Thinking Beyond the Box – Xerox to Acquire ACS

Today, Xerox Corporation announced that it had reached a definitive agreement to acquire Affiliated Computer Services (ACS). ACS, headquartered in Dallas, TX, is one of the world’s largest diversified business process outsourcing firms. ACS is a $6.5 billion company with revenue growth of 6 percent and new business signings of $1 billion in annual, recurring revenue during its fiscal 2009. The combined Xerox-ACS company will have $22 billion of annual revenue, $17 billion of which will come in on a recurring basis.

Xerox is buying ACS in a cash and stock transaction valued at $63.11 per share or $6.4 billion as of the closing price of Xerox stock on September 25. Xerox’s $6.4 billion offer for ACS represents a 36% premium and about 15 times earnings. By comparison, Dell is paying $3.9 billion, a 68% premium, or about 30 times earnings for Perot Systems.

Xerox CEO Ursula Burns referred to the deal as a “game changer,” helping Xerox expand its business and benefit from the stronger revenue and earnings growth. “Xerox becomes a $22 billion global company… the revenue we generate from services will triple from $3.5 billion in 2008 to an estimated $10 billion next year” said Burns. “By combining Xerox’s strengths in document technology with ACS’s expertise in managing and automating work processes, we’re creating a new class of solution provider,” added Burns.

The transaction, which has already been approved by the Xerox and ACS boards of directors and ACS special committee, is expected to close in the first quarter of 2010. ACS will continue to operate as an independent company and will initially be branded as ACS, a Xerox Company. It will be led by Lynn Blodgett, current ACS president and CEO, who will report directly to Ursula Burns. Xerox will continue to run its Global Services business, which primarily focuses on managed print services, as a separate organization under Steve Cronin.

Within InfoTrends, we sat down and discussed what this deal means. Here are a few key highlights:

• The lines between business process outsourcing and document process outsourcing are blurring.
• The down economy will continue to drive enterprises to reduce costs and improve efficiencies through outsourcing.
• Xerox is clearly thinking “beyond the box” and is working aggressively toward becoming less reliant on “pages” and more focused on information and business processes.
• The competitive profile is shifting (or expanding). In many respects, Xerox now competes less with the likes of Canon, Ricoh, and Konica Minolta, and more with companies such as Accenture, IBM Global Services, HP Enterprise Services, Computer Sciences Corporation, and Hewitt Associates.
• This is a bold move by Xerox to expand its global services play beyond the technology infrastructure services it is well known for, and much deeper into the BPO services space. Until now, document process outsourcing (DPO) and business process services, while growing in market size and customer demand have been somewhat elusive for many of the copier manufacturers.
• The companies indicated they currently share only about 20% of the same customers, suggesting a significant opportunity to introduce each other’s products and services into their respective accounts.
• The effects of this acquisition will be global. ACS is primarily a U.S.-based player today; however, Xerox is betting a large amount of capital and cash flow that it will achieve significant growth by leveraging its strong global brand and client relationships to scale ACS’s business in Europe, Asia, and South America.

As InfoTrends reported earlier this year in its 2009 Roadmap for Document Outsourcing, The Lines between Document Outsourcing, BPO, and ITO are Blurring. As technology becomes more Web-enabled, solutions become more software enabled, and outsourcing environments converge, what used to be distinct lines of delineation between IT, the document infrastructure, and business processes are no longer as clear. It used to be simple to identify document-oriented technologies (applications and processes) from IT driven ones and business process ones. That is no longer the case.

Document outsourcing providers like Xerox, Océ Business Services, Pitney Bowes Management Services and IKON (now Ricoh) have provided on-site and managed print services for years. These on-site services include office fleet management, production center management, mailroom management, and so forth. At the same time, customers of these services are often engaging IT outsourcing providers to support the systems, network, application, and data management aspects of their business. Customers are now driving towards having a unified IT outsourcing strategy, ideally where one provider is able to manage the total environment (understanding that the primary provider may engage partners that specialize in particular areas). The HP/EDS deal certainly helped accelerate movement in this space, but the fact is that customers have wanted a simpler approach managing the infrastructure for years. To effectively respond to this opportunity, IT providers will seek partners that deliver complimentary services, including document services.

InfoTrends sees a similar convergence occurring between the business process outsourcing (BPO) providers and providers who deliver DPO services. By the truest definition, providers of DPO services are often managing the document-intensive aspects of a larger business process. BPO players like Accenture, Deloitte, Unisys, and SOURCECORP maintain core business process management capabilities, but often require or desire more focused document solutions to enhance and automate their offerings. Similar to information technology outsourcing (ITO) providers, BPO and DPO providers seek companies that deliver complimentary outsourcing services-or more focused expertise-to deliver comprehensive process outsourcing.

