Affiliated Computer Services Sells to Xerox Corp.

Xerox makes largest-ever purchase

Xerox products have gotten smaller, but its business is getting bigger. Image from Flikr.

Xerox has seen a decline in demand for its services, and now it has decided to buy Affiliated Computer Services Inc. for $6.4 billion and shift the focus of its business.

Xerox will pay $18.60 a share in cash and 4.935 Xerox shares for each Affiliated Computer Services share. Bloomberg.com reports this is about 34 more than the  closing price Sept. 25.

Affiliated Computer Services

Affiliated Computer Services is based in Dallas, Texas. The company provides information technology and business process outsourcing services to businesses, government agencies and non-profit organizations. Right now it operates in more than 100 countries and makes about $6 billion per year.

Its profits haven’t kept Affiliated Computer Services from borrowing money, and Xerox will also now be responsible for Affiliated Computer Services’ debt of about $2 million. One of Affiliated Computer Services’  main clients is Medicaid.

More about acquisition deal

The deal between Xerox and Affiliated Computer Services is expected to close in early 2010, according to Wikipedia. Xerox expects its acquisition of Affiliated Computer Services will triple its sales in the services sector. The company expects to pull in about $10 billion in sales from services yearly after the purchase.

Affiliated Computer Services CEO Lynn Blodgett will continue to run the company as a unit of Xerox. She will report to Xerox CEO Ursula Burns.

Not going paperless yet

Much of Xerox’s business in the past was dependent on people’s dependence on paper. Xerox is the United States’ largest supplier of color printers. As the world continues to do more digitally, people are using printers less and less, preferring to exchange documents between computers.

Xerox is still investing in paper and hard copies, as it has started developing and selling digital printers for packaging and labels.

Naysayers

Of course, the CEOs of both Xerox and Affiliated Computer Services are optimistic that the deal will benefit both companies. However, not everyone is so sure it will work out.

“It’s going to take a Herculean effort to integrate these two companies,” said Peter Falvey, a managing director at Revolution Partners LLC in Boston. “There is significant execution and integration risk. It’s a very bold bet.”

Xerox has struggled to stay afloat in the past decade. Ursula Burns’ predecessor, Anne Mulcahy managed to keep the company out of bankruptcy through trimming debt, shedding jobs and exiting unprofitable businesses.

Contracts and expansion

Mulcahy was the one who switched Xerox’s business focus to laser printers rather than personal copiers. Xerox’s purchase of Affiliated Computer Systems under Burns’ direction marks yet another big shift in business focus.

Affiliated Computer Systems is one of the largest outsourcing companies in the U.S. About 90 percent of Affiliated Computer Systems’ business contracts are for outsourcing.

A big purchase

Affiliated Computer Systems is actually larger than Xerox, as Affiliated Computer Systems has about 20,000 more employees than Xerox. Xerox estimates its purchase of Affiliated Computer Systems will help it expand into a market worth $150 billion.

“There’s just no question that some of these big guys are looking to become more horizontal,” said Falvey. Computer Sciences Corp. and some Indian outsourcing companies may become targets, he said.