| BUSINESSWEEK ONLINE : DECEMBER 27, 1999 ISSUE | ||||||||
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| NEWS: ANALYSIS & COMMENTARY
Xerox: Investors Turn Up the Heat on Rick Thoman The stock has plunged 65%, but the board backs the CEO When G. Richard Thoman took over as chief executive at Xerox Corp. in April, he talked a lot about the company's digital dreams. Now, he's coping with a nightmare as the copier giant's earnings skid for the second quarter in a row. The litany of reasons runs from Y2K worries to a rocky revamp of the sales organization to the still weak Brazilian economy. But with rivals such as Canon USA Inc. (CANNY) reporting record sales, irate investors who have seen two-thirds of their money in Xerox (XRX) stock vanish since May are starting to wonder if Thoman himself should be added to the list. It was the second time in two months that the buoyant executive surprised the Street with bad news. So, is Thoman in danger? On Dec. 13, Xerox Chairman Paul A. Allaire wrote a letter to the company's top corporate officers, saying the board is ''unanimously supportive of Rick,'' despite the ''clearly disappointing performance of the company.'' Allaire, who recruited Thoman from IBM two years ago, stressed that the memo was meant to boost the confidence of employees rather than Wall Street, even as Thoman called it to investors' attention. ''What the board has to do is feel sure that management is addressing the short-term issues while maintaining the right long-term strategy,'' says Allaire. ''And we feel they are doing that.'' ''KISS OF DEATH.'' While Thoman calls the note a positive sign, at least one large institutional investor sees it as an acknowledgement--and a warning--that patience is wearing thin. ''To me, that's the kiss of death,'' says the shareholder, who points out that happy boards don't feel a need to defend management. ''I think the board is saying the same thing I am--we had a great opportunity [so] how did we blow this?'' Good question. Xerox has certainly not lived up to the lofty language of its leaders. Thoman, 55, promised annual earnings growth in the ''mid to high teens'' just before he became CEO. Then, in early October, the stock lost a quarter of its value when he suddenly warned that third-quarter results would disappoint--with profits ultimately coming in at $339 million, 11% lower than a year earlier. On Dec. 10, Thoman was back to say that fourth-quarter earnings would now be 40% below already lowered expectations. Shocked investors revolted once again, driving the stock to about one-third of its $64 high in May--leaving Thoman to ponder what went wrong. ''When you have this kind of destruction of shareholder value, I can say all the words I want, and it doesn't matter,'' Thoman told BUSINESS WEEK. But he's not saying mea culpa either--except to take the rap for the unforeseen costs of consolidating customer administrative centers. That, he allows, is ''one area where we screwed up.'' In other areas, such as an extensive sales force reorganization, he maintains that the company is doing what's needed to transform Xerox and get higher revenue growth. Maybe so, but Canon has been ringing up record sales over the past few months--and seeing its stock double--while the Stamford (Conn.) company was coping with internal chaos and other problems. Not only has the Japanese manufacturer released a new line of higher-speed digital copiers and mid-range printers, but it managed to do so while coping with higher yen costs and Y2K fears as well. ''If Y2K is an issue, then we're in for a fantastic first quarter,'' says Canon spokesman Tim Andree. ROBUST RIVALS. Analysts and investors may support Thoman's long-term vision, but they remain angry with his recent execution. At the very least, they say he should have been more candid about the challenges facing Xerox and more careful about timing big moves when rivals were racing to grab market share. ''The earnings problems they have been experiencing have been largely of their own making,'' says Jack L. Kelly of Goldman, Sachs & Co. The big question is what happens next. Thoman now admits that Xerox may post poor results until the second half of next year, when the reorganization and push to higher-growth businesses such as outsourcing and high-end publishing should start to pay off. Returning shareholders to the happy state they were in when Thoman took over may take longer. As Daniel Kunstler, an analyst at J.P. Morgan Securities Inc., puts it: ''To the extent that any CEO has any honeymoon, his is definitely over.'' For Thoman, just getting investors to stay committed to a relationship with Xerox will be a challenge. By Diane Brady in New York and Pamela L. Moore in Greenwich, Conn. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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