WILL XEROX's BET IN BUYING A.C.S. PAY-OFF ?
WILL XEROX's BET IN BUYING A.C.S. PAY-OFF ?
2010-04-11 at 5:52:55 pm #23577
WILL XEROX’s BET IN BUYING A.C.S.
Will Xerox’ Bet in Buying ACS Pay Off Like HP’s Bet in Buying
Following HP’s footsteps, Xerox acquired ACS
early this year for over $6 billion. According to the management, the
deal creates a diversified leader with $10 billion from services in the
fiercely competitive Business Process Outsourcing market. Xerox claims
the combination offers a strong revenue growth potential by scaling ACS
internationally through Xerox brand and global account relationships and
cost synergies by combining corporate governance, services delivery and
infrastructure. However time will tell whether this deal would be a
winner for Xerox shareholders who should closely monitor management
synergy scorecard quarterly and think twice before jumping into XRX yet.
HP bought the computer services company last year for $13.9 billion, it
immediately began hacking the work force. Led by a master cost-cutter
Mark Hurd, HP laid off 25,000 EDS workers, and cut the salaries of some
by more than 20 percent. Hurd even stripped the EDS brass of their plush
offices and corralled them into 6-by-6-foot cubicles.
despite the risk that disgruntled employees and customers would walk out
the door, the acquisition has paid off big for HP — so well, in fact,
that an important rival has decided to strike a similar deal. Dell
announced later that it was paying $3.9 billion for Perot Systems.
Plenty of employees have complained about HP’s tactics, but the company
says it has persevered through the turmoil to keep most of EDS’s
customers. Last quarter, HP’s operating profit margin on services hit
13.8 percent, the highest in a decade. And the combined company’s
services division is HP’s biggest business in terms of revenue — a
remarkable metamorphosis for what has long been viewed as a slow-growth
PC and printer maker.
They even decided to extinguish the
47-year-old company’s name. The new name, HP Enterprise Services,
reflects the union of the services operations at the two companies. HP
may have engineered the deal at just the right time. The down economy
gave HP time to perform its painful restructuring and primed the company
to grow when the good times returned.
Following HP’s footsteps,
Xerox acquired ACS early this year for over $6 billion. According to the
management, the deal creates a diversified leader with $10 billion from
services in the fiercely competitive Business Process Outsourcing
market. Xerox claims the combination offers a strong revenue growth
potential by scaling ACS internationally through Xerox brand and global
account relationships and cost synergies by combining corporate
governance, services delivery and infrastructure. Xerox CFO Zimmerman
expects a total base case of $750+ million in year three reaching almost
$2 billion in year five.
Here is why Xerox/ACS merger seems far
more challenging than HP/EDS deal:
1. Size Matters – HP was a
bigger company at the time of acquisition than EDS which was financially
struggling on its own. ACS is more than twice Xerox Global Services
size with a more diverse revenue mix that even includes IT outsourcing
that is completely foreign to Xerox.
2. Culture Anyone? – Even
Xerox CEO Ursula Burns complained about Xerox’s “let’s not rock the boat
and be ultra-nice to each other” culture out of NY/CT which
fundamentally contradicts with ACS’ more operationally-driven culture
out of Utah. Mrs. Burns will have to get very hands-on overseeing the
integration almost daily.
3. Technology vs Appliance Provider
Heritage – HP has traditionally offered technology, services and
appliances as an integrated solution that can be delivered outright or
outsourced. On the other hand, Xerox has traditionally offered
appliances such as copiers, printers, scanners etc. Xerox would have
difficulty in monetizing ACS capabilities with Xerox’s own board room
brand permission which shortfalls HP’s.
4. Mixed Integration
Approach and Track Record – HP’s Mark Hurd knew exactly how to chop EDS
up to integrate into HP Enterprise Services division. Xerox on the other
hand bought ACS because it realized it was way behind the market and
could not internally catch up via XGS. In other words, HP has already
absorbed EDS but Xerox has put ACS in charge of managing Xerox Global
Services. Xerox’s track record of successfully integrating acquired
companies is mixed compared to HP’s under Mark’s leadership. However,
Ursula may be a much tougher cost-cutter than Mark because this deal of
her own making is too critical for her future as CEO and now Chairman.
Are You Global or Multi-domestic? – Neither HP nor Xerox operates as a
truly global company. Neither EDS nor ACS has successfully established a
commercial footprint outside the US. It is precisely why Xerox’s
ambitions to cross-sell and up-sell ACS into its global accounts outside
the US would prove to be almost a non-starter. Not to mention neither
Xerox nor ACS has any meaningful services delivery footprint outside the
6. Show Me the Money – Xerox is world famous for developing
brilliant inventions that created HPs and Apples of the world. The firm
has not been able to cross the cultural chasm between researchers and
business managers to quickly commercialize innovation; ACS’s value
proposition today largely depends upon offshore and/or people-intensive
“do-my mess-for-less” value proposition which can not be sustainable in
the long term. One of the more interesting potential drivers of value
behind the deal seems to be injecting Xerox intellectual property around
work and process automation technologies into ACS’s delivery and
technology infrastructure. One would wonder if they failed to do it for
so long for so many times internally, how effectively could they do it
now for an external company?
These are interesting and
challenging times for Xerox and ACS…Xerox is desperate for sustainable
growth that it has long been searching for…however time will tell
whether this deal would be a winner for its shareholders who should
closely monitor management synergy scorecard quarterly and think twice
before jumping into XRX yet.