DXC technology (NYSE: DXC) is a $6.6 billion IT services and technology company. Early Sept’22, media reports said DXC had hired a consultant and was in talks with at least one private equity firm, of which KKR was was selected as a potential suitor.Last week, DXC finally comfirmed Rumors, it was announced that the company had approached financial sponsors.Bloomberg followed report Baring Private Equity Asia could be a potential acquirer.This rumor The purchase price is $45/share, a 55% increase from the current price. Interestingly, the market’s reaction to these developments has been rather lukewarm, with shares only 15%-20% above pre-rumor levels.
Acquisition rumors stem from DXC’s multi-year strategic review and previous acquisition interests. Following the arrival of a new CEO in 2019, DXC sold several business units, including state and local HHS ($5 billion, 3-20), healthcare provider business ($525 million, 7-20), and most recently Microsoft Dynamics business (8/22), while several strategic acquisitions. This has allowed the company to significantly reduce net debt (from $6.3 billion in March 2020 to $2.6 billion currently) and be profitable, with net income of $736 million in fiscal 2022 compared to losses in previous years . The company became a takeover target last year as its financial performance improved – in Jan’21, DXC received a non-binding offer from French-listed peer Atos (price not disclosed, but rumored to be at an enterprise value of $10 billion). Management rejected the proposal, saying it was “inadequate and lacking certainty.” I estimate Atos’ bid at $30/share — slightly above the current market price.
At current prices, DXC is trading at just 7.0 times TTM Adjusted EBIT. An offer of $45 per share would value the company at 10 times. Much larger but still comparable peers trade at much higher multiples – 18x for ACN ($176bn market cap), 26.3x for IBM ($116bn) and 12.3x for GIB (C$22bn) times. Likewise, DXC management seems to think the stock is cheap — $701 million worth of DXC stock (over 11% of current market cap) has been bought back around today’s levels since 3/21.
Business and Finance
DXC emerged in 2017 as a combination of two companies – CSC and EDS (formerly HP Enterprise). DXC provides enterprise software services to Fortune 500 companies, including data analytics, business process services, outsourcing and cloud solutions. The company divides its business into Global Business Services (GBS, including analytics, application and business process services) and Global Infrastructure Services (GIS, cloud/security and IT outsourcing).
On the financial side, the company’s revenue peaked in 2018 (as of March) before starting to decline year over year. However, this is driven by the peeling of the aforementioned parts. Going forward, the company expects the new strategy to lead to higher margins — which is already reflected in 2022 results, where EBIT margins are at pre-pandemic levels of 8-9%. Importantly, management has noted that revenue has shifted to “higher value businesses” or GBS (rather than GIS). GBS accounted for 47% of revenue in fiscal 2022, compared to 42% in fiscal 2019. From a cost perspective, the company has managed to slash SG&A – $1.4 billion in fiscal 2022, compared to the historical average of around $2 billion. These facts suggest that while macroeconomic tailwinds may dampen the company’s operating performance in the near term, DXC is well-positioned to benefit from a strategic transformation given the stickiness of its customer relationships.
Note: 2020 EBIT was negatively impacted by a goodwill impairment loss of $6.8 million.
Baring Private Equity Asia (BPEA) – one of the rumored buyers – is a private equity firm investing in Asia. BPEA appears to be a trustworthy company with 45 companies (10 holdings in technology, enterprise software, and related industries) and $21 billion in paid AUM. BPEA has recently completed several international acquisitions, including IGT Solutions (May 22, from an affiliate of Apollo), PI Advanced Materials (Jun 22) and Virtusa (Feb 21). The firm is ranked among the top three private market investment management firms in Asia by AUM. Notably, BPEA agreed on March 22 to be acquired by Swedish investment firm EQT Partners for $7.5 billion. The merger is currently underway and is expected to be completed by the end of the year.
At current prices, DXC offers an interesting investment opportunity with a massive 55% upside. Given the company’s undervalued valuation relative to its peers, a financial buyer could acquire DXC at a premium to current prices. Despite the ongoing tech and broader market sell-off, the risk/reward is favorable in my opinion, suggesting that investors should consider DXC a position in their portfolio.