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Tech Companies IBM, Xerox and Dell Run After Business Process Outsourcing Firms

|Includes: ACN, ACS, BAC, DELL, HPQ, IBM, PER, Xerox Corporation (XRX)
By Chris V.

In an aggressive attempt of major technology manufacturing firms to diversify its markets for more consistent revenue streams, they have been buying and bidding for business process outsourcing services firms.

Last month alone, technology giants Xerox (NYSE:XRX) and Dell Inc. (NASDAQ: DELL) have reported their acquisition of services companies, Affiliated Computer Services Inc. (NYSE:ACS) and Perot Systems Corporation (NYSE:PER).  On September 28, printer and imaging business leader Xerox announced its purchase of business process outsourcing firm Affiliated Computer Services Inc. (NYSE:ACS) for $6.4 billion. A week before that, Wall Street Journal wrote that computer maker Dell Inc. (NASDAQ: DELL) has agreed to purchase information technology services Perot Systems Corporation (NYSE:PER) for $3.9 billion.

With the economic downturn, tech manufacturing firms have found themselves heavily suffering to meet positive quarterly results. Xerox (NYSE:XRX) second-quarter total revenue of $3.7 billion this year was down 18 percent last year’s. Dell Inc. (NASDAQ: DELL) also experienced revenue decrease for this quarter of 16% from $16 billion last year to $13.4 billion this year.

This shows the enterprise industries’ decrease in technology products and equipment spending. Hardware producers CEOs also admit that they even if hardware sales pick up next year, it will still retain the companies in a struggling mode. This pushes the technology manufacturing giants to diversify their markets through complimentary company takeovers.

Xerox (NYSE:XRX) move to buy BPO company Affiliated Computer Services Inc. (NYSE:ACS) is not a surprise anymore given that this is the same strategy taken on by printer maker Hewlett-Packard Company (NYSE:HPQ) when it acquired EDS. The tech services division of HP contributes 38% of the entire company’s $9.5 billion operating profit for this year while its printing business contributes 33% and the pc division even less at 12%.

International Business Machines Corp. (NYSE:IBM) has also been one of the pioneers in changing the hardware manufacturing business. For 15 years, the technology giant has moved from hardware and machine production to information technology service business with its purchase of PricewaterhouseCooper LLP (PwC) in 2002 and the establishment of its IBM Global Services. To further strengthen the company’s investment in their services business, IBM announced that it intends to buy Bank of America Corp.’s (NYSE:BAC) Wilshire Credit Corp., which provides BPO services to financial institutions in the mortgage sector.

What will be interesting to see is a debunking of this ongoing industry strategy wherein technology manufacturing giants buy out service companies to expand and diversify their markets as the demand for their main products have continually dwindled. This trend is expected given that these tech leaders have purchasing power advantage. A non-conformist analyst, Bob Evans of Information Week, have challenged Accenture Plc (NYSE:ACN) to be the first one to make that change as he believes that Accenture has the power reverse this current trend.

Disclosure: No positions.