Xerox Buys Service Provider ACS for $6.4 Billion

Xerox Corp. said it will acquire Affiliated Computer Services (ACS), a provider of third-party business process services, for $6.4 billion in stock and cash.

The printing and imaging vendor will pay the equivalent of $63.11 per share for all of ACS’ shares of common stock. The deal is structured as 70 percent stock and 30 percent cash: ACS stock holders will receive 4.935 Xerox shares for each ACS share and $18.60 per share in cash. Prices were based on market close last Friday.

The vendor said with the ACS acquisition it expects to triple its services revenue to $10 billion and save $100 million in costs after one year and up to $400 million after three years.

Xerox officials called the purchase a “transitional acquisition,” referring to the vendor's new-found ability to deliver not only expertise in document management but also in the automation of business processes.

“With ACS, Xerox is creating a new class of solution provider with leading technology and expertise in document and business process management,” said Ursula Burns, Xerox chief executive.

“We pursued this because our customers have been telling us that they need a deeper connection between back office document infrastructures and front office business process services,” she said.

Xerox and ACS peg the market for business process management at upwards of $150 billion annually, growing at a yearly 5 percent clip.

Burns said that the deal is important to both companies because it provides each with catalysts for growth. Xerox needs to alter its sources of revenue and to increase its services offerings while ACS believes its growth is hampered by an absence of global customers.

She said that Xerox wants to deliver more services and automate paper-based work processes and “ACS needs brand strength, global account relationships and innovation to create differentiated offerings.”

The companies considered forming a partnership but “as we started to work with ACS we saw that the synergy potential, particularly on the revenue side, is bigger being closely connected,” Burns said.

Including ACS, Xerox will be a $22 billion company, $17 billion of which will occur from recurring revenue. ACS generates about $6.5 billion in annual sales.

Revenue from technology services currently makes up about 50 percent of Xerox’s annual sales, said Larry Zimmerman, Xerox chief financial officer. He said that with the ACS acquisition, Xerox estimates that up to 80 percent of its revenue will emanate from annuity contracts, adding backbone to the vendor’s financial position.

“The strength of the annuity model is cash generation,” Zimmerman said.

Xerox gains government contracts

Lynn Blodgett, ACS president and chief executive, will run the business unit--which will be renamed ACS, a Xerox Company--and report to Burns.

“ACS has deep knowledge and expertise in business processing,” Blodgett said. “This will allow us to penetrate new global markets.”

Xerox will manage ACS independently, Burns said, similar to the manner in which it operates Global Imaging Systems, which it purchased for $1.5 billion in 2007.

She said that Xerox had put in place the “appropriate incentives to keep Lynn and his team.”

Burns said that an evaluation of the customer lists of both companies showed only a 20 percent overlap, offering the chance for each to take advantage of the other’s sales reach. About 92 percent of ACS’ customers are based in the U.S.

“We have significant opportunity to enhance the value we bring to both sets of our customers through cross selling,” she said.

A key benefit of the purchase for Xerox is that it gains a presence in government agencies for business process management. ACS maintains multi-year contracts with about 1,700 government agencies and describes itself as the “largest provider of managed services to government entities in the U.S.”

Xerox’s purchase of ACS is the third such acquisition of a technology services provider in the past year. About a year ago, Hewlett-Packard Co. bought EDS for $13.9 billion and earlier this month Dell Computer Inc. announced its intention to purchase Perot Systems for $3.9 billion.

The purchase is subject to approval by both companies’ boards and is expected to close in the first quarter of 2010.