ACS, Xerox Merger Approved

Affiliated Computer Services Inc. (ACS), a leading business process outsourcing firm rose 0.45% after hours after falling 2.28% to close at $59.64, following the company’s announcement that shareholders had approved its acquisition by Xerox Corporation (XRX).
 
The transaction is expected to close soon and as a result, Standard & Poor’s announced changes to its index. S&P MidCap 400 constituent Urban Outfitters Inc. (URBN) will replace ACS in the S&P 500 index.
 
In September, Xerox agreed to acquire Affiliated in a cash and stock transaction valued at $6.4 billion ($63.11 per ACS share in cash and Xerox stock as of the closing price of Xerox on September 25). Affiliated shareholders would receive $18.60 per share in cash and 4.935 shares of Xerox.
 
Xerox would also assume $2 billion of ACS’s debt and would issue $300 million of convertible preferred stock to ACS’s shareholders. For this, Xerox issued about $2 billion in bonds last month, the net proceeds of which would support the ACS acquisition.
 
Xerox and ACS have already satisfied the Hart-Scott Rodino and Securities & Exchange Commission requirements for the merger. In addition, Xerox confirmed that pre-closing litigation-related issues have been resolved and that both parties intend to progress quickly to close the deal.
 
The company said that that the acquisition will enable Xerox to become the leading global enterprise for business process and document management and accelerate its growth in an expanding market. ACS will help Xerox expand its service offerings into payrolls, accounts payable, information technology outsourcing and other business and accounting functions.
 
More than 96% of Xerox shareholders voted in favor of the acquisition, while more than 86% of the voting power of the outstanding shares of ACS Class A and Class B stock voted in favor of the acquisition. In addition, both the majority and the minority voting requirements were met.
 
As a subsidiary of Xerox, Affiliated will operate independently. The combined company will have greater BPO capability and help expand Affiliated’s presence in international markets. Currently, the BPO market opportunity for the two companies is about $130 – $150 billion, growing at 5% to 10% a year. With the Xerox/Affiliated merger, the total market opportunity will be more than $500 billion.
 
The combined company plans to cut costs by up to $400 million a year from 2012 onwards. It is currently expected to generate $22 billion in revenues, of which $17 billion is expected to be recurring in nature and $10 billion is expected to come from services. The transaction is expected to be accretive in fiscal 2010.
 
ACS revenue grew 6% and the company had new business signings of $1 billion in annual recurring revenue during fiscal 2009. Trading currently below the acquisition price, we believe the deal would be beneficial for Affiliated, though Xerox may face integration-related issues.
 
Xerox’s CEO said that the company will remain active in acquiring smaller targets that may not be as large as ACS. Smaller acquisitions would be better in the current market scenario, since it will minimize integration issues and allow the company to focus on the core business.
 
We remain Neutral on both ACS and Xerox.