Xerox-ACS deal brings new opportunities

Acquisition is a game changer for the two companies

When completed in the first quarter of 2010, Xerox’s purchase of Affiliated Computer Services Inc. will be the largest acquisition by the company best known for making copiers. It will create a $22 billion global enterprise for document technology and business process management solutions.

5 reasons the Xerox/ACS deal makes sense

1. Advances Xerox’s printing and document services capabilities, creating new revenue streams to counter shrinking profits in the competitive hardware space.
2. ACS will have access to Xerox’s global customer base, providing business opportunities in Europe, Asia and South America.
3. Provides exposure to the growing health care information technology sector, supplementing Xerox’s document-processing capabilities with ACS’ analysis- and outcome-based health care solutions.
4. ACS’ large governmental client base, Medicaid and Medicare processing work, and back-office outsourcing business help insulate it from the ups and downs of the overall economy.
5. Xerox expects $300 million to $400 million a year in cost savings within three years from reductions related to overlapping public company costs and back-office operations.

Source: Houlihan Lokey

“This is an exciting opportunity for us,” said Joseph Doherty, executive vice president and group president of ACS Government Solutions, a unit of ACS. “It’s a win-win for both companies, absolutely.”

The merger also is expected to nearly triple Xerox’s services revenue to $10 billion next year from $3.5 billion in 2008, said Xerox Chief Executive Officer Ursula Burns during a Sept. 28 conference call announcing the deal.

The acquisition “is a game-changing initiative for sure,” she said.

Xerox will pay $6.4 billion in cash and stock at $63.11 per share for the Dallas-based diversified business process outsourcing (BPO) firm.

ACS, which will be known as ACS, a Xerox company, will become the corporation’s core BPO provider with CEO Lynn Blodgett remaining at the helm.

“ACS brings a strong government presence to the table, plus expertise in systems integration and especially business process optimization,” Shawn McCarthy, director of government vendor programs at IDC Government Insights, wrote in his blog.

“Meanwhile, Xerox brings an established federal government sales and marketing group, and it’s well positioned to enhance ACS’ BPO expertise by enhancing the way its integrated systems capture documents, information and an organization’s internal data,” he wrote.

McCarthy said he expects that in 2010, Xerox will focus on organic growth, new government business, new government market alliance partnerships and channel agreements for its managed print services.

Xerox historically has had a limited footprint in the federal BPO market, said Rishi Sood, vice president at Gartner Research. “There has been some print-on-demand, managed print services work that Xerox has done in the government space overall, but clearly this [merger] is about to take it much higher and much more deeper with government customers.”

ACS was mostly out of the federal market for five years because of a noncompete agreement the company signed when it sold most of its federal business to Lockheed Martin Corp. for approximately $658 million. In exchange, ACS received Lockheed Martin’s commercial and state and local information technology business.

The noncompete agreement with Lockheed ended in November 2008, and ACS is again hiring sales and other employees to boost its footprint in the federal sector, Doherty said.

He added that he foresees no potential conflicts between Xerox and ACS because the merger will create a single provider, which would reduce costs to the federal customer, improve processes and more efficiently manage the total information workflow.

“Our understanding is that the larger federal agencies have a general manager at Xerox, so they understand the mission and capabilities and expectations for that particular agency,” Doherty said.

“I would expect us to partner with them,” he said. “They would help us understand the agency, understand what they are doing today, and then jointly, we would have conversations with the customer as to how we could extend the value proposition.”

The merger also could benefit ACS by providing the company with potential new sales outlets.

“It broadens our reach through a global mechanism,” Doherty said, pointing out that Xerox “is in a significant number of countries where we are not. And again, they have a customer set that is different than ours in a lot of cases. So I just think there’s a good value proposition all the way around both in the technology enhancements, in the sales capability and in the footprint.”

One of ACS’ core competencies is health care solutions. About 40 percent of the company’s revenue comes from federal, state and local government clients, especially Medicaid claims processing, Blodgett said during the conference call.

Xerox technologies will help ACS handle the millions of pages of unstructured health care documents, data and images, he said, which will lead to better analyses and more outcome-based health care solutions.

“When you think of those hot, long-term growth opportunities like the government health care marketplace, that’s clearly an area that needs a greater degree of technology penetration," Sood said. "That’s clearly an area where greater focus on document management, information workflow, information dissemination solutions are important."

“I think what you’re building in a Xerox/ACS organization is the ability to be able to provide services and solutions that not only target those types of opportunities from a hardware perspective but also from a professional services perspective,” he said.

Indeed, Burns said ACS’ strength in the health care sector helped Xerox decide to acquire the company. “But this clearly was not the only reason — or even the primary reason — why we went after ACS,” she said, citing ACS’ strong management team, good growth rate, financial acumen and ability to extend Xerox’s offerings globally as the main motivators for the deal.

Doherty said he believes the weak economy also has been an impetus for the recent spate of similar mergers: Dell Inc. bought Perot Systems Corp., Hewlett-Packard Corp. bought EDS Corp., and Cisco Systems Inc. bought Tandberg.

“Companies are saying, ‘How are we going to get ourselves set and ready and make the investment now for the long term?’ and I think that is what HP saw, what Dell saw, and that absolutely is what Xerox sees,” he said.

Nevertheless, Sood cautioned that “it’s always a tough cultural issue to merge organizations as disparate as Xerox and ACS.” Xerox, based in Norwalk, Conn., is reflective of the liberal East Coast, while ACS has its headquarters in more conservative Texas.

Both organizations face another big challenge because it is difficult to reorient a traditional hardware organization to sell services and solutions, he said.

“Xerox and ACS need to assure competitors that this is going to be a merger that provides advantages to all types of relationships in the marketplace,” he said.

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