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.

So after doing the M&A dance for months, why did the companies rush to announce the deal on Yom Kippur, the Jewish holiday? Apparently, word got around on Sunday that Xerox was preparing a significant announcement, and some reporters were tipped off about it, two of the sources told Dealzone. But the board only ended up meeting late at night to approve the deal, and so it was considered “safe” to hold on to the announcement overnight, but not through all of Monday!

Update: From my colleague Franklin Paul, who said Xerox CEO Ursula Burns apologized to the audience on the ACS deal call “for our need to do this announcement on Yom Kippur.” “It was certainly not our intention,” Burns said, but they wanted to seal the deal before it began leaking. Certainly they did, given that Xerox has coveted ACS for a long time and probably would have hated to see the deal botched by rumors before the two sides signed on the dotted line.

Real Business is running a copy of what it says is Jon Moulton's resignation letter from Alchemy.

It is full of wonderful nuggets about the private equity boutique he set up in 1997 and gives insight into a wider malaise in financial services.  Moulton is not saying if the letter -- which is addressed to investors -- is authentic.

The letter's parting words capture the tone: "I would do it again - but better".

(Photo: Reuters file photo)

This year’s annual August doldrums was one for the record books.

U.S. M&A for the month totalled $13 billion, its lowest since February 1994, while global M&A stood at $72 billion, the lowest since February 2003, according to data from Thomson Reuters.

The largest U.S. deal was Warner Chilcott’s $3.1 billion purchase of Procter & Gamble’s prescription drug business.

Year-to-date, however, European M&A has suffered even more, with total deal value halving to $378.4 billion. U.S. mergers, at $441.5 billion, have fallen 40 percent from a year ago. Fees for completed in August sank to $694 million, the lowest since records started in 1998, according to Thomson Reuters.

Global financial sponsor deals reached $2.4 billion, the lowest level of activity in 8 years. Privaty equity and other financial sponsor activity accounted for only 3.2 percent of total M&A activity in August. So far this year, global buyouts totaled $32.1 billion, down 80 percent from a year ago, the data showed.

Billionaire investor Wilbur Ross said on Thursday he would consider buying banks under a newly revised proposal on private equity investment in troubled banks, but the rules should be eased further.

U.S. banking regulators on Wednesday partially retreated from a much-criticized proposal to impose new rules on private equity investment in troubled banks, aiming to encourage responsible investment in distressed banks.

The regulators lowered capital requirements and dropped or modified measures that could have required investors to kick in more capital after their initial investment. The rules will be further reviewed in six months.

In an interview with Reuters Television, Ross said the capital requirements should be lowered even further.

Under the current proposal, Ross said he still would be “in the game” and look at banks that have good local deposits. He said many of his potential targets are in Sunbelt States such as Florida, Arizona, Texas and Nevada.

Ross said the private equity industry has about $450 billion of unused capital and roughly $100 billion of that could be used to invest in banks.

Separately, Ross called the commercial real estate market the next “time bomb” that the market under-appreciates. Ross said he would be an investor in distressed commercial properties.

- Photo credit: Reuters/Rebecca Cook

Warner Chilcott Plc agreed to buy the pharmaceutical business of Procter & Gamble Co for $3.1 billion, winning an auction that drew few bidders.

The unit had attracted interest from some private equity firms but very few pharmaceutical bidders, sources familiar with the auction said.  Many of the key products within P&G’s pharma unit, such as the overactive bladder drug Enablex, already face stiff competition from a wide range of rival drugs, while other products are close to their patent expiration. Other pharmaceutical companies are struggling enough with these problems without buying a business that echo these issues, the sources said.

As a result, Warner Chilcott was essentially in a bidding war alone. Under terms of the deal, Warner Chilcott will pay $3.1 billion in cash.  It will finance the deal, and restructure some of its existing debt, through $4 billion in funding it received from a syndicate of banks, sources said.

Still, Warner Chilcott said the deal will immediately boost earnings and will bring “compelling” financial dynamics, including future generation of substantial cash flow. From P&G’s perspective, the deal will allow it to focus more clearly on its consumer health care products and give it added flexibility for potential stock buybacks.

A number of private equity firms in Europe are going back to investors for more money to fix over-extended balance sheets and fund add-on acquisitions for companies in their portfolio.

Private equity’s world has turned upside down since the start of the credit crisis. All the stats show that deal flow has dropped off a cliff and those deals that have got done are smaller and the equity cheques larger. At the same time,  restructuring situations are mounting as firms face the uneviable choice of injecting more equity or face losing their investments to the banks.

The upshot is that buyout funds raised in rosier times are no longer suited to the current environment, if indeed they have any capital left at all.

As I have discovered, Nordic Capital, Investindustrial - the Bonomi family’s southern European buyout firm - and Graphite Capital are all asking investors for more money as they look to adapt to the new climate.

Many investors are currently over-committed to the asset class, meaning that the reaction to requests for new capital is likely to be mixed.

One investor in KKR’s second European buyout fund refused to back a planned 750 million euro annex fund because he viewed it as “a good money after bad” situation.

Other top-up fund stories have a more positive spin.

