Can Xerox Integrate ACS?

Xerox has agreed in principle to purchase Affiliated Computer Services for roughly $ 5.6B. Is this a catch-up strategy? Do they have the ability to succeed from a financial and management view? Who's taking over whom?

IBM and HP started the services acquisition wave, followed by Dell's apparently pricey announcement to acquire Perot Systems. At least Xerox appears to be paying a much more reasonable multiple for ACS; about 13.5 times estimated fiscal 2010 earnings, compared to Dell paying 29 times. But a reasonable purchase price does not ensure success. One of the reasons the purchase price is lower is that ACS has been shopping itself for sometime, with no other apparent interest. That it partly because ACS focuses more on low value and low margin BPO contracts, bidding aggressively for the business, then relying on up sells to make money on a project.

I agree that Xerox can probably get some synergies on these type of processes, but it seems hard to find nearly enough to justify the cost. One of the main ways to streamline these types of costs is through the use of software to replace human processes, but this is not where ACS or Xerox excels. Xerox's history in acquiring and integrating software companies is poor at best. Their acquisition a while back of XM Pie for $ 54 M three years ago was tactical and has not been leveraged to the Enterprise.

For the acquisition to close, Xerox must maintain an investment grade rating after financing the deal and I have doubts there, as well as their management bench to execute.

Lastly, ACS has around 74, 000 employees to Xerox's approximately 47,000. Their yearly service revenue is almost double Xerox's. At a time when IBM and HP have bulked-up and the 800 pound Gorilla named Accenture lurks. I believe the merger distraction, lack of high value/top-of-mind implementations and culture clashes will prove rather costly to Xerox's shareholders.

This author consults with leading institutions through GLG