Computer Associates Hits The Download Button For $9 Billion

Will CA's bid for CSC signal a new takeover wave?

After a long hiatus, the dealmeister of the software industry is back in action. On Feb. 11, Computer Associates International Inc. went public with a bid to buy Computer Sciences Corp., a top information-technology consulting and services company.

CA's offer of $108 in cash for each share of CSC common stock would amount to roughly $9 billion--and would be the biggest of the 60 or so deals through which Chairman Charles B. Wang has built up his company over 18 years. And it would rank among the largest deals ever done in the computer industry, possibly edging out Compaq Computer Corp.'s part-stock purchase of Digital Equipment Corp., announced just last month.

BIG BLUE BOGEY. The two companies began discussing a possible merger in mid-December, when Wang and President and Chief Operating Officer Sanjay Kumar first approached CSC. But the two companies could not agree on price. CSC may also have been leery of CA's reputation for buying companies and stripping them bare. On Feb. 11, CA made public a letter it sent to Van B. Honeycutt, CSC's gentlemanly chief executive, assuring him that all employees would be retained and that CSC would be on equal footing with CA. CSC issued a statement characterizing the offer as "unsolicited" and said it is evaluating the proposal.

For CA, now the third-largest independent software maker--after Microsoft Corp. and Oracle Corp.--CSC would bring huge benefits. Its nearly $6 billion in revenue would put CA ahead of Oracle, and CSC's lucrative consulting and systems-integration business would give it more clout with corporate customers and a better basis on which to compete with IBM. CSC's service margins are 15% to 20%--a fraction of what CA enjoys from its high-end software products. But CSC's 44,000 employees could help push CA software products and nail down long-term service contracts that provide a steady and predictable stream of revenue.

The benefits are less clear for CSC, which could use growth opportunities but might suffer from a culture clash. If it shrugs off the advance, CA could take its case to shareholders and even launch a hostile takeover--although it's a dangerous tactic that could drive away employees. "We would prefer a negotiated solution, but we're not ruling out any alternatives," says Kumar. And analysts suggest there may be other suitors, such as AT&T, IBM, or General Electric, waiting in the wings.

Whether or not CA succeeds in getting this deal, the bid could spark a wave of mergers in the $280 billion market for technology services. It's increasingly important for software and computer companies to offer services as well as basic hardware and software. Indeed, one of Digital's big attractions for Compaq was its 22,000-employee, $5.8 billion services business. "All of a sudden, it's an imperative," says Douglas J. Crook, a software analyst with Prudential Securities Inc.

FREE-FOR-ALL. And all of a sudden, lots of service companies look like takeover bait. At the top of the list is $15 billion Electronic Data Systems Corp., which is just climbing out of a slump. Smaller companies, such as American Management Systems Inc., could be easy picking. Even giant Andersen Consulting could be a target. Melvyn E. Bergstein, CEO of Diamond Technology Partners and a former partner at Andersen, says the CA bid is Andersen Consulting's "worst nightmare." Why? A bidding war for CSC could drive up the value of all services companies and in the process boost the divorce settlement Andersen must pay to get out of its marriage to Arthur Andersen & Co., the audit firm.

For CA, a consulting deal may be more than Wang's next ambitious move. It may be the only way to keep up. IBM's $19 billion service unit gets $3 in service revenue for every $1 of sales of IBM's Lotus Notes program, for example. And customers seem to like IBM's ability to sell the products, install them, and do a little consulting on how they can help the client's business. "If you look five years out, we want to be the leading supplier of end-to-end solutions," says Kumar. And if the deal with CSC falls through, he says, CA will look elsewhere. "We're going to continue with this strategy." The dealmakers are back.

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