XEROX MAKES A BIG BET!

With its announcement today of an agreement to acquire Affiliated Computer Services, Xerox has made the leap to dramatically increase the services component of its revenue mix. Up to this point, the company has expanded its consulting and managed services business primarily via organic growth. Its more recent acquisitions have expanded its distribution network aimed at medium sized businesses. The ACS deal will nearly double the service revenues of Xerox. This move is very likely to alter the culture of Xerox which has traditionally been dominated by an equipment sales organization and “big iron” engineering. Xerox Global Services, its consulting and services division, has made a good start of shifting the approach to the global large enterprise market toward solutions. This move will accelerate that strategy.

It’s interesting to see this announcement in the week following Dell’s acquisition of Perot Systems. This move has been seen as a follow-on response to HP’s acquisition of EDS last year. These players already have access to the CIO suite in a way that Xerox has not enjoyed, given its absence from the pc and server markets. It will be interesting to see whether Xerox establishes any agreements with other hardware companies so as to match up with capabilities offered by HP.

The announcement said that the deal is expected to be accretive (as contrasted with dilutive) to earnings within the first year. ACS’s revenues have been solid and profitable even through the recent downturn. This should improve the quality of Xerox’s earnings over time. It indicates that Xerox expects to be able to sellhardware and servicesinto existing ACS relationships.

So this move looks to me to be a big bet in some ways (size of the deal, cultural & systems integration questions), and yet a no regrets move in others (revenue and earnings quality, extension of an existing service strategy).

What do you think?