Summary
Xerox's attempt to neutralize its main revenue decline by acquiring ACS will end up further de-focusing the company's core business as well as the weakening of ACS's competitiveness in the marketplace. Xerox big bet on services with ACS acquisition is not likely to be successful.
Analysis
Xerox is going after "services fad" this time again. It has failed miserably in financial services sector by acquiring several large financial services firm in early 1980's (Van Kemp Merritt ? and others costing many billions around 1983).
At that time, Xerox made a public statement that Xerox will be a $ 100 Billion company by early 1990's due to growth from financial services business as well as the synergy & growth from its mainline copier & electronics business. In 2008, however, Xerox revenue was ~ $ 17B, and the revenue has been sliding downwards.
ACS business is basically a "people intensive, labor cost sensitive customer service business". ACS is neither the market leader nor the lowest cost service provider in this sector, and this BPO is already well entrenched with several larger competitors having product/product synergies such as IBM, HP/EDS, CSC, and Accenture. Further, newer, lower cost entrant such as India's WIPRO is coming into this BPO segment making the future of ACS precarious even without the corporate pressure from Xerox.
Although Xerox & ACS claim a re-structuring cost of $ 50~ 75 M over 5 years, and $ 100M/yr of expense savings by combining two public companies into one public company, this is easier being said than done. This overlooks the fact that ACS is an entirely different people/service intensive business, and mixing it with Xerox's main line business is like mixing oil & water - anticipated expense savings of $ 100M/yr will result in ACS losing market competitiveness and market share as well as decline in its gross margin.
Another claim that global Xerox customer accounts can be penetrated with ACS services, and vice versa with ACS ITO with Xerox product/service offering is being overly simplistic and naive. It sounds good on paper, but its realization is NOT likely at all.
In sum, Xerox' big bet on services with this acquisition is not likely to be successful.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
