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Why Shares of Datalink Corp. Are Surging Today

Image source: Datalink Corp.

What happened

Shares of IT services and solutions provider Datalink Corp. (NASDAQ: DTLK) soared on Monday following news that the company is being acquired by Insight Enterprises (NASDAQ: NSIT). Datalink stock was up 18.5% at 10:45 a.m. EST, while shares of Insight had risen about 2.25%.

So what

Insight agreed to pay $11.25 in cash for each share of Datalink, good for an equity purchase price of $258 million and an enterprise value, net of cash and debt, of $196 million. This price represents a 19% premium to Datalink's closing price on Nov. 4.

"The strength of Datalink's world-class data center capabilities combined with Insight's scale and breadth of offerings will bolster our ability to deliver solutions for complex business problems across an expanded footprint of clients," said Datalink COO Shawn O'Grady. "This combination gives our team significant new opportunities to help more organizations elevate and transform their IT."

Insight expects to realize roughly $20 million in annual cost savings within two years after closing, driven mainly by corporate efficiencies, IT system integration, and removing duplicate functions. The acquisition should be accretive to adjusted earnings in 2017, excluding one-time costs associated with the transaction. The deal is anticipated to close in the first quarter of 2017.

Now what

Datalink generated $765 million of revenue last year, about 14% of Insight's revenue. Both companies operate low-margin businesses, with 2015 operating margins of 2.4% and 1.2% for Insight and Datalink, respectively. While $20 million in cost savings may not seem like much for a combined company that will produce around $6 billion of revenue annually, it could provide a meaningful bump in earnings given those low margins.

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Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.