An offer they can't refuse

Two things you should know about Charles Wang, the chief executive of Computer Associates International: In the last two decades, he's bought 60 companies and he always pays in cash.

Those two incidentals may loom large as the board of directors of Computer Sciences Corp. (CSC) mulls the unsolicited $9 billion takeover bid CA (CA) faxed to their offices Tuesday night.

	CA's $9B bid: An offer they can't refuse? for CSC.
	Dear CSC: The text of CA's offer letter.
	CA: Why we want CSC
	What CSC offers back
	Dodge: Hmmm, who are those guys?

Although CA officials bristle at the description, the company earned its reputation as a scavenger that buys struggling companies for their products and then slashes costs. In measuring out stiff doses of capitalism, CA may not win any popularity contests -- but it's a recipe to Wall Street's liking.

"We think this could be the most strategic acquisition ever for CA," said Morgan Stanley analyst Chuck Phillips. Reason: CSC is mainly a "services" company. It earns its daily bread by offering big corporations, such as DuPont, the expertise they need to create and implement industrial-strength information systems. "We've been bemoaning the fact that CA was leaving a ton of money on the table not providing consulting and outsourcing services for its 10,000 customers who were looking for one-stop shopping," said Phillips.

