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UXC Limited gets $428m takeover offer: Is there another takeover target in the IT sector?

Takeovers tend to be synonymous with oversized returns for lucky shareholders betting on such an outcome, but things don’t always work out that way as UXC Limited (ASX: UXC) shows.

Shares in the information technology consultancy tumbled 6% to $1.25 after US tech services giant Computer Sciences Corporation (CSC) offered to pay $1.26 a share for the company.

Shareholders will also receive a fully franked 2 cents a share dividend on top of the cash offer, but some in the market were clearly hoping for more as the stock surged by nearly 20% over the past month to close at $1.33 yesterday.

Given that the deal will be settled in February next year at the earliest, some investors are happy to give up a few cents to take the money now.

The $428 million deal is the biggest in the Australian IT services space in a long while and is likely to put the spotlight on other targets in the space.

UXC’s board is recommending shareholders accept the offer subject to an independent expert report supporting the offer price and no superior counter offer being tabled.

CSC’s offer seems fair to me, although it doesn’t really matter that much what people think as the merger is practically a done deal in my opinion.

It is believed UXC and CSC have been negotiating this deal for some months and I don’t think UXC will get a better offer.

But if one does emerge, CSC will have the right to match the bid. If it chooses not to, UXC will have to pay an undisclosed break-free to CSC.

The IT services industry is starting to recover after big cutbacks in spending by government and corporate clients drove the sector’s earnings to the wall.

You only need to look at the string of new contract wins by UXC to see how far the sector has come over the past few months.

Conditions are ripe for more deals as greater clarity on the industry’s earnings, the need for scale and a falling Australian dollar making consolidation a logical, if not attractive, strategy for many.

This could put the “bad boy” of the sector, DWS Ltd (ASX: DWS) in the crosshairs – as the stock has been marked down due to a series of disappointing profit results.

Could the pickup in demand for IT services and its low valuation be a re-rating trigger for the stock? The jury is still out but it’s worth keeping an eye on the stock.

One in the sector I do like is Empired Ltd (ASX: EPD), as I am anticipating a big uplift in net profit for the current financial year. The market isn’t pricing in this strong outcome and I think the stock could jump over $1 over the next six to 12 months.

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Motley Fool contributor Brendon Lau owns shares of Empired Limited. Follow me on Twitter - https://twitter.com/brenlau

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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