DXC technology (DXC – Free Report) recently announced that it has been approached by a financial sponsor about a potential acquisition of the company. However, the IT management company did not disclose further details. In its statement, DXC said that although it is engaged in preliminary discussions, it has not received any formal proposal for the acquisition.
Later, citing people familiar with the matter, Bloomberg reported that Baring Private Equity Asia had made an acquisition approach to the US information-technology services provider. The financial news and data provider reported in September that DXC had hired financial advisers after receiving takeover interest.
This is not the first time DXC has received a takeover proposal. In early 2021, the company received an unsolicited, preliminary and non-binding proposal to acquire all of its shares from French technology services provider, Atos SE. However, DXC later rejected the offer stating that it was insufficient.
We believe that DXC’s impressive transformation journey from a struggling highly leveraged company to a high-growth business-oriented firm makes it a profitable acquisition target.
DXC was formed through the merger of Computer Sciences Corporation (“CSC”) and the Enterprise Services Division of the Hewlett Packard Enterprise (HPE – Free Report) , which ended on Apr 1, 2017. While CSC was founded in 1959, Hewlett Packard Enterprise existed after the split of the former Hewlett Packard Company on Nov 1, 2015.
Before the merger was completed, CSC took on additional debt. This increases DXC’s total long-term liability, thereby increasing its interest expense burden while limiting its scope for investing in growth opportunities.
To overcome the aforementioned situation, DXC used 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 June 30, 2022, from $10.33 billion as of June 30, 2020. Its interest expenses fell to $37 million in the first quarter of fiscal 2022 from $106 million in the first quarter of fiscal 2020.
Divestments and spin-offs of non-core assets have improved DXC’s focus on its core businesses. They also enhance the company’s ability to execute acquisition strategies in 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. Taking the lead Service Today (NOW – Free Report partner) helps DXC strengthen its position as a leading serviceNow solutions provider throughout 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 helped DXC enhance its capabilities in the Autonomous Drive/Advanced Driver Assistance Systems (AD/ADAS) space.
In addition, DXC depends on partnerships to enhance its offerings. The company is looking to expand its networking-based infrastructure to the benefits of VMwareby (VMW – Free Report) hybrid cloud offerings. The move helped DXC strengthen its position in the virtualization server market. The partnership with VMware also enabled DXC to offer an efficient and enhanced hybrid IT environment to drive its performance.
Due to 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. Additionally, non-GAAP earnings is up 44.1% year over year to $3.50 per share in fiscal 2022.
Currently, DXC, Hewlett Packard Enterprise, ServiceNow and VMware carry a Zacks Rank #3 (Hold). Shares of DXC, HPE, NOW and VMW have fallen 15%, 17.8%, 35.2% and 2.5%, respectively, year to date. You see the complete list of Zacks #1 Rank (Strong Buy) stocks today here.