Kyndryl and Apollo Global linked to bid for DXC Technology

Creating economies of scale by merging ever-shrinking infrastructure services businesses

DXC Technology, the beleaguered tech services provider that emerged from the alliance between HPE Enterprise Services and CSC then lost billions in revenue, is again reportedly the subject of takeover talks.

At the time of the merger in 2017, The Reg described the union as two struggling businesses – which had both suffered at the hands of the cloud – joining forces to make an even bigger headache for management. A frankenfirm.

In the latest twist, loquacious sources this week told Reuters that Kyndryl, the Global Infrastructure Services division spun out by IBM in 2021, and private equity investor Apollo Global are the latest prospective buyers.

The pair reportedly launched a joint bid of between $22 and $25 per share, a premium on the record-low $15 stock price that DXC was valued at on the NYSE. Shares jumped to $18.45 following the news on June 10.

DXC is also reportedly soliciting separate bids to cash in on its insurance software business. The price is understood to be $2 billion.

Jon C Davies, analyst at UK-based TechMarketView and a former DXC employee, said the insurance biz is the "global leader in life and wealth, speciality and reinsurance while the company's technology processes one in five property and casualty transactions worldwide."

"The company has been making significant investments in the business over the past 18 months. As part of this, DXC has recruited (or in many cases rehired) around 1,500 insurance industry experts. As the insurance industry increasingly looks to modernize its IT estate, it is also worth noting that DXC Technology is the largest AWS insurance industry customer in the world and currently has around 20 million policies running on the AWS cloud."

There is no guarantee that DXC will be sold, and new broom Raul Fernandez, who joined the business in February, hasn't yet had time to show investors he has the ability to turn the ship around.

DXC was incorporated seven years ago and forecast revenue of $24 billion to $24.5 billion for its first year. In the most recent full financial year ended March 31, it reported revenue of $13.667 billion.

Like rivals in the field of infrastructure services, DXC has become less relevant in the cloud era. Kyndryl was exposed for the same reason when under IBM's control and experienced a reduction in sales before it was shipped out as a separate entity. Atos is going through similar pains.

All have tried to modernize by learning to embrace the cloud, initially reselling and providing technical services for customers. This is a low-margin game.

If Reuters' sources are correct, this will be the third time DXC has been approached by potential suitors, the first being Atos and then a consortium of private equity investors. DXC employs 130,000 staff these days, down from 170,000 in 2017, and after repeated redundancy programs to cut its cloth to match shrinking revenue. Any new owner – or indeed the current management – might need to be more innovative than relying on accountants running spreadsheets.

Davies at TechMarketView said: "While none of the parties involved have issued any comment on the unconfirmed reports, such a move would not be unexpected considering DXC's failure to deliver revenue growth and its most recent financial performance.

"While developments appear to be at a relatively early stage, Kyndryl seems to be an obvious suitor for the rump of DXC, in fact many commentators (including this one) have long speculated that such interest might materialize.

"Meanwhile, with a potential price tag of around $2 billion and a ready-made ring-fenced business, DXC's global insurance operations may to some look like the most appealing of the two potential transactions. If things indeed do eventually play out as initially seems possible, it will perhaps be the end game that many have been expecting for some time."

The short-term future of Atos became clearer yesterday after it accepted a restructuring proposal from a creditor. Maybe it will for DXC too. We've asked all parties involved to comment.

A DXC spokesperson told us: "We do not comment on market rumor and speculation." ®

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