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Xerox Shares Plunge on ACS Acquisition

(Updates stock quotes)

NORWALK, Conn. ( TheStreet) -- Shares of Xerox (XRX - Get Report) plunged in pre-market trading Monday as investors responded to the firm's $6.4 billion acquisition of Affiliated Computer Services (ACS).

Xerox's stock fell $1.55, or 17.3%, to $8, despite the firm's bold attempt to boost its services business. Shares of ACS, however, rose $6.20, or 13.%, $56.31.

Dallas-based ACS provides services to automate paper-based work processes, and Xerox will now combine this business with its own document management offerings.

They Just Don't Get Xerox!

"Xerox will benefit from margin expansion and strong revenue and earnings growth," said Xerox CEO Ursula Burns, during a conference call before market open. "In acquiring ACS, Xerox is changing its business with the evolving demand in the marketplace."

The business-process outsourcing market is growing at 5% a year, according to Xerox, although ACS grew its revenue by 6% last year, despite a tough economy. Xerox expects the deal to turn it into a $22 billion company, of which $17 billion will be recurring. The company also predicts that its services revenue will triple to an estimated $10 billion next year.

Companies like IBM (IBM - Get Report) and Hewlett-Packard (HPQ - Get Report) have been throwing their weight behind services in recent years in an attempt to clinch recurring revenue at a time when hardware budgets are stagnating.

Xerox's ACS acquisition may also be timed to boost its services capabilities ahead of President Obama's ambitious overhaul of the U.S. health care system, which involves replacing paper-based systems with state-of-the-art systems. With big financial incentives being dangled in front of doctors and other providers, more than $20 billion, for example, will be spent on electronic medical records.

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