What Makes DXC Technology (DXC) a Lucrative Takeover Target?

DXC Technology DXC has hired financial advisors after receiving a takeover interest, Bloomberg reported on Wednesday citing people familiar with the matter. Following the reports, shares of the global system integrator and solution provider soared as high as 9% before ending Wednesday’s trading session at a 1.8% gain.

Citing the unnamed sources, Bloomberg revealed that at least one private equity firm has approached the Ashburn, VA-based company to discuss an acquisition deal. However, the financial news agency stated that it is unclear whether the company is open for sale or not.

This is not the first time when DXC has received a takeover proposal. In early 2021, the company had received an unsolicited, preliminary and non-binding proposal to acquire all its shares from French technology services provider Atos SE. However, DXC later declined the offer stating it to be inadequate.

DXC Technology Company. Price and Consensus

DXC Technology Company. price-consensus-chart | DXC Technology Company. Quote

What Makes DXC a Takeover Target?

We believe that DXC’s remarkable transformation journey from a struggling highly leveraged company to a high-growth business-oriented firm has made it a lucrative takeover target.

DXC was formed by the merger of Computer Sciences Corporation (“CSC”) and Enterprise Services Division of Hewlett Packard Enterprise HPE which was completed on Apr 1, 2017. While CSC was founded in 1959, Hewlett Packard Enterprise came into existence after the split of the former Hewlett Packard Company in Nov 1, 2015.

CSC, prior to the completion of the merger, took an additional debt. This had amplified DXC’s total long-term liability, thereby increasing its interest cost burden while limiting its scope for investing in growth opportunities.

To overcome this situation, DXC resorted to debt refinancing and divestment as well as spin-off of non-core assets. The strategy significantly reduced its outstanding debt level to $3.87 billion as of Jun 30, 2022, from $10.33 billion as of Jun 30, 2020. Its interest expenses decreased to $37 million in first-quarter fiscal 2022 from $106 million in first-quarter fiscal 2020.

Divestment and spinning off non-core assets have improved DXC’s focus on its core businesses. Also, it enhances the firm’s ability to execute acquisitions strategies across high-growth businesses, including enterprise software-as-a-service, technology security solutions, and autonomous driving.

In August 2019, the company acquired independent service management and security solutions provider Syscom. The acquisition of the leading ServiceNow NOW partner is helping DXC strengthen its position as a leading ServiceNow solutions provider across the Nordics region.

Furthermore, in April 2020, the company’s digital strategy and software engineering arm, Luxoft, completed the acquisition of mobility systems developer, CMORE Automotive. This acquisition has helped DXC enhance its capabilities in the Autonomous Drive/Advanced Driver Assistance Systems (AD/ADAS) space.

Additionally, DXC is depending on partnerships to enhance its offerings. Notably, the company is looking to expand its networking-based infrastructure with the benefits of VMware’s VMW hybrid cloud offerings. The move has helped DXC Technology to strengthen its position in the virtualization server market. The partnership with VMware also enabled DXC to offer an efficient and improved hybrid IT environment to drive performance.

Thanks to the restructuring initiatives, the company’s non-GAAP net income margin improved 200 basis points to 5.5% in fiscal 2022 from 3.5% in fiscal 2021. Moreover, non-GAAP earnings jumped 44.1% year over year to $3.50 per share in fiscal 2022.

Attractive Valuations Makes DXC Acquisition Target

Technology is among the most-battered sectors amid a broader market sell-off this year so far. However, this sell-off in the broader equity market has led to a massive correction in several technology companies’ stock prices. These companies were considered to be grossly overvalued at the sector’s peak in 2021. With this correction, several tech stocks are currently trading way below their 52-week high and at an attractive valuation as well, despite strong fundamentals.

In our opinion DXC is among the most beaten-down stocks in the technology space. Shares of DXC have plunged 14.4% year-to-date and at yesterday’s closing price of $27.54, the stock is trading 30.5% lower than its 52-week high of $39.65 attained on Feb 9, 2022.

Moreover, the stock currently trades at a forward 12-month price-to-earning multiple of 6.75, significantly lower than the five-year high of 12.97 as well as the Zacks IT Services industry’s average of 27.49.

The strength of DXC’s fundamentals and solid prospects along with attractive valuations is likely to have made the undisclosed private equity firm consider the acquisition.

Currently, DXC, Hewlett Packard Enterprise, ServiceNow and VMware, each carries a Zacks Rank #3 (Hold). Shares of HPE, NOW and VMW have plunged 20.2%, 38.2% and 4.3%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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