Inflexion raised a 75 million pound top-up fund earlier this year for its 2006 fund to help it take advantage of what it saw as increased opportunities stemming from the financial crisis. Similarly, Graphite is asking for a modest 35 million pounds to enable it to do larger deals without over-commiting its existing buyout fund, which is so far only around 25 percent spent.

Investindustrial, meanwhile, has spent its 2005 buyout fund but wants more money to fund bolt-on deals for the strongest companies in the portfolio. Nordic Capital wants 150 million euros for some defensive portfolio work and some add-on deals but is asking to reuse money otherwise destined to be returned to investors.

Whatever the purpose of top-up fund, had buyout firms (in most cases) retained enough capital in their funds in the first place, they would not be knocking on doors now.

Investors expect to see more such top-up requests, and say they will consider all such requests on their individual merits. But they also hope firms will learn from the experience and make adequate provision in the future..

Read the Dealtalk, or go to the Graphite story.

With Magna and GM finally agreeing terms on Opel, more deals are on the horizon.

Mergers and acquisition stories in the media on Friday include:

A Canadian bank has approached Allied Irish Banks and the Irish government with a proposal to buy a stake in Allied when it has been cleansed of its risky loans, the Irish Times reported on Friday

India’s federal government will offer its 49 percent stake in Bharat Aluminium Co (Balco) to Sterlite Industries (India) Ltd for about 20 billion rupees ($416 million), the Economic Times reported on Friday.

Barclays Capital has prepared a database of more than 100 private-equity owned companies ready to be listed in the next 12 to 18 months, the Wall Street Journal reported on Friday.

Peter Cruddas, a leading London financier, may take CMC Markets public in 18 months, the Daily Telegraph reported on Friday.

Merrill Lynch, a unit of Bank of America Corp, is ramping up its recruitment programs for financial advisers with signing packages more generous than its 2006 and 2007 offerings, according to a story on the Financial Times website. Reuters story here.

Nycomed, the Swiss drug company, already has 4 billion euros or so of net debt and some pretty junky single-B credit ratings. But that’s not deterring the private-equity owned outfit from plotting a bid for the drugs business of Belgium’s Solvay, even in these leverage-phobic times. As I wrote earlier:

“Switzerland’s Nycomed plans to draw on buoyant junk bond markets and new cash from its private-equity owners to fund a buyout of Solvay’s drugs unit, people familiar with the matter said.

“Such a structure would allow Nycomed — which already has billions of euros of syndicated loans — to bypass the moribund leveraged loan market and would create a group with some 6 billion euros ($8.6 billion) in yearly sales.”

Nycomed has a few strong cards to play — a track record for integrating acquisitions and quickly paying down debt, owners ready to stump up a billion euros or so of fresh funds, and a solid case for being able to tap both Europe’s recently resurrected junk-bond market and its much larger U.S. counterpart.

And in preferring securities to bank debt, Nycomed is blazing a high-yield trail down a path already well-trodden by investment-grade peers such as Roche, whose buyout of Genentech was underpinned by $30 billion of bonds. Indeed some, including Reuters columnist Alex Smith, sense a “dramatic shift” underway in Europe as bonds fill a vacuum left by vanishing bank loans.

Australia and New Zealand Banking Group Ltd will likely clinch a deal this week to buy some Asian assets from British lender Royal Bank of Scotland Group for about $775 million, a source briefed on the situation told Reuters, marking it the Australian bank’s biggest overseas purchase.

In other M&A related stories reported by other media on Monday:

British-based, US-listed cable operator Virgin Media is considering a secondary listing of its shares in London to attract UK-based investors, according to a report in the Times newspaper. Virgin will make an announcement about its decision at its second-quarter results this month, the report said.

The biggest private equity groups are sitting on $400 billion of debt that needs to be repaid over the next five years, putting the future of some of the largest buyouts in doubt, the Financial Times said, citing data from S&P LCD.

Yahoo Inc, which last week announced a Web search deal with Microsoft Corp , will invest money from reduced marketing and infrastructure costs into its display ad, content and mobile services technology, its chief executive Carol Bartz told the New York Times in an interview.

Andrew Hall, the trader behind Phibro LLC, the energy trading arm of beleaguered bank Citigroup Inc, is pushing for a “quiet divorce” from his parent company and has had preliminary talks with one potential suitor, the New York Times said.

Private equity firm Candover is considering plans to inject fresh funds to support its investment in DX Group, a UK postal services company it bought two years ago for 347 million pounds, the Financial Times reported.

A Warburg Pincus deal to invest $115 million in Webster Financial on Monday left at least some folks scratching their heads. 

The private equity firm agreed to start with an initial investment acquiring 5.9 percent of Webster’s common stock, to be raised to 15.2 percent after getting regulatory and other approvals. 

On the face of it, the 5.9 percent figure was unusual because the stake threshold for private investors in banks is 9.9 percent — beyond which they need to get the Fed to sign off on the deal.

So, why 5.9 percent and not 9.9 percent (or even nothing) before all approvals?

As it turns out, the 5.9 percent is actually like 9.9 percent – when you include the warrants that Warburg is getting as part of the deal, according to a source familiar with the matter. 

When the Fed works out the 9.9 percent number, it takes into account the warrants — even if they have not or will not execute them, the source said.