Xerox-ACS deal brings new opportunities

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When completed in the first quarter of 2010,[link widoczny dla zalogowanych], Xerox’s purchase of Affiliated Computer
Services Inc. will be the largest acquisition by the company best known for making
copiers. It will create a $22 billion global enterprise for document technology and
business process management solutions.

“This is an exciting opportunity for us,” said Joseph Doherty, executive vice president
and group president of ACS Government Solutions, a unit of ACS. “It’s a win-win for
both companies, absolutely.”

The merger also is expected to nearly triple Xerox’s services revenue to $10 billion
next year from $3.5 billion in 2008, said Xerox Chief Executive Officer Ursula Burns
during a Sept. 28 conference call announcing the deal.

The acquisition “is a game-changing initiative for sure,” she said.

Xerox will pay $6.4 billion in cash and stock at $63.11 per share for the Dallas-based
diversified business process outsourcing (BPO) firm.

ACS, which will be known as ACS, a Xerox company, will become the corporation’s
core BPO provider with CEO Lynn Blodgett remaining at the helm.

“ACS brings a strong government presence to the table, plus expertise in systems
integration and especially business process optimization,” Shawn McCarthy,[link widoczny dla zalogowanych], director
of government vendor programs at IDC Government Insights, wrote in his blog.

“Meanwhile, Xerox brings an established federal government sales and marketing
group, and it’s well positioned to enhance ACS’ BPO expertise by enhancing the way
its integrated systems capture documents, information and an organization’s internal
data,” he wrote.

McCarthy said he expects that in 2010,[link widoczny dla zalogowanych], Xerox will focus on organic growth, new
government business, new government market alliance partnerships and channel
agreements for its managed print services.

Xerox historically has had a limited footprint in the federal BPO market, said Rishi
Sood, vice president at Gartner Research. “There has been some print-on-demand,
managed print services work that Xerox has done in the government space overall, but
clearly this [merger] is about to take it much higher and much more deeper with
government customers.”

ACS was mostly out of the federal market for five years because of a noncompete
agreement the company signed when it sold most of its federal business to Lockheed
Martin Corp. for approximately $658 million. In exchange, ACS received Lockheed
Martin’s commercial and state and local information technology business.
The noncompete agreement with Lockheed ended in November 2008, and ACS is
again hiring sales and other employees to boost its footprint in the federal sector,
Doherty said.

He added that he foresees no potential conflicts between Xerox and ACS because the
merger will create a single provider, which would reduce costs to the federal
customer, improve processes and more efficiently manage the total information
workflow.

“Our understanding is that the larger federal agencies have a general manager at
Xerox, so they understand the mission and capabilities and expectations for that
particular agency,” Doherty said.

“I would expect us to partner with them,” he said. “They would help us understand the
agency, understand what they are doing today, and then jointly, we would have
conversations with the customer as to how we could extend the value proposition.”
The merger also could benefit ACS by providing the company with potential new
sales outlets.

“It broadens our reach through a global mechanism,” Doherty said, pointing out that
Xerox “is in a significant number of countries where we are not. And again,[link widoczny dla zalogowanych], they have
a customer set that is different than ours in a lot of cases. So I just think there’s a good
value proposition all the way around both in the technology enhancements, in the sales
capability and in the footprint.”

One of ACS’ core competencies is health care solutions. About 40 percent of the
company’s revenue comes from federal, state and local government clients, especially
Medicaid claims processing, Blodgett said during the conference call.

Xerox technologies will help ACS handle the millions of pages of unstructured health
care documents, data and images, he said, which will lead to better analyses and more
outcome-based health care solutions.

“When you think of those hot, long-term growth opportunities like the government
health care marketplace, that’s clearly an area that needs a greater degree of
technology penetration," Sood said. "That’s clearly an area where greater focus on
document management, information workflow, information dissemination solutions
are important."

“I think what you’re building in a Xerox/ACS organization is the ability to be able to
provide services and solutions that not only target those types of opportunities from a
hardware perspective but also from a professional services perspective,” he said.
Indeed,[link widoczny dla zalogowanych], Burns said ACS’ strength in the health care sector helped Xerox decide to
acquire the company. “But this clearly was not the only reason — or even the primary
reason — why we went after ACS,” she said, citing ACS’ strong management team,
good growth rate, financial acumen and ability to extend Xerox’s offerings globally as
the main motivators for the deal.

Doherty said he believes the weak economy also has been an impetus for the recent
spate of similar mergers: Dell Inc. bought Perot Systems Corp., Hewlett-Packard
Corp. bought EDS Corp., and Cisco Systems Inc. bought Tandberg.

“Companies are saying, ‘How are we going to get ourselves set and ready and make
the investment now for the long term?’ and I think that is what HP saw, what Dell
saw, and that absolutely is what Xerox sees,” he said.

Nevertheless, Sood cautioned that “it’s always a tough cultural issue to merge
organizations as disparate as Xerox and ACS.” Xerox, based in Norwalk, Conn., is
reflective of the liberal East Coast, while ACS has its headquarters in more
conservative Texas.

Both organizations face another big challenge because it is difficult to reorient a
traditional hardware organization to sell services and solutions, he said.
“Xerox and ACS need to assure competitors that this is going to be a merger that
provides advantages to all types of relationships in the marketplace,” he said.