The acquisition is expected to enhance the services offered by CSC to its global utilities clients and support CSC’s strategic presence in the chemical, energy and natural resources market. Moreover, CSC will also benefit from Bass & Company’s talent pool, using the senior consultants to expand its utilities business.
CSC’s policy of expansion through strategic acquisitions has worked for it previously as well. In January 2008, CSC completed the acquisition of First Consulting Group at $13.00 per share, or approximately $365 million, in another all-cash transaction. This acquisition enhanced CSC’s Project Accelerate strategy by enhancing its healthcare expertise and intellectual property and expanding its worldwide delivery capabilities.
In August 2009, CSC completed the acquisition of BearingPoint’s operations in Brazil. The acquisition supports CSC’s multi-year strategic growth plan by expanding the company’s presence in Brazil. This apart, the operation will enhance CSC’s ability to support existing customers with a presence in Brazil, gain additional new clients from BearingPoint and position CSC to pursue and win new business in the region. We believe acquisitions will lead to technological enhancements, add scale and increase business volumes for the company going forward.
Being a government contractor, most of the order flow in recent times has been in relation to extension of existing contracts or task orders issued pursuant to previous arrangements with government departments. One of the more recent orders was from the U.S. Army. As per this agreement, the company will provide technical as well as engineering support to the Aviation and Missile Research Development and Engineering Center (AMRDEC) of the U.S. Army. This contract has a one-year base period, with four one-year renewal options, bringing the total deal value to around $104.0 million.
CSC’s main role will be to facilitate the process of technological integration, as well as technological backup to the AMRDEC’s systems engineering and digitization projects. The tech major is expected to provide support, which will in turn enhance the communications, simulation and live training transformation technologies.
While growth looks imminent for the company in the medium to long term, certain issues affecting CSC makes us slightly apprehensive. The company has a limited number of indigenous products which may result in some margin pressure, as a number of large and small competitors are entering the IT and professional services market.
This apart, the company’s U.S. federal government customers are slowly restructuring their spending priorities, whereby budgets are being reallocated from IT to other priority zones. So deal wins may not be as frequent over the next few quarters. However, considering the steady growth in bookings and CSC’s exploration of new business areas, we are reiterating our Neutral rating on CSC. The short-term rating remains Hold, as denoted by the Zacks rank of #3.
