Today, Xerox announced its intended acquisition of Affiliated Computer Services (ACS) for $6.4 billion in a combined cash and stock deal. Ursula Burns, CEO of Xerox, described this acquisition as “game changing.” She positioned it as different from some of the earlier services acquisitions by IBM, Perot Systems by Dell and EDS by HP (though not mentioning these by name) by saying that the industry needs not only software applications and IT infrastructure, but that companies are increasingly seeking service providers that offer a full range of solutions, global capabilities and global account management that address both back-end services and front-end document processes.  Both companies spoke highly of Xerox’ ability to automate many of ACS’ current manual and labor-intensive processes, especially those related to image capture, management and processing.  They also spoke about migrating ACS services to serve Xerox’ internal needs.  These two approaches form the base of what was described as a very conservative estimate of $300 to $400 million in synergies ($100 million in the first year) and a great deal of upside. The ability to gain such synergies from this conservative model was described as a “huge safety net” for the success of the acquisition.

One issue that was not addressed on the analyst and media calls is how much competitive equipment exists within the ACS network, either owned or managed, that can (and likely will) be replaced with Xerox equipment. Subsequently, WhatTheyThink received this response:  “They aren't a Xerox customer, so it opens up all kinds of opportunities to replace existing technology.”

The other question that comes to mind is what will happen with any apparent redundancies between the two organizations, most significantly, Xerox Global Services organization.  Burns was careful to say that ACS will initially be known as ACS, a Xerox company. That leaves the door open to a range of organizational options as the acquisition proceeds. Again, subsequent to the call, the official Xerox response to this question was:  “We have a transition team in place to take a look at what select Xerox services could be integrated into ACS to take advantage of their BPO expertise.” It is likely that XGS, or parts of it, would be one of those “select Xerox services.”

ACS is obviously excited about access to the Xerox brand, its global reach (ACS primarily operates in North America at present), and its world-class global sales force and account relationships.  Currently, there is only about a 20% overlap in customer base, which leaves plenty of opportunity for each to introduce the other to existing customers for a strong combined sales start.

One analyst cited the abysmal performance of many acquisitions in the U.S. economy, including some older Xerox acquisitions such as Crum & Forster, and asked why this one would be different.  Burns was quick to cite the success of recent acquisitions by Xerox as an example of the company’s ability to do successful acquisitions.  These included Xerox Litigation Services, Xerox Mortgage Services, XMPie, Global Imaging (who has acquired an additional 10 companies), and Tektronix.

ACS also has a significant health care footprint.  President and CEO Lynn Blodgett indicated that the healthcare industry is placing heavy focus on reducing the 2% to 3% of costs that are administrative, while the real opportunity lies in the 97% to 98% of costs associated with the actual delivery of health care.  Blodgett believes that the “real magic” lies in the fact that Xerox has tremendous capability in the management and processing of unstructured data, with the ability to analyze unstructured data such as claims forms and images, providing more in-depth and automated analytics on that type of information, therefore driving toward more outcome-based health care solutions, the direction the industry is trying to go.

Of course, the timing of this acquisition aligns nicely with the supposed availability of huge amounts of government dollars as the health care debate, currently raging, gets resolved one way or another.  ACS already gains 40% of its revenues from government business and has a nice foothold there as well as in the commercial health care arena. Xerox also has a reasonable presence in the health care industry.

With an expected close in the first quarter of 2010, it sounds like next year will be a busy one for both Xerox and ACS as they work to meet (or exceed) market expectations relative to this latest—and very significant—acquisition.