Monday September 28, 05:37 PM
UPDATE 4-Xerox to buy ACS to expand back office services
By Franklin Paul
NEW YORK, Sept 28 (Reuters) - Xerox Corp (NYSE: XRX - news) plans to buy Affiliated Computer Services Inc for $5.4 billion following Hewlett-Packard Co into the fast-growing outsourcing and data center management businesses.
The cash-and-stock deal, Xerox's biggest ever, is the latest in the active technology services sector, whose reliable revenue streams has attracted acquisitive hardware companies. A week ago, Dell Inc (NASDAQ: DELL - news) said it would buy Perot Systems Corp (NYSE: PER - news) . HP bought Electronic Data Systems (NYSE: EDS - news) a year ago.
'HP strengthened their position in terms of business services (in addition to) printing,' said Gabelli & Co analyst Hendi Susanto. 'Xerox may have to compete with HP, and this will strengthen their position.'
Xerox said on Monday it will pay 4.935 Xerox shares and $18.60 in cash for each share of ACS (Madrid: ACS.MC - news) , totaling $6.4 billion or $63.11 per share based on Friday's closing prices. That represented a premium of 33.6 percent, and compares to ACS's record high share price of $63.66 in 2006.
But shares of Xerox fell about 16 percent to $7.50 on Monday morning, shrinking the deal value to $55.61 per share. ACS shares jumped nearly 14 percent to $53.73.
Xerox, which has about $1 billion in cash, said around $3 billion of the deal will be financed through capital markets. Its credit default swaps rose by 0.10 percentage point to 1.78 percentage points, indicating the cost of protecting its debt has risen.
'The ACS acquisition will strengthen Xerox' enterprise business, allowing it to expand from a document management company ... into the (outsourcing) space with strongholds in government and healthcare,' said analyst Shannon Cross, in a note to clients. 'With solid operating margins and cash flow, we believe ACS will further enhance Xerox' core strength, allowing for additional acquisitions over time.'
SERVICES REVENUE TO TRIPLE
ACS competes with Accenture Ltd (NYSE: ACN - news) and Computer Sciences Corp (NYSE: CSC - news) in data center management, as well as technology services giant IBM (NYSE: IBM - news) . Roughly two-thirds of ACS' revenue comes from handling back office operations for companies, and the rest comes from providing technology services.
Xerox Chief Executive Ursula Burns said the company's revenue from services will triple to an estimated $10 billion next year from $3.5 billion in 2008 after the deal.
'The reason why we pursued this is that our customers have been telling us that they need a ... deeper connection between back-office document infrastructures and front office business process services,' Burns said on a conference call. 'Putting our two companies together allows us to do this.'
Xerox will assume ACS's debt of $2 billion and issue $300 million of convertible preferred stock to ACS's founder Darwin Deason. On an adjusted earnings basis, the deal is expected to add to Xerox's earnings in the first year.
The Norwalk, Connecticut-based company has been focusing on its so-called annuity business, in which customers consistently order supplies and services for their printers.
It derives some 70 percent of its cash flow from the sale of supplies, financing and services to repeat customers. But the economic downturn has forced some of its customers to slow their plans to buy new equipment or order service.
The companies expect annualized cost savings of $300 million to $400 million in the first three years after closing, expected in the first quarter of 2010. ACS CEO Lynn Blodgett said some jobs will be affected at the Dallas-based company.
After the deal closes, ACS will operate as a standalone unit, run by Blodgett.
J.P. Morgan and Blackstone Advisory Partners acted as financial advisors to Xerox for the deal, Citigroup Global Markets Inc was financial advisor to ACS and Evercore Partners (NYSE: EVR - news) was financial advisor to a special board committee at ACS.
(Reporting by Franklin Paul and Tiffany Wu; Editing by Derek Caney) Keywords: ACS XEROX/
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