Monday, 28 September 2009

Xerox ‘copies’ Dell – buys ACS

(By Anthony Miller – Monday 28th September 2009 6:00pm). Well, one in, all in, I say. Now it’s copier-flogger, Xerox, that wants to muscle into the ‘grown up’ services world by acquiring diversified BPO and IT services player, Affiliated Computer Services (ACS).

Let’s look at the deal from the financial side first. Xerox will be paying $6.4b for ACS of which 30% will be in cash. At $63.11 per share, this is a 34% premium to ACS’ $47.25 closing price last week. Based on ACS’ FY09 numbers (to 30th June) Xerox is paying a PSR of 1x sales, though if you add in the $2b of debt that Xerox is also going to assume, then that’s an EV/sales more like 1.3x. The price represents 9x FY09 EBIT (12x EV/EBIT) and 18x FY09 P/E. Although these are not ‘fire sale’ prices – and nor should they be – they seem much fairer prima facie than the outrageous price Dell is paying for Perot (see Dell, Perot try the Texas Tango).

Unlike Perot, ACS looks like a classic ‘boring’ BPO/IT services play, with steady margins (around 10-11% vs 7-8% at Xerox), long-term contracts, diversified portfolio of services etc etc – I guess in some ways like an 'American Capita'. That’s why the price doesn’t raise my eyebrows. Indeed, Capita is currently valued at 1.8x FY08 revenues and 15x EBIT but runs at a 12% margin, again making the ACS price not look daft.

But yet again it’s the strategic value of the deal that I struggle with. Xerox has already confirmed that it will not combine its existing managed print services into the ACS business, so the growth case appears to be predicated on the famous ‘revenue synergies’. So tell me this. If you buy your copiers from Xerox, would you be more inclined to buy BPO/IT services from ACS? And if you are already an ACS client and you are in the market for copiers, wouldn’t you already be looking at Xerox? And if you chose a competitor instead, would its ownership of ACS have changed your mind?

I am even more worried that the headlong rush of product companies acquisitively moving into services is going to end in a multiple pile-up. Even if the financial argument is compelling – and it isn’t (the cost savings in this deal are more to do with delisting ACS and unspecified procurement and back office savings – nothing to do with service delivery) – the market proposition just has to make sense. And to me it doesn’t.

By the way, ACS is tiny in the UK, much like Perot. Their last UK accounts (to 31 June '08) showed some £16m in revenues, probably including some of the Syan acquisition (see Goodbye Syan. What does this mean for ITO to SMEs?), which still would leave them under £50m p.a., I would think. So no landscape-changing stuff here, then.

And finally (for now) ... who's gonna be next? We're fast running out of independent IT services players to be acquired. Dare we suggest CSC? But who would buy them? Let's see now, on current track record, it needs to be a completely inapppropriate hardware vendor. Hmmm. I know! How about Cisco?

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