What Makes DXC Technology (DXC) a Profitable Takeover Target? – September 22, 2022

DXC technology (DXC Free Report) has hired financial advisers after receiving takeover interest, Bloomberg reported on Wednesday citing people familiar with the matter. Following the reports, shares of the global systems integrator and solutions provider rose as high as 9% before ending Wednesday’s trading session with a 1.8% gain.

Citing 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 said it was unclear whether the company was open for sale or not.

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.

What Is DXC’s Takeover Target?

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 Enterprise Services Division of Hewlett Packard Enterprise (HPE Free Report) that ended on Apr 1, 2017. While CSC was founded in 1959, Hewlett Packard Enterprise came into being after the split of the former Hewlett Packard Company on Nov 1, 2015.

CSC, prior to the completion of the merger, took on additional debt. This increased DXC’s total long-term liabilities, thereby increasing the interest expense burden while limiting its scope for investing in growth opportunities.

To overcome this 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 first quarter of fiscal 2020. .

The divestment and spin-off of non-core assets improved DXC’s focus on its core businesses. It also enhances 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.

Additionally, DXC depends on partnerships to enhance its offerings. Notably, the company is looking to expand its networking-based infrastructure with the benefits of VMwareby (VMW Free Report) hybrid cloud offerings. The move helped DXC Technology 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 performance.

Thanks 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.

Attractive Valuations Make DXC an Acquisition Target

Technology has been among the most battered sectors amid a broader market sell-off this year so far. However, this sell-off in the broader equity market led to a massive correction in the stock prices of several technology companies. These companies are considered extremely overvalued in the top sector in 2021. With this correction, several tech stocks are currently trading below their 52-week highs and at an attractive value as well , despite the strong basis.

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

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

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

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

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