(Bloomberg) -- Atos SE’s management is talking with some of the French IT outsourcing company’s biggest investors to try to win their support for a takeover of U.S. competitor DXC Technology Co., according to people familiar with the matter.
The executives argue that gaining a significant presence in the world’s biggest economy would give it the scale it needs to compete, the people said, asking not to be identified as the deliberations are private.
Atos may decide to proceed with a formal proposal if it secures the backing of shareholders, the people added. The two companies have a combined market value of around $16 billion.
Atos is battling rivals including Accenture Plc, Infosys Ltd. and International Business Machines Corp. for contracts to modernize and manage corporate IT systems that are shifting to cloud platforms run by tech giants such as Amazon.com Inc.
Investors haven’t yet warmed to the idea of a combination with Tysons, Virginia-based DXC. Atos shares fell 9% last week, when it confirmed reports of the approach.
Read More: Atos’ DXC Flirtation Makes Sense But Carries Some Top-Line Risk
Shareholders had been expecting the French company to focus on organic growth and bolt-on acquisitions, and were taken aback by the sudden move to pursue a large deal, the people said. Atos bought several smaller technology companies in 2020 for an undisclosed amount.
“Atos can’t overpay for DXC -- their shareholders wouldn’t forgive them,” Kepler Cheuvreux analyst Laurent Daure said by phone. “$10 billion to $11 billion would be reasonable. Anything beyond that would not.”
Representatives for Atos and DXC declined to comment.
Structural Decline
A tie-up would allow Atos to make cost savings in administration, real estate and procurement and grow faster in cybersecurity, said a person familiar with the company’s own analysis.
It would double Atos’s size overnight and make it one of the biggest IT outsourcing contractors in the world -- behind Accenture but ahead of Infosys, French domestic rival Capgemini SE and Tata Consultancy Services Ltd., the person added. The industry is worth around $70 billion, according to IDC data.
A lot of new IT investments by corporations are going into cloud services and security, where Atos, DXC and other older IT firms face intense competition from the owners of the cloud platforms -- Amazon, Alphabet Inc.’s Google and Microsoft Corp. These structural pressures have pushed DXC’s sales into decline in recent years.
“Those secular headwinds won’t cease, and in fact may only grow stronger, and so it is not likely this deal would lead to meaningful growth,” said Bloomberg Intelligence analyst Tamlin Bason. “However, Atos would have scale to better resist some of those pricing pressures.”
It isn’t the first move on a U.S. competitor by Atos -- in 2018, it bought Syntel Inc. for $3.4 billion in cash. That acquisition may be paying off as the pandemic accelerates an overhaul of IT systems in the financial industry, where Syntel has a strong presence, said BI’s Bason.