In the history of the technology business, few companies have done less with more than

Xerox

(XRX) - Get Report

, the inventor of products from the computer mouse to the graphical user-interface concept, but the commercializer of none of them. Now, with its future prospects dim, the famed copier giant has turned to prominent players in the leveraged buyout world in order to craft a survival strategy.

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The secretive meetings with the LBO firms began Thursday and will continue through today. The options, according to people familiar with the meetings, include the possibility of the four firms taking control of the company. Were the four firms, each with varying degrees of technology expertise, to like what they see at the troubled giant, equity investors in Xerox's beaten-down stock could see a major boost beyond the back-from-the-dead bounce the shares have enjoyed in recent weeks. But if the heavy-hitting LBO funds walk away without taking action, it would be another slap in the face for a management team that already has precious little credibility on Wall Street.

The four firms --

Texas Pacific Group

,

Clayton Dubilier & Rice

,

Kohlberg Kravis Roberts

and

Silver Lake Partners

-- each sent teams to Xerox's Stamford, Conn., headquarters for daylong presentations Thursday by top Xerox managers, according to representatives of two of the firms. The sources at these firms say Thursday's auditorium-style group presentations will be followed up by one-on-one meetings this morning. Each of the LBO firms declined to comment on the record about the hush-hush meetings, which a Xerox spokesman would not specifically confirm are taking place.

The Xerox situation is severe. The firm reported year-end financial results Monday that included a slightly larger-than-expected fourth-quarter loss of $118 million, or 31 cents per share, vs. the 30-cent consensus loss Wall Street expected. Year-over-year revenues were down 13%, while equipment sales fell 19% as margins deteriorated.

"Year-over-year revenue comparisons got worse in the fourth quarter in virtually every business,"

Lehman Brothers

analyst Caroline Sabbagha told clients. The declining fortunes were bad; the storied company's balance sheet is even worse. Xerox ended the year with debt, net of cash, of $16.4 billion, or 80% of its capital. Moreover, the company faces debt payments of as much as $3 billion this year and $9 billion in 2002. Clearly, if ever there were a time for a financial savior for Xerox, it's now, before the company has to beg banks to restructure loans even as its business declines.

"They have a limited time in which to show progress," says Gibboney Huske, who follows Xerox for

Credit Suisse First Boston

. "This would be a pretty tough LBO to get done," she adds, given the company's massive existing debt load and therefore a shortage of additional assets to borrow against. "But there'd be a lot of people who would be pretty happy" to see Xerox get bailed out.

Plenty of people -- investors, that is -- are already pretty unhappy with Xerox and its current management. As sales and earnings have dwindled, the company's stock has fallen as well, from a high of $29.75 last March to below $4 in December. As Xerox has unveiled a sale of an interest in a joint venture in China, as well as plans to find third parties to take over its equipment leases, the stock has rallied. It closed Thursday at $8.43, up 23% since Xerox reported results Jan. 29, a key feature of which was word that the company anticipated having enough cash to last out the year.

Performance Not to Be Copied
It's been a rough year for Xerox shares

One source of cash is continued asset sales, which the company anticipates will generate proceeds of between $2 billion and $4 billion, all of which obviously will be earmarked for debt service. Indeed, asked to comment on the end-of-week meetings with each of the four LBO firms, the Xerox spokesman says, "We meet with a ton of people every day because we've announced that we're selling

these assets."

Those assets include a 25% stake in its

Fuji

-Xerox joint venture, a share of the storied Xerox PARC research facility in Silicon Valley

PARC stands for Palo Alto Research Center and is where

Steve Jobs

first saw the mouse and GUI in action, and inkjet, European paper and engineering divisions.

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But according to sources planning to take a closer look at Xerox, the meetings with the LBO funds are about far more than asset sales. "They're basically saying, 'You give us the money and we'll give you the keys,' " says a representative of one of the four firms, who suggests that the Thursday and Friday meetings will be merely a prelude to a further "deep dive" of due diligence. But it won't be nearly as easy for Xerox as handing over the operation. "My fear is that what you'll find is the thing has so much debt that you can't make something of it," says the financier.

Of course, the size of the debt is a problem only because Xerox's core business is lousy. CSFB analyst Huske notes that Xerox's gross margins of 33.7% are worse than the 37.5% achieved by

Ikon

, which is a distributor for

Canon

. "There's something fundamentally wrong with their cost structure," says Huske, if a distributor is more profitable than a company that controls manufacturing and its own distribution.

Each of the four LBO firms looking at Xerox brings something to the table that might make it think it can take on a troubled company with a tremendous brand. Texas Pacific Group has been an investor in semiconductor companies, notably

Zilog

, which earlier this year pulled a proposed initial public offering. Clayton Dubilier is best known in tech circles for its LBO of

IBM's

(IBM) - Get Report

printer division, now called

Lexmark International

(LXK)

, as well as the LBO and subsequent public offering of the instrument-testing business now known as

Acterna

(ACTR)

.

KKR doesn't have much experience in technology, though it's one of the most highly regarded firms when it comes to high-debt situations, and has made a large investment in communications equipment start-up

Zhone Technologies

. Silver Lake, one of the newest players in the LBO field, has made investments in disk maker

Seagate Technology

, consulting firm

Gartner Group

(IT) - Get Report

and

Cabletron Systems

(CS) - Get Report

, the communications equipment company.

Shares of Xerox already have had a nice run-up, and any good news is likely to help the stock more, including an additional asset sale or the suggestion that LBO firms are thinking seriously about taking on the challenge of buying Xerox. But make no mistake, this is one unhealthy company that has set modest goals Wall Street doesn't even think it can hit. If the LBO firms go in, they'll consider their investments to be risk capital. Public investors should as well.

In keeping with TSC's editorial policy, Adam Lashinsky doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback and invites you to send it to

Adam Lashinsky.