Xerox Corp plans to buy Affiliated Computer Services Inc for $5.5 billion to move into the outsourcing business,but shares of the printing company plunged on concerns that it was gambling on a major shift in strategy. The cash-and-stock deal,Xerox's biggest ever and the first major move by new CEO Ursula Burns,is the latest in the technology services sector,where reliable revenue streams have attracted hardware vendors looking to diversify. Xerox rival Hewlett-Packard Co bought EDS last year,and Dell Inc plans to buy Perot Systems Corp. Shares of Xerox fell 14.48 per cent to $7.68 as some analysts questioned how quickly the acquisition will bear fruit and others cited concerns about the dilution of Xerox shares. BMO Capital markets analyst Keith Bachman said Xerox is seeking to buy access to new markets for its copiers and printers through ACS,but their sales teams could struggle to sell each other's services. "Xerox's (deal) appears more radical in scope than any deal contemplated by HP,Sun,or IBM - more change at once,with less initial product overlap," Bachman wrote in a client note. "To be fair,we believe that Xerox has proven with Global Imaging Services that it can effectively integrate companies,but we question the amount of current strategic overlap." Xerox acquired GIS in April 2007 for about $1.5 billion. Xerox said it will pay 4.935 Xerox shares and $18.60 cash for each share of ACS,totaling $6.4 billion,or $63.11 a share based on Friday prices. That was a 33.6 per cent premium - and about the same as ACS's record share price of $63.66 in 2006. But with the fall in Xerox shares on Monday,the deal value shrank to $56.60 per share. ACS rose 13.99 per cent to $53.86. Norwalk,Connecticut-based Xerox,which has about $1 billion in cash,said about $3 billion of the deal will be financed through capital markets. Its credit default swaps rose by 0.10 per centage point to 1.78 per centage points,indicating that the cost of protecting its debt has risen. Xerox said that if its board terminates the deal,the company will have to pay ACS $235 million. If ACS's board terminates the deal,then the company will pay Xerox $194 million. Despite Xerox's share fall,analyst Shannon Cross of Cross Research said the deal appeared to be fairly priced when compared to Dell's bid for Perot and HP's acquisition of EDS. "The ACS acquisition will strengthen Xerox's enterprise business,allowing it to expand from a document management company . into the (outsourcing) space with strongholds in government and healthcare," Cross said in a note to clients.
