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Affiliated Computer Services, Inc. (ACS) has grown since it was founded in 1988 to become a Fortune 500 company providing business process outsourcing (BPO) services to commercial and governmental clients. The company has made more than 50 acquisitions and continually reinvents itself as new opportunities arise. ACS began by providing data processing and other services to banks and financial institutions. In the 1990s it operated an ATM network that was second only to that of Electronic Data Systems Corporation (EDS) among non-bank networks. Through acquisitions, ACS has grown from a regional provider based in Dallas to a national player in the outsourcing services field. After establishing itself as a major provider to federal, state, and local governments, ACS announced in August 2003 that it would sell its government solutions business to Lockheed Martin Corporation to focus on providing BPO services to commercial clients.

Providing Data Processing Services to Financial Institutions: 1988-90

Affiliated Computer Services, Inc. (ACS) was founded in Dallas, Texas, in 1988 by Darwin Deason and Charles M. Young. Deason became the company's chairman and CEO, while Young served as president and COO. ACS was originally called Affiliated Computer Systems, Inc., and began business as a financial data processing company. Deason and Young were both former executives of MTech Corporation, a bank technology outsourcing company. When MTech was put up for sale in 1988, Deason and other executives put in a bid of $245 million for a management buyout, only to lose to EDS's bid of $345 million. After Deason left MTech, he decided to build another financial data processing firm that would compete with EDS, and he took a substantial part of MTech's executive team with him.

From the start, ACS pursued an aggressive growth strategy. In its first two years, acquisitions accounted for an estimated 70 percent of the company's growth. Revenue in its first fiscal year ending June 30, 1989, was $74 million. Revenue for 1990 was in the $120 to $150 million range, and the firm's workforce grew to about 1,300 employees, 800 of whom worked in Dallas.

A key acquisition was completed in December 1989, when ACS acquired OBS Companies, Inc., of San Francisco. Located near Silicon Valley, OBS had a 55,000-square-foot data processing center in Santa Clara, California. OBS was a mature service company with a 20-year history, about 200 employees, and $25 million in annual revenue.

In addition to gaining new customers through acquisitions, ACS arranged to purchase mainframe computers from struggling savings and loan institutions, then provide them with data processing services. At the beginning of 1990 the company's data processing center was located near downtown Dallas and contained six IBM mainframes, each worth about $8 million if purchased new. ACS also pursued government clients. In association with the state of Maryland and technicians from IBM Corporation, Deason devised a system of using automated teller machines (ATMs) and bank cards to replace mailed food stamps and welfare checks. The system enabled ACS to beat out EDS for a five-year contract to computerize Los Angeles County's food stamp program.

Providing Services As a Private Company: 1990-94

ACS was well positioned to take advantage of changes in doing business that occurred in the 1990s. By utilizing telephone lines and computers, companies could eliminate paperwork through electronic data interchange (EDI) and achieve greater efficiencies. The role of ACS and its competitors was to operate mainframe computer hubs that connected to individual businesses, thereby providing an electronic network through which businesses could communicate.

Not all of ACS's acquisition attempts were successful. In 1991 the company tried to enter the mortgage banking business and buy BancPlus Mortgage Corporation. At the time BancPlus was under control of the Resolution Trust Corporation (RTC), which was accepting bids to take over the company. BancPlus was the largest mortgage company under government control, servicing more than $10 billion in loans. Ultimately, ACS lost out to a bid from BancPlus's management team, which was backed by the wealthy Bass family of Texas. ACS sought to have the RTC's decision overturned, but was denied in court.

In 1992 ACS expanded its business into the Northeast with the purchase of CIC/DISC, an outsourcing firm based in New York City. CIC/DISC specialized in the growing niche market of handling a financial institution's depository operations during a merger or liquidation. Among the clients gained by ACS through the acquisition were Manufacturers Hanover Corporation and State Street Bank.

