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Business – Xerox $6 Billion Deal May Inspire More Copycats To Be Like IBM

Katie Hoffmann and Serena Saitto

Sept. 29 (Bloomberg) — Xerox Corp.’s plan to buy Affiliated Computer Services Inc. for about $6 billion may point to more acquisitions of consulting companies as hardware companies try to revive slumping sales.

The next targets might include Computer Sciences Corp.,Accenture Ltd. and Hewitt Associates Inc., said Moshe Katri, an analyst at Cowen & Co. in New York. The Xerox deal follows a move by Dell Inc. to buy computer-services provider Perot Systems Corp. for almost $4 billion. And last year, Hewlett- Packard Co. purchased Electronic Data Systems Corp. for more than $13 billion, making it the No. 2 computer-services company.

Services provide wider profit margins and steadier revenue than computer hardware, helping technology companies weather the worst recession since World War II. International Business Machines Corp. snapped up acquisitions during the past 10 years, turning itself into the world’s largest computer-services provider. That’s helped the company boost profit margins despite falling sales.

“What you are seeing is some of the product companies trying to replicate IBM’s model,” Katri said. “They have a successful services business that makes them a one-stop shop.”

Global information-technology spending may drop 8 percent this year, Goldman Sachs Group Inc. said this month. Businesses are coping with the recession by slashing their budgets — especially on personal computers, servers and other hardware — eating into revenue at IBM, Dell, Hewlett-Packard and Xerox.

E-ZPass System

Xerox’s acquisition will help triple the amount of revenue it gets from services, reaching about $10 billion, the Norwalk, Connecticut-based company said yesterday. Affiliated Computer, based in Dallas, helps customers outsource tasks such as human- resources management. It’s also the U.S.’s biggest student-loan processor and operates the E-ZPass toll-collection system.

The total business-process outsourcing market is valued at about $150 billion, Xerox said yesterday. Almost 90 percent of Affiliated Computer’s new business contracts came from outsourcing last year. The big challenge for Xerox will be fitting the pieces together, said Keith Bachman, an analyst at BMO Capital Markets in New York. That’s left investors uncertain about the deal.

Xerox fell $1.30, or 14 percent, to $7.68 yesterday in New York Stock Exchange composite trading. Affiliated Computer jumped 14 percent to $53.86.

What’s Next?

Shares of Computer Sciences and Accenture both rose almost 5 percent yesterday as investors tried to anticipate the next big services acquisition.

Computer Sciences, the manager of networks for NASA and the U.S. Navy, would give an acquirer access to government contracts, Katri said. The Falls Church, Virginia-based company gets more than 35 percent of sales from the North American public sector. Computer Sciences wasn’t immediately able to comment.

A purchase of Accenture, meanwhile, would give a buyer the world’s second-largest technology-consulting business. Accenture’s cost may be an impediment, though, said Jason Kupferberg, an analyst at UBS AG in New York. The company has a market value of $27.8 billion.

“There’s a small number of companies in tech that could afford to buy Accenture,” Kupferberg said. “The other potential challenge is post-merger integration. Accenture has more than 180,000 employees.”

Alex Pachetti, a spokesman for Dublin-based Accenture, declined to comment.

Eyeing Hewitt

Hewitt Associates presents a smaller target, Katri said. The Lincolnshire, Illinois-based company, which offers consulting and human-resources help, has a market value of $3.38 billion. Hewitt declined to comment on takeover speculation.

Cognizant Technology Solutions Corp., CGI Group Inc. and Sapient Corp. also provide computer services.

Cisco stands out as a hardware company without a services business, said Shaw Wu, an analyst at Kaufman Bros. in San Francisco. The company, which leads the market for networking equipment, is already expanding into other kinds of information technology. Services may be the next step, he said.

“Cisco is probably the last hardware company that doesn’t have a big services arm,” Wu said. “Look at where they’re trying to go, which is to become more of a complete provider of IT, not just networking infrastructure.”

Cisco declined to comment, said Terry Alberstein, a spokesman for the San Jose, California-based company.

Oracle Corp., the second-biggest software maker, also may use acquisitions to bolster services, Wu said. The company is already buying Sun Microsystems Inc., a provider of computer servers and software.

‘Like an IBM’

“They’re also trying to become more like an IBM or H-P,” Wu said. “Oracle does have some consultants already, but to beef up that operation makes a lot of sense.”

Deborah Hellinger, a spokeswoman at Redwood City, California-based Oracle, didn’t return a message seeking comment.

EDS helped Hewlett-Packard increase its services revenue 93 percent last quarter. That contrasts with an 18 percent drop in revenue from its personal-computer division.

Hewlett-Packard declined to comment on other possible acquisitions, said Christina Schneider, a spokeswoman for the Palo Alto, California, company.

IBM is now focused on acquiring new technologies, rather than adding companies with big service staffs, said Dave Liederbach, head of the Armonk, New York-based company’s strategic outsourcing business. IBM had its biggest consulting acquisition in 2002, when it bought PwC Consulting. Since that integration is done, IBM has an edge over competitors going through acquisitions now, Liederbach said.

The remaining service companies could probably stay independent if they wanted to, said Dylan Cathers, an analyst at Standard & Poor’s in New York. Even so, a merger lets them cross-sell to hardware customers. And it’s hard to dispute IBM’s success in the market, he said.

“Can service companies survive on their own? Absolutely,” Cathers said. “Do I think they might be better off partnering? There is a strong argument for that.”

To contact the reporters on this story: Katie Hoffmann in New York at khoffmann4@bloomberg.net; Serena Saitto in New York at ssaitto@bloomberg.net

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September 29, 2009 - Posted by | Uncategorized |

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