Investors Give Xerox's (XRX) Affiliated Computer (ACS) Takeover a Thumbs-Down

Investors are giving Xerox's (NYSE: XRX) decision to acquire Affiliated Computer Services, Inc. (NYSE: ACS) a clear thumbs-down. Shares of the copy machine maker are down 18.8% on the news. ACS is up just 11.5%, while the original deal called for a 34% premium. Since the deal is made up of cash and stock, it will fluctuate with the share price of the Xerox.

Under the terms of the agreement, ACS shareholders 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 to ACS's Class B shareholder.

Xerox said on an adjusted earnings basis, the transaction is expected to be accretive in the first year. The transaction is expected to close in the first quarter of 2010.

In response to the news, Standard & Poor's Ratings Services placed the rating on Xerox on CreditWatch with negative implications. They said if the transaction goes through they will likely lower the corporate credit rating on Xerox to 'BBB-'

Analysts at Kaufman Bros said the material drop in Xerox shares suggests that many Xerox shareholders do not see the strategic or cultural fit. They said the strategic fit is not compelling to them either; however, they can understand how Xerox's document management outsourcing offering would benefit from ACS' broader emphasis on cutting the back-office costs of its customers via BPO deals.

Analysts at Wells Fargo were more positive, saying "valuation is a lot more reasonable than what Dell paid for Perot Systems. In our view, strategically makes sense for XRX as it has been trying to move its bpo offerings into the back office beyond document mgmt."

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