During the first half of the 1990s ACS provided a range of computerized services to financial institutions, including outsourcing, facilities management, transaction processing, and data communication. The company also operated the MoneyMaker ATM network, signing up banks and other financial institutions. ACS then provided them with software and hardware systems for the ATMs as well as a range of support services, including transaction processing, card insurance, installation, monitoring, and maintenance. Most of MoneyMaker's clients were located in Texas, with others in Louisiana, Oklahoma, and other southwestern states.

In New Mexico one bank hooked up to the MoneyMaker network via satellite. ACS's satellite service allowed users either to purchase or lease a satellite dish. The company noted that it cost half as much to operate a satellite-based system than a land-based system. In addition to providing ATM service, ACS's MoneyMaker division also delivered electronic funds transfer (EFT) services.

By 1994 ACS's MoneyMaker network included about 2,200 ATMs, with 1,900 of them owned and operated by ACS. Most of the terminals were located in high-traffic locations, such as convenience stores, shopping malls, and sports venues. In 1994 ACS signed agreements with American Airlines and United Airlines to install ATMs in airport lounges in their terminals, including Chicago's O'Hare, Miami, and Los Angeles airports. Also in 1994 ACS signed an agreement with Wal-Mart to install MoneyMaker ATMs in its Supercenter Stores and Sam's Club Stores.

In April 1994 ACS re-entered the electronic benefits transfer (EBT) market by establishing a joint venture called Transfirst, Inc., with minority businessman Walter Patterson. Patterson was the director of the Arkansas Department of Human Services when Bill Clinton was governor of Arkansas. Whereas ACS had participated in early experiments to deliver welfare checks, food stamps, and other benefits electronically, the company did not pursue the market after determining there was not much demand for it. By 1994, however, many states were pursuing such initiatives, driven by federal cost-cutting mandates.

Continuing Aggressive Acquisitions Strategy As a Public Company: 1994-99

For its fiscal year ending June 30, 1994, ACS reported revenue of $271 million and net income of $12.3 million. On September 27, 1994, ACS went public as Affiliated Computer Services, Inc., offering 2.3 million shares of stock on the NASDAQ at $16 per share. Since its inception in 1988, ACS had acquired 13 data processing companies. At the time it went public, ACS's principal line of business was providing ATM services to banks. The company also provided a range of information processing services, including data processing services for retailers, wholesale distributors, hospitals, and transportation companies. Among ACS's subsidiaries, Dataplex Corporation specialized in document imaging and record storage and retrieval services. Following the initial public offering, Precept Business Products, Inc., another subsidiary, took control of the company's business support services, including business forms and products, a courier service, and some real estate operations previously controlled by ACS Properties, Inc.

During 1995 ACS announced plans to exit data processing for banks and focus on the electronic funds transfer (EFT) services market, as well as to expand its systems outsourcing business into industries other than banking. With 3,400 ATMs in its ATM network, ACS was second only to EDS's system of 5,300 ATMs among non-bank networks.

In an effort to expand its ATM network by installing them in retail grocery outlets, ACS offered a low-cost ATM called the Anycard ATM through an agreement with ATM manufacturer AnyCard International, Inc. These ATMs could be profitable at 400 to 500 transactions a month, compared with the 2,000 transactions a traditional ATM required to break even. ACS estimated it had deployed about 1,000 Anycard ATMs as of mid-1995. Toward the end of 1995 ACS created a new division, ACS Merchant Services, Inc., to market point-of-sale (POS) services to independent merchants, retail chains, and banks. The division also processed credit and debit bank card transactions for merchant and agent banks. ACS also acquired a minority interest in Integrated Delivery Technologies, Inc., which was developing a new online financial transaction processing network geared toward supermarkets and other retail outlets. The Cartel Network, as it was called, debuted in November 1995. By mid-1996 ACS claimed to have more than 5,000 ATMs deployed.

