JPMorgan Cites Uncertainty In Xerox Downgrade

Xerox Corp XRX confirmed late Sunday it has terminated its planned merger with Fuji-Xerox, a move that prompted JPMorgan to downgrade the stock.

The Analyst

JPMorgan's Paul Coster downgraded Xerox from Overweight to Neutral with an unchanged $38 price target.

The Thesis

Xerox's decision to terminate its pending merger follows the resignation if its CEO and five board members stepping down, which resulted in activist investor and large shareholder Carl Icahn gaining control of the board, Coster said in the downgrade note. (See the analyst's track record here.) 

The management shuffle is potentially disruptive to the company's ongoing operations, the analyst said. 

The series of events also creates an environment of "strategic uncertainty," with the potential for negative impact on management and staff, Coster said. Xerox's existing partnership with Fuji-Xerox could become "strained" and result in inefficiencies and incremental costs in the near term, and the potential for legal costs associated with the merger is "elevated," he said. 

Xerox's competitors could take advantage of the series of events to capitalize on the situation by "alerting enterprise customers" to the turmoil at the company, Coster said. 

The merger with Fuji-Xerox appeared to be a good fit for Xerox in JPMorgan's view, and Xerox now has "too much uncertainty" to justify a bullish stance, the analyst said. 

Price Action

Xerox shares were falling 7.76 percent at the time of publication Monday morning. 

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