s $5-per-share too expensive. Your call on that one.
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