Computer Associates Makes Bid for CSC
Software giant Computer Associates International made a $9-billion bid Wednesday to buy El Segundo-based Computer Sciences Corp., a large service and consulting company, after previous negotiations between the two apparently ended in a disagreement over price.
The proposed deal is an aggressive attempt by Computer Associates to expand its presence in the competitive but lucrative world of corporate and government computer accounts dominated by IBM Corp. and Electronic Data Systems.
The unsolicited proposal, delivered by fax early Wednesday morning, got a chilly reception from CSC, possibly setting the stage for a battle for control of one of the nation’s largest computer services firms.
Computer Associates executives said they hope that the bid--a cash offer of $108 per share--will spark a new round of friendly talks between the companies. But the executives also signaled that they are prepared to launch a hostile takeover attempt.
“We have the products, they have the services,” said Charles Wang, chairman of New York-based Computer Associates. “We want to move quickly, and I would not rule out any options with respect to further [acquisition] strategies.”
For their part, CSC executives issued a statement saying they will evaluate the offer but warned shareholders to “refrain from taking any precipitous action” and implied that previous talks between the companies were anything but cozy.
“There have been two brief meetings at Computer Associates’ request,” said Van Honeycutt, chairman of CSC. “Any suggestion that there have been negotiations or agreements between the two companies is absolutely false.”
Nevertheless, news of the offer sent CSC’s stock price surging $11.69 per share to close at $103.88. Computer Associates fell $7.31 to $50.75 per share. Both issues traded heavily Wednesday on the New York Stock Exchange.
If the deal is completed, it would create a powerful new company with 51,000 employees and annual sales of $11 billion.
Analysts said the proposed deal underscores a growing conviction in the computer industry that strong consulting and support services are critical to winning and keeping big accounts. Compaq Computer Corp., for instance, recently acquired Digital Equipment Corp. largely for its staff of 20,000 sales and service representatives.
“To dominate the market of systems management, you have to have a services component,” said Paul Dravis, an analyst at Nations Bank Montgomery Securities.
Computer Associates and CSC already have a licensing agreement, with the latter installing and managing software made by the former in corporate and government accounts. Buying CSC could give Computer Associates greater access to and control over those large accounts.
Computer Associates, with 11,000 employees, makes software used to manage complex computer networks. Its flagship product, Unicenter, does everything from allocating disk space to controlling who is able to sign on to a network. The company trails only Microsoft Corp. and Oracle Corp. in software sales revenues.
Computer Sciences has 40,000 employees, most of whom help companies build and manage their networks, with services ranging from long-term outsourcing deals to short-term consulting contracts that often yield 30% profit margins, analysts said.
Wang tried to maintain a conciliatory tone during interviews Wednesday, pledging that none of CSC’s employees would lose their jobs if a deal is struck.
But experts said it might be tough to mesh the cultures of two very different companies--one a product-focused software maker known for buying companies and trimming costs, the other a sprawling service organization whose existence depends on its ability to keep talented workers happy.
“The people that I know at Computer Sciences are going to want to see whether Computer Associates understands this,” said Tony Scott, a recruiter with A.T. Kearney in Silicon Valley. “It’s a completely different mentality.”
There are other signs of distrust. CSC’s stock has risen considerably since December, prompting speculation that news of the talks was being leaked. Analysts said that may explain why Computer Associates decided to go public with the offer on Wednesday.
Wang denied that, saying the company is obligated to disclose the offer under regulatory requirements. But he declined to discuss why an unsolicited bid had become necessary.
Wang did stress that the $108-per-share price reflects a 35% premium over what CSC’s stock was fetching before talks began.
Analysts said the latest offer may be too lucrative for Computer Sciences to decline without angering shareholders.
“If I’m a shareholder,” said Gibbs Moody, an analyst at UBS Securities in San Francisco, “$108 looks like a sweetheart deal.”
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Mixed Reaction
Computer Associates’ unsolicited bid Wednesday for Computer Sciences had opposite effects on their stock prices:
Computer Associates
Wednesday close: $50.75, down $7.31
Wednesday close: $103.88, up $11.69
Source: Bloomberg News
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