Xerox Is Still Looking For Wall Street's Respect

It's betting that new Net technologies could do the trick

Xerox Corp. spent most of the '90s reinventing its businesses, switching from the old light-lens copying machines to ones that moved information in bits and bytes. The digital revolution was well under way when Xerox directors charged Richard Thoman with transforming the company into a high-tech thoroughbred. But it hasn't worked out that way. Instead, since he became chief executive in April, 1999, Xerox has lost $20 billion in stock market value. And the old accusation--that Xerox helped usher in the computer age without profiting from it--remains firmly stuck on the Stamford (Conn.) company.

Now Thoman is trying to grab some Internet glamour and tie Xerox' battered stock to it. Net valuations are not what they were, but to Xerox' long-suffering shareholders, they'll still look pretty good. Xerox, at the recent price of 28, sells at around 14 times this year's earnings, which makes it more an Old Economy relic than a beacon of the New Economy (table).

DATA WRAPPER. A tech-savvy IBM alum, Thoman just announced his boldest move yet. He traveled to Xerox' fabled Palo Alto Research Center--birthplace of the computer mouse and the laser printer--to announce a key alliance with Microsoft and the spin off of Xerox' ContentGuard technology into a new company. Xerox will own a majority stake in the new outfit, called ContentGuard Inc., which will be based in McLean, Va. Microsoft will take an undisclosed minority stake. Says Microsoft's Dick Brass, vice-president for technology development and co-chairman of the new company: "We think this is going to be a vast business." ContentGuard creates a hard-to-crack electronic envelope for moving ads, video, books, music and other content over the Internet, and it protects copyrights by giving the sender control over how the material is used. Microsoft plans to introduce the technology this summer in Microsoft Reader, the software it developed for loading electronic books onto palm-size devices. Later on, Microsoft plans to use the technology in Media Player and Windows.

Thoman's plan is to take ContentGuard public as soon as possible. An IPO could bring huge gains down the road, but Thoman is also hoping that he can reap a more immediate reward by changing the market's perception of his embattled company. Clearly, the Xerox execs are thrilled to be partners with Microsoft--despite its public tangles with the feds--because it gives Xerox a high-profile way to assert some of its Internet technologies. "This announcement should demonstrate that we have surprising skills that people don't give us credit for," says Thoman.

He needs a big win. Since Thoman took over, the stock price has sunk under the weight of earnings shortfalls, reorganizational problems, intensifying competition in the core copier business, and a weakened economy in Brazil, an important market for Xerox. On Apr. 25, the company reported first-quarter earnings of 30 cents a share before special charges--a drop of 38%. This time, at least, the stock got a 16% boost by Apr. 26 from the Street because revenue gains exceeded expectations. Thoman's patent strategy paid off a little, too: an extra $40 million, or 3 cents a share, came from licensing fees.

Even with the strong first-quarter sales gains, Thoman has a tough road ahead because his company doesn't have much credibility with the investment community. In the early 1970s, Xerox sported dot-com-like valuations. But over the past three decades, the company squandered many of its technologies, fell behind its Japanese competitors, and made ill-fated acquisitions. Just look at the stock: Shares today trade at only 4 1/2 times the split-adjusted offering price in 1959 of $6.17.

QUICK BOOST. Investors and analysts say a spin-off alone is not going to make Xerox a hot stock. "There'll be a short-term boost," says James W. Lundy, a research director at Gartner Group Inc. "But it doesn't solve the big problems."

Investment adviser Robert E. Torray, whose Bethesda, Md., investment firm holds 3.8 million shares, agrees. What will build shareholder value, he says, is successive quarters of revenue and earnings growth. Splashy spin-offs alone won't do that.

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