Impact on Xerox

According to research firm Factset, the sectors that are expected to be the biggest casualties based on their revenue exposure to the U.K., are energy, information technology and materials with respective exposures of 6.4%, 4% and 3.7%.

With 5% of the total revenue coming from the U.K., information technology services provider Xerox Corporation (XRX – Analyst Report) is expected to be a high-profile victim of the Brexit fallout. Xerox has a significant number of manufacturing and engineering facilities in the U.K. The company has also high pension obligations in the U.K. Pension Plan for salaried employees.

The revamped market dynamics are expected to affect many U.S. firms like Xerox that import or export from the U.K. They are likely to be stifled by the renegotiated deals and restrictions imposed on trade with other European Union members. Brexit could further result in higher tariff and non-tariff barriers to trade between the U.K. and the European Union, lowering productivity of the company.

Adding to the Woes

Xerox has been grappling with slow demand in its printing business for years, while its attempts to leverage the business process outsourcing market also failed to lend growth momentum. The company also endured a number of slip-ups in its Medicare and Medicare information services for several government agencies across the U.S.

In 2015, the company conducted a review of structural options for its portfolio and capital allocation. On the basis of this review, the company decided to split into two independent, publicly traded entities in the first quarter of 2016. The process is expected to be completed by the end of 2016. The separation will see Xerox segregating its hardware operations and its services business. While one would comprise Document Technology and Document Outsourcing businesses, the other its Business Process Outsourcing (BPO) business. Both these entities would likely feature among the Fortune 500 companies and will be leaders in their respective markets.

With a strategic focus on various markets, Xerox expects to capitalize on the unique strengths of its Document Technology and BPO businesses and capture the value-creation opportunities post split. As part of the restructuring, Xerox has decided to execute a three-year strategic transformation program to improve its productivity and reduce costs across the businesses.

Amid such a scenario, when the company is in a fluid state and is actively restructuring its operations, the Brexit is likely to cause an additional burden on the exchequer. Only time can tell whether this Zacks Rank #3 (Hold) stock can survive this carnage or not.

Published on ZACKS June 24, 2016