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Xerox Buys ACS in $6.4B Business Process Play

Xerox
Source: Xerox
Xerox said this morning that it has entered into an agreement to purchase Affiliated Computer Services (ACS), an outsourcing and data-management firm, for $6.4 billion in cash and stock.

With the acquisition, Xerox (NYSE: XRX) looks to improve efficiencies through ACS' workforce-automation expertise. Specifically, ACS (NYSE: ACS), which bills itself as the world's largest business-process outsourcing (BPO) firm, will look to automate the labor-intensive processes surrounding key Xerox intellectual property such as its smart-document technology.

"It's a game-changing initiative for sure," Xerox CEO Ursula Burns said on a call with reporters this morning. "With ACS, Xerox is creating a new class of solution provider."

Through the acquisition, Xerox is angling to carve out a leadership position in the business-process management (BPM) services sector similar to the role it enjoys in documents.

Xerox said it expects its services revenue to vault from $3.5 billion in 2008 to $10 billion in 2010.

Xerox's big buy comes just one week after PC giant Dell (NASDAQ: DELL) announced it was shelling out $3.9 billion to purchase services provider Perot Systems. That move continued the march toward services that has already transformed the business lines of IT heavyweights like HP and IBM.

After the merger, Xerox is looking ahead to $22 billion in annual revenues, with $17 billion coming in the form of recurring annual contracts. ACS currently overlaps with about 20 percent of Xerox's customer base.

Xerox expects the transaction to net the $300 million to $400 million in cost savings over the first three years after the deal closes.

"There are a number of cost synergies that we will be able to executive upon both on the ACS side and the Xerox side," ACS President and CEO Lynn Blodgett said. "We will essentially be doing the kind of work for Xerox that we do for all of our customers."

The companies did not say how many jobs are likely to be eliminated through the merger.

ACS works with clients in an array of industries, spanning sectors such as telecommunications, retail and financial services.

It also works in health care, which Burns identified as an area of keen interest for Xerox. ACS' BPO service could help reduce health-care providers' administrative costs, but she sees an even greater opportunity in automating the workflow around the troves of unstructured data contained in medical records.

The economic stimulus package enacted in February allocated $19 billion for moving from paper-based systems to electronic medical records, an opportunity that is not lost on Burns.

"Xerox is passionate about being able to participate in stimulus," she said.

The union with ACS would seek to marry Xerox's smart-document technology with ACS' BPO expertise.

"What Xerox has that ACS does not have is a tremendous capability in the area of unstructured data," Blodgett said. "We have the ability to go in and do analytics."

Once the deal closes, ACS will be branded as a "Xerox company," but operate as an independent division led by Blodgett, who will report to Burns.

Xerox's offering of $63.11 per share represented a 33.6 percent premium to ACS' closing price on Friday.

Shares of ACS were up 13.5 percent in early trading, while Xerox shares fell nearly 17 percent.

The companies expect the transaction to close in the first quarter of 2010.