Computer
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 worlds largest computer-services provider. Thats helped the company boost profit margins despite falling sales.
“What you are seeing is some of the product companies trying to replicate IBMs 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
Xeroxs 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. Its 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 Computers 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. Thats 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.
Whats 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 wasnt immediately able to comment.
“Theres 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 doesnt have a big services arm,” Wu said. “Look at where theyre trying to go, which is to become more of a complete provider of IT, not just networking infrastructure.”