Xchanging Plc Shares Surge 10% After CSC Trumps Capita PLC’s Bid

A new bid for Xchanging Plc (LON: XCH) has sent its shares soaring, while endorsement for Capita PLC’s (LON: CPI) bid has been withdrawn.

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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 company’s board.

The new 190p per share offer is almost 19% higher than the previously recommended bid by Capita (LSE: CPI) which has now been overlooked in favour of CSC’s, despite around 25% of Xchanging’s 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 CSC’s bid is said to have gained support from 47% of Xchanging’s shareholders, there’s still a chance of further developments later on today. That’s because a third company, Ebix, has until close of business today to make a formal offer, while Capita’s bid was said to be final when it was originally made.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 it’s easy to see why. The company’s earnings per share may be set 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 company’s 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, Xchanging’s real appeal today appears to be centred on the potential synergies that could be created in combination with CSC. That company has said it believes that Xchanging’s capabilities and experience in the commercial insurance market would complement its own global insurance presence in the software, outsourcing and services spaces.

Notably, Xchanging’s 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, it’s perhaps unsurprising that Xchanging has become the subject of an apparent bid war.

With Xchanging’s 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 it’s 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 Xchanging’s board) doesn’t appear to be a sound move.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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