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Troubled Xerox searches for a new direction
But that won't be easy in post dot-com boom era
Copier company aims to duplicate its prior success


M. COREY GOLDMAN
SPECIAL TO THE STAR INVESTING

Montreal—In the age of sizzling dot-com booms and busts it is easy to forget the many North American companies of yore that developed technologies that revolutionized the modern world.

IBM is an obvious one, as is Kodak. RCA had its name on a radio in practically every living room in North America in the 1940s, while Ford, Chrysler and General Motors put cars in millions of residential driveways, before the first Volkswagens, Nissans and Toyotas arrived on North America's shores.

But that same nostalgia doesn't quite hit home when it comes to Xerox. The document company's slogan is perhaps one of the more recognized, but few would equate its products — those massive copy machines that love to munch paper and spread black ink all over your hands — as one of the more glamorous inventions of our time.

It took the better part of 20 years for an unknown patent lawyer by the name of Chester Carlson to convince Joseph C. Wilson and the Haloid Co. in the late 1930s — and subsequently for Wilson to convince the rest of the world — of the need for makin' copies. It took another 20 years for Wilson to turn Haloid, then Haloid Xerox, then just Xerox, into a successful, multimillion dollar, multi-national conglomerate.

And then it took less than 10 years for the technology revolution to roar past Xerox like a digital tidal wave. By the end of 2001, Xerox was left with its management in tatters, its books swimming in hefty operational losses and its lawyers fending off allegations of accounting irregularities that put the company precariously close to bankruptcy and prompted several in its higher ranks to defect.

Xerox's stock price reflects all that, to some degree. While its shares gained some altitude alongside the tech bubble in the late '90s, they reached their peak long before many other tech companies even hit their astronomical stock-price stride.

Xerox's shares hit an all-time high of $62 (U.S.) on Jan. 29, 1999, and then began a steep descent that was only magnified by the bursting bubble more than a year later. Its shares touched an all-time low of $4.20 last Oct. 10. On Friday, Xerox shares closed up marginally at $8.66 on the New York Stock Exchange, still well below the 52-week high of $9.75.

It is evident to people both inside and outside Xerox that a new direction is what the company both wants and needs. The ordinary office copier on which Xerox built its reputation and fortune has become a low-margin commodity item that for all intents and purposes is being phased out — 43 years after the company introduced the world's first photocopy machine, the 914.

But figuring out a new direction is no easy task. Xerox is involved in so many different initiatives, ranging from semiconductors to re-useable paper products to new kinds of multi-purpose — printing, scanning, faxing, copying, telephone — machines that even it doesn't appear to know its true focus.

For instance, Xerox was behind some significant technological developments at the renowned Palo Alto Research Centre (PARC) — a tech-research facility it founded in 1970. PARC is the birthplace of numerous innovations, including laser printing, Ethernet, the graphical user interface, ubiquitous computing, and the mouse.

Xerox finally spun off PARC in 2000, and the centre continues its leading-edge work on electro-bio convergence, micro-sensors, nanotechnology, flexible electronics, and mining unstructured data, to name a few.

Xerox is also behind the New York-based Wilson Centre for Research and Technology, which announced in February that it had developed a new silicon chip that will supposedly lower the cost of connecting homes and offices to fibre cables underground.

The chip, about the size of a fingertip, contains switches and waveguides for fibre-optic communication. It could allow a network equipment manufacturer to produce a relatively inexpensive box that would be able to split up the channels delivered by a fibre-optic line and deliver bandwidth to a large number of people in a given area — the proverbial last mile.

Xerox is also currently backing research and development in other divisions. One is a company called Gyricon Media Inc., which is commercializing Xerox's electronic reusable paper technology, which it developed through PARC. That company's initial products are electronic signs and wireless systems and software for retailers that work with retail merchants' point-of-sale systems.

Another company is called iXerox, which sells and distributes other Xerox-made products including the Xerox Terminology Suite, software for what it calls corporate terminology creation, Xerox XeLDA, a linguistic engine that can integrate text applications, and mDoc, software that enables viewing documents that reside on main server using a personal digital assistant — without plugging anything in.

But Xerox has dropped the ball before when it comes to seizing new tech-related ideas and reproducing them for the mass market. Famous Xerox innovations such as the graphical user interface and mouse — both refined and produced at PARC — grew up to benefit the bottom lines of other corporations.

Fortunately for Xerox, investors look more at a company's future than its past. Even so, getting any true-grit information about the company's financial direction is not an easy task.

While some 17 different analysts cover JDS Uniphase, for instance, only eight cover Xerox. According to First Call Thomson Financial, which collects analysts' ratings on companies, there is currently one "buy," five "holds" and two "sells" on Xerox shares.

Only one analyst covering Xerox returned phone calls requesting information for this article. And he — Chris Whitmore, with Deutsche Bank Securities in San Francisco — just took over researching the company and could not immediately comment.

The only firm that appears to have done any significant research on Xerox — the California Public Employees' Retirement System — was all too happy to make its views widely known a few weeks back when the $131 billion (U.S.) pension fund trashed the company in its annual review of its investment holdings.

"It is time to bring some new blood to Xerox," said Sean Harrigan, president of the CalPERS board. "It's disconcerting that the same members that oversaw Xerox during its worst period are still there."

"I think it is reflective of the past, not reflective of the actions that we've taken," shot back chief executive Anne Mulcahy shortly after the CalPERS report was released. "We have been working hard to make real substantive changes in our business and we certainly would have liked to have seen that reflected with the CalPERS' report."

Big changes indeed. Since taking over as CEO in August, 2001, Mulcahy has spearheaded the company's efforts to drastically reduce its outstanding debt, clean up its books, cut its head count by the thousands and narrow the company's focus on businesses that it thinks will make money.

So far, it appears to be paying off. Xerox shares jumped 17.4 per cent after reporting earnings of $19 million (U.S.), or 1 cent a share, in the fourth quarter. The numbers were a shock to analysts and investors who had expected the company to post yet another loss. Xerox will report its first quarter earnings at the end of this month.

But Xerox is still grappling with a mountain of debt and some tough competition from some very strong rivals — Hewlett-Packard, Canon and Ricoh, to name a few — not to mention a dire slump in business spending.

And it will take some time before Xerox can convince analysts and investors alike that its new products and ideas will take the company in a positive long-term direction.

After all, it did let the mouse slip from its grasp.
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