Xerox Bets Big on Services

CEO Burns' $6.4 billion deal to buy Affiliated Computer Services will accelerate the transformation of Xerox into a services provider

Xerox Chief Executive Ursula Burns Steve Pyke/Contour/Getty Images

By Aaron Ricadela

Given its reliance on hardware, Xerox (XRX) got squeezed by the recession as companies stretched equipment further and put off purchases of new printers and copiers. The company's bold expansion into services, through the $6.4 billion acquisition of Affiliated Computer Services (ACS) announced on Sept. 28, represents an attempt to capitalize on the global recovery.

Buying ACS will triple Xerox's services revenues, to $10 billion, and help it benefit from companies' desire to do more with fewer workers, even as business comes back. ACS, which handles paper-oriented tasks such as billing and claims processing for governments and private companies, also gives Xerox a bigger toehold in health-care and government services, two areas primed to benefit from federal economic stimulus spending.

Xerox Chief Executive Ursula Burns says the company needed to make a large services acquisition to accelerate its transformation from a product company into a service provider. "The way we were going was going to take 10 years," she said in an interview. "The path we were on wouldn't have given us scale fast enough."

Taking a Page from Big Blue

Other technology firms are taking a page from IBM (IBM), betting on services as a way to bring in steady revenues at a time when customers are keeping computers and other equipment longer to save money. Xerox's cash-and-stock bid for ACS represented a 34% premium to ACS's closing stock price on Sept. 25. It came a week after Dell (DELL) said it's paying $3.9 billion for information technology services company Perot Systems (PER), offering a 68% premium. Hewlett-Packard (HPQ) bought tech services company EDS for $13.9 billion in 2008. "Everyone is looking at the IBM model and trying to emulate it," says Eric Gebaide, a managing director at investment bank Innovation Advisors.

Burns, who pulled the trigger on Xerox's biggest-ever acquisition after less than three months as CEO , will need to prove to investors that Xerox's latest push to diversify beyond hardware will succeed better than failed attempts a decade ago. Rick Thoman, CEO in 1999 and 2000, led an expansion into inkjet printing, Xerox-developed software, and document management services, with disastrous results.

Business Exchange

Track and share business topics across the Web.