(XRX) Xerox Aquires Benefits Subsidiary of Hewlett-Packard to Expand BPO

Xerox Corporation (XRX) recently completed the acquisition of a subsidiary of Hewlett-Packard (HPQ). ExcellerateHRO LLP (“EHRO”), a benefits subsidiary of HP, has been taken over by the recently annexed Xerox subsidiary Affiliated Computer Services (“ACS”) for $125 million.

The deal has been undertaken by ACS to focus on the new aspects of both pension administration and human resources outsourcing. It has enabled ACS to offer HR services such as consulting, benefits administration, HR outsourcing and learning services, establishing it as one of the largest third-party pension providers in the world.

EHRO is a global firm providing HR services to about 350 mid-sized and large organizations. Its existing client list includes several Fortune 500 companies along with growing mid-market customers. Hence the deal is expected to strengthen Xerox’s existing business operations through access to new industries and markets in both national and international arenas.

The $125 million acquisition will consolidate Xerox’s footprint in the BPO industry. The company had ventured into the BPO sector with the acquisition of ACS, and has been focusing on this business so far. It also supports ACS’s recent $50 million investments towards innovating and upgrading its HR business.

The second quarter of 2010 proved successful for Xerox with revenues of $5.5 billion, up a sharp 48% from the year-ago level. The company’s net earnings were recorded at $342 million or 24 cents per share, overshadowing the Zacks Consensus Estimate of 21 cents.

Xerox’s strong performance was attributed to a stellar performance from its BPO service, which comprised nearly 55% of total Services revenue of Xerox. ACS along with its BPO and ITO services proved profitable for Xerox during the quarter.

We recommend the shares of Xerox as “Hold” (Zacks #3 Rank) in the short term and “Neutral” in the long term.

Zacks Investment Research

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