Frustrated by a chilly reception to its initial offers, Computer Associates (CA) today commenced its hostile takeover of Computer Sciences by offering approximately $9.8 billion for all outstanding shares in the company.
CA also said it has commenced legal action intended to force Computer Sciences' board of directors to allow stockholders to consider the offer. The company also has filed documents with the Securities and Exchange Commission that describe the conditions of its offer, including the redemption or invalidation of Computer Sciences' "poison pill" rights plan and the inapplicability of certain antitakeover provisions under Nevada law.
Computer Sciences, a computer services firm, has about 85 million shares outstanding, on a fully diluted basis, and about $700 million in debt.
Gibbs Moody, an analyst with UBS Global Securities, said the deal will give CA a consulting arm that competitors like Oracle and IBM already have. "CA had relationships with outside service providers," he said, "but they were not capturing that business themselves."
Although staggering, the $9.8 billion price tag attached to the deal is fairly reasonable, said Moody, given the potential revenue that CA could derive from a services organization. "It makes strategic sense," he said. "At the end of the day, would you rather have a company without a services division that would lose out on business, which would eventually hurt the stock, or bite the bullet today and make the deal?"
According to reports published yesterday CA president Sanjay Kumar said that his company, which makes complex computer software mainly for businesses, wanted to start negotiations immediately, and that if meaningful talks had not started by noon today it might have to lower its offer.
"The deal makes CA a lot more important partner, and a stronger player if they can do this on a reasonably friendly basis," said Chuck Phillips, an analyst with Morgan Stanley. "If it is just the CEO and some board members [at CSC] resisting, that's one thing. But if it's middle management opposed to it, that's another and it could make the [deal] more difficult."
The offer, equal to $108 a share, got a less-than-warm reception when it was announced last week. Computer Sciences, a computer services company, urged shareholders not to take any "precipitous action" until its management had responded.
A deal at the proposed price would be the second biggest takeover in the computer industry after Compaq Computer's pact to buy Digital Equipment for $9.6 billion last month. It also would be the latest in a long string of acquisitions for Computer Associates, which has a reputation for buying smaller software companies while manufacturing few products on its own.
CA said Credit Suisse First Boston arranged financing for the acquisition through Bank of America, Chase Manhattan Bank, and NationsBank.
CA sells complex system and applications software that can take a long time to install. Computer Sciences' support operations would help it compete with IBM, Oracle, and other rivals, industry analysts said.
"Our request is simple," Jumar wrote in his letter dated February 15. "We would like to commence negotiations with you this weekend."
"If substantive negotiations have not started by Monday at noon EST, we will have no choice but to move ahead on a unilateral basis at a substantially lower price," continued the letter, which was released to the news media.
Computer Associates said when it announced its offer last week that the two companies had discussed a merger but "have not been able to come to a final resolution."
Reuters contributed to this report.