LITTLE ROCK — Xerox Corp. agreed to buy Affiliated Computer Services Inc. for $6.4 billion in its biggest purchase, shifting to technology services as sales of its printing equipment drop.
The acquisition will help triple sales from services to about $10 billion, Xerox said Monday. The total price of thecash-and-stock deal is about 34 percent more than Dallas based Affiliated Computer's closing price Friday.
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 highspeed color printers to about 128,000. Her predecessor, AnneMulcahy, 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 rose $6.61, or 13.9 percent, to $53.86 on the New York Stock Exchange Monday, the biggest daily jump in 2 1/2 years. Xerox, based in Norwalk, Conn., fell $1.29, or 14.38 percent, to $7.68, the largest drop since March. The stock had climbed 13 percent this year before Monday.
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, 55, 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 that ended June 30.
Part of the logic behind such deals is to acquire companies that have tighter relationships with their customers because they provide more critical services, said Craig Le Clair, an analyst with Forrester Research. Businesses have more at stake outsourcing their payroll or accounting systems than buying copiers or personal computers. And companies that provide those services end up with steady revenue streams from multiyear contracts.
"Great move by Xerox," Le Clair said. "It's a very storied company, but one aspect of that story is they haven't moved into new markets quickly enough. And this is exactly the kind of thinking and bold move that will move them into the next phase of growth."
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, and Affiliated Computer has 74,000 workers. Xerox said annual savings from the deal will increase to as much as $400 million in three years.
CREDIT-RATING CUT?
Xerox will pay $18.60 a share in cash and 4.935 shares for every Affiliated Computer share, amounting to about $63.11, based on closing prices as of Friday. Xerox also will assume about $2 billion in 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.
Standard & Poor's said Monday it may cut Xerox's BBB credit rating, citing the increase in debt. The rating is two steps above junk.
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.
Affiliated Computer Chairman Darwin Deason, the company's founder, will become one of Xerox's largest shareholders. He said in the release that he is "optimistic" about the company's future and that he plans to remain a "long-term" investor.
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.
Information for this article was contributed by Katie Hoffmann of Bloomberg News and Andrew Vanacore of The Associated Press.
Business, Pages 19, 20 on 09/29/2009