Contact: Brenon Daly
Finally, Darwin Deason does his deal. The chairman and overwhelmingly largest shareholder of Affiliated Computer Services (ACS) has had the IT services company he founded in 1988 in play for some time now. The firm was approached by an unnamed private equity (PE) shop some four years ago, but talks were scrapped in January 2006. Then came Cerberus Capital Management, which put forward a $5.9bn bid in March 2007, only to pull it some three months later as the credit markets started tightening. Finally, on Monday, Xerox said it will buy ACS for $6.4bn in cash and stock. (Incidentally, Xerox shares were worth quite a bit less after the announcement, dropping 19% in Monday-afternoon trading.)
It’s noteworthy that a strategic acquirer has replaced PE shops as the buyer of the slow-but-steadily growing services company. We would chalk that up to the recent changes in the credit market. When debt was cheap and plentiful, buyout shops could afford to give up ‘synergies,’ knowing they could make a return because of the low cost of capital. (And the synergies can add up. Xerox expects to save $300-400m in the first three years by cutting duplicate costs and other financial advantages of the combination.) ACS has some $2.3bn in debt, which Fitch gives a ‘speculative’ rating of BB.
Although Deason stepped upstairs at ACS three years ago, he still controls some 44% of the voting stock in the company. (His outsized control in the vendor comes primarily through his ownership of all of the Class B shares of ACS, which carry 10 votes per share.) Looking at the rest of ACS’ board helps to explain at least one other part of the transaction as well, the fact that ACS was advised by Citigroup Global Markets. Longtime Citigroup executive Robert Druskin has served on the ACS board since March 2008. Additionally, Evercore Partners advised the board at ACS. On the other side, JP Morgan Securities and Blackstone Group advised Xerox.