WILL XEROX's BET IN BUYING A.C.S. PAY-OFF ?

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WILL XEROX's BET IN BUYING A.C.S. PAY-OFF ?

 user 2010-04-11 at 5:52:55 pm Views: 53
  • #23577

    http://www.glgroup.com/News/Will-Xerox-Bet-in-Buying-ACS-Pay-Off-Like-HPs-Bet-in-Buying-EDS–47581.html
    WILL XEROX’s BET IN BUYING A.C.S.
    PAY-OFF ?

    Will Xerox’ Bet in Buying ACS Pay Off Like HP’s Bet in Buying
    EDS?

    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.
    Analysis

    After
    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.

    But
    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.

    5.
    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
    US.

    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.
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