DXC to pay $2bn for nearshore vendor Luxoft

DXC Technology has started 2019 with a bang, announcing a $2bn deal to acquire near-shore services provider Luxoft.

The move represents DXC’s largest purchase since its inception in 2016 following a string of mid-size deals, and represents an important step forwards in restoring some shine to its applications services business. 

Luxoft is headquartered in Switzerland, but is firmly part of the clique of Eastern Bloc suppliers – that also includes EPAM and SoftServe – that have harnessed the region’s pool of competitively priced, highly technical skills.

The company has a network of 42 delivery centers worldwide, but the majority of its 13,000 employees are based in the Ukraine (c3,300 engineers in its last full financial year), Russia (c2,000), Poland (c2,000) and Romania (c1,500).

Luxoft’s revenue has more than doubled in the last five years, and sales rose by 15% to $906m in the year ending March 2018. However, its profitability has declined in the last four years as it ramped up its investment in its resources, global presence and acquisitions. 

Luxoft has a pretty even split of revenue in terms of geography, with North America representing 32%, continental Europe accounting for 34% and the UK taking a 21% share of sales in its most recent quarter. The company’s vertical breakdown is a little less even with financial services accounting for 55% of revenue and automotive and transport representing 22%, but it has some interesting capabilities in both areas. 

Deutsche Bank is its largest long-term account (18% of annual revenue), and we have blogged in the past about some of Luxoft’s proprietary offerings in the financial services sector, a market in which DXC claims the combined company will now serve half of the top players on either side of the Atlantic. Luxoft’s automotive story was recently boosted by its recent acquisition of Objective Software, a Munich-based development firm focus on autonomous vehicle manufacturers. 

The deal makes sense for a number of reasons. DXC is looking to rebalance its business mix away from its infrastructure services activities (which represented half of total revenue in its most recent financial year), where cloud continues to cannibalize its base of long-standing outsourcing deals.  

Luxoft will serve as a new spearhead for DXC’s Global Business Services wing. This incorporates DXC’s applications and consulting activities, and reported a 4.6% decline in sales in its most recent year (at constant currency). DXC has been working with India’s HCL to bolster its applications development and management services, and while this tie-up has borne some fruit (particularly in North America), the acquisition of Luxoft will offer a much more solid platform on which to attack opportunities in both custom development and packaged software deployment.

As always, the key to success will be in the integration process. Sensibly, DXC will keep Luxoft’s brand for the time being at least, with current CEO Dmitry Loschinin continuing to run the business. DXC must take care not to rock the boat with Luxoft’s key accounts, with its five largest customers representing 43% of revenue in its most recent quarter. A key framework deal with second-largest client UBS (17% of sales in the most recent financial year) is up for renewal in September. 

The acquisition is set to close in June, with 83% of Luxoft shareholders currently backing the move.