ACS continued to acquire smaller companies in 1995 and 1996 and expand its presence nationally. Key investments and acquisitions included a 70 percent interest in systems integrator Systems Group Inc. of Dallas and Atlanta; a majority interest in LAN Co., a Philadelphia-based provider of network design and installation services and document management systems to law firms and other businesses; and the purchase of Pittsburgh-based Genix Group Inc.

To reduce the volatility of its stock price, ACS announced at the beginning of 1997 that it was moving its stock listing from NASDAQ to the New York Stock Exchange. In 1997 and 1998 ACS made two major acquisitions that gave it a strong presence serving state and local governments. In 1997 it acquired Computer Data Systems of Rockville, Maryland, a major systems integrator for federal agencies, for $373 million. In the second half of 1998 it acquired BRC Holdings Inc. for about $261 million. Founded in 1976 as Cronus Industries Inc., BRC Holdings was based in Dallas and specialized in providing automated record-keeping services to state and local governments. The acquisition of BRC Holdings added about 1,100 employees and increased ACS's workforce to more than 13,400 employees. The company had operations in North, South, and Central America as well as in Europe and the Middle East.

ACS also was making smaller targeted acquisitions. Toward the end of 1998 it acquired the unclaimed-property services division of State Street Corporation. The acquisitions added about 70 employees and was designed to enhance ACS's financial and securities services business.

In March 1999 company cofounder Darwin Deason stepped aside as CEO and was succeeded by Jeffrey A. Rich, who had been president of ACS since 1995. Deason, 58 years old and the largest individual shareholder in ACS, remained as chairman and planned to remain active in the company until he turned 65. For fiscal 1999, ACS reported revenue of $1.64 billion and net income of $86.2 million. About one-third of the company's revenue came from government clients.

Entering New Markets and Growth Through Acquisitions: 1999-2003

During 2000, ACS established a new division for BPO, gained new government clients, continued to make acquisitions, and divested its ATM business. The new BPO division consolidated a variety of outsourcing services, such as processing insurance claims, a task that was accomplished in part by 3,000 employees working in Guatemala and Mexico. ACS estimated that BPO would account for $950 million in fiscal 2000, or about half of the company's revenue. The BPO division also signed a $56 million contract with Ginnie Mae to support the government's mortgage-backed securities program over a three-year period.

Acquisitions completed in fiscal 2000 included Consultec LLC, a provider of administrative support services to the healthcare industry, for $105 million. The acquisition enabled ACS to compete better with other service providers for state government contracts to help them manage and administer their Medicaid and welfare programs and combat fraud and abuse. ACS also acquired Birch & Davis Holdings, Inc. of Silver Spring, Maryland, for $75 million. Birch & Davis specialized in providing healthcare management and consulting services, especially to state governments. The acquisition added more than 600 employees and strengthened ACS's position in the government healthcare services market, bolstering its ranking as a top systems integrator in the government information technology (IT) field. As a result of these acquisitions, ACS subsequently formed a new subsidiary, ACS Healthcare Solutions Inc.

At the end of fiscal 2000 ACS completed the acquisition of Intellisource Group Inc. of Vienna, Virginia. ACS gained 680 employees in the transaction and acquired a customer base that included the NASA Goddard Space Flight Center, the Federal Aviation Administration, the U.S. Air Force and Coast Guard, and the cities of Newark, New Jersey, and Philadelphia, Pennsylvania. ACS also sold off its ATM unit at the end of fiscal 2000, saying that it could no longer compete in that market. The unit was acquired by Genpass Inc., a subsidiary of the Chicago-based private equity firm of GTCR Golder Rauner, for $180 million.

Since its inception in 1988, ACS had completed more than 50 acquisitions through the end of fiscal 2000. To help ACS pursue acquisitions of IT and business process outsourcing companies, it hired merger and acquisition specialist Bill Deckelman as general counsel and executive vice-president in March 2000. For fiscal 2000 ACS reported revenue of $1.96 billion and net income of $109.3 million.

