DealZone

Xerox, which said early Monday morning it will buy Affiliated Computer Services for $6.4 billion, has had its eye on the IT services company for at least two years, but talks only began toward the end of the first quarter of 2009, several people familiar with the matter told Dealzone. Blackstone, which advised Xerox, worked with the company on this over the past 18 months, in addition to making the introductions earlier this year, according to one source.

Talks grew hot and heavy over the summer, especially as the credit market conditions improved, a second source said. Xerox has committed financing of $3 billion for this deal, which is being arranged by JPMorgan, so the deal only began to look like a real possibility once the financing side was sorted out.

ACS, which competes with other technology services providers such as Computer Sciences Corp and Accenture, is an attractive company because of its recurring revenue business model. It’s been an especially alluring target for private equity buyers, with Cerberus having offered to buy it for $62 a share in 2007. Cerberus withdrew its offer citing the credit crunch and ACS management’s refusal to engage with them. TPG was also interested in ACS about five years ago, the second source added.

Buyout firms didn’t lose the opportunity to sniff around at ACS this time around either, the sources said, although it’s not clear if the ACS management asked its bankers to run a formal sale auction.

“Every PE firm in the world that could raise the debt was kicking the tires on this one because of the cash,” said the third source.

After Dell went to its $10 billion treasure chest to buy up Perot Systems for $3.9 billion, you might have expected investors to be a little more excited about Xerox’s bid for ACS. After all, business services helps Xerox get away from nuts and bolts copiers, much the way Perot was seen helping Dell move away from building computer boxes. And ACS is seen giving Xerox more chips to play against HP, which bought Electronic Data Systems a little over a year ago.

The Xerox bid, unveiled at $6.6 billion, includes 4.935 Xerox shares and $18.60 in cash for each share of ACS. That totaled $63.11 per share based on Friday’s closing prices, but with Xerox shares having lost more than 15 percent in the opening minutes today, the value is now down to a little over $55 per share. Has the office copy machine behemoth misjudged the market? Dell’s stock lost only about 6 percent following the Perot announcement.

Perhaps the issue was more one of timing than anything else. Monday is the Yom Kippur Jewish day of atonement. Speaking with analysts, Xerox CEO Ursula Burns apologized “for our need to do this announcement on Yom Kippur” “It certainly was not our intention.” they wanted to do it before it leaked, she said. The company may have a lot more than bad timing to atone for if investors don’t get behind the deal.