The great rush by hardware firms to diversify out of their narrow base of slower growth businesses is underway. Which information technology services firm will be next?

IN PICTURES: Digging Out Of Debt In 8 Steps

The technology sector has seen two large deals in September 2009. Last week, Dell Computer (Nasdaq:DELL) announced that it would buy Perot Systems (NYSE:PER) for $30 a share, a 68% premium.

Next came Xerox Corp (NYSE:XRX) buying Affiliated Computer Services (NYSE:ACS) at a 34% premium.

The rationale for the deals is an attempt by the hardware companies to expand into higher growth and higher margin businesses. Also, the hardware companies can now sell the service businesses it has acquired into its corporate customer base.

So who could be next? Let's take a look at the top four information technology companies by market capitalization.

Large And In Charge?
Computer Sciences Corporation (NYSE:CSC) is one of the largest services company with a market capitalization of $8 billion. The problem with Computer Sciences Corporation as it pertains to its attractiveness to hardware companies is that 41% of its sales are in the public sector, primarily the Federal Government.

The company is also a serial acquirer, has purchased dozens of other businesses and may not be for sale.

Scandalous Satyam
Satyam Computer Services Ltd. (NYSE:SAY) is involved in an accounting scandal with a former Chairman admitting to falsifying earnings. The company is currently restating past years financials making this company toxic to a buyer for the time being. (Read about other scandals in our article The Biggest Stock Scams Of All Time)

Stretching Beyond The Borders
NCR Corp. (NYSE:NCR) offers a widely diversified base of services to its customers, serving the financial, healthcare and retail industries. The company is also diversified geographically, with 66% of its revenues outside the United States. This may increase its appeal to a buyer. However, NCR Corp is not exclusively a services provider; about 50% of its revenues came from products rather than services in its most recently reported quarter.

Mini But Mighty
Syntel Inc. (Nasdaq:SYNT) has a $2 billion market capitalization, and is easily digestible by a larger company. The company is fast growing and is positioned well in the services business, but it had only $410 million in sales in its last fiscal year, which may not be enough to interest a large hardware company.

The stock is fairly expensive, trading at 20 times earnings excluding any premium that an acquirer would have to pay. Also, the stock is trading at a lifetime high price of just under $50 a share.

Asking The Wrong Question?
Perhaps a more important issue is who would the buyer be? Dell Computer and Xerox are no longer in the market. Hewlett Packard (NYSE:HPQ) bought EDS last year, and doesn't really need anything else. IBM (NYSE:IBM) is already the ultimate software/services/hardware company, and wouldn't benefit except perhaps with a small bolt on acquisition to fill a hole in its lineup.

It would seem that investors are not the only ones that engage in herd-like behavior as traditional hardware-oriented technology companies queue up and pay up for companies stacked with technology services businesses. It's not all that clear that such a strategy will work for these eager buyers. (To learn about how to value mergers and acquisitions, see Accretion/Dilution Analysis: A Merger Mystery)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center