Computer Sciences Goes on the Block

Confirming rumors that have dogged Computer Sciences (CSC) since last fall, the company said Apr. 4 that it had retained Goldman Sachs (GS) to explore a potential sale.

But that wasn't the only bit of unsettling news to hit CSC employees on a rainy day in Los Angeles. The company also announced layoffs of 5,000 workers, or 6% of its staff, by the end of its next fiscal year, in April, 2008 -- a move likely to make the outfit more enticing to buyers.

Computer Sciences, among the largest providers of technology consulting and outsourcing services worldwide, was reportedly in talks with Lockheed Martin (LMT) and a handful of private equity firms last October, but negotiations fell apart when the buyers couldn't reach the company's desired $65-per-share price. In January, talks reportedly resumed with Hewlett Packard (HPQ) and the buyout firm Blackstone Group. A spokesman for Computer Sciences would not comment on any of the rumored negotiations, nor on anything in the press release. The stock leapt more than 4%, to nearly $60 a share, on the announcement.


  Joseph Vafi, a technology analyst with the investment bank Jeffries & Co., said the layoffs will likely make the company more attractive takeover candidate. Potential buyers -- who would have to pony up more than $11 billion -- include competitors IBM (IBM), Hewlett Packard, and British Telecom (BT), which has been beefing up its technology services business. Any acquisition by one of those companies would likely necessitate layoffs because the combined firms would have redundant staff.

The $375 million in charges Computer Sciences announced it is taking in association with the layoffs will also make the business more attractive to private equity firms, Vafi said. That's because a purchase by a private equity firm would likely add a lot more debt to the balance sheet, and such a buyer would prefer not to have to expend more cash afterwards. "They're doing this ahead of a deal," Vafi says.

Growth in the technology services sector has been tepid since the end of the tech boom in 2000, as giants such as IBM, HP, Electronic Data Services (EDS) and Accenture (ACN) all slug it out over business. Computer Sciences disappointed Wall Street in its most recent quarter, reporting only $3.1 billion worth of new orders, 40% below last year.


  Still, with their long-term contracts and steady cash flow, technology services companies are attractive businesses for financial restructuring. Last summer SunGard Data Systems was acquired by a consortium of private equity firms that included Bain Capital Partners, the Blackstone Group, and Kohlberg Kravis Roberts & Co. In March, Affiliated Computer Services (ACS) completed a tender offer for $465 million of its own shares.

Despite the drop in orders, Computer Sciences is still expected to earn $610 million on revenues of $14.6 billion this year, according to Reuters Research. That's a 10% increase in earnings from last year (see BW, 4/3/06, "Outsize Performance From Outsourcers").

Surprisingly, Computer Sciences has been slower to outsource some of its own work. According to a report from Merrill Lynch, the company had only 6% of its workers in India, compared with 13% for IBM and Accenture (see BW, 1/11/06, "The Ongoing Allure of Outsourcing").


  In its release, Computer Sciences hinted that many of the cuts would likely come from Europe. "For some time, it has been apparent to us, and to other companies in our industry, that there is excess capacity in certain geographies, particularly Europe," said Chairman and CEO Van B. Honeycutt.

One bright spot for Computer Services and others in the group has been U.S. government business, in particular that for the Defense Dept. Revenues from military contracts increased 12% in the most recent quarter to $820 million. "The whole federal IT sector has been extremely active," says Jon Kutler, a former defense-industry investment banker who now runs his own buyout group, Admiralty Partners. That should make Computer Sciences an easier sale, especially given its recent layoffs.

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