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By Nick Wakeman

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Nick Wakeman

Xerox to split printer, outsourcing businesses

The press release announcing Xerox’s split into a printer and imaging company and an outsourcing company hits some very familiar notes.

In fact, you could almost swap out the name Xerox and replace it with any number of other company that have gone through similar splits in recent years, including Science Applications International Corp., Hewlett-Packard, Computer Sciences Corp., and Lockheed Martin.

HP is probably the closest comparison to Xerox in that both are competitors in the imaging and printer market and both splits mostly separate hardware from services.

Xerox made a major play to get into the services market, particularly business process outsourcing when it acquired Affiliated Computer Services in 2010 for $6.4 billion. That remains Xerox’s biggest acquisition.

The split effectively undoes the ACS acquisition.

“Seven years in this market is like seven years of dog years,” said Xerox Chairman and CEO Ursula Burns in response to an analyst's question. Xerox announced the ACS acquisition in 2009 and closed it in early 2010.

Many of the markets where the BPO business has a major position have changed significantly, particularly the health and health care provider markets. The company has seen a lot of its large customers consolidate.

The international market has slowed and the strong dollar has added to difficult sales overseas, she said.

And there have been a lot of technological shifts such as software as a service and robotic process automation, which have changed how services are delivered, Burns said.

(Robotic process automation is the use of artificial intelligence to replace human interaction with computer systems.)

Today’s BPO market requires “fitness and focus,” she said.

The BPO business will have $7 billion in revenue and 104,000 employees.

About 27 percent of that revenue is in the public sector. Xerox’s BPO business has a strong presence in the state and local market where it does a lot of health care and transportation work. It claims to have a 50 percent market share nationally of electronic toll collection systems such as EZ Pass.

According to Govini, Xerox had $154.6 million in federal contracts in fiscal 2015, of which 64 percent or $98.8 million was for services, but the services figure includes $37 million in leases or rentals of office machines, text processing systems and other equipment.

ACS had effectively gotten out of the federal market in 2003 when it swapped assets with Lockheed Martin. But just prior to the acquisition by Xerox a non-compete agreement with Lockheed Martin expired and ACS was trying to rebuild its federal business.

The separation will be tax free and will create two independent publicly traded companies. All of that should sound familiar. The split will be completed by the end of the year.

The names and management teams for the new companies have not been announced yet.

The rationale for the split also is familiar – enhanced focus, simplified structure, and margin improvements for both new companies.

The BPO business at Xerox is focused on eight primary offerings: healthcare solutions, customer care, finance and accounting, transaction process, transportation solutions, human capital, pre-paid card services and industry specific solutions.

Ursula Burns, chairman and CEO, said that the two parts of Xerox needed to separate because the two businesses had very different business models and cash flow characteristics. The growth drivers and competition also is very different.

The BPO market is growing at 5 percent a year but is rapidly evolving, Burns said, so there is a need for agility and technical expertise.

Burns told analyst that with the split they feel that the BPO business can grow revenue and improve margins.

“We haven’t looked at the specific growth rate, but we know we can grow faster than we are today,” Burns said.

In particular, the transportation and government and private sector health related work can grow faster than 5 percent annually, she said.

Posted by Nick Wakeman on Jan 29, 2016 at 9:29 AM

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