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CSC reacts to hostile bid

Computer Associates prepares a hostile takeover of Computer Sciences, which may not be up for the fight.

Computer Associates (CA) is ready to go to war with Computer Sciences (CSC) over a hostile takeover bid filed today.

It has yet to be determined, however, whether CSC is ready to enter battle or whether it must surrender the fight--a move that would leave open the question of what CSC can do going forward.

Sources said that CSC may have some announcement on the issue as early as Thursday, but cautioned that any such announcement could be very preliminary.

CSC, a consulting and services business generating some $5.6 billion in revenue, may agree to the terms of CA's offer, or may find the proverbial white knight that would outbid CA. Potential suitors include Hewlett-Packard (HWP) and Unisys (UIS).

"A major hardware company that is building a model like IBM [with both products and services] would be a good fit," said John Puricelli, an analyst with A.G. Edwards. "A couple of names to top the list include HP and Unisys. All these have a services arm that could take CSC and wrap it into their existing services and make them a major player in this area."

Along with CSC, IBM (IBM) and Electronic Data Systems (EDS) are the top three computer services companies, Puricelli said.

IBM and EDS, however, are not likely to up CA's offer, he added. IBM may face antitrust issues with a CSC acquisition, and EDS does not have enough cash on hand to make a bid. EDS can't even leverage its stock, since it is restricted from doing so after using its shares to complete a recent acquisition.

Shares of CSC rose as high as 110-1/4 in early trading today before ending at 106-9/16, down 13/16 over Friday. CA shares fell as low as 44-3/4 in morning trading, before ending the day at 46-1/16, down 2-5/16 from Friday.

CSC has been on its own acquisition warpath of late, buying up smaller companies in an effort to vertically integrate its operations. The company recently snapped up a service company that caters to the healthcare industry in order to give it a bigger foothold in that growing market.

CSC spokesman Michael Dickerson said CSC has grown through acquisitions, but said he was unaware of any previous occasions when his company has been an acquisition target. He said the company's management continues to review CA's offer, but declined to comment on the progress of that evaluation process.

Hostile takeover bids are rare in the computer industry, where the collective knowledge of a firm's employees is viewed as a major asset. Should CSC's employees, who have skills that currently are in short supply in the industry, walk in the midst of the hostile takeover turmoil, the value of CSC could be hurt, analysts said.

That possibility is making CSC's customers nervous about CA's bid. Additionally, the company currently is in the bidding process for service contracts with the state of Connecticut and with the Internal Revenue Service's for a major modernization of its computer systems, said Gary Helmig, an analyst with Soundview Financial.

CA said it is seeking to eliminate CSC's antitakeover hurdles, such as a "poison pill" that would result in the issuance of more of the company's shares should an unwanted suitor purchase shares above a designated level. The poison pill would be used to dilute the holdings of existing shareholders.

CA, which is offering CSC shareholders $108 a share to tender their stock, wants to have at least 51 percent of CSC's shares tendered by March 16. It may withdraw its offer at that point, but warned that the deadline could be extended.