During fiscal 2001 ACS obtained a $450 million revolving credit facility from a consortium of financial institutions that included Wells Fargo Bank, Bank One, SunTrust Bank, and Bank of Tokyo-Mitsubishi. In June 2001 ACS agreed to acquire Global Government Solutions (GGS) from Systems & Computer Technology Corporation for $85 million in cash. GGS was based in Lexington, Kentucky, and provided IT solutions to state and local governments. The acquisition enhanced ACS's powerful market position in the government sector and made it the largest provider of local government IT solutions. For fiscal 2001 ACS reported revenue of $2.06 billion and net income of $134.3 million.

ACS began fiscal 2002 with an agreement with Lockheed Martin Corporation to purchase its IMS Corporation subsidiary for $825 million in cash. IMS specialized in providing a range of processing services to state and local governments, including child support payments collection, operation of welfare-to-work programs, and processing traffic violations. With 250 offices located in 44 states and Canada and 4,800 employees, IMS had estimated annual revenue of $700 million. Also in July 2001, ACS obtained a major defense contract worth up to $346 million over ten years from the Defense Finance and Accounting Service to provide data processing and payroll services for military retirees and annuitants. Another major acquisition was completed in June 2002, when ACS purchased AFSA Data Corporation for $410 million. AFSA had more than 3,500 employees and was the largest education services company in the United States, servicing 8.1 million student loans worth $85 billion. By the end of fiscal 2002 ACS was hiring new employees at the rate of 500 a month. For the year ACS reported revenue of $3.06 billion and net income of $229.6 million.

During fiscal 2003 ACS adopted an annual goal of increasing cash flow by 10 percent through internal growth and 10 percent through acquisitions. In September 2002 the company obtained an $875 million unsecured line of credit to consolidate its existing debt. It planned to seek out only one to three significantly large contracts a year. In December 2002 it obtained a ten-year, $650 million contract with Motorola Inc., to handle its human resources functions, including payroll and benefits administration. As part of the deal, ACS acquired parts of Motorola's human resources division, including 600 employees in 27 countries. An even larger contract, worth about $100 million a year, was signed in January 2003 with Texas's Medicaid system.

ACS became a member of the Fortune 500 in 2003, ranked 488th. For fiscal 2003 the company reported revenue of $3.79 billion and net income of $306.8 million. About two-thirds of the company's revenue came from BPO services. One key to ACS's success was its use of cheaper labor available outside the United States. The company opened its first foreign facility in 1997 in Mexico. Approximately 25 to 30 percent of the company's workforce of 40,000 employees worked outside the United States in 2003, including 5,000 employees in Mexico, 2,000 in Guatemala, and 1,000 in Ghana, among other locations.

Perhaps signaling a new direction for ACS, the company agreed in August 2003 to sell the majority of its federal government business to Lockheed Martin Corporation. ACS would retain its $150 million-a-year contract for loan servicing services with the U.S. Department of Education, which it has held since 1994. Some ACS operations would also continue to serve as subcontractors on portions of the transferred business. The deal, which was expected to close in 2004, called for Lockheed Martin to pay $658 million for ACS's government solutions business, while ACS would pay $107 million for Lockheed Martin's commercial IT outsourcing business. In addition to netting $551 million in cash, ACS would gain contracts worth about $240 million annually from new customers such as Nike Inc. and Simon & Schuster Inc., and existing customers such as General Motors Corporation and Goodyear Tire & Rubber Co. A spokesperson for ACS said the company decided to divest its government business because it did not have the resources to compete for the extremely large contracts common in the federal market. On the other hand, the company also felt it was too large to compete for some of the niche business. Following the deal ACS planned to focus on providing high-margin business process outsourcing (BPO) services to commercial clients.

Principal Subsidiaries: ACS Desktop Solutions, Inc.; ACS Healthcare Solutions, Inc.; CyberRep.

Principal Competitors: Computer Sciences Corporation; Electronic Data Systems Corporation; International Business Machines Corporation.

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Source: International Directory of Company Histories, Vol.61. St. James Press, 2004.