Shareholders Sue CSC's Board Over CA Bid

Computer Sciences (CSC) has been hit with a shareholder lawsuit seeking the appointment of a review board to consider the unsolicited takeover bid launched by Computer Associates (CA). The lawsuit, which is seeking class action status, also alleges that CSC and its board's interests are in conflict with the interests of CSC's shareholders. Meanwhile, analysts are saying that in announcing its bold US$9 billion bid for CSC CA did something it has never done in its more than 70 acquisitions -- attempt to swallow a much bigger firm that does not operate in its core software business.

Computer Sciences (CSC) has been hit with a shareholder lawsuit seeking the appointment of a review board to consider the unsolicited takeover bid launched by Computer Associates (CA)

The lawsuit, which is seeking class action status, also alleges that CSC and its board's interests are in conflict with the interests of CSC's shareholders, according to the complaint.

The lawsuit was filed in Clark County, Nevada District Court on behalf of shareholder Frances Bornstein by the Las Vegas law firm of Albright Stoddard Warnick & Albright. The lead attorney on the case did not immediately return phone calls.

A spokesman for CSC said the company has not seen the complaint and was not able to comment. CA was named as a nominal defendant in the suit, a CA spokesman said, adding that CA could not comment further on the action.

The motion came a day after CA made an unsolicited offer to buy CSC in a deal worth US$9 billion.

The complaint also seeks the appointment of a special committee of the CSC board to consider the CA offer and negotiate with CA on behalf of the CSC shareholders.

In announcing its bold US$9 billion bid for CSC, CA did something it has never done in its more than 70 acquisitions -- attempt to swallow a much bigger firm that does not operate in its core software business.

The buyout attempt is a move to create a major systems integration, outsourcing and management player that has the breadth of network management software and outsourcing capabilities to go head-to-head with IBM and other companies in the IT and services sectors, say analysts. If successful, the move would result in a company with more than 50,000 employees and $US11 billion in annual revenue.

The move to match CA's databases and flagship Unicenter TNG systems management software with a traditional services provider makes sense, especially in the face of IBM's abilities, say observers. On the down side, however, operationally it will be a difficult task to merge the two companies.

The bid calls for CSC shareholders to receive $108 in cash for each share of common stock. The acquisition attempt is what's known in the trading community as a "bear hug." Negotiations, begun in December of last year, reached an impasse recently, mainly over pricing, according to CA's Kumar.

The public announcement is not technically a hostile takeover attempt, because CA has not yet tendered a formal offer to CSC shareholders, noted analysts. But, in making its bid public, CA is putting CSC shareholders on notice that they can receive a cash premium over the value of their stock -- and thereby putting pressure on management to secure a deal.

Investors jumped on CSC stock after the announcement, driving the value up 11-9/16 to 103-3/4. Meanwhile, CA shares, whose value will be diluted for a number of years, according to Kumar -- at least partly as a result of the debt CA will have to assume -- dropped 7-11/16 to 50-3/8.

CA Chairman and CEO Charles Wang says that after developing a strong client/server business in the last five or six years -- with Unicenter as its flagship product -- the company had to look to the future. And the key to future growth lies in the "solutions" business, he says.

"We want to be the leading provider of end-to-end solutions," Wang says. CA, in selling its Unicenter product, has had a lot of opportunities to take on systems integration work that it had to pass up because it didn't have the service employees, he says.

"Customers are coming to us and saying 'I don't care what you do to make it work, just make it work '" Wang says.

CA had three choices to build up its services business, Wang says: grow its own; buy many small services players; or merge with a larger company.

"We went with the big bang," Wang says.

Some analysts are applauding the move, saying the services and outsourcing industry is booming and that other IT players are merging to match products with services, such as the recently announced deal for Compaq to buy Digital. IBM, which owns the Tivoli systems management product which rivals Unicenter, has been known to essentially give away the software as part of outsourcing deals, note observers. In addition, outsourcing has become the lead growth sector for IBM, they say.

"This is a good strategic move for CA and one that we have been discussing and urging," Charles Phillips, an analyst with investment banking firm Morgan Stanley, said in a report on the proposed deal.

CA customers have been asking the software vendor to take responsibility for whole turnkey applications packages and to provide a broader range of services, said Phillips. Meanwhile, CA has been hiring people that don't have as deep a core systems background as its traditional employees, who are steeped in database and network administration techniques, according to Phillips.

"This changes the model for CA and gives them a lot more recurring revenue and top line visibility; it creates one of the largest information technology companies in the software and service segment," he said.

But while the deal would make sense in terms of a services-systems management product match, it will be tough to pull off, despite CA's acquisition track record, other analysts say.

"It's something they may need to do -- but it's going to be a very, very difficult acquisition; bringing 40,000 people into a 10,000-person company will be a management nightmare," said one stock analyst who is a longtime CA observer and who requested anonymity.

CA has always bought smaller software development companies, the analyst noted. And CA has been notorious for being something of a slash-and-burn parent -- buying companies for their market share and technology, cutting costs and staffs, but often leaving frustrated users in its wake. In acquiring a major services company, "customer continuity" -- exactly the area where CA has been slammed in the past -- will be even more in the forefront.

Another big problem for CA would be potentially alienating other services companies which resell Unicenter and currently work with CA to support product installations, observers note.

Analysts also noted that CA's move appears to be defensive -- a counter to IBM's ability to combine a vast army of services employees with Tivoli and other management products. However, as much as CA may need to do this, it has in effect put CSC into play by making its unsolicited offer public. Thus, another bid may be put on the table, perhaps from a company such as Hewlett-Packard Co., which also sells the OpenView network management product and is much larger than CA.

If another bidder comes in for CSC, CA will be able to bid higher, according to observers. Trader sources said at least four major banks have agreed to finance the $9 billion offer -- so with that many banks underwriting a bid of that size, it would probably be possible for CA to go to $112 per share, or even $120 per share if it gets into a bidding battle.

CSC declined to comment on the bid, aside from characterizing it as "unsolicited," and saying that management had only received a fax copy of Kumar's offer letter this morning. Even though the two firms had been in negotiations, the bid was technically unsolicited since CA went ahead and bid without waiting for agreement on the bidding price from CSC.

In CA's public offer, CA pledged to retain CSC employee headcount. CA has more than 11,000 people in 43 countries and annual revenue of $4.5 billion, while CSC has 41,000 people and about $6.5 billion in revenue.

The text of Kumar's offer letter is available on the Internet at http://www.cai.com/csc/.

CA, based in Islandia, New York, can be reached at +1-516-342-5224 or at http://www.cai.com/. CSC is in El Segundo, California, at +1-310-615-0311 or http://www.csc.com/.

(Additional reporting by Kristi Essick.)

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