Xerox Falls on $6.4 Billion ACS Deal

Trupti Mehta
28 Sep, 2009
New York City

Xerox agreed to acquire Affiliated Computer Services, Inc for $6.4 billion in cash, stock and debt. The expensive deal will position Xerox as one of the largest government contract and business outsourcing companies.

[R]10:00 AM New York – Xerox agreed to acquire Affiliated Computer Services, Inc for $6.4 billion in cash, stock and debt. The expensive deal will position Xerox as one of the largest government contract and business outsourcing companies.[/R]

Xerox Corporation agreed to acquire Affiliated Computer Services, Inc in cash and stock for $6.4 billion.

Xerox hopes that the expensive acquisition will help the document processing company to expand markets in government contracts business and develop more business process outsourcing services. Xerox has been struggling with three quarterly revenues decline in a row.

Xerox has offered $18.60 in cash and 4.935 share of Xerox in exchange of each ACS share or valuing the company at $63.11 a share.

Xerox will also assume $2 billion of ACS debt and issue $300 million of convertible debt to class B stockholders. The offer is 34% premium to Friday’s closing price of ACS.

In the early morning trading Xerox fell 17% to $7.48 billion and ACS surged 13.65% or $6.38 billion to $53.65.

ACS expects new business contracts especially in the healthcare and government outsourcing will drive the future business. Since founding 20 years ago ACS has grown to 74,000 employees and has acquired several companies along the way.

ACS has increased new business contracts to $1.1 billion from $607 million in 2007 primarily in the Federal and State government health services and transportation contracts and commercial, financial and education services out sourcing for private corporations.

ACS estimated $11 billion opportunity in global government transportation enforcement services and violation processing.

Only two month ago Xerox appointed new chief executive Ursula Burns. The first acquisition of Burns shifts Xerox’s focus to business process outsourcing and government contracts from traditional printer sales and maintenance and services contracts.

Xerox estimated that its services revenues will triple with the acquisition to $10 billion in 2010 from $3.5 billion in 2008. Xerox, currently generate $17 billion in recurring revenues of total $22 billion annual sales.

JP Morgan Chase & Co and Blackstone Advisory Partners provided merger advisory services to Xerox and Citigroup acted as ACS advisor.

Latest Earnings Review of Xerox and ACS

ACS revenues for the fiscal year 2009 rose 4.8% to $6.5 billion from $6.2 billion a year ago. Net income in the year rose 6.4% to $349.9 million or $3.57 per diluted share compared to net income of $329 million or $3.32 per share a year ago.

Affiliated Computer Services, Inc ((ACS)) in the last one year traded as high as $52.30 in September 2009 and as low as $34.84 in November 2008. Based on the yesterday’s closing price of $55.09 the company has market cap of $5.38 billion.

Xerox fiscal 2008 rose 2.3% to $17.6 billion from $17.2 billion a year ago. Net income in the year fell 80% to $230 million or 26 cents per diluted share compared to net income of $1.1 billion or $1.19 per share a year ago.

Xerox Corporation second quarter revenues fell 18% to $3.7 billion from $4.5 billion a year ago. Net income in the quarter fell 35% to $140 million or 16 cents per diluted share compared to net income of $215 million or 24 cents per share a year ago.

Xerox Corporation ((XRX)) in the last one year traded as high as $12.40 in September 2008 and as low as $4.12 in March 2009. Based on the yesterday’s closing price of $7.63 the company has market cap of $6.63 billion.