Xerox Marries an Equal

I've spotted a rare animal in the wild! OK, it's not the elusive yeti, nor that mysterious Loch Ness lassie, or even the legendary albino moose of Dalecarlia. It's the mysterious acquisition of equals!

Document processing veteran Xerox (NYSE: XRX  ) is buying office workflow specialist Affiliated Computer Services (NYSE: ACS  ) in a true blockbuster deal. For each ACS share, ACS owners will get $18.60 in cash plus 4.935 Xerox shares. Xerox also assumes nearly $2 billion of ACS debt while pocketing $730 million in cash equivalents, and owners of ACS Class B stock will get another $300 million of preferred Xerox stock.

Add it all up, and you get a total sticker price of $5.6 billion after factoring in the reduced value of Xerox shares being swapped.  The buyer's market cap today? $6.6 billion.  Xerox may call this an acquisition, but I call it a straight-up merger.

Of course, nothing is final until both Xerox and ACS shareholders approve this deal. Early signs are mildly positive, though: The boards of both companies have approved the deal. However, investors were less certain that the deal offers enough cost savings to cover Xerox’s buyout premium, sending shares of the company plummeting nearly 16% as of this writing.

On the other side of the fence, ACS stock is trading at 93% of the proposed acquisition value. Given the size of the arbitrage opportunity, investors seem to think this deal will close as is, but they have some doubts. Still, I'd be surprised if ACS owners voted this contract down.

So Xerox is pulling a page from the Hewlett-Packard (NYSE: HPQ  ) playbook, augmenting its hardware businesses by moving into business services in a big way. And of course, the last big “merger” of equals I can remember was when HP met Compaq.

Marrying hardware with services has become a huge trend in the IT sector, including recent mega-deals like Dell (Nasdaq: DELL  ) buying Perot Systems (NYSE: PER  ) . Everybody wants to be the next multi-sector synergy machine  like IBM (NYSE: IBM  ) , including software giant Oracle (Nasdaq: ORCL  ) which is moving into hardware and new support services.

Those other deals all fell in the IT sector proper, while Xerox and ACS run in the related but separate field of business services. Xerox sees up to $400 million in annual cost savings and immediate profits from the ACS deal, and the combined beast claims a $22 billion enterprise that will have quite a bit of clout in the $150 billion outsourcing market.

That's a pretty attractive two-headed beast. Would you buy Xerox stock today, or would you rather have an albino moose? Discuss in the comments below.