Software giant Computer Associates International Inc has attempted to throw itself into the services arena by putting in a $9bn bid for consultancy and outsourcing firm Computer Sciences Corp. The offer on the table represents $108 a share, a 17% premium over Tuesday’s closing price of $92.1875, and if accepted would build a company with […]
Software giant Computer Associates International Inc has attempted to throw itself into the services arena by putting in a $9bn bid for consultancy and outsourcing firm Computer Sciences Corp. The offer on the table represents $108 a share, a 17% premium over Tuesday’s closing price of $92.1875, and if accepted would build a company with combined revenue of some $11bn. CA has got the financing lined up, with four banks ready to lend it the money. The Islandia, New York-based software company took the offer to CSC in December and has had several rounds of discussions since then, but talks appear to have stalled temporarily as CSC balked on the price. CA says it hammered out most of the deal, including an assurance to CSC’s management that all of the company’s employees would retain their positions, and feels that its offer is fair – meaning it has no intention of upping the price. CA chief executive Charles Wang said for now he’ll wait it out, confident that CSC will realize the deal is good for both parties and will take the offer to its shareholders. But he isn’t ruling out anything, and hints that he would be prepared to take the issue to CSC shareholders himself. CA’s board of directors has unanimously approved the offer. Wang admits that, given the size of the offer, the deal would be dilutive this calendar year and possibly next year as well, although that time frame could be reined in a bit when CA is able to take a closer look inside CSC. CA, a voracious shopper over the years which has made more than 70 acquisitions in total, is keen to add CSC’s consulting and services capabilities to its own offerings. When Wang first realized the talks weren’t going his way, he and president and chief operating officer Sanjay Kumar wrote to CSC’s chairman and CEO Van Honeycutt with the renewed offer, stressing the synergies between the two companies and reiterating the promise that not one CSC employee would be shed if the merger went ahead. Analyst Charles Phillips at Morgan Stanley & Co Inc thinks the deal could be the best strategic move ever for CA, saying We’ve been bemoaning the fact that CA was leaving a ton of money on the table by not providing consulting and outsourcing services for its 10,000 customers who were looking for one stop shopping. Phillips also figures the deal would dramatically improve CA’s recurring revenue, the holy grail for most software companies. CA believes the merger would create a world class information technology solutions provider with unparalleled depth in both software and services. It would also allow CSC to take over the service contracts CA was working on and gives CA the software products currently being developed by CSC. Phillips points out that with Year 2000 looming ever larger, the two would be well placed to exploit their combined strengths, CA with its line of tools, and CSC which has one of the largest Year 2000 consulting practices. One thing that may stop the deal is personal rather than business-related. Honeycutt has apparently waited years to become CEO at El Segundo, California- based CSC, having run several of the company’s divisions. Thus, analysts reckon selling the company will not be on the top of his to-do list. CA shares responded to the news by plunging $7.6875, or more than 13%, to close at $50.375. Russell Artzt, executive vice president in charge of research and development and number three in command at CA, quietly seized the opportunity to sell 175,000 of his shares for a cool $9.5m before news of the offer went public on Wednesday. CSC shares rose $11.6875 to $103.875. The proposed deal, coupled with Compaq’s Dell acquisition, leads one to wonder who the likes of Dell Computer Corp and other top- tier vendors will turn to in an environment where everyone wants to get into the services game and create a one-stop shop.