Xerox to buy outsourcing firm for $5.8B

Xerox Corp. agreed to buy Affiliated Computer Services Inc. in a deal valued at about $5.8 billion, to shift to technology services as sales of its printing equipment drop.

The acquisition will help triple sales from services to about $10 billion, Xerox said yesterday in a statement. The total price of the cash-and-stock deal was about 34 percent more than Dallas-based Affiliated Computer's stock before yesterday's trading.

Chief executive officer Ursula Burns, who took over in July, is increasing Xerox's debt and more than doubling the workforce, sending the stock down and shaving about 10 percent off the purchase price. Her predecessor, Anne Mulcahy, helped Xerox avoid bankruptcy this decade by paring debt, exiting unprofitable businesses, and shedding jobs.

"It's going to take a Herculean effort to integrate these two companies," said Peter Falvey, a managing director at Revolution Partners L.L.C. in Boston. "There is significant execution and integration risk. It's a very bold bet."

Shares of Xerox, based in Norwalk, Conn., fell $1.29, or 14 percent, to $7.68 on the New York Stock Exchange, bringing the per-share value of the transaction to about $56.50, compared with $63.11 before yesterday's trading.

Affiliated Computer rose $6.61, or 14 percent, to $53.86.

The transaction helps Burns expand into a market Xerox values at about $150 billion and gives her a foothold in managing administrative operations for multiple arms of the U.S. government. The number of workers at Xerox will increase to about 128,000.

"With this combination, our tool box just got a lot bigger," Affiliated Computer CEO Lynn Blodgett said in an interview. Blodgett will run the business as a unit of Xerox and report to Burns.

Almost 90 percent of Affiliated Computer's new business contracts last year came from outsourcing, or managing operations for other companies. Total sales rose 5.9 percent to $6.5 billion in the year ended June 30.

Xerox has posted sales declines for three straight quarters, with analysts projecting a fourth, according to the average of estimates compiled by Bloomberg.

Xerox has about 54,000 employees, and Affiliated Computer has 74,000 workers. Xerox said annual cost savings from the deal would increase to as much as $400 million in three years.

Xerox will pay $18.60 a share in cash and 4.935 shares for every Affiliated Computer share. Xerox also will assume about $2 billion in debt.