The leading technology solutions and service provider, Computer Sciences Corporation (CSC) recently announced the acquisition of Sao Paulo-based IT services firm, VIXIA Consultoria e Tecnologia Ltda. The acquired company provides core operational software, business consulting and systems integration services, and caters to the insurance, reinsurance and financial institutions in Brazil.
This acquisition is expected to enhance the company’s ability to support the expansion objectives of its multi-national clients and also help pursue and win new business in the emerging financial services market. The company did not disclose the pecuniary details of the agreement.
Computer Sciences initiated its operations in Latin America in 2009. In that year, the company introduced a wide range of software and services for the region’s financial services industry. To further strengthen its position in the region, CSC also acquired BearingPoint of Brazil in 2009 and went on to become a major provider of consulting and systems integration services.
The BearingPoint acquisition supports CSC's multi-year strategic growth plan by expanding its presence in Brazil. This apart, the acquisition has enhanced CSC's ability to support existing customers within Brazil. It has also added new clients from BearingPoint that position CSC to pursue and win new business in the region.
Although the company is trying to grow through acquisitions, especially in the Latin American region, the company’s U.S. federal business is expected to face challenges as government customers seek to reduce their spending on new technology.
Revenues from this segment may be impacted by tighter U.S. government budgets, which could limit expenditure on technology, as indicated by Standard & Poors (S&P) lowering its outlook for America's long-term credit rating to "negative" from "stable." This makes us apprehensive about the business growth of the company. The federal business constitutes around 40.0% of CSC’s total revenue.
Revenues from the NHS contract (estimated to be 2.0% to 3.0% of revenues) can serve as a swing factor for quarterly and annual results given that the company never discloses the size of the contract. The NHS contract is considered as a major risk for the company as it has forced CSC to lower its guidance for fiscal 2011 as a result of delay in realization from the contract.
Further, the company is currently entangled in a class action lawsuit initiated by an institutional investor in the District Court of the Eastern District of Virginia on behalf of customers of Computer Sciences Corporation. They have accused the company of misstating facts, which resulted in the substantial decline in stock price, resulting in a huge loss to the investors.
We are apprehensive about the intense competition in the IT and cloud computing space from both big and small players such as Accenture (ACN) and Hewlett-Packard Company (HPQ). Moreover, with government orders expected to dry up to a certain extent and the NHS realization to be delayed further, things look difficult for Computer Sciences.
Although the VIXIA acquisition will add value to the company’s portfolio, it will take time for the company to generate substantial business from the acquired company. Moreover, the demand for the company’s products in Europe is not encouraging for the upcoming quarters.
CSC has a Zacks #5 Rank, implying a short-term Strong Sell rating.
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