Standard & Poor’s Ratings Services placed Xerox Corp. (XRX) on CreditWatch negative Monday after the copier-maker said it’s buying business processes outsourcer Affiliated Computer Services Corp. (ACS).
Wall Street didn’t seem too pleased, either. Xerox’s shares had plummeted 14.6 percent to $7.66 by 3:28 p.m. Eastern on news that Xerox plans to buy ACS for $63.11 per share in cash and stock, for a total of about $6.4 billion.
S&P analysts said that while the acquisition will help Xerox diversify and serve new customers, the amount of ACS debt it’s assuming – $2 billion – is just too high. Still, if the combined companies “generate solid levels of discretionary cash flow” right away, they could cut that leverage quickly, said Lucy Patriola, a credit analyst for S&P.
“We view the acquisition as an enhancement to Xerox’s existing business profile, given ACS’s good position in state and local government, diversified customer base, and recurring revenue stream,” Patriola added.
Meanwhile, Xerox said it’s picking up ACS to create a $22 billion global firm that oversees document technology and business process management. The move mimics those made recently by computer makers Dell Inc. and HP. Last week, Dell bought Perot Systems, a systems integrator, to better compete against rivals HP and IBM Corp. Similarly, HP earlier this year purchased EDS to fortify its strength in the services sector.
Now Xerox, in its largest M&A deal ever, is edging into the same market. ACS will operate independent of Xerox and be called ACS, a Xerox Company. Lynn Blodget, president and CEO of ACS, will retain that position, reporting to Xerox head Ursula Burns.
The merger should close early next year.
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