Xerox Acquisition of ACS Fits Vision, Execution Likely to Be More Difficult

While I am not enamored with this deal, I do respect it.  Xerox's former Rochester neighbor, Kodak, was close to running out of cash when KKR stepped in to help.  In contrast, Xerox managed to pull itself away from the brink of bankruptcy, much to the credit of its management team including Anne Mulcahy and the new CEO Ursula Burns.  The acquisition of ACS looks to be as much one of grasping for revenue as one of true synergy.  It is a better deal than the Dell / Perot Systems though and should be interesting to watch unfold.

Let's start with the good in this deal.  Xerox has long struggled to expand beyond its core printer and printer services business.  In spite of a branding campaign about document management, most of their revenue continues to come from the traditional segments.  They tried to sell the notion that document management is a major product and process category.  It is actually a subset of many other business processes.  As a player in the lower end of the services spectrum, ACS has industry and process expertise in many of the businesses (and processes) which are intensive users of documents.  It should also be noted that ACS has shown great discipline in building their business which hosts operating margins exceeding those of Xerox.  The price also appears to be decent and I think that this is the right place in the economic cycle to take action.

Now on the side of caution.  The biggest question is whether the sum of part parts is greater than the individual pieces.  Culture and ability to achieve initial bottom line synergies will be paramount. 

Xerox has been through a difficult decade.  While significant transformation has occurred, it is still a company with the DNA of an old school technology provider (e.g. Digital Equipment).  ACS is a scrappy company with an entrepreneurial heritage and strong discipline on the financial side (~10% operating earnings over the last 4 years is impressive).  Even though Burns has stated that the companies will not be integrated, senior management will be.  There are sure to be many difficult decisions on the strategy and investment front ahead of them.  I also believe that a tighter integration will have to occur in some parts of the business which will test the cultural compatibility lower in the ranks.

I found the investor presentation to be less than compelling.  The strategic case sounds good at a conceptual level, but the actual cost and revenue synergies seem a little suspect.  There is a statement in the cost synergy slide which appears to suggest that application of Xerox technology to ACS operations will yield significant cost take out.  I have always found these scenarios to be tricky, often because other divisions tend to be your worst suppliers.  I also do not see how capital investment would be a short term cost take out driver.  The only other cost opportunity noted is duplicate public company infrastructures.  On the revenue side, only high level information was shared.  While I am sure that there will be synergies, I think that buyers differ dramatically between the two businesses and the international opportunities are constrained by language and other local market challenges.  I suspect that these opportunities will take longer than anticipated.

As a final note, let's just recognize that the term services applies to a broad set of businesses at Xerox.  Everything from a small management consulting business, to copier repair people, to clerks processing parking tickets will all fit under the services banner in the combined Xerox / ACS.  This is a really diverse set of things to be good at and to manage effectively.