DXC Turns Down Atos’ Bid as Low

/ February 6, 2021/ Atos, Automotive, DXC Tech, Luxoft, M&A (large, with revenues above $50m), US

DXC Considered Atos’ Offer as too Low

Unsurprisingly, DXC Technology turned down Atos’ offer to acquire the firm. DXC considered it, USD 10bn, as reported by Reuters, as too low. The company considers it is going through a turn-around. Also, 16 months into the job, DXC’s CEO, Mike Salvino, believed it was too early to sell the Tysons, VA-based firm.

DXC Is Still in Turn-Around

DXC’s share price has almost tripled since mid-March 2020, at the beginning of the pandemic. Still, the company has a low market cap (~USD 6.6bn) for a company this size.

Having said that, DXC’s financials are depressed, to say the least. In Q3 FY21 (ending December 31, 2020), its revenues were down 10.5% yoy at cc/cs. DXC underperforms the market even in digital: in Q3, analytics & engineering revenues were flat yoy, and cloud & security were down by 1%. We estimate that cloud spending was up 10% to 15% in 2020, while security and analytics were up by 5% to 10%. DXC’s growth issues go beyond the secular decline in the IT infrastructure management business.

DXC continues to be a high-single-digit organic decline firm and has been for years. DXC’s management has pointed that bookings have increased, and its book-to-bill ratio has been well above 1 for the past three quarters. The company is now targeting flat revenue for FY22. We think this target is optimistic.

On the positive side, DXC’s management is actively reducing its net debt, selling assets, such as its US Medicare and Medicaid business and the former iSOFT (used at the UK NHS).

Atos’ Priorities Are Security and Cloud, Not ER&D

From an ER&D perspective, DXC would have brought a jewel, Luxoft‘s digital automotive business, and some digital capabilities (mostly security and analytics). However, DXC would not have significantly strengthened Atos’ engineering capabilities. Looking forward, we do not expect Atos to invest further in ER&D. The company has made it very clear that its priorities are security and cloud.

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