What does the UXC Ltd and CSC Deal Mean for IT in Australia?

UXC Limited [ASX:UXC] is an Aussie IT company. They provide IT services to companies all over the Asia Pacific region.

Their customers are from industries such as healthcare, government, financial services and energy. They have more than 2,500 customers on their books and are a robust company.

UXC is also a small cap company. At the very beginning of the year the company was worth around $300 million trading at a stock price of about 74 cents. Compared to the multi-billion dollar IT giants you see in the states – UXC is small time.

But that doesn’t mean the big US giants aren’t watching…

Six months off six months up

For the first six months UXC had a pretty stable share price. Trading around 74 cents. Then as if on cue, it all changed at the beginning of July.

By the end of July UXC was trading at 91.5 cents.

By the end of August they were at $1.10.

At the end of September, $1.25.

And by early October they had reached a peak of $1.33 — this was the highest the stock had been in over seven years.

UXC November

UXC Year-to-date Stock Price. Source: Google Finance

So why did the stock almost double from July to October? And why is it now currently trading at $1.20? Why in six months has the stock jumped 62%?

It’s all because rumours started to get traction that UXC was in line for a takeover bid. This proved to be correct when UXC stated in early October it had received an offer from Computer Science Corporation [NYSE:CSC].

What made this particularly interesting was that UXC Managing Director, Cris Nicolli, explained CSC weren’t the only interested party. Nicolli told the Australian Financial Review they had interest from another party over a period of about four months — beginning in June.

As it stands, the CSC bid is now going ahead. And CSC is going to pay a total of $1.24 for 100% of UXC shares. That puts the total deal at around $413 million for the whole company.

But why is a US$9.83 billion (AU$13.5 billion) buying a relatively small Aussie IT services company?

It’s all about Asia Pacific

There is a huge market available in Australia for IT services. On top of that, Australia is a hub to expand outward into the neighbouring Asian region.

I see this as a play by CSC to get a foothold into the Asia Pacific region. A straight takeover means they don’t have to start from scratch. It’s the Asia Pacific region that is the real prize and UXC gives CSC an ‘in’ straight away.

Mike Lawrie, CSC’s president and CEO said,

The addition of UXC would continue the process of rebalancing our offering portfolio and strengthening our global commercial business. UXC’s application platform capabilities – combined with CSC’s existing strengths in cloud, cyber, and big data – would enhance what the two companies already deliver to clients in the region.’

Under the umbrella of CSC, UXC will have far more financial clout behind it. This will help them further expand into the region. That will press other existing IT companies in the region to be more competitive. Or it might even bring a few of them together.

I’m talking about a lot more consolidation in the sector. More mergers. More takeovers. And it’s going to come on strong now other big US tech companies see what CSC are doing.

There are some excellent IT businesses in Australia right now. While UXC is getting in the news, here are a few more to keep an eye on.

SMS Management [ASX:SMS], PS&C Limited [ASX:PSZ], ASG Group [ASX:ASG] and Empired [ASX:EPD] are all involved in this promising sector.

Thanks to UXC and CSC these companies all look attractive as takeover targets. And I would expect that in 2016 you will see more of the same. If you’re invested at the right time you might see some pretty healthy gains in the IT sector for 2016.

Regards,

Sam


Sam Volkering is an Editor for Money Morning and is small-cap, cryptocurrency and technology expert.

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