+$10 billion in Tech Deals on the line

Atos bids $10 billion for DXC Technology

Atos is a powerhouse in the IT services industry. When it wants something, they will get it. Even it means paying a premium.

IT service deals continue to ramp up for 2020. At the beginning of this month it was rumored that Atos would bid $10 billion for DXC technology. Atos began speaking with its largest shareholders to win support for the takeover. Today Atos is worth ~$7 billion in market cap and would double in size with this acquisition.

The Atos executive team believes they need scale to compete in the IT services industry. Atos’ top competitors include Accenture, Infosys. and IBM for cloud migration contracts. Doubling its global footprint will allow Atos to cut administrative costs to increase profits. So, great dealmakers bet big on cost synergies for an immediate payback on their investment. Atos is also now in talks with Dell to acquire Secureworks to expand its cybersecurity capabilities.

This isn't the first major deal by Atos. In 2018 the company acquired Syntel, a major IT service provider, for $3.4 billion in cash. Atos made a big bet to enter the U.S. markets with Syntel, which has paid off from the growing need of new cloud strategies during the pandemic.

DXC hasn’t responded with a counter but I suspect shareholders will want more than $10 billion.

Office Depot rejects Staples, Again

Staples is hungry but Office Depot is not biting. The Depot rejected Staples' $2.1 billion bid and the chance to spinoff CompuCom, its IT services unit.

Market consolidation will continue in every industry with low interest rates. Private equity will continue to use cheap debt to buyout competitors. The office supply industry is no exception. In fact, with everyone working from home, this industry is ripe for change.

In 2016, a federal judge blocked Staples’ old $6.3 billion bid for Office Depot because of its anti-competitive nature. The market took a nosedive in the last four years. These office suppliers fell behind the ecommerce curve as startups delivered better office supplies. So, Office Depot acquired CompuCom for $1 billion in 2017 to diversify its revenue stream into IT services [here’s Office Depot’s original deal presentation for CompuCom].

Yet, Office Depot is now valued at a third of Staples original bid. And Staples wants to spinoff the Depot’s IT services division. CompuCom has a strong recurring revenue base with steady margins but does not fit Staples long term strategy. The company once owned Thrive Networks but hasn’t been in the MSP IT services industry since.

It is possible that a merger will take place between both companies' ecommerce operations so they may maintain market leadership. Office Depot is open to doing a retail-only deal with Staples at the moment [read the response letter here]. But I think this will deal be blocked with regulatory obstacles again.

Google is entering consumer tech

First the acquisition of Fitbit is complete. It took +2 years and dozens of regulatory hurdles to get this deal done. But now Google has expanded its consumer products line. I suspect this acquisition will be like acquiring Android to enter the smartphone space. These deals have been about devices, not data. Building good hardware is hard.

Now the coming is expanding its consumer tech line up. Google hired Giusy Buonfantino, a 30-year executive at J&J, Amway and Kimberly-Clark. This is a notable hire from the CPG industry.

Giusy will be joining the Google Cloud team to create vertical Cloud Solutions. But this is a bigger move for the search giant. You see, YouTube is the #2 most searched website in the world after Google.com. The search giant Has never been able to break into social media but this consumer strategy will give them a new Edge. Interactive shopping is the future of social commerce. And Youtube will become the dominant interactive shopping experience.

Google’s entry into consumer tech with wearables and strong CPG presence will make them the leading shopping platform in the future. They will dominate another angle of the consumer shopping experience.

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