Another Monday… Another “Game-Changing” Deal
Source: http://feedproxy.google.com/~r/InvestmentU/~3/R9-2_2fVKgo/another-game-changing-deal.htmlPosted on Monday, September 28th, 2009 | In Contrarian Perspectives, Investing Lessons
Another Monday… Another “Game-Changing” Deal
by Martin Denholm, Senior Editor
Monday is Merge Day.
A few weeks ago, the market saw the busiest day of deal-making in three months, as the news-wires lit up with news of several big takeover announcements, including Walt Disney (NYSE: DIS) buying Marvel (NYSE: MVL).
It happened again the following week. In fact, over a 10-day period, more than $40 billion worth of deals were announced.
And even as the third quarter winds down, the pace is still frenetic in the M&A market.
Today saw technology equipment firm Xerox (NYSE: XRX) announce a $6.4 billion deal to buy Affiliated Computer Services (NYSE: ACS) – its biggest acquisition on record.
Xerox investors greeted the news with a collective “ugh,” as shares of the photocopying and business supplies giant spiraled down by 17%. While perhaps fearful about Xerox taking on Affiliated’s $2 billion worth of debt, Xerox CEO Ursula Burns called the buyout a “game-changer” for the company, as it dives into the world of information technology and “expands our business and benefits from margin expansion and stronger revenue and earnings growth.”
If last year is anything to go by, she has a point. In a poor economy, where businesses were cutting back on employees and other costs, Affiliated still notched up 6% sales growth, compared with the 5% industry average.
Revenue Repeating
In addition, Xerox hopes the deal will allow it to grab all-important recurring revenue as high as $17 billion and triple its services revenue to $10 billion in 2010.
Xerox may also be positioning itself to capture some of the benefits that will come from healthcare reform. As an information technology and data storage firm, Affiliated is just one of many companies vying for a piece of a $20 billion pie in an attempt to digitize medical records. This is a topic that my colleague Louis Basenese covered last week – and profiled another company poised to take advantage.
The Xerox deal comes at a price, though – a 33% premium over Affiliated’s September 25 closing price of $47.25. However, it’s following in the footsteps of Dell (Nasdaq: DELL), which snapped up Perot Systems (NYSE: PER) last week, as well as IBM (NYSE: IBM) and Hewlett-Packard (NYSE: HPQ), who have also delved into the IT data services field.
And at a time when business budgets are squeezed tight, today’s move down for Xerox might represent a good opportunity to buy the dip.
Martin Denholm
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