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Rob McCourt

The business case for Kyndryl to stay the course and not acquire DXC


The business case for Kyndryl to stay the course and not acquire DXC
The business case for Kyndryl to stay the course and not acquire DXC

Managment has done a great job in turning the business post spin and has the company on the verge of profitability in FY 2025. The path has been tough, and the story has been difficult to communicate to investors over the last 3 years with one-time spin-off charges and declining revenue driven by the strategy of renegotiating unprofitable contracts that accounted for 40% of their revenue. This transition is almost complete and management projects a return to revenue growth in Q4 FY 2025.


They are now hitting their stride and FY 2025 is a pivotal year to reach profitability. Implementing the 3 A strategy has gross margins improving to 18% up from 11% but still way below the competitor average of 29%. The 11pp gross margin spread versus the competitive average presents over $1.7billion in gross margin upside with no acquisition risk or cost of acquisition.


Why get distracted with a major acquisition of a struggling competitor? DXC is the worst performing company in the competitive set illustrated below. It feels like it would be catching a falling knife.



Kyndryl is undervalued versus the competitive set. Price to sales is trading at only $.37 versus over $2 for competitors and EBITDA/EV is trading at 7X versus competitors of 13X. The only company performing worse in my selected set of competitors is DXC. By staying the course Kyndryl's value can double just from capturing the margin turnaround opportunity.



Finally, and probably the biggest reason to remain focused is the AI opportunity. The company has done a great job improving strategic alliances with companies like NVidia, Micrsoft, AWS, etc. They have developed a great consulting practice that is growing faster than Accenture. Kyndryl will be at the center to help their customers drive value from AI implementation and integration. They could actually be the second derivative of the AI gold rush. Management and employees will lose focus if they are attempting to integrate a DXC acquisition.


The value upside for Kyndryl is great but could be lost with the wrong strategic move. I hope management will put this rumor to rest and stay focused on the 3 A's Strategy and growing the AI consulting and integration business.

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