CA bids on Computer Sciences

Tools and utilities software maker Computer Associates International ( CA) today put an unsolicited $9 billion cash bid on the table for Computer Sciences (CSC), but the offer's reception was somewhat chilly.

"CSC's management, board of directors, and professional advisers will evaluate the offer, and the board's response will be issued when that evaluation is complete," Van B. Honeycutt, CSC's chairman, president, and chief executive, said in a statement. "In the interim, shareholders are cautioned to refrain from taking any precipitous action concerning the proposal until they have received CSC's response."

"While there have been two brief meetings at CA's request, any suggestion that there have been negotiations or agreements between the two companies is absolutely false," the statement added.

Under the terms of the pending deal, Computer Sciences shareholders would receive $108 in cash for each share of CSC common stock, according to CA. The combined companies would have revenues of more than $11 billion and employ more than 50,000 workers.

Analysts say CA is offering a premium price for the company, a multiple of about 28 times its estimated fiscal 1998 earnings. Other service companies currently are trading between 20 and 24 times earnings.

Complicating the current deal is the fact that CSC officials apparently were unhappy with CA's previous offers. Negotiations between the two companies began last December, but CSC and CA disagreed on the proper valuation for the company, Charles Wang, CA's founder and chairman, said in a conference call.

"With the exception of price, we have been in pretty good understanding of what CSC's requirements are in terms of employees, retention plans, compensation, etc.," Wang said.

But CSC's board has yet to approve the offer, and even if the board had signed off on the deal, it still would require the approval of the services company's shareholders.

In negotiations where there is 100 percent agreement, the boards of both companies typically approve a deal quickly and make a joint announcement. However the CA-CSC deal could turn into a hostile takeover attempt if CA goes directly to its shareholders for approval and circumvents the board of directors.

"We are not making a tender offer directly to CSC shareholders at this time," Wang said. "We would not, though I'm not ruling out any options with respect to further strategies."

CA's decision to offer all cash, as opposed to a stock-swap transaction, was determined to be the best route by which to speed the deal along and minimize distractions, Wang said. He added that it is still too early to tell what type of dilution eventually will take place, but said the deal will go through and is likely to endure for "a number of years."

If the deal goes through, it would mark the second largest merger in the history of the computer industry.

Fueled by news of the offer, Computer Sciences' stock jumped by as much as 23.1 percent in early trading, to 113-1/2, before closing the day at 103-7/8, up from 92-3/16 yesterday. By late afternoon, however, the stock had given up some of its gains. CSC's stock was relatively flat for a large portion of last year, but started to trend up in November, when it was trading in the 70s.

CA's stock, meanwhile, sunk as much as 13.8 percent, to 50, before finishing the day at 50-3/4, down 7-5/16 over yesterday. The company's share price has risen steadily since last April, when it traded for under 26 a share, and in late January it spiked from around the mid-40 range.

"I think CA is paying a fair price," said Gibbs Moody, an analyst with UBS. "I believe that the way investors are reacting, given the mention of the word of dilution, it shows their short-term focus, even though it's likely this will strengthen the company in the long-term."

Computer Associates, which posted revenues of $4 billion in fiscal 1997 and net profits of $366 million in its most recent earnings report, said it already has obtained financing commitments for the deal. CSC, for its part, reported revenues of $5.6 billion, and net profits of $192.4 million, in fiscal 1997.

As is the case with many consulting firms, the most valuable asset of CS is its employees and their collective knowledge, and CA already has said that it plans to retain all Computer Sciences employees should the transaction go through. Sanjay Kumar, CA's president and chief operating officer, noted that the company does not expect a large number of its employees to cash out their options and jump ship as a result of a deal, because the company has made other successful acquisitions and has seen its stock performance improve of late.

CA said the CSC acquisition will fulfill the needs of its customers. Five to six years ago, CA made a move to expand beyond the mainframe business and into the client/server arena, and Wang said that, as a result, "Customers were asking for end-to-end management."

Unicenter TNG, CA's flagship systems management software suite, is a client/server management tool that caters to that need. A few months ago, CA rolled out Jasmine, an object-oriented database that also is geared for the client/server market.

Wang characterized the company's mainframe and Unicenter business as strong.

"Five years from now, we want to be the leading provider of end-to-end solutions offering platform neutrality for our clients [for products and services] ," Wang said. "What we'd like to do is to offer everything from management consulting, software development, system integration, to outsourcing."

CA views CSC as a vehicle to help implement Unicenter and Jasmine, and CA's offer comes at a time when CSC could use some help.

Deutsche Morgan Grenfell research associate Wayne Segal said that CSC's business is expected to see a dip in revenue growth from the 16 percent to 17 percent level it achieved in fiscal 1997. A drop of 13 percent to 15 percent is expected as booking for consulting deals slows down.

CSC's government consulting business, which accounts for 25 percent of its revenues, has been flat to down during the last six quarters, Segal said. Over the past several years, the company also has stepped into outsourcing, which carries lower profit margins. Under these outsourcing deals, CSC will agree to manage a company's IT operations for a designated number of years, whereas previously, CSC focused on the high-end of the consulting business.