Takeover Talk Sparks Computer Sciences

Shares of Computer Sciences(CSC) shot up Monday on news of a potential buyout of the IT outsourcing firm.

The stock jumped as much as $8.21, or 18.1%, to $53.56 before retreating slightly Monday. Shares were most recently up $5.67, or 12.5%, at $51.20.

Citing unnamed sources, The Wall Street Journal on Monday named three buyout firms -- Texas Pacific Group, Warburg Pincus and Blackstone Group -- that are actively looking at taking over El Segundo, Calif.-based CSC. William Lackey, the company's director of investor relations, declined to comment, citing the company's policy not to comment on speculation and rumor.

CSC, which has 78,000 employees, reported revenue of $14.1 billion in fiscal year 2005, up 4.5% from the previous year. The company's net income from continuing operations rose slightly less -- 4.2%.

The company's growth picked up in the most recent quarter, with earnings per share from continuing operations up 18% on an 8.6% jump in sales.

But before Monday's gain, the stock was trading at a discount to its peers. Shares of CSC were trading around 14 times projected earnings for fiscal year 2006, while rival Electronic Data Systems(EDS), a turnaround story, is trading at 22 times forward earnings. Accenture(ACN) is trading at 15.5 times forward earnings, and Affiliated Computer Services(ACS) is trading at 13.6 times forward earnings.

The news of a potential buyout of CSC comes at a time when the IT outsourcing market has been showing signs of maturation. Clients are breaking up contracts and signing smaller deals, while at the same time competition is increasing offshore from Indian firms.

However, about 50% of CSC's revenue is insulated from competition from India because it's either government- or defense-related, the company has said.