Here’s why the UXC Limited share price is headed higher

What: The share price of information technology (IT) services company UXC Limited (ASX: UXC) is set to trade higher when it exits a trading halt after the company announced before the market opened on Wednesday morning that it had entered into a Scheme Implementation Deed with the US$9.6 billion Nasdaq-listed Computer Sciences Corporation (CSC).

So What: The acquisition offer has been struck at a price of $1.22 per share plus an additional 2 cent franked interim dividend. The offer marks a premium of around 8% to the $1.15 price at which the stock last traded before entering a trading halt on Monday morning.

Now What: The takeover offer for UXC is a reminder for investors that the IT services sector could be a happy hunting ground for potential investment opportunities.

A number of UXC’s peers including SMS Management & Technology Limited (ASX: SMX) and DWS Ltd (ASX: DWS) have performed reasonably well in recent times however over the medium term of the past five years their share price performance remains well below that of the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) with falls of 55% and 17% respectively.

It begs the question of whether there could be further merger and acquisition (M&A) ahead for the IT services sector…

According to consensus forecasts, SMS and DWS are trading on forecast price-to-earnings (PE) ratios of roughly 13x and 12x respectively which compares favourably against the 15x that UXC is trading on. The relative valuation of both stocks could make them worth a closer look by inquisitive investors with the potential for a pick-up in M&A across the sector a handy bonus.

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Motley Fool contributor Tim McArthur owns shares in UXC Ltd. 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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