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A Brobignagian PE Deal Craters
The efforts of a group of giant private equity firms -- the usual suspects: Texas Pacific Group, Bain Capital and The Blackstone Group -- to acquire IT outsourcing firm Affiliated Computer Services (ACS) for more than $8 billion seem to have failed.
The group was reportedly prepared to bid up to $65 per share, or 10% more than ACS’ stock closing price of $59.18 as of 12/31/05. In the world of acquisition premiums, that’s not a particularly high number, though the stock’s been on a tear -- rocketing from about $47 in mid-November to $61 on 1/4/06.
Like competitor EDS, ACS provides BPO and IT services, e.g., payroll processing, records maintenance and shipment scheduling, to commercial and government clients. Founded in 1971 in Dallas and employing about 51,000, ACS has -– unlike EDS -- been reliably profitable, most recently generating an after-tax ROS of about 9% on $4.6 billion in sales. Growth, at about 7% per year since 2003, is what you’d expect for a well-managed IT services vendor of this scale.
The PE consortium’s rumored offer of $8 billion would have represented a trailing price/earnings ratio of about 20x. And ACS’ balance sheet is in pretty good shape with a debt/capital ratio of 19%, therefore promising a strong leveraging opportunity for PE buyers. For these reasons and others, many industry analysts feel that ACS is worth over $9 billion, and now ACS' largest shareholder and chairman, Darwin Deason, apparently agrees.
Despite the failure of this consortium's bid, its mere presence is another example of how these groups are remaking the American industrial landscape, especially among IT service vendors. And now that ACS is in play, it may see additional PE group bids as did CSC after it refused an initial pass also by suitors Texas Pacific and Blackstone.
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