Xerox will buy business process outsourcer ACS for $US6.4bn

With the deal, Xerox hopes to expand its market beyond document management

Xerox has agreed to buy business process outsourcer Affiliated Computer Services (ACS) for US$6.4 billion, in a move it hopes will allow it to expand beyond the field of document management.

The deal will triple Xerox's revenue from services, from $US3.5 billion a year to $US10 billion a year, Xerox CEO Ursula Burns said in a conference call with analysts on Monday.

Dallas-based ACS was one of a shrinking band of outsourcers not yet tied to a hardware vendor.

Coming hot on the heels of Dell's announcement last week that it will buy Perot Systems for $US3.9 billion, the Xerox-ACS deal could increase the pressure on other independents, including CSC, Unisys and Indian companies such as Wipro and Infosys Technologies, to find a suitor. The name of another former independent, EDS, disappeared last week when its brand was subsumed into that of Hewlett-Packard, which acquired it last year.

Around the world, ACS's 74,000 employees work in finance, human resources, IT support, and customer care. For the year to June 30, ACS reported revenue of $US6.52 billion, up 6 percent on the previous year. Around 40 percent of that came from government customers, making ACS one of the largest providers of managed services to U.S. government bodies.

Xerox's 54,000 staff work on document management technologies and services, as well as on the company's historic photocopier business. The company reported a 2.2 percent year-on-year rise in revenue for its 2008 fiscal year, to $US17.61 billion, of which 26.6 percent came from equipment sales.

The merger will create "a new class of solutions provider" that will differentiate its business process offering through innovation, Burns said.

"This game-changing initiative helps us significantly expand our business and improve our growth."

That growth could come from cross-selling of the two companies' services: only around 20 percent of their customers are common to both businesses, said Xerox Vice Chairman and CFO Larry Zimmerman.

The companies also hope to cut ongoing costs by up to $US400 million a year after three years, Burns said.

As a subsidiary of Xerox, ACS will operate as an independent business run by its current CEO, Lynn Blodgett.

"The technology Xerox has is directly applicable to our customers," said Blodgett during the conference call, citing the example of its unstructured data management tools, which ACS could use to handle information in the hundreds of millions of images of health care claim forms that it holds.

"It's light years ahead of where we are," he said, adding, "Labor is our largest cost. This would allow us to eliminate a lot of that cost."

Xerox's worldwide sales team will also allow ACS to better take advantage of opportunities outside the U.S., Blodgett said.

Today, ACS makes around 92 percent of its revenue from U.S. customers, while for Xerox the figure is only 53 percent, with 33 percent coming from European customers.

The offer price of $US6.4 billion is a little above the $US6 billion proposed by ACS founder Darwin Deason when he offered to take the company private in March 2007.

Xerox will pay about 30 percent of the purchase price in cash, and the rest in stock, based on its closing share price Friday. It expects the deal to close in the first quarter of next year, subject to approval from regulatory authorities and the companies' stockholders.

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