Story Stocks^®

DXC Technology (DXC -2%), an IT analytics and security services provider, took off yesterday right before the close following a Reuters report disclosing that Apollo (APO) and Kyndryl (KD) were in talks about a potential joint bid for DXC. The price APO and KD discussed in acquiring DXC is around $22.00-25.00 per share, translating to a roughly 40% premium to DXC's current stock price. The potential acquisition price would represent a forward P/E multiple of around 9.1x, a relatively palatable valuation, especially when stacked against KD's 15.1x forward earnings ratio.

Shares of KD, an IBM (IBM) spin-off specializing in infrastructure IT services, moved lower. KD recently reached record highs following upbeat Q4 (Mar) results and a decent FY25 (Mar) outlook last month, leading to some profit-taking on the news. KD shareholders also may find the potential acquisition a bad move, especially given DXC's ongoing struggles. Shares have tumbled by 30% over the past 52 weeks, selling off in August on reduced FY24 (Mar) guidance and again last month following bearish FY25 financial forecasts. DXC's yr/yr revenue growth has been negative for over 20 straight quarters, partly weighing on a similarly consistent decline in quarterly earnings.

• What has been going so wrong for DXC over the years? The company's business is split between Global Business Services (GBS) and Global Infrastructure Services (GIS). The latter segment has been the weak link for DXC for several years, as organic revenue has stayed in negative growth territory and margins continued contracting.
  • GIS's woes have partly led to a CEO shakeup, with Raul Fernandez appointed DXC's new leader on February 1, 2024. One of Mr. Fernandez's first actions was initiating a restructuring program in GIS.
• Meanwhile, DXC's insurance software business has started growing stale. As the world's largest insurance software provider, boasting 21 of the top 25 global insurance carriers, DXC is no slouch in this vertical. However, while insurance revs did grow mildly yr/yr in Q4, its boot-to-bill ratio was just 0.8x, a striking drop from 1.6x in the previous quarter, underpinning possible structural demand issues. Management attributed the volatility to the timing surrounding large renewals. Nevertheless, this blemish may have KD shareholders concerned.

With shares of DXC trading well below the reportedly discussed price between APO and KD, investors are skeptical that DXC is ready to sell. Given that DXC is under new leadership, perhaps the new CEO wants time to see if restructuring can turn GIS around. The company has also reportedly solicited bids to offload its insurance software business, highlighting a possible desire to remain an independent but leaner organization. It is worth noting that around the fall of 2022, rumors swirled that a private equity firm, Baring Private Equity Asia, was interested in taking over DXC, only for the talks to ultimately break down.