DXC Technology (DXC) Pops 9% on Takeover Bid By Atos

Shares of DXC Technology DXC jumped 9.3% on Thursday after the company confirmed that the French multinational IT consulting company, Atos SE, has offered a take-over proposal.

The U.S.-based IT services provider revealed that Atos has made an “unsolicited, preliminary and non-binding proposal” to acquire all of its shares. However, the company didn’t disclose the financial terms of the offer.

Earlier in the day, Reuters had reported about the take-over bid. Citing two sources familiar with the matter, the global news and financial data provider reported that Atos’ takeover bid values DXC at more than $10 billion including debt.

The report further stated that the buyout would fortify Atos’ presence in the United States, and lead synergies and cost savings for the French company. Moreover, the acquisition would give Atos access to a wide range of DXC clients and business-to-business products, including IT consulting services, and cloud and analytics applications.

DXC Technology Company. Price and Consensus

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

DXC Struggles Under Debt

We believe the deal will provide DXC, which is struggling under a massive debt burden, an opportunity to grow as a combined company.

Notably, DXC was formed in 2017 by the merger of Computer Sciences Corporation and the enterprise services unit of Hewlett Packard Enterprise HPE. CSC, prior to the completion of the merger, took an additional debt. This has amplified DXC’s total long-term liability, thereby increasing its interest cost burden.

As of Sep 30, 2020, DXC’s balance sheet had only $3.08 billion in cash and cash equivalents, while long-term debt outstanding (net of current maturities) was $8.05 billion.

DXC Strengthening Balance Sheet With Spin-Offs

DXC has resorted to a spin-merger approach to strengthen its balance sheet and boost shareholders’ wealth.

For instance, after the company spun off its U.S. Public Sector business in 2018 and subsequently merged it with Vencore Holdings and KeyPoint Government Solutions, shareholders of DXC received 86% of the combined company’s shares and $1.05 billion of cash from the sale. The move resulted in the formation of a new company — Perspecta PRSP.

Last March, the company spun off its U.S. State and Local Health and Human Services business and agreed to sell it to Veritas Capital for $5 billion. Further in July, DXC sold its healthcare software business to Dedalus Group for $525 million.

During its second-quarter fiscal 2021 earnings conference call, DXC had stated that it completed the asset sale transaction with Veritas on Oct 1, 2020. It further noted that of the $5 billion gross proceeds received from the deal, $3.5 billion were used to pay down debt.

Zacks Rank and A Key Pick

DXC currently carries a Zacks Rank #3 (Hold).

A better-ranked stock in the broader technology sector is Teradata Corporation TDC, sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for Teradata is currently pegged at 16.1%.

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