IT Could Be Next Private-Equity Target

A buyer never materialized Wednesday after rumors circulated that Computer Sciences (CSC - Cramer's Take - Stockpickr) might receive a takeover offer, but investors' favorable reaction to the news spotlights the reasons why information technology services companies may become buyout targets.

Computer Sciences shares jumped nearly 2.5% Wednesday to $57.52 and continued rising after the markets closed, on speculation that a buyer was lurking. Last year, the company tried to sell itself, but it gave up after talks with private-equity giant Blackstone Group faltered.

The most likely acquirers for companies such as Computer Sciences would be other private-equity firms and copycat hedge funds eying the possibility of steady cash flow streams from multiyear IT services contracts.

Computer Sciences and its similarly sized rivals -- EDS (EDS - Cramer's Take - Stockpickr), Affiliated Computer Services (ACS - Cramer's Take - Stockpickr) and Accenture (ACN - Cramer's Take - Stockpickr) -- would certainly be easy enough to swallow, given the growing appetite of these investment pools.

In March, Cerberus Capital Management teamed up with Darwin Deason, ACS board chairman, to make a bid for the 58,000-employee computer services company.

"Big traditional IT players whose growth has slowed but that have long-term contacts would draw attention of private-equity buyers," said Jefferies & Co. analyst Joe Vafi.

There's plenty of room for buyout firms to improve operations and cash generation. IT services projects and outsourcing deals are notorious for eroding profits after running over budget and taking longer than expected.