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ACS Sinks on CEO Departure

Jeff Rich, who headed the IT company and was not expected to leave, may form his own M&A firm.

Updated from 12:29 p.m. EDT

Shares of

Affiliated Computer Services


sank Monday after the company unexpectedly announced the departure of CEO and longtime employee Jeff Rich.

ACS immediately named President and COO Mark King to the top post. Rich will enjoy a nice safety net, as he appears poised to form his own M&A firm.

Shares of ACS recently traded down $3.46, or 6.3%, at $51.14 in after-hours trading after falling to as low as $50.78 Monday in volume that was more than six times its daily average in the past three months.

Dallas-based ACS said Rich will leave the top post and his position on the board of directors to "pursue other business ventures" after 16 years with the IT services firm and six years as its CEO.

But in a regulatory filing that outlined a generous departure package for Rich, ACS also mentioned the possibility of the executive starting an M&A advisory firm -- with his former employer as a client.

"In the event Mr. Rich establishes an M&A advisory firm by Jan. 1, 2007, the company will retain such firm for a two-year period from its formation for $250,000 per year plus a negotiated success fee for completed transactions," the filing said.

That's not the only connection Rich will retain with ACS. Rich will remain on the company's payroll and receive a salary of $820,000 a year through June 30, a lump-sum payment of $4.1 million, health benefits through Sept. 30, 2007, and limited administrative assistance through Sept. 30, 2006.

ACS also will pay Rich for his vested options, with the payment determined by subtracting the strike price from $54.08, Thursday's closing price. His unvested options, valued around $4.6 million, will be terminated.

Rich will remain an employee with ACS through June 30, assisting the company with an orderly transition of duties to his successor, according to an agreement between Rich and the company.

King, Rich's successor, has been with ACS since its founding in 1988 and previously served as its chief financial officer.

As a result of Rich's departure, Lynn Blodgett, group president of commercial operations, will assume the additional duties of corporate executive vice president and chief operating officer and has been appointed to the ACS board.

ACS said it does not intend to change its strategic focus or operations. Analysts indicated they expect no major changes, although there was some concern about what drove Rich's abrupt departure.

"Mr. Rich was a rainmaker and regardless of the depth of talent in the firm, it will take a concerted effort by management to assure clients, prospects and partners that ACS remains on track," Banc of America Securities analyst Abhishek Gami wrote in a note Monday.

"While we view Mr. Rich's departure from ACS as a negative, we believe that the company is still in good hands," he added. Gami has a neutral rating on ACS and BofA has done banking with the company.

Rich received a salary of $750,000 plus a bonus of $790,308 and 500,000 stock options in fiscal year 2005, which ended June 30, according to the company's proxy statement. With his promotion, King will get a raise to $750,000 on Oct. 1 from $550,000 in fiscal year 2005, when he also received a bonus of $507,114 and 375,000 stock options.

Separately, ACS announced signing a contract worth as much as $82.5 million with the New Mexico Human Services Department. The contract is for five years with three one-year options.