Xerox boosts BPO Buys ACS

Xerox boosts BPO offering with ACS buy

A week after Dell announced plans to acquire Perot Systems, another Texan services firm has been snapped up by a large hardware manufacturer. Xerox is paying $6.4 billion for Affiliated Computer Services (ACS), following not only in the footsteps of Dell, but HP and IBM too.

The purchase of ACS will more than triple Xerox's services revenues to an estimated $10 billion in 2010, from $3.5 billion in 2008. The combined operation, to be known as 'ACS, a Xerox Company' and led by ACS CEO Lynn Blodgett, will comfortably rank as one of the 20 largest global IT services providers, ahead of the newly expanded Dell services business, which should generate yearly sales of around $8.5 billion.

Xerox and Dell now join other hardware vendors such as IBM, HP, Fujitsu and Unisys in the list of the top 20 biggest global IT services providers. This further underlines the increased investment in services by major hardware manufacturers.

ACS finally gets the takeover deal it wanted
ACS has been flirting with potential private equity acquirers for several years now. Most recently, in 2007 founder and chairman Darwin Deason, backed by investment group Cerberus Capital Management, tabled a series of offers culminating in a bid of $62 per share. However, the proposal met shareholder opposition and did not pass.

Almost two years on, and in a very different economic environment, Xerox has succeeded in pushing its bid through and it is not difficult to see why the deal is attractive to both sides. As with Dell, IBM and HP, Xerox is looking to keep pace with the converging IT market. Simply put, hardware vendors with services arms are able to cross-sell both hardware and services, as well as diversifying their business away from hardware refresh cycles.

For ACS, which generates over 90% of its revenues from the US, Xerox intends to help it expand globally - something it did not achieve alone, despite several years of trying. ACS said in 2006 that it was planning a major expansion in Europe, but the expected large-scale acquisitions failed to materialise. Instead, the company preferred to make a number of small purchases, including UK-based infrastructure services firm Anix for $50 million and Germany's SDS Business Services for $67 million. It is therefore not surprising that Xerox intends to use its brand name and existing client relationships to grow ACS's business in Europe, Asia-Pacific and South America.

More a BPO than an IT move
What makes ACS really attractive to Xerox is its business process outsourcing (BPO) capability. Of all the global IT services vendors mentioned above, ACS generates a higher proportion of its revenues from BPO (79%) than any other. It also has expertise both across horizontal functions (such as finance and accounting outsourcing) and in vertical-specific areas such as healthcare payer and insurance transactions.

The ability to further automate ACS's services using Xerox document management technology has been singled out as a major advantage for the combined company. This should result in lower cost of service and potentially the introduction of new types of BPO service where the combined company can remove or lessen manual processing.

However, the challenge of internationalising the combined business should not be underestimated. Recognisable as the Xerox name may be, it is not automatically associated with the delivery of business-critical services, especially outside North America.