UPDATED: Atos Approaches DXC: Gains Further Strength in Digital Manufacturing

/ January 7, 2021/ Atos, Automotive, DXC Tech, France, M&A (large, with revenues above $50m), US

Atos Approaches DXC in a USD 10bn Transaction

Following a Reuters news release, European IT services vendor Atos confirmed it had submitted to the Board of DXC an unsolicited non-binding offer to acquire the firm. The offer is at a preliminary stage. Reuters estimated Atos’ offer to USD 10bn.

UPDATE: Atos is eyeing DXC’s digital and cloud capabilities (USD 4bn estimate). The company is most interested in its strategic service line security services, and DXC would help it almost double its size. Finally, Atos is also looking at cost synergies around real estate, data centers, and procurement).

We Think the Transaction Is Unlikely

We think the acquisition is unlikely, for several reasons. The USD 10bn price seems inaccessible to Atos, which has a low market valuation of USD 9.4bn (before the announcement) despite its zero net debt. Atos would need to take on high debt to finance the deal while doing a massive capital increase.

UPDATE: Atos provided indirectly some light on the financing. The company would raise USD 1bn in equity and increase debt to USD 9bn.

Also, DXC is gradually becoming a turnaround story. Under its new CEO, ex-Accenture Mike Salvino, DXC is offloading several units, including Gainwell Technologies, for USD 5bn. With this divestment and others under process, we think DXC is close to a zero net debt and has re-gained financial flexibility. The company’s next challenge is to stop its 5-10% annual revenue decline. So far, Mr. Salvino has not proved he can turn around the firm. However, the COVID-19 crisis has not helped either.

Investors believe in the recovery: the stock of DXC has almost tripled since its lowest point in March 2020. Nevertheless, the market cap of DXC remains low, considering its revenue. Finally, we would not be surprised if private equity jumped in and drove the valuation high.

DXC Brings Luxoft Automotive ER&D Capabilities and High Growth Potential

In the ER&D space, both DXC and Atos are relatively emerging vendors. DXC, through the 2019 acquisition of Luxoft, has gained automotive ER&D capabilities and a digital business. Luxoft, with its delivery arm located in Russia-Belarus-Ukraine, has a high potential for product engineering service contracts. We estimate the ER&D revenues of DXC to somewhere around USD 250-300m.

Atos has a different background in ER&D services, coming from its PLM work in Germany (a heritage from the SIS acquisition) and Airbus’ work in France. The company has other separate capabilities across units but has not yet formulated an ER&D strategy. In the past, Atos did not seem interested in entering the ER&D space, unlike Capgemini.

The Enlarged Atos Would Gain Further Strength in Digital Manufacturing

However, the DXC acquisition would strengthen Atos in the space of digital and cloud. DXC has very decent analytics & AI, security, and overall automation capabilities that would strengthen Atos’ investments in cloud orchestration, security and analytics, and IoT (with its Codex offerings). We think that the enlarged Atos would have a credible offering in digital manufacturing (i.e., the next-gen offerings of industrial/plant IT) and high-growth digital segments. It still would lack core product engineering capabilities.

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