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Atos Acquisition of Xerox ITO Business: the A to X

In the early hours of this morning, Atos announced it is acquiring the IT outsourcing business of Xerox. Full details of the acquisition are here.

Atos is ending 2014 with a bang. Having completed the integration of Siemens IT Solutions & Services pretty darned quickly (certainly far faster and more effectively than naysayers would have predicted), it has proceeded this year to the carve-out of Worldline, a distinctly different business, the acquisition of Bull, which brings in HPC systems capabilities, and now today’s announcement of the Xerox ITO unit.

The price Atos is paying for the business appears reasonable in terms of multiples.

It appears that Atos and Xerox have been in discussions all year, initially around some kind of partnership. They have experience of working together: Xerox provides managed print services, HR and F&A BPO services to Atos, while Atos supports Xerox for some of its ITO work in Europe.

What does this mean for Atos?

  • Its three-year “Ambition 2016” strategic plan is “to become a Tier 1 Global IT brand”. For this to happen, expansion in the U.S. is clearly critical. With this acquisition, Atos’ revenues in the U.S. will nearly triple, from an estimated to €1.7bn (>$2.1bn), and North America will move from 7% to 17% of its global revenue. The U.S. is important both because of the size and maturity of the market, and also because it tends to lead in the adoption of new technologies. NelsonHall estimates that Atos will become the sixth largest IT services player globally, and lessen its dependence (somewhat) on the comparatively soft European market 
  • Since acquiring SIS, Managed Services has clearly been the primary focus for Atos: with Xerox ITO, MS will represent over €6bn (~$7.8bn) in annual revenue
  • The acquired business brings in some offshore delivery capability – an area where Atos is still lagging:  it will gain ~3,850 resources in low cost countries, mainly in India, the Philippines and Mexico
  • As well as bringing in new U.S. clients such as McDonald’s, Atos gains a sizeable new client with Xerox: two separate contracts with Xerox will together bring in $240m in annual revenue
    • In the first, which is to serve Xerox as a client, Atos will also benefit from Right of First Offer/first Negotiation on any new opportunities with Xerox – what is not yet clear is what this might mean for HCL Technologies whose 2009 data center outsourcing contract with Xerox is about to expire
    • In the second contract with Xerox, Atos will be picking up some business servicing some of Xerox’s BPO and Document Outsourcing clients.

While history has not been favourable to European-centric IT services vendors needing to penetrate the U.S., Atos has gained considerable experience in managing the integration of large companies – and it already has some local capabilities in the U.S.

What does this mean for Xerox?

  • The assets being divested are formerly from ACS, and not its core BPO business. This should be seen as a portfolio management effort by Xerox, who is getting rid of a business that is now being described by Ursula Burns as sub-scale and that has been dilutive to margins (although it will be accretive to Atos margins). Arguably Xerox could have moved a little faster in managing the integration of this business: Atos will doubtless show more rigor. This year, Xerox has been more selective in the types of ITO deals it is pursuing, and while the business has continued to deliver topline growth, renewals and new signings have been down.  Xerox Services can now focus on a pure BPO and document outsourcing (which NelsonHall also classifies as BPO) portfolio, which will help with go-to-market and sales. And we should expect to see margin improvement as soon as the transaction is complete
  • It potentially means new BPO opportunities in Europe, by targeting Atos’ client base
  • Xerox will continue to partner with other systems integrators in its MPS business
  • Xerox will use at least $400m of the proceeds from the sale of the ITO business to boost its M&A allocation for 2015 to $900m. This could support expansion in Europe and/or further industry-specific BPO development.  Certainly, we should expect to see significant acquisition activity by Xerox next year.

What does this mean for Atos and Xerox clients?

  • Atos European HQ'd MNC clients will potentially be able to also be serviced by Atos in their U.S. operations
  • Xerox ITO clients will potentially benefit from a large vendor with a global MS service line that has been able to invest, for example in automation technology, cloud, the Atos Technology Framework (ATF) and its zero incident program (ZIP).

Joint Innovation from Atos/Xerox?

One phrase in the presentation deck hinted at joint innovation: “a strategic collaboration geared to leverage both parties’ technologies and capabilities”. In theory, there is the opportunity for Atos and Xerox to jointly go to market for integrated ITO and BPO opportunities for new kinds of services in Europe and North America – next generation services that involve BPS and leverage big data/analytics/cloud/perhaps IoT technologies.  But Ursula Burns’ response to our question in an analyst call today indicated that the thinking at the moment is on cross-selling into each other’s client base rather on developing next-generation integrated ITO/BPO services.

In conclusion, our immediate responses are:

  • A: Atos, a great move, over three years after acquiring SIS, less than a year after Bull. Atos has shown itself highly capable in acquiring, integrating and sorting out troubled, unprofitable assets (and Xerox ITO is neither of these): integrating Xerox ITO should be relatively easy, though separating some of the offshore assets that reside within Xerox campuses may take some time. In 2015, Atos in the U.S. will be of a similar size to Atos in Germany, Atos in France and Atos in the U.K. The acquisition will probably leave Atos with zero net debt: there are few onshore-centric vendors around who can make a $1bn+ acquistion without getting into net debt
  • B: BPO pureplay. Xerox deals decisively with a lower-margin business and streamlines its Services business to become a pureplay (other initiatives for ITO would have required substantial investment)
  • C: Clients of both parties benefit
  • X: X for unknown. The jury’s out as regards future collaboration and joint go-to-market for innovative offerings. This could possibly have legs... but there is...

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