Xerox Decision to Sell ITO Unit Signals Continued Focus on High-Value Services

by Robert Palmer | 12/22/14

Xerox has announced plans to sell its Information Technology Outsourcing (ITO) business to France-based computer services provider Atos. Terms of the deal call for Atos to pay $1.05 billion in cash prior to closing adjustments, with additional consideration of $50 million subject to the condition of certain assets at closing. The transaction, which is subject to customary conditions and regulatory approval, is expected to be complete in the first half of 2015.

The deal is significant for both parties. Xerox will report the unit as a discontinued operation, which will have a positive impact on quarterly earnings comparisons. Xerox says that it expects to book about $850 million in cash from the deal, which will be allocated toward funds set aside for acquisitions and share repurchases. “This transaction aligns with our ongoing portfolio management strategy and increases our focus on those areas where we can deliver the most value and expertise to our clients,” said Xerox Chairman and CEO Ursula Burns, in a prepared statement.

For Atos, which will acquire Xerox’s existing ITO clients, the deal will provide a significant boost to its presence in the U.S. market. “Increasing our position in the U.S. is a major step in the completion of our three year strategic plan and responds to a strong demand from our global customers,” said Atos Chairman and CEO Thierry Breton. Atos also gains significant resources as part of the deal. Xerox’s ITO business includes approximately 9,800 employees in 45 countries, with 4,500 in the U.S. and more than 3,800 in global delivery countries. Xerox’s ITO leadership team will also join Atos as part of the deal.

Xerox says that the transaction will allow it to deliver world-class ITO capabilities to its clients, while enabling new levels of strategic collaboration between the two firms. As part of the transaction, Atos will provide IT services for Xerox clients and will also be responsible for providing much of Xerox’s internal IT requirements globally. For more information on the acquisition, see press release.

Our Take

Xerox’s decision to divest its ITO business could be surprising to some. After all, the firm has embarked on a well-documented strategy to transition from a product company to a services organization. Xerox has certainly made bold moves to reposition itself as a services-led provider, with the acquisition of ACS and a continued focus on document outsourcing, BPO, and other value-add services. Indeed, Xerox’s ITO unit was basically acquired as part of the $6.4 billion deal for ACS in 2010. Today, Xerox happily reports that more than half its revenue now comes from services.

But Xerox is not purely an outsourcing business. It is a technology company, an R&D company, a services company, and yes, even a product company. IT outsourcing is a low-margin business that can prove difficult to scale. For Xerox, this was especially challenging given its relatively small market share in ITO combined with the firm’s need to focus resources and assets to other areas of its business.

Selling its IT outsourcing business delivers important benefits for Xerox. First, it can transition its ITO customers to a much larger global player that is focused on the IT sector, which means that customers will be better served in the long term. Through this new relationship, Xerox will also leverage Atos to provide IT services as part of its BPO offerings. This ongoing relationship is actually a significant part of the deal because it allows Xerox to work closely with an IT outsourcing partner to supporting existing BPO customers and develop new clients. Finally, the deal with Atos is important because it allows Xerox to focus its efforts on high-value, professional services such as such as BPO and document outsourcing, which are more in line with its long-term business strategy. 

 

Robert Palmer is chief analyst and a managing partner for BPO Media, which publishes The Imaging Channel and Workflow magazines. He is an independent market analyst and industry consultant with more than 25 years experience in the printing industry covering technology and business sectors for prominent market research firms such as Lyra Research and InfoTrends. In December 2012 he formed Palmer Consulting as an independent consultancy focused on transformation, mobility, MPS, and the entire imaging market. Palmer is a popular speaker and presents regularly at industry conferences and trade events in the U.S., Europe, and Japan. He is also active in a variety of imaging industry forums and currently serves on the board of directors for the Managed Print Services Association (MPSA).