Worries about debt and integration issues cast pall over merger agreement.
Shares of Xerox fell about 15% in Monday trading on concerns that the company's plan for a multibillion dollar acquisition of outsourcer Affiliated Computer Services could expose the imaging giant to significant debt and integration problems.
Xerox shares were off 14.86% Monday, to $7.68. ACS shares rose 13.76%, to $53.75. Xerox announced a deal, initially valued at $6.4 billion, to buy out ACS prior to the opening of financial markets Monday.
Xerox believes it can marry its document imaging technology with ACS's expertise in managing paper-intensive back office processes for large organizations like government agencies, commercial customers, and healthcare concerns.
But investors fear the risks could outweigh the deal's upside potential. For starters, the agreement calls for Xerox to take on ACS's $2 billion debt load. That fact prompted Standard & Poor's to place Xerox on its watch list Monday, with a downgrade of Xerox's debt rating to triple-B-minus, one level above junk status, likely.
Observers also fear that the merger could be unwieldy, given that ACS counts more than 70,000 employees at locations worldwide. Xerox has roughly 54,000 workers.
In an interview, Xerox corporate operations president Jim Firestone shrugged off the concerns. "As is typical in these sorts of transactions the buyer's stock comes under pressure," said Firestone. "We expect Xerox's stock to recover," he said.
"Over time this is not only strategically powerful because it gives us an expanded platform for growth, it's financially accretive in the first year on a cash basis, and it's margin enhancing. It's transformational in terms of the financial profile of the company," Firestone added.
Xerox's plan to buy out ACS is the latest sign of consolidation in the highly competitive IT and business services market. Dell last week announced a deal to acquire Perot Systems for $3.9 billion, while Hewlett-Packard snapped up Electronic Data Systems for $13.9 billion last year.
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