Xerox to seek entry into HIT market with ACS deal

In another example of a hardware manufacturer buying an information services provider, Xerox Corp. last week announced it would acquire Affiliated Computer Services with a cash and stock offer that the companies are valuing at $6.4 billion.

The deal, disclosed on Sept. 28, is the third in little over a year in which a company known primarily as an information technology hardware manufacturer moved to acquire a company known primarily as an IT implementation and outsourcing services provider.

In May 2008, Hewlett-Packard Co. made public its offer to buy Electronic Data Systems Corp. in a $13.9 billion deal that closed in August of that year. Last month, Dell announced its offer to buy Perot Systems Corp. for $3.9 billion.

John Lovelock, a research vice president at Gartner, an IT research company, says the ACS acquisition makes sense. The market for IT services is heating up in the U.S. healthcare industry because of the proposed federal subsidies under the American Recovery and Reinvestment Act of 2009. And so it is for other reasons, in other industries, in other countries.

“If you leave healthcare out for a moment, hardware really got hit in the downturn,” Lovelock said. “Its recovery is going to be much slower than software and services. Most countries, it's working out this way. From a pure hardware point of view, they (Xerox) are going to have to find growth and margin growth in other areas. Dell, for a long time, has needed a service offering to round itself out. Xerox needed a larger services business than it has.” In fact, the recent run at service providers with big stakes in healthcare “is a little surprising,” Lovelock said.

Xerox, which traces its roots back to 1906, is best known as a manufacturer of copying machines, Xerox has since become a global conglomerate offering a wide range of products for document and image creation, storage and transmission.

The company reported revenue of $17.6 billion for the fiscal year ended Dec. 31, 2008, and a net income of $230 million, according to financial reports. Xerox expects to increase dramatically the portion of revenue derived from sales of services, according to Xerox CEO Ursula Burns, in a news release issued at the time of the ACS purchase announcement.

Burns said she expects top-line revenue for the combined company will reach $22 billion next year while revenue from services—which is what ACS is all about—will “triple from $3.5 billion in 2008 to an estimated $10 billion next year. By combining Xerox's strengths in document technology with ACS' expertise in managing and automating work processes, we're creating a new class of solution provider,” Burns said in the news release.

ACS was founded in 1988 by Darwin Deason, who remains as company board chairman and a major stockholder. ACS is a provider of business process outsourcing and IT services. In its fiscal year ended June 30, the company reported revenue of $6.5 billion and net income just short of $350 million for the period, according to its annual report to the Securities and Exchange Commission.

In the healthcare industry, ACS provides payers, providers and the government outsourcing services for claims processing, eligibility and enrollment functions, revenue-cycle management, pharmacy benefits management, data-mining and healthcare claims auditing.

According to ACS, 79% of its revenue for its most recent fiscal year, or about $5.1 billion, came from outsourcing; another 16%, or $1 billion, from IT services; and 5%, or $349 million, from systems integration.

Healthcare IT, because of the stimulus funds, has “gotten a lot of attention, but it is still one of the smaller markets,” Lovelock said. “It's a vibrant, interesting market with good margins to be made on vendors who attack it.”

But internationally, IT opportunities in other industries, such as financial services, are even better, Lovelock said. The Dell-Perot deal, for example, “has a lot of synergies, both here and abroad,” Lovelock said.

With Xerox, “they're a lot more than just copiers, but they are going to be transitioning themselves a lot more around the workflow of documents,” Lovelock said. “ACS has a lot of offerings around document management. Probably one of the big difficulties healthcare has with going to electronic records is the time you'll have to deal with the hybrid of paper and electronic records. The Xerox and ACS deal seems to tackle that head on.”

A version of this story initially appeared in this week's edition of Modern Healthcare magazine.

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