Once a global IT powerhouse, Xerox corp, said yesterday that it would acquire BPO service provider Affiliated Computer Services for $6.4 billion in a cash and stock deal to transform itself into a leading global enterprise for document and business process management.

Under the terms of the deal, shareholders of the world's largest diversified business process outsourcing (BPO) firm, ACS will receive a total of $18.60 per share in cash plus 4.935 Xerox shares for each ACS share they own. 

In addition, Xerox will assume ACS's debt of $2 billion and issue $300 million of convertible preferred stock. Xerox said that the deal values ACS shares at $63.11 each, a premium of 34 per cent to the closing price of Xerox stock on 25 September.

"By combining Xerox's strengths in document technology with ACS's expertise in managing and automating work processes, we're creating a new class of solution provider," said Ursula Burns, the chief executive officer of Norwalk, Connecticut-based Xerox. 

Xerox with a market cap of $7.8 billion, will become a $22 billion global company, of which $17 billion is recurring revenue - a significant boost to the profitable annuity stream. The revenue generated from services will triple from $3.5 billion in 2008 to an estimated $10 billion next year.

But Burns will find it hard to justify the $2-billion premium that Xerox is paying since ACS had a net income of only $97 million on revenue of $1.7 billion in the last quarter.

Burns says that the acquisition will be "A game-changer for Xerox, acquiring ACS helps us expand our business and benefit from stronger revenue and earnings growth.''

Xerox expects to achieve annualised cost synergies of approximately $300 million to $400 million in the first three years following the close of the transaction.

ACS, based in Dallas, is a Fortune 500 Company and its expertise is in managing paper-based work processes and providing specialised BPO and information technology services for industries that range from telecommunications, retail and financial services to healthcare, education and transportation.

The company was founded in 1988 and was initially operating as a data services provider to the financial services industry. Founder Darwin Deason expanded the company into the communications, education, financial services, government, healthcare, insurance, manufacturing, retail, and travel and transportation industries.

Business process outsourcing is estimated to be a $150-billion market, growing at a rate of 5 per cent per year and ACS is the largest provider of managed services to government entities in the US.

ACS employs about 74,000 people around the globe serving thousands of businesses, government agencies, and non-profit organizations. It has multi-year contracts with more than 1,700 federal, state, county and local governments. Its 2008 revenue was a little over $6 billion.

"When ACS was founded, we had a vision of becoming a best-in-class company by working harder than our competitors. More than 20 years and 74,000 employees later, as the world's top BPO company, we have now found a partner to help us reach even greater heights," said Deason, founder and chairman of ACS.

Lynn Blodgett, president and chief executive officer of ACS said, "We also know that for ACS to expand globally and differentiate our offerings through technology, we need a partner with tremendous brand strength and leading innovation. Xerox offers that and more to bring our business to the next level while strengthening theirs."