Technology

Why Xerox Needs to Find Another Merger Partner

The COVID-19 pandemic has created massive change inside of corporate America. How business gets done going forward will happen with fewer on-site employees in many companies, and going back to packed offices does not seem to be in the cards, even if a vaccine or treatment for the coronavirus comes out this year. One company that is going to struggle with fewer on-site employees is Xerox Holdings Corp. (NYSE: XRX).

The stock sold off drastically with the market during the panic selling in March, but unlike many other technology giants, its shares have not come screaming back with any sort of strength at all. What is becoming very evident after its earnings report is that the company needs to find another merger candidate, even if the effort to leverage up to acquire HP Inc. (NYSE: HPQ) was a misguided effort that should have been done in reverse.

A drop of 3% or 4% in Xerox might not seem bad considering the selling pressure we have seen elsewhere in tech companies this earnings season, but Xerox lost more than half of its value from mid-February through the March selling peak. And the post-earnings reaction now has its shares slightly worse off than those plunge-depth lows in March. Over that same period, the S&P 500 has recovered more than 40% and the index is still trying to get back to positive for the year again.

Xerox reported net income of $27 million on revenues of $1.465 billion. That is down from the reported amounts of $181 million in net income and $2.26 billion a year earlier. The company’s adjusted per-share earnings, which is the relative basis for analyst reports, were $0.15, which managed to beat a consensus loss of $0.07 per share despite a consensus revenue expectation of $1.48 billion.

What stands out here is that Xerox cited the global COVID-19 crisis as having a significant impact on its revenues as many businesses were closed and as office building capacity restrictions affected customers’ purchasing decisions. Another issue, which also is likely to be permanently changed going forward, is that Xerox saw significantly lower printing volumes on its devices.

The long and short of the matter is that Xerox is going to have to figure out its next-next thing. The chief executive did note that management has now modeled numerous scenarios to ensure flexibility “no matter how the pandemic continues to impact global business,” but it sure seems that Xerox will need more drastic measures than just modeling scenarios.

Note that Xerox had increased manufacturing operations for COVID-19 health care initiatives, such as making disposable FDA-cleared ventilators and hospital-grade hand sanitizer. That is not what investors would have normally expected, and Xerox should be considering if it can continue along that path or related ones.

Xerox shares traded down more than 4% at $15.10 on Tuesday, in a 52-week range of $14.22 to $39.47. Its consensus target price was $18.60.