Beyond the Box
Xerox has chosen to invest in a large business process outsourcing company – not a technology or equipment company, signaling they intend to grow profits through providing services with supporting technology versus buying market share. Clearly Xerox is thinking “beyond the box.” This acquisition is a transformative, fundamental repositioning of the company. Xerox is now a $22 billion company with $10 billion from BPO/IT outsourcing services. Xerox is becoming less reliant on “pages” and more focused on information and business processes. The underlying dynamic is that Xerox is beginning to demonstrate some level of indifference to print versus “content”.

Xerox has positioned itself very well to succeed as the economy improves – they have a strong portfolio of services, extensive account base, strong distribution, good cash flow, and an extensive product line. Xerox will have approximately $17 billion in recurring revenue further insulating the company from the ups and downs of the economy. Xerox and ACS are well aligned in terms of the industries and processes they support – ACS is focused on “document” and “image”-intensive processes, has a strong presence in North America, and is primarily focused on business process outsourcing (80%) vs. information technology outsourcing (20%).

ACS has a strong focus on vertical industries including government and health care. About one-quarter of ACS’s revenue comes from the health-care sector, which includes commercial and government contracts. At an investor day earlier this month, ACS was confident that it could increase its Medicaid contracts as well as benefit from a push for more electronic health records, according to a J.P. Morgan research note.

Similar to its acquisition of Global Imaging, Xerox is acquiring a company that has a strong heritage of successfully making acquisitions to sustain growth. ACS has made nearly 100 acquisitions over the last 20 years. The fact that Xerox could arrange financing for such a large deal speaks well for the investment community’s confidence in the ability of Xerox management to execute. Recall that less than 10 years ago during the recession of 2001, Xerox was flirting with bankruptcy amid an accounting scandal, high levels of debt, and various operating and management issues. Today, Xerox is consistently generating significant levels of operating cash, has been buying back stock, and has made a smooth transition to a new CEO.

Xerox’ acquisition of ACS puts the company on a new strategic path that reduces its dependence on equipment and supplies, and opens up many long term opportunities for technology and business process outsourcing services.

Challenges in Maximizing the Value of the ACS Acquisition
Bold news like the ACS announcement raises some interesting questions that, depending on the final answers, will ultimately determine how successful Xerox is in maximizing the value of the acquisition.

• Can Xerox effectively leverage assets (management, technology, sales infrastructure) without adversely affecting company culture? In recent years, Xerox appears to have learned the importance of letting its acquisitions do what they do best and not try to impose a “Xerox way”. Recent examples include critical acquisitions of Global Imaging Systems (2007), XMPie (2006), and smaller companies such as Amici LLC (2006) and Advectis (2007).
• How will Xerox position/integrate ACS with Xerox Global Services (XGS)? This issue was fairly easy when Xerox acquired Global Imaging because the Xerox direct operation typically called on different accounts. There were some issues and channel conflict with the Xerox Agent program, but they were relatively minor. Clearly, ACS and XGS offer different services, but the account sales reps will be calling on many of the same accounts, especially in North America. For now, ACS and XGS will remain separate organizations. This is due to the fact that XGS is still primarily a managed print service offering that is closely related to Xerox equipment. ACS will be the Xerox business process offering. Since Xerox does have some BPO services today, they will evaluate and determine what should move to ACS and what should remain within XGS.
• What will be the major impact on its relations with other IT and Business Process Outsourcing vendors? The impact is not expected to be significant. The fact is that the majority of these relationships are centered on Xerox’s managed print services offerings, not BPO. Looking back on the impact of the EDS relationship (which dissipated as a result of the HP acquisition of EDS), that relationship was similar in nature in that is was primarily centered around the combination of managed desktop services (EDS) and managed print services (Xerox). ACS will help replace some of that synergy based on the fact that ACS today managed several hundred thousand desktops and maintain that competency, but this acquisition is not about IT infrastructure. It is about business process outsourcing.
• How effectively will Xerox be at expanding the ACS business into other regions? Clearly, geographic-based expansion of the ACS business will require more than having a Xerox global account manager set up a meeting with a client and having an ACS subject matter expert walk through a presentation. Xerox will have to invest in local resources in every region and country it plans to expand its new BPO business into.
• How will customers respond? The extent to which customers recognize value and are comfortable with the integrated business process and technology management services that Xerox/ACS offers, will go a long way in determining the success of this acquisition. ACS is currently almost exclusively a U.S. play. Will Xerox need to consider additional, albeit smaller acquisitions in Europe (and beyond) to establish the localized capabilities that customers may want to see before committing?
• Is Xerox betting the farm? The company is tying up a large amount of capital and its cash flow in this acquisition. Xerox will not likely be able to make any other large investments in the near to mid-term. Xerox may have to limit its investments in R&D which has traditionally been its foundation for long-term business growth. In many respects, Xerox can’t afford to fail.

Xerox’s acquisition of ACS will reverberate across the document output, document outsourcing, and BPO industries. Stay tuned for further analysis on this exciting announcement.

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1. Document Solutions Daily Update | ChangeForge | Ken Stewart | Where business and technology collide — September 29, 2009 @ 10:54 pm

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