KUHN CAPITAL Wednesday, March 21, 2018
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CSC: Up the Down Staircase


Tech outsourcing deals are down 10% to 15% this year, bad news for giant tech services vendor Computer Science. So why did the company’s stock see a 18% pop on October 24? Call it the PE fund effect.

Press reports have a consortium of Texas Pacific Group, Warburg Pincus, Blackstone Group and Lockheed looking at taking CSC private (sales: $14 billion), pay for most of the transaction by loading the company with debt, then fold its defense market business and perhaps other technical consulting units into Lockheed, and sell off or hold the remaining pieces.

Like Boeing, Lockheed wants to expand its IT services capabilities to escape the highly variable and perhaps declining business of making warplanes. Lockheed is already the Pentagon's main IT provider, but it is also holds lucrative contacts with the Census Bureau, the SSA, the USPO and other agencies.

Huge private equity consortiums like that purchasing tech services vendor SunGard for over $11 billion last April have become increasingly visible on the mega-deal M&A scene. While their sheer size is itself noteworthy, what’s caught our eye recently is their apparently rising interest in software and IT consulting properties, our specialty.

And CSC looks like a target for several reasons: its stock’s P/E ratio of 14x forward earnings lags that of its peers, and its balance sheet is fairly clean.

But even more novel in this case is the combination of private equity players with an operating company partner. One can imagine the attraction: in such an arrangement, the operator could steal a march on competitors by obtaining desirable and hitherto unavailable properties at pre-auction rates. And the PE groups see reduced risk by bringing on board industry-wise advisors and by “selling” off a portion of their future portfolio before they buy it.

Whether this particular deal succeeds or not, expect more like it. To us the combination of operating assets and expertise with huge sums of capital looks inevitable.

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