Affiliated Computer Services Inc. (ACS) announced that the complaint filed by ACS shareholders regarding its merger with Xerox Corp. (XRX) has been resolved. The plaintiffs have temporarily withdrawn their motion for an injunction to block the deal.
The lawsuit was filed in October in Dallas County, Texas as Xerox was struggling to convince its shareholders to approve the deal.
The plaintiffs agreed to drop the lawsuit only if ACS’s Board of Directors received a better proposal than Xerox’s current bid and Xerox did not force ACS’s Chairman Darwin Deason to exercise his voting power in favor of the Xerox acquisition. The previous agreement called for Mr. Deason to cast half his votes in favor of the Xerox bid. He controls 44% of the votes at ACS.
Xerox has also decided not to force ACS to hold a shareholder meeting to vote on the Xerox transaction, and if requested by the Xerox’s shareholders ACS will terminate the Merger Agreement. Xerox also said that a pension fund has dropped a lawsuit over the purchase of ACS. However, a separate shareholder class action lawsuit is still pending in Delaware.
In September, Xerox agreed to acquire Affiliated in a cash and stock transaction valued at $6.4 billion ($63.11 per ACS share in cash and Xerox stock). Affiliated shareholders will receive $18.60 in cash and 4.935 shares of Xerox for each ACS share. Xerox will also assume $2 billion of ACS’s debt and issue $300 million of convertible preferred stock to ACS shareholders.
As a subsidiary of Xerox, Affiliated will operate independently. The combined company will have greater BPO capability and help expand Affiliated’s presence in international markets. Currently, the BPO market is about $130 – $150 billion, with an average growth rate of around 5% to 10% a year. With the Xerox/Affiliated merger, the total market opportunity will be more than $500 billion.
The combined company plans to cut ongoing costs by up to $400 million a year from 2012 onwards. It is currently expected to generate $22 billion in revenues, of which $17 billion is expected to be of a recurring nature and $10 billion is expected to come from services. The transaction is expected to be accretive in fiscal 2010.
In our opinion the deal is now open to third-party bidders provided they pay a higher price for ACS. Trading currently below the acquisition price, we believe the deal to be beneficial for Affiliated, however Xerox may face integration related issues.
Due to the expected merger, ACS did not provide financial guidance for the second quarter or fiscal year 2010.
Shares of Xerox rose 1.3% to $7.93, while ACS increased 1.1% to $55.90.
We have a Neutral rating on both ACS and Xerox.
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