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Changing Hats: Xerox to Pay $6.4B to Become a BPO Provider

One week after Dell announced plans to buy Perot Systems, Xerox says it will snatch up ACS, another U.S. outsourcing supplier.

Further enhancing the status of business-process outsourcing, Xerox announced Monday that it will pay $6.4 billion, or $63.11 per share, to expand into the BPO market by acquiring Affiliated Computer Services.

The larger company — known mostly for making color printers — will use a mix of stock and cash to buy ACS. Executives at Xerox, which took in $17 billion in revenue last year, believe the “game-changing” deal will triple its revenue from services work, from $3.5 billion last year to $10 billion in 2010.

Under the deal, Xerox will give ACS shareholders $18.60 per share in cash, plus 4.935 of its shares for every ACS share they own. It will take over ACS’s $2 billion in debt and issue $300 million in convertible preferred stock to ACS’s Class B shareholders.

Xerox’s move comes just a week after Dell’s expansion into the outsourcing world by acquiring Perot Systems for about $3.9 billion, moving beyond its positioning as solely a computer maker. In a conference call last Monday, Dell CFO Brian Gladden called it “a critical acquisition in our strategy to transform the company.”

Similarly, Ursula Burns, Xerox’s CEO since July, said during a call with analysts that the ACS acquisition will transform Xerox “from a technology leader to the leading global enterprise for document and business-process management.”

This latest announcement is another sign that there likely will be more consolidation in the outsourcing industry, predicts Peter Bendor-Samuel, CEO of Everest Group, a consulting and research firm. For the most part, he adds, outsourcers’ corporate clients “want larger and more capable providers,” as well as to reduce the number of vendors they use.

Indeed, Burns noted that the ACS buy partly derives from consumer demand. “Customers are increasingly seeking service providers that offer a full range of solutions, from their document technology to the process management in their back- and front-office operations,” she said.

The success of the acquisition could depend on another type of demand: whether the BPO market continues to grow at 5% per year, as Xerox claims. During the summer, outsourcing advisory firm TPI reported that BPO work had declined across regions and functions during the first half of 2009, falling to its lowest point in the past five first-half periods.

However, according to Bendor-Samuel, the slow movement in the BPO space this year has had more to do with the recession and business decision-makers’ focus on other internal projects, such as layoffs. Almost all outsourcing service providers have strong pipelines, and most industry analysts “believe there will be continued growth in BPO,” he says.

ACS’s BPO services include finance and accounting, human resources, and inventory management. About 60% of its revenue comes from corporate clients, and the rest from government work. Its revenue grew by 6% in 2008, to $6.5 billion.

Xerox expects that more than three-quarters of the companies’ combined $22 billion in revenue will be recurring, partly due to ACS’s long-term contracts. “This acquisition not only expands our ability to create and deliver solutions to our customers, it enhances every aspect of our business model,” said Xerox CFO Lawrence Zimmerman during Monday morning’s conference call.

Xerox also expects to see growth by extending ACS’s reach beyond the United States; currently, 92% of its revenue comes from U.S. companies. Further helping growth prospects is the fact that only 20% of the companies’ customers overlap.

The companies expect to close the deal during the first quarter of 2010, and Xerox expects to see a positive earnings effect from the acquisition beginning next year.

 

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