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

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.