Shares in insurance software specialist Xchanging (LSE: XCH) are up by 10% today after a dramatic late bid by Computer Sciences Corporation (CSC) was unanimously recommended by the companys board.
The new190p per share offer is almost 19% higher than the previously recommended bid by Capita (LSE: CPI) which has now been overlooked in favour of CSCs, despite around 25% of Xchangings shareholders having already accepted the lower offer. They will, of course, have the opportunity to change their minds and accept the higher bid.
Is that the end of the story? Not at all. While CSCs bid is said to have gained support from 47% of Xchangings shareholders, theres still a chance of further developments later on today. Thats because a third company, Ebix, has until close of business today to make a formal offer, while Capitas bid was said to be final when it was originally made.
Clearly, Xchanging is an in-demand company at the present time. And looking at its growth prospects its easy to see why. Thecompanys earnings per share may beset to fall by 30% in the current financial year but there are better times ahead. Looking ahead to next year, its bottom line is set to rise by 36%.
With shares in the company trading on a price-to-earnings (P/E) ratio of 23.3, this equates to a price-to-earnings growth (PEG) ratio of just 0.6. This indicates that the companys shares are relatively good value for money even at their current price of 193p. And even though investor sentiment had been weak prior to the initial bid approach from Capita in August, improved performance in the next financial year could have acted as a positive catalyst over the medium term.
Of course, Xchangings real appeal today appears to be centred on the potential synergies thatcould be created in combination with CSC. That companyhas saidit believes that Xchangings capabilities and experience in the commercial insurance market would complement its own global insurance presence in the software, outsourcing and services spaces.
Notably, Xchangings new Xuber offering has been relatively successful in terms of its adoption among UK-based insurers and while the company has attempted to diversify in recent years, its core activities remain relatively appealing to its peers. As a result, its perhaps unsurprising that Xchanging has become the subject of an apparent bid war.
With Xchangings shares trading above the 190p per share cash offer from CSC, it appears as though the market may be pricing in a further, higher bid. While this prospect could entice investors seeking to make a quick gain, the reality is that its impossible to determine whether there will be any further bids. Therefore, buying at a higher price than the current highest offer (which has been recommended by Xchangings board) doesnt appear to be a sound move.
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