Xerox to Buy Affiliated Computer in Its Biggest Acquisition

By Katie Hoffmann

Sept. 28 (Bloomberg) -- Xerox Corp. agreed to buy Affiliated Computer Services Inc. for $6.4 billion in its biggest purchase, shifting to computer services as sales of its printing equipment drop.

The acquisition will help triple sales from services to about $10 billion, Xerox said today in a statement. The total price of the cash-and-stock deal is about 34 percent more than Dallas-based Affiliated Computer’s closing price Sept. 25.

Chief Executive Officer Ursula Burns, who took over in July, is increasing Xerox’s debt and more than doubling the number of workers at the world’s largest maker of high-speed color printers to about 128,000. Her predecessor, Anne Mulcahy, helped Xerox avoid bankruptcy this decade by paring debt, exiting unprofitable businesses and shedding jobs.

“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.”

Affiliated Computer jumped $6.80, or 14 percent, to $54.05 on the New York Stock Exchange at 11:04 a.m. Xerox, based in Norwalk, Connecticut, fell $1.44, or 16 percent, to $7.54, the biggest intraday drop since March. The stock had climbed 13 percent this year before today.

Government Contracts

The transaction helps Burns expand into a market Xerox values at about $150 billion and gives her a foothold in managing administrative operations for multiple arms of the U.S. government.

“With this combination, our tool box just got a lot bigger,” Affiliated Computer CEO Lynn Blodgett said in an interview. Blodgett will run the business as a unit of Xerox and report to Burns, 51.

Almost 90 percent of Affiliated Computer’s new business contracts last year came from outsourcing, or managing operations for other companies. Total sales rose 5.9 percent to $6.5 billion in the year ending June 30.

Xerox has posted sales declines for three straight quarters, with analysts projecting a fourth, according to the average of estimates compiled by Bloomberg. Global spending on technology products will fall 8 percent this year, Goldman Sachs Group Inc. said this month.

Xerox has about 54,000 employees, while Affiliated Computer has 74,000 workers. Xerox said annual cost savings from the deal will increase to as much as $400 million in three years.

Payment Terms

Xerox will pay $18.60 a share in cash and 4.935 Xerox shares for every Affiliated Computer share, amounting to about $63.11, based on closing prices as of Sept. 25. Xerox also will assume about $2 billion in Affiliated Computer’s debt. Xerox had $1.22 billion in cash and cash equivalents at the end of last quarter, and about $6.7 billion in long-term debt.

Mulcahy, who took over in 2001, had brought down the company’s debt from more than $18 billion the year before she took over. She cut at least 20,000 jobs to revive Xerox after the bursting of the technology bubble left Xerox with mounting borrowings and its first annual loss in five years.

Under Mulcahy, Xerox stopped making personal copiers and started focusing on laser printers, as well as color printing. Earlier this month, Xerox said it would begin selling digital printers for packaging and labels, aiming to tap a new market.

Services Acquisitions

The recession may have hastened Xerox’s decision to expand in services as companies curbed spending in its equipment, said Falvey, whose investment bank worked with Xerox on a prior deal.

This month, Dell Inc. agreed to buy Perot Systems Corp. for $3.9 billion to expand into computer services. Last year, Hewlett-Packard Co. bought Electronic Data Systems Corp. for $13.2 billion in a similar deal.

“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.

Computer Sciences, the manager of networks for NASA and the U.S. Navy, rose $2.53, or 5 percent, to $53.32 on the New York Stock Exchange. Cognizant Technology Solutions Corp., another provider of consulting and computer services, gained 74 cents, or 2 percent, to 38.55 on the Nasdaq Stock Market.

JPMorgan Chase & Co., Blackstone Group LP and Simpson Thacher & Bartlett LLP are advising Xerox on the transaction, and Citigroup Inc. and Cravath, Swaine & Moore LLP are working with Affiliated Computer. Evercore Partners Inc. and Ropes & Gray LLP are counseling a special committee of Affiliated Computer’s board.