Computer Associates' hostile takeover bid for Computer Sciences (CSC) is growing increasingly nasty, with CSC announcing it will use "any legal means necessary" to ward off the attempt, and CA vowing to persevere.
Meanwhile, analysts warn that a hostile takeover might lead to the loss of CSC's key asset - its people.
Following aborted merger talks that started in December, CA offered to buy CSC for $108 per share, or a total of about $9 billion in cash, on 10 February. When the CSC board was slow to respond to the offer, CA turned directly to the company's shareholders.
On 17 February, CA announced a cash tender for all 85 million outstanding CSC common stock at the same $108 price. According to CSC, CA subsequently 'indicated' that it might raise the bid to $114 if CSC would agree to a friendly merger.
The warring companies give strongly differing accounts of the talks that preceded all this. While CSC chairman and CEO Van Honeycutt has denied that the meetings between both companies had amounted to merger negotiations, CA executives have suggested that both companies were agreed on all aspects of a deal except price.
On Wednesday, the CSC board formally turned down the offer and refused to enter into renewed merger negotiations. In a letter to CA chairman and CEO Charles Wang, Van Honeycutt claimed the offer "does not represent fair value".
Honeycutt listed three reasons why the merger was ill advised. First, the resulting company would be financially weaker and have a lower credit rating, placing CSC at a disadvantage to conclude large outsourcing deals. Second, CSC would lose its credibility as a provider of vendor-independent solutions. And finally, CSC's top asset, its personnel, might be inclined to leave due to the differences in corporate culture.
These same criticisms of the proposed deal have been voiced earlier by analysts.
The letter further claimed that some CSC customers have threatened to end their outsourcing contracts with CSC if the merger goes through, or would reduce the flow of new business to CSC. This would mean that the merged company would almost certainly lose some sources of revenue, while potential revenue gains from synergies between both companies remain doubtful.
The letter concludes: "Charles, we respectfully suggest that you withdraw your offer immediately and move on."
In a filing with the Securities and Exchange Commission, CSC outlined a number of measures to prevent a hostile takeover. Amendments to the company's bylaw make sure that certain laws regarding takeovers in the state of Nevada do not apply to the company.
Other moves aim to make a takeover more expensive. The company's board has given Honeycutt the power to designate up to 150 employees who would receive special compensation should the takeover go ahead. And the shareholder rights plan was amended to the effect that CSC shareholders would be entitled to buy CA stock at a discount.
CA immediately responded to Honeycutt's letter by announcing its intention to push through with its offer to CSC shareholders. It is pushing for a shareholder referendum.
Tom Sweeny, an analyst at Dataquest, said he expected CSC to put up a bitter fight. "CSC's unique value proposition to the marketplace would almost certainly be lost in a CA scenario," Sweeny said.
Though he refused to speculate on the outcome of the fight, he warned: "Services is a people business. And there is absolutely no guarantee that people won't leave". He added that the possibility of key personnel leaving the company was "probably the best defence" that CSC now has.
Shareholders showed their uncertainty about the deal in trading on Thursday: after the announcement of CSC's rejection and its measures to counter the takeover, shares in the company fell. They closed at $103.5, well below the price of CA's offer. CA's shares, meanwhile, were up $.06 at $47.06.
CA has 11,000 employees and had revenues of $4.5 billion in 1997. CSC dwarfs its suitor with 44.000 employees and revenues of $6.3 billion. The takeover, if it goes ahead, will rival the proposed merger between Compaq and Digital as the largest such deal in the history of the computer business.
The Compaq deal has been estimated at $9.6 billion. CA stated on Thursday that its $108 bid for CSC would actually amount to a $9.8 billion transaction, rather than the $9 billion reported earlier, because of $700 million of CSC indebtedness.
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