(IT) CA Acquires Interactive TKO Incorporated

Information technology (IT) management software company, CA Inc. (CA) recently announced that it has acquired privately-held Interactive TKO, Inc for approximately $330 million in cash. The company is a leading provider of service simulation solutions for developing applications in composite and cloud environments.

This acquisition is expected to add a critical dimension to modern IT management and enhance the efficiency of the entire service delivery life cycle. In particular, the acquisition will help customers overcome the limitations of current organizational approaches, breaking down the silos across development, testing and operations.

CA expects the deal to be completed in three months. The company expects the acquisition to affect profit in fiscal 2012 and 2013 but be accretive to 2013 adjusted earnings. Interactive TKO delivered $39.0 million in revenues in its last fiscal year that ended on March 31, significantly up from the previous year.

The news of this acquisition helped CA Inc. shares move up 16 cents and finish at $22.63.

Moreover, this acquisition marks the continuation of CA’s strategy to grow inorganically, which strikes a balance between investmenting to grow the company and returning cash to shareholders. The company has repurchased shares worth $150.0 million so far in fiscal 2012.

In September 2010, CA announced the acquisition of Texas-based enterprise software company Hyperformix Inc. with the intention of integrating Hyperformix’s operations and intellectual properties with its Virtualization and Automation business. With the acquisition, CA Technologies has extended its virtualization, automation, assurance and cloud-based portfolio.

The combined solution offered by the collaboration ensures proper planning and implementation as well as management of cloud solutions, which can be integrated with existing IT infrastructure.

CA is slowly tapping the huge opportunity prevalent in the virtualization/cloud computing space, which should help its growth over the next 2-3 years. This apart, through the acquisition of the cloud computing company Oblicore, CA acquired additional technical know-how that could boost its cloud computing business. Therefore, the company appears to be set to benefit from the huge potential of the virtualization/cloud computing domain from 2011 onward.

The company posted modest fourth quarter results, in line the Zacks Consensus Estimate although revenues failed to beat the Zacks Consensus Estimate. However, the product demand trend noticed in the quarter was encouraging. Keeping in mind the quarter’s revenue backlog, we consider the fiscal 2012 guidance a bit conservative. We believe that CA Inc.’s endeavor to return shareholder value through share buybacks and dividend increases could boost investor sentiment.

On the other hand, we are a bit concerned about intense competition in the software & cloud computing space from big players, such as International Business Machines (IBM) and Hewlett-Packard Company (HPQ). This apart, its high debt balance and European exposure may pose some challenges going forward.

Currently, CA Inc. has a Zacks #3 Rank, implying a short-term Hold rating.

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