FTC Cuts Short HSR Waiting Period For DXC's Spin-Merger Deal

DXC Technology Company (NYSE:DXC) is on track to complete its planned spin-off of the U.S. Public Sector (USPS) business, and subsequently merge the same with the company’s pending acquisitions of Vencore Holdings and KeyPoint Government Solutions ahead of time. This is because the company has been granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) by the U.S. Federal Trade Commission (FTC).

The HSR Act seeks to ensure due filing of all documents necessary for mergers, acquisitions and transfer of assets or securities by companies with the U.S. Federal Trade Commission and Department of Justice.

Notably, the three companies have come together to form a publicly-traded IT service-providing entity, primarily to the U.S. government. Vencore and KeyPoint are owned by private-equity firm Veritas Capital.

Transaction Details

Per the agreement, the deal will be structured as a ‘Reverse Morris Trust’ transaction, thereby making the entire transaction tax free for DXC Technology and its shareholders.

Upon completion of the deal, shareholders of DXC Technology will receive 86% of the combined company’s shares. Along with this, the company will receive $1.05 billion of cash from USPS, upon completion of the spin-off. The proceeds from USPS are intended to be used for debt repayments, share buyback and other general corporate purposes.

On the other hand, Veritas Capital will receive approximately 14% shareholding and a cash consideration of $400 million on completion of the entire transaction.

The current president and CEO of Vencore — Mac Curtis — will hold the position of chief executive officer of the new company, while Marilyn Crouther, senior vice president and general manager, DXC USPS, will serve as the chief operating officer. Mike Lawrie chairman, president and CEO of DXC, will chair the board of the new entity, while names for other positions will be decided later.

Reason for the Deal

Per the company, the IT services market for both commercial and the U.S. public sectors has been evolving at an accelerating pace. Therefore, DXC Technology’s latest spin-merger move is anticipated to provide it a customized approach toward handling two different types of clients. On the successful formation, the new entity will become one of the top five IT services providers to the U.S. government.

Furthermore, it should be noted that Vencore is well known for providing cyber security, engineering, analytics and other IT solutions to the federal government, while KeyPoint is specialized in offering investigative services to a wide range of sectors, including federal, defense, intelligence and civilian sectors.

Hence, per the company, the above-mentioned transaction is likely to fortify its capabilities in “offering differentiated, mission-driven solutions in cybersecurity, big data analytics, cloud engineering, enterprise IT services, and systems engineering – all enabled by a portfolio of cutting-edge Intellectual Property (IP).”

The reinforced capabilities will help the new company win government contracts, in turn bringing in more revenues, in our opinion.

Boosting Shareholders’ Wealth

The latest move comes just months after DXC Technology came into existence in April this year. Notably, the company is a result of the merger of the Computer Sciences and the Enterprise Services business of Hewlett Packard Enterprise (NYSE:HPE) . The transaction has enhanced shareholders’ value of both companies. Additionally, it has opened up new opportunities for driving the company’s growth.

Therefore, we believe the recent spin-merger transaction of the USPS business will not only boost DXC Technology’s shareholders’ value in the near term, but will also continue to create wealth over the long run.

Since its first trading on Apr 4, 2017, DXC Technology has gained 37.2%, significantly outperforming the industry’s return of 26%.

Currently, DXC Technology flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

A couple of other top-ranked stocks in the broader technology sector are NVIDIA Corporation (NASDAQ:NVDA) and Micron Technology, Inc. (NASDAQ:MU) , both sporting the same Zacks Rank as DXC Technology.

NVIDIA and Micron have expected long-term EPS growth rates of 10.3% and 10%, respectively.

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