|
Two of the biggest acquisitions of Computer Services Industry members, Affiliated Computer Services and Perot Systems occurred during the month of September of 2009. The acquisitions of these two respectively by Xerox and Dell indicate that a major shift is going on as those companies who manufacture and sell computers and office equipment are seeking more dependable and consistent streams of revenue, profits and Free Cash Flow.
The Computer Services Industry is vulnerable to suitors because its annualized or Trailing Twelve Month (TTM) revenue over the last 12 months declined by 20.6%, a five-year record, and has been declining at an accelerating pace over its last four quarters. This compares to a 1.13% increase for the Computer Hardware Industry (Dell’s Industry) and a 13.3% increase for the Office Equipment Industry. The industry’s lackluster performance has resulted in a majority of the industry’s members to have share prices which are much closer to their 52 week lows than their highs.
Annualized Cash Flow From Operations (CFFO) for the Computer Services Industry has fared even worse than its revenue as CFFO has declined for the last six consecutive quarters and at a rate of 9.9% over its latest twelve months. The Computer Hardware Industry led the three industries with a growth rate of 5.2% and the Office Equipment Industry Office lagged all three with a CFFO decline of 21.2% as compared to its year earlier twelve months.
The Computer Services Industry is an attractive industry for technology companies to poach from because its recurring or residual revenue stream business model which is services oriented is less much volatile those industries who are looking to make outright sales of new equipment to businesses and corporations. That is probably why Michael Dell, the founder and CEO of Dell said in a conference call that Dell would likely be looking for more acquisitions after digesting Perot. His statement might have motivated Xerox to acquire Affiliated Computer Services ten days after Dell announced that it was acquiring Perot Systems.
According to BearMarketNavigator.com there are currently 22 companies in the Computer Services Industry, out of the 117 that are monitored by www.StockDiagnostics.com, which have a minimum Free Cash Flow yield of 7%. This yield makes them very attractive as acquisition candidates. This is because the Free Cash Flow Yield which is calculated by dividing annualized Free Cash Flow by market cap (FCF/Market cap) represents the after tax yield that a corporation or individual can get on from a bank certificate of deposit or a bond. Since the current after tax rate on CDs and short term bonds is below 2% its quite attractive for a company to acquire a company at a price which would generate a after tax yield of 3% or better. Dell’s announced acquisition of Perot at premium of over 60% compared to its previous day’s closing share price on September 18, 2009, is a good example. After the announcement Perot’s Free cash yield fell from latest quarter ending 9% on 6/30/09 to 4.3%. Even with the significant premium that Dell paid its Free Cash Flow return of over 4.0% is much higher than the after tax return that Dell was getting on its cash in the bank.
A list of those 22 companies in the industry who have a current minimum yield of 7% is now available at www.BearMarketNavigator.com to its members.
|
