CSC Buyout: Bigger Than Sungard?

Justin Hibbard

The Wall Street Journal reports that Lockheed and three private-equity firms (Texas Pacific Group, Warburg Pincus, and Blackstone Group) may bid up to $12 billion for Computer Sciences Corp., the venerable tech-services outsourcer in El Segundo, Calif. (the same one A Tribe Called Quest rapped about in "I Left My Wallet in El Segundo"). To me, the most interesting things about this deal are a) how soon it is happening after the Sungard deal (another buyout of an old-line tech-services outsourcer), b) the reported price of $12 billion ($700 million higher than Sungard, which was the largest tech LBO ever), and c) how differently this deal is structured from Sungard.

With Sungard, seven private equity firms paid $11.3 billion in a straight acquisition. With CSC, a strategic buyer (Lockheed) is reportedly joining three financial buyers to break up the company.

The Sungard buyers took a lot of flack for the high premium they paid (about 33%), and, without knowing more about their master plan, it’s not clear what kinds of returns they'll reap. If CSC’s buyers shell out the reported $12 billion, they would pay an even higher premium (about 44% above CSC’s stock price before the buyout news leaked).

Lockheed seems to stand the best chance of getting a decent return since it would buy CSC’s government outsourcing business, which is of long-term strategic value to the defense contractor. The financial buyers would buy CSC’s corporate outsourcing business, which seems harder to justify at a 44% premium.

Why are buyout shops willing to pay up for these established tech-services companies? I know they like the steady cash flow for servicing debt, but I'm curious where growth will come from. And which company is next? EDS?

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