DXC Technology (DXC, Financial), an IT analytics and security services provider, saw a significant uptick yesterday following a report that Apollo (APO, Financial) and Kyndryl (KD, Financial) are in talks about a potential joint bid for DXC. The discussed acquisition price is around $22.00-25.00 per share, representing roughly a 40% premium to DXC's current stock price and a forward P/E multiple of around 9.1x, compared to KD's 15.1x forward earnings ratio.
Shares of KD, an IBM (IBM, Financial) spin-off specializing in infrastructure IT services, moved lower. KD recently hit record highs following positive Q4 results and a solid FY25 outlook, leading to some profit-taking. KD shareholders may view the potential acquisition negatively, especially given DXC's ongoing struggles. DXC shares have fallen 30% over the past year, impacted by reduced FY24 guidance and bearish FY25 forecasts. DXC's revenue growth has been negative for over 20 quarters, contributing to a consistent decline in quarterly earnings.
- What has been going wrong for DXC?
- DXC's business is divided between Global Business Services (GBS) and Global Infrastructure Services (GIS). GIS has been the weak link, with organic revenue in negative growth and contracting margins.
- GIS's issues led to a CEO change, with Raul Fernandez appointed as the new leader on February 1, 2024. One of his first actions was initiating a restructuring program in GIS.
- DXC's insurance software business is also facing challenges. Although it is the world's largest insurance software provider, its boot-to-bill ratio dropped to 0.8x in Q4 from 1.6x in the previous quarter, indicating possible structural demand issues. Management attributes this volatility to the timing of large renewals, which may concern KD shareholders.
With DXC shares trading below the discussed acquisition price, investors are skeptical about a sale. Under new leadership, the CEO might want time to see if restructuring can turn GIS around. DXC has also reportedly solicited bids to offload its insurance software business, suggesting a desire to remain independent but leaner. Notably, in late 2022, rumors of a takeover by Baring Private Equity Asia surfaced but ultimately fell through.
