Synnex - Momentum Continues After Acquisition Of IBM Customer Care Business

| About: SYNNEX Corporation (SNX)

Shares of SYNNEX (NYSE:SNX) jumped upwards following the news that the business service provider acquired IBM's customer care service business.

Add to that an upbeat outlook for the third quarter and investors are enthusiastic, sending shares 10% higher in after-hours trading. The deal seems excellent, yet I remain on the sidelines given the lack of dividends and the strong momentum which has sent shares 40% higher for the year.

The Deal

SYNNEX announced that it will acquire IBM's (IBM) worldwide customer care services business. SYNNEX will pay $505 million for the activities. The company will pay $430 million in cash, with the remainder being paid in stock.

The activities will be combined with its subsidiary Concentrix. IBM's activities are leading providing a platform to support customer interaction in every stage of the lifecycle.

Following the transaction, Concentrix becomes a top 10 provider in the customer relationship management business processing outsource market.

As part of the deal, SYNNEX will enter into a multi-year agreement with IBM under which IBM will become a preferred partner for global customer care and BPO outsourcing.

Following integration, Concentrix will have some 45,000 employees which serve 300 clients across 50 delivery centers.

CEO Kevin Murai commented on the rationale behind the deal, "This acquisition will make Concentrix a global Top 10 player in a growing market. With our collective strengths in the CRM BPO market, this strategic acquisition will create an even more compelling value proposition for our clients and shareholders."

SYNNEX sees $120 million in additional EBITDA in the first 12 months following completion of the deal. Diluted earnings per share are expected to increase by $0.55 per share on the back of the deal.

Note that the expected accretion excludes one-time charges and integration costs. Also take into account that roughly half the purchase price reflects intangible assets which will be amortized in a two to ten year time frame.

The deal is subject to normal closing conditions, including regulatory approval, and is expected to close in the coming months.

An Upbeat Guidance

Besides announcing the acquisition of IBM's activities, SYNNEX came with an upbeat operational update. Third quarter revenues are now seen at the high-end of the prior guidance of $2.65 to $2.75 billion.

Consensus estimates for third quarter revenues stood at $2.70 billion.

SYNNEX will report its third quarter earnings on the 25th of September.


SYNNEX ended its second quarter with almost $231 million in cash and equivalents. The company operates with $297 million in total debt, including some convertible debt, for a very modest net debt position.

Revenues for the first six months of the year came in at $5.05 billion, up little over 2% compared to a year earlier. Net income fell by 13% to $64.2 million in the meantime.

At this pace annual revenues could come in around $10.5 billion while earnings could come in between $140-$150 million.

Factoring in gains of 10%, with shares exchanging hands at $53 per share, the market values SYNNEX at roughly $2.0 billion. This values operating assets of the firm at 0.2 times annual revenues and 13-14 times annual earnings.

SYNNEX does not pay a dividend at the moment.

Some Historical Perspective

Long term holders in SYNNEX have seen decent returns despite the lack of dividends. Between 2004 and 2008, shares have been rather boring, trading in a $15-$25 trading range. After trading as low as $10 during the 2008 crisis, they have seen a steady uptrend towards current levels at $53 per share.

Between the fiscal year of 2009 and 2012, SYNNEX increased annual revenues by a third to $10.3 billion. net income rose by roughly two thirds to $151 million last year. Shareholders have seen modest dilution as the share base increased by a tenth over the time period.

Investment Thesis

All in all, it seems a nice addition for SYNNEX. For $505 million in total the company will get a hold of a $1.3 billion revenue generating unit which generates $120 million in EBITDA per annum.

As such, SYNNEX will pay 0.4 times annual revenues and 4.2 times annual EBITDA. This compares to a multiple of 0.2 times annual revenues for the business itself. The acquisition will add some 11% in annual revenues, and result in earnings per share accretion of $0.55 per share. This would boost earnings per share by some 15%.

For IBM the deal is tiny. The annual revenues being generated by the unit represent just about 1% of total revenues which run over $100 billion per annum. IBM has been focusing on software and analytics going forward, and is pulling back from lower margin businesses.

Following the deal, SYNNEX and its Concentrix unit will increase the value of it's offerings for its customers across the globe. The company will continue to focus on customer care for banks, insurers and health care companies trying to gain share in a fragmented global market. The company did not specify whether the expected earnings per share accretion already includes synergies or not. Expected synergies were not specified in the press release.

I guess we will learn more about synergies and the implications of the deal in two weeks time when SYNNEX stands to report its third quarter results.

For now I remain on the sidelines. While the deal seems fair, so does the valuation. Yet the lack of dividend and significant momentum so far this year make me hesitant to pick up some shares at this point in time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.