CA battle for CSC won't dent R&D efforts

Now that Computer Associates International Inc.'s (CA) bid to acquire Computer Sciences Corp. (CSC) has officially turned hostile, CA may face a tough fight, but not one that will damage its core product development, according to analysts. CA stepped up the pressure on CSC yesterday, officially filing with the Securities and Exchange Commission the terms of a cash offer of US$108 per share for all of the outstanding common stock of CSC. CA offered an unsolicited bid, made public last Wednesday, for the same amount to CSC chairman, president and chief executive officer ,Van B. Honeycutt.

Now that Computer Associates International Inc.'s (CA) bid to acquire Computer Sciences Corp. (CSC) has officially turned hostile, CA may face a tough fight, but not one that will damage its core product development, according to analysts.

CA stepped up the pressure on CSC yesterday, officially filing with the Securities and Exchange Commission the terms of a cash offer of US$108 per share for all of the outstanding common stock of CSC. CA offered an unsolicited bid, made public last Wednesday, for the same amount to CSC chairman, president and chief executive officer ,Van B. Honeycutt.

With today's action CA is essentially skirting around management and offering all stockholders the option of selling shares to CA. CA has retained Mackenzie Partners Inc. to manage the transmission of the tender documents to all CSC shareholders. Credit Suisse First Boston has arranged financing for CA through Bank of America, The Chase Manhattan Bank and NationsBank.

Though CA is turning up the heat on CSC management with its latest move, it also may be making the deal more complex and tougher to complete, not least because CSC has a shareholders' rights -- or "poison pill" -- clause in its bylaws.

Typically, a poison pill calls for the issuance of a large number of new shares once a company that has launched a hostile takeover buys up a certain number of shares. The new shares makes it impractical for the acquiring company to complete its takeover.

Another problem is that even if the deal goes through a merger of the two corporate cultures may become tougher than ever if the takeover battle becomes protracted and bitter.

"Most hostile takeovers don't work," said Charles Phillips, an analyst at investment banking firm Morgan Stanley & Co. Inc. in New York. Phillips initially applauded the move by CA, saying CA would be stronger with the services expertise of CSC. Though he still believes that the acquisition would benefit CA, whether it will happen at this point "is hard to call. The odds of its working out are declining."

However, the product release schedule from CA won't be affected one way or the other, Phillips said.

Other analysts agreed.

"It's not as if CA product people are getting involved," said Chris Mortenson, at the Alex. Brown & Sons Inc. investment bank in New York. "Only a handful of people at CA are involved in a deal like this."

And the acquisition, if successful, should not divert funds from CA's product research groups, he added.

"CA is generating more than enough cash they need for their core businesses," Mortenson said,

CSC has been reviewing CA's offer since last week. But in letters to the public and to employees on the company's Web site, CSC management made it clear it was not happy. In one letter, Honeycutt said, "Any suggestion that there have been negotiations or agreements between the two companies is absolutely false." He also called the original offer "hostile," although technically it was not since CA did not formally tender the bid to CSC shareholders, as it is doing today.

CSC had no comment today on the new turn of events, other than to say it was still reviewing the bid. "The company will respond when it is ready to respond," said Michael Dickerson, a company spokesman. A CSC spokeswoman last week said the company would complete its review by the end of this week.

CA had no comment beyond the press release it issued today, which briefly described various legal moves it is taking.

CA announced that it has begun legal action designed to compel CSC's board of directors to take "appropriate steps" to permit CSC's shareholders to consider the offer. CA declined to specify what the steps are. But typically in takeover cases like this, the acquiring company could cite the target company bylaws calling for shareholders to have the right to review bids.

CA's press release today also said the SEC documents describe conditions to the offer, "including the redemption or invalidation of CSC's 'poison pill' rights plan and the inapplicability of certain anti-takeover provisions under Nevada law."

CSC is incorporated in Nevada. The move by CA to declare CSC's poison pill clause invalid under the law of the state in which it is incorporated is a typical legal maneuver in a hostile takeover, said analysts.

Another possible move CA could make is to initiate a proxy shareholder fight, where shareholders at the company's annual shareholder meeting attempt to gather enough support to oust executives who are opposed to the buyout with CA, and replace them with a board of directors willing to do a deal.

CA in its release today indicated it was preparing to do this, saying that it is filing with the SEC "preliminary materials for solicitation of written consents, proxies and agent designations from CSC shareholders that are intended to expedite the tender offer."

Taking into account the effect of dilution on CSC's 85 million shares, and the company's $700 million in debt, the offer has a value of about $9.8 billion, according to CA. The offer is lower than a $114 per share offer CA made over the last few days to management to sweeten the deal and remove CSC executives' recalcitrance, according to published reports.

CA's offer has already boosted CSC stock. After briefly hitting $108, CSC shares closed today at 106-9/16, down 13/16 from its open but up from 89-1/4 last Monday, a day before CA's initial offer letter to Honeycutt was dated. That the share price is so close to CA's offer means the market believes that "the right price is slightly north of the current offer," said Mortenson.

Meanwhile, CA shares were down 2-5/16 to 46-1/16 today. The transaction, if it goes through, will have a dilutive effect on CA stocks.

CSC is looking for a "white knight" to come in with a new bid and block CA's bid, according to published reports. But it is getting late in the game for that to happen, said analysts. Though CA and CSC officials declined to comment on the subject, CSC hesitation at dealing with CA probably has to do with CA's reputation of taking over companies and slashing costs via layoffs, observers said.

CA, based in Islandia, New York, can be reached at http://www.cai.com/. CSC is in El Segundo, California, at http://www.csc.com/.

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