DXC Tech Acquires Luxoft and enters ER&D services
DXC Technology, the third largest IT service vendor after IBM and Accenture, is to acquire Luxoft for $2bn. The company is offering a ~83% premium over the stock value of Luxoft last Friday.
Luxoft provides IT and ER&D services. The company had FY18, the year ending March 31, 2018, revenues of USD 907m, and an adjusted operating margin of 11.6%. Headcount is and 13k employees, located mostly in Eastern and Central Europe. Luxoft derived ~57% of its revenues from BFSI, ~17% from the automotive industry, and 26% from other industries.
Luxoft was until FY17 a high-growth story, growing as fast as EPAM Systems, by 20%-30% annually. In the past years, Luxoft has suffered from its heavy client concentration, with its top two wealth management clients, UBS and Deutsche Bank, representing 52.3% of revenues in FY16. In the current FY19, the revenue decline has accelerated with revenues moving to flat growth in H1 FY19. The UBS account is now under control while Deutsche Bank’s spending with Luxoft remains challenging.
Deutsche Bank and UBS only represented 34.7% of revenues in FY18.
Luxoft has an automotive unit, which is mostly ER&D services. The unit is in high growth mode (~+25% in H1 FY19, including some acquisitions) with major clients including Visteon, Daimler, Ford, Harman and Valeo.
Finally, other industries, “Digital Enterprise” groups a range of IT services and ER&D services capabilities with investment in UX, IoT, analytics and traditional ADM services. Luxoft is investing in its portfolio transformation to increase its digital capabilities. Digital Enterprise was a success story for Luxoft until the end of FY18. In H1 FY19, the unit has been suffering.
The acquisition of Luxoft comes as a surprise, as Luxoft was progressively exiting from troubled times. This may not have been the best time to sell Luxoft. Having said that, the $2bn cash offer values Luxoft almost as twice as much as its current market cap.
The acquirer is also a surprise: DXC is the heritage company from three firms CSC, EDS and HP Services, and is mostly an IT infrastructure management vendor, which had not signaled interest in the type of hybrid IT services and ER&D services work that Luxoft provides.
The impact on the ER&D industry should be limited: Luxoft will keep on operating as an independent firm, with DXC not targeting cost rationalization but revenue synergies. Luxoft should therefore successful in automotive ER&D, provided market conditions remains favorable. However, DXC brings little ER&D capabilities apart from PLM service capabilities, which we expect will remain outside of the perimeter of Luxoft. In other words, the acquisition by DXC of Luxoft should have limited impact, at least in the short-term on the ER&D service industry.
We will be commenting further on this acquisition.