Affiliated Computer Services Inc. (ACS), a leading business process outsourcing firm, and Xerox Corporation (XRX) announced that shareholders will have the right to vote on Xerox’s agreement to buy ACS.

Shareholders of both the companies on record as of Dec. 11 will be able to vote on the merger in a special meeting scheduled for Feb. 5, 2010.

In September, Xerox agreed to acquire Affiliated in a cash and stock transaction valued at $6.4 billion ($63.11 per ACS share in cash and Xerox stock as of the closing price of Xerox on September 25). Affiliated shareholders would receive $18.60 per share in cash and 4.935 shares of Xerox.

Xerox would also assume $2 billion of ACS’s debt and would issue $300 million of convertible preferred stock to ACS’s shareholders. For this, Xerox issued about $2 billion in bonds last month, the net proceeds of which would support the ACS acquisition.

Xerox and ACS have already satisfied Hart-Scott Rodino and Securities & Exchange Commission requirements for the merger. In addition, Xerox confirmed that pre-closing litigation-related issues have been resolved and that both parties intend to progress quickly to close the deal.

As a subsidiary of Xerox, Affiliated will operate independently. The combined company will have greater BPO capability and help expand Affiliated’s presence in international markets. Currently, the BPO market is about $130 – $150 billion, growing 5% to 10% a year. With the Xerox/Affiliated merger, the total market opportunity will be more than $500 billion.

The combined company plans to cut ongoing costs by up to $400 million a year from 2012 onwards. It is currently expected to generate $22 billion in revenues, of which $17 billion is expected to be of a recurring nature and $10 billion is expected to come from services. The transaction is expected to be accretive in fiscal 2010.

ACS revenue grew 6% and the company had new business signings of $1 billion in annual recurring revenue during fiscal 2009. Trading currently below the acquisition price, we believe the deal to be beneficial for Affiliated, though Xerox may face integration-related issues.

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