Using a Divestiture Strategy for Growth

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There are times when companies are compelled to sell some of their business units in order to use the capital for more growth-oriented businesses. For many years, divestitures used to give an impression that a company is going through a financial crisis. But Computer Sciences Corporation (NYSE: CSC) takes these divestitures as a strategy and always aims at selling its non-performing businesses and investing that capital in next generation technology solutions and services. This strategy works well for CSC, as it helps in reforming its portfolio and keeps it on track. The company continues to move ahead with this, as in the last two months CSC has made three divestitures.

CSC will be selling its credit service business, one of its most high margins generating business, for $1 billion to Equifax in order to concentrate more on its core business. The cash from this divestiture will be used to make share buybacks ($300 million- $400 million), pension plans ($300 million- $400 million) and general corporate purposes. CSC credit service business owns credit files in 15 Midwestern and central U.S. states, which represents one fifth of the United States population. It is the biggest independent U.S. consumer credit reporting agency and has been affiliated with Equifax for almost 20 years. This deal is expected to close in August, 2013. After the Credit Service divestiture was announced, shares of the company rose 3%.

Just after a few days of its Credit Business divestiture, CSC also sold its Australian IT staffing unit Paxus to South African staffing provider Adcorp for $73.5 million. The proceeds generated from this divestiture will be further invested in general corporate purposes, consulting, outsourcing, and business process management. Paxus was CSC's acquisition was made in 1996, and in 2012 it recorded revenue of $340 million.

Additionally, CSC is aiming at increasing its revenue with its cost cutting plan of $2 billion by the end of 2017. These savings will be made from all across the glob, targeting at the supply chain and procurement savings of $350 to $400 million, enterprise overhead reduction of $200 to $250 million, workforce optimization that saves $250 to $300 million, and contract management discipline saving $200 to $250 million. It has also reduced its management layers from 13 to 7. The savings will be reinvested in workforce optimization, boosting the marketing activities and enhancing enterprise tools and systems.

CSC faces stiff competition from Accenture (NYSE: ACN), the world's second largest technology consulting company, which remains actively involved in making acquisitions with an intent to get incremental revenue and diversify globally. The company recently acquired NewsPage, which is a mobility software company. This acquisition will expand Accenture's mobility capabilities and will deliver many add-ons to its existing Consumer Goods and Services platform. This enhancement will make its CAS platform compatible with iOS, Windows, and Android, providing multi-platform mobility. Accenture made another acquisition of Octagon Reasearch Solutions in order to upgrade its clinical services capabilities, which include safety case processing, data management and clinical programming. The company made this acquisition to provide its pharmaceuticals clients with enhanced clinical and regulatory service. This will give Accenture a strong position in the life science sector by getting it new deals with new and existing customers. Accenture's financial position will be boosted with its acquisitions strategy, as in the last 3 to 4 years the company has grown massively and its stock has moved up 34% in the last year alone.

CSC is also in direct competition with International Business Machines (NYSE: IBM), which in the last five years made 30 acquisitions worth a total of $16 billion, with an intent to widen and diversify its portfolio. IBM announced that it will be acquiring StoredIQ, an Information management, compliance, and electronic discovery software developer. During the business process huge data is generated, and it becomes difficult to manage everything; StoredIQ helps solve this problem. It makes a software that manages big data, serving a number of industries without moving the data to some other location. IBM will integrate it in its software business, forming a part of its Information Lifecycle Governance Suite.

Coming on to its other recent acquisition, IBM closed its Kenexa deal for $1.3 billion in order to place itself in the global talent management market. Kenexa is a leader in recruitment process outsourcing and will help IBM in consulting, talent management technology, HR transformation, and employee assessment. In the last quarter IBM reported $1.3 billion in free cash flow, which will be used for dividend payment and share buybacks.

Turning back to CSC, apart from divestments and restructuring, the company has also won many contracts that will strengthen its core business. CSC was awarded a contract of $54 million with the US immigration and Custom Enforcement to conduct background investigations for Immigration and Customs Enforcement. Furthermore, it won a contract with the US Army worth $34 million to enhance a simulator-based flight and aviation training device for the U.S. Army Aviation Center of Excellence at Ft. Rucker, Ala. These opportunities will help CSC in future growth. Currently, the company’s stock is trading at ~$39, which is up 59% year to date, with a forward P/E ratio of 11.76x. I would recommend buying this stock. 

ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines. Motley Fool newsletter services recommend Accenture Ltd. and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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