Xerox snaps up ACS in $6.4 billion takeover; investors think it overpaid

Ursula Burns isn't wasting any time.

Elevated to CEO of Xerox Corp (XRX) in July, Burns, the first African-American woman to lead an S&P 100 company, has orchestrated a major takeover Xerox hopes will give it a bigger foothold in the business services space. Xerox said Monday that it would pay $6.4 billion in cash and stock for Affiliated Computer Services (ACS), a large IT and outsourcing firm.

While the deal will surely boost Xerox, investors wondered whether Burns paid too dear a price: Xerox shares were trading down nearly 10 percent in pre-market activity Monday. ACS shares, meanwhile, were up over 20 percent in early trading.

The takeover follows similar high-profile mergers in the technology space, including Adobe's (ADBE) $1.8 billion deal for Omniture and Dell's (DELL) $3.9 billion buyout of Perot Systems.

While the increased deal-making is a good sign for the tech space and the economy more broadly, a weekend report showing that job-hunters outnumber job openings by a shocking 6 to 1 ratio indicates that Joseph Stiglitz may have been right when he predicted that while economic growth may pick up soon, jobs may not return for years.

In other words, the United States could be on the verge of a recovery -- just one without job creation. Surely, the irony will not be lost that ACS, besides being a giant office services company, also specializes in outsourcing. During a conference call with investors, executives of both companies said they hope the deal will allow the combined company to lower their labor costs -- corporate speak for layoffs.

Calling the ACS deal "a game-changer" for Xerox, Burns, a 29-year veteran of the company, said it would help Xerox "expand our business and benefit from stronger revenue and earnings growth." The deal will triple the service component of Xerox's revenue to roughly $10 billion annually from $3.5 billion, according to the company.

"By combining Xerox's strengths in document technology with ACS's expertise in managing and automating work processes, we're creating a new class of solution provider," said Burns. "Xerox becomes a $22 billion global company, of which $17 billion is recurring revenue -- a significant boost to our profitable annuity stream," she added.

During the conference call, Burns apologized for announcing the deal on Yom Kippur, one of the holiest days in the Jewish calendar. Burns said Xerox had hoped to announce the deal later in the week, but moved earlier to avoid the news leaking.

Xerox will pay ACS shareholders $63.11 per share -- $18.60 in cash plus 4.935 Xerox shares for each ACS share they own, according to a Xerox statement. In addition, Xerox will assume ACS's debt of $2 billion and issue $300 million of convertible preferred stock to ACS's Class B shareholder.

Xerox said it intends to leverage its "strong global brand and established client relationships to scale ACS's business in Europe, Asia and South America. In addition, Xerox will integrate its intellectual property with ACS's services to create new solutions for end-to-end support of customers' work processes."

Darwin Deason, founder and chairman of ACS, hailed the deal. Deason is poised to become one of the combined company's largest individual shareholders.

"This is a tremendous outcome for our shareholders driven by the commitment of a strong management team and incredibly dedicated employees," Deason added. "At closing, I will become one of the combined company's largest individual shareholders, and I intend to remain a long-term investor because I could not be more optimistic about the future of the combined company."

While the deal may represent a "tremendous" outcome for shareholders, neither the employees laid off as part of the merger, nor the workers whom ACS's outsourcing business makes "redundant," are likely to share Deason's enthusiasm.

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