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DXC Stock Soars After Firm Calls For ‘Strategic Alternatives’

The company is looking to sell or spin-off three of its businesses in a move it said could generate up to $5 billion, the bulk of which would be returned to investors in the form of share repurchases or dividends.

DXC Technology's stock price skyrocketed by more than 18 percent on Tuesday, the day after the company disclosed plans to pursue “strategic alternatives” for three of its businesses.

DXC’s share price peaked Tuesday early afternoon at $35, up sharply from Monday's close of $29.40 per share, before moving a bit lower to about $34.50 per share late in the day.

The Tysons, Va.-based global solution provider formed in the 2017 merger of HPE Enterprise Services and CSC on Monday said it was exploring strategic alternatives for three of its businesses.

[Related: DXC Technology’s New CEO: 5 Things You Need To Know About Mike Salvino]

CEO Mike Salvino listed those three businesses as DXC's U.S., state, and local health and human services business; its horizontal BPS (business process services) business; and its workplace and mobility business.

These three businesses together account for about 25 percent of DXC's total revenue, Salvino said.

Salvino, who in September joined DXC Technology, told investors during the company’s second quarter 2020 financial conference call those so-called strategic alternatives include a potential sale to strategic or private equity buyers or a spin-off.

"These businesses are strong," he said. "Our workplace and our U.S., state, and local health and human services businesses are market leaders. And we have meaningful IP (intellectual property) in our horizontal BPS business."

DXC expects it can generate net capital proceeds of about $5 billion for the three businesses, said Paul Saleh, executive vice president and chief financial officer at DXC Technology. Of that, DXC expects to deploy $4.25 billion or more to repurchase shares and pay dividends over the next 10 quarters, Saleh said.

DXC’s share price during the year fell as DXC weathered three major legal battles including one based on alleged management fraud, a fight with its former parent company Hewlett Packard Enterprises over an expected payment, and the replacement of its CEO.

The planned divestment of the three businesses will likely initially be a negative to DXC's credit rating given that those businesses have a higher margin profile than DXC as a whole does, according to a Tuesday report from Moody’s Investors Service.

However, Moody's said, the shift in strategy will mean DXC will be better able to turn around its declining top line and react to IT industry changes.

"DXC has been slower than other competitors, such as Accenture (Aa3 stable) or Cognizant, to react to an evolving IT services landscape but we believe the scale and depth of its customer relationships provide an opportunity to reposition the company and return to long-term growth," Moody's wrote.

The firm was ranked number three in CRN's 2019 Solution Provider 500 list.

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