Atos-DXC-Acquisition

Atos Announces Intent to Acquire DXC to Strengthen Its U.S. Presence

France-based Atos recently announced its intent to buy U.S.-based DXC Technology. If successful, this would be one of the largest acquisitions in the history of the IT services market, placing Atos as the second largest IT service provider by revenue after Accenture.

Atos is not a stranger to large acquisitions. It has acquired more than 20 firms in recent years, including Syntel in 2018 to expand in North America with application services and increase its offshore footprint. This latest proposed acquisition is aimed at further expanding its presence in the region and leveraging DXC’s complementary services. DXC, formed with the merger of CSC and EDS in 2014, has strong presence in the Americas. Revenue in the U.S. alone makes up 37 percent of its global revenue.

We see the following potential opportunities and challenges arising from this development:

Union of stronger services with Atos’s attractive portfolio and DXC’s U.S. market presence

Atos and DXC each have a strong portfolio of services that are likely to overlap in some ways. ISG Provider Lens studies for private hybrid cloud data center, public cloud services, cyber security and digital workplace services indicate how the two companies are likely to complement each other. DXC’s cloud, infrastructure and cyber security services, which are part of its Global Infrastructure Services (GIS) division, have strong market presence in the U.S. and will complement Atos’s portfolio strength in these areas.

Atos recently consolidated its cloud-related services under the OneCloud offering (announced in November 2020) that focuses on increasing technical certifications, acquisitions and R&D. Its strong Google practice combined with DXC’s Azure capabilities will form a solid combined portfolio. Atos strategically focuses on digital workplace and aspires to be a leader in employee engagement. DXC earlier announced it would divest its workplace business, but because of positive results in the post-pandemic world, it decided to retain it. It has a strong U.S. client base for its managed workplace, field support and service desk services. It also has employee engagement capabilities. The proposed acquisition will therefore create a top provider of IT infrastructure and security services, second only to IBM’s NewCo.

Unlike the Syntel acquisition, acquiring DXC could give Atos significant penetration in the U.S.

Despite securing a leadership position in next-gen application services in the U.S. when it acquired Syntel, Atos has not been able to cross-sell adequately or fully integrate Syntel capabilities. One of the obvious advantages of acquiring DXC for Atos would be to gain a stronger foothold in the U.S. DXC strengthened its client base in the U.S. for engineering services when it acquired Luxoft in 2019, which would go a long way to boost Atos’s data engineering services in the country. Like Atos in Europe, DXC has solid experience working with the public sector in the U.S. Its core leadership is also based in the U.S, which will be another benefit.

While the proposed acquisition comes with its share of opportunities, Atos also will face challenges with DXC’s recent negative financial growth. Its debts and costs are high because it offers more capital-intensive services and lower offshore ratios than its peers. Of late, it has shed assets such as its healthcare business and its investment banking trading services. Atos intends to spend more than DXC market capitalization to cover the debt and may very well rack up additional debt to fund the acquisition even though it has always been a nearly debt-free company.

Another challenge Atos will likely face will be scaling its services at a time when the market demands agility. By acquiring DXC, Atos will gain scale while other providers that have traditionally been juggernauts with large-scale infrastructure services are shedding these capabilities to become lean. They are outplaced by hyperscalers that are winning a larger share of the traditional infrastructure work as an increasing volume of workload is moving to the cloud. To address these challenges, Atos may have to examine DXC’s business areas that align with its strategic initiatives and consider divesting the rest.

ISG is keeping an eye on this development and will be back with a detailed analysis once the acquisition is formally announced.

About the author

Mrinal Rai is the principal analyst for Digital Workplace and Conversational AI. His area of expertise is digital workplace services, enterprise social collaboration and conversational AI both from a technology and business point of view. He covers key areas around the Workplace, End User computing domain and conversational AI viz., modernizing workplace, Enterprise mobility, BYOD, VDI, managed workplace services, service desk, enterprise social software, content/ team collaboration, chatbots and intelligent virtual agent platforms. He has been with ISG for last 8+ years and has more than 13 years of industry experience. Mrinal works with ISG advisors and clients in engagements related to chatbots, virtual assistants, workplace modernization, social intranet, collaborative workplace, cloud-based VDI, end user computing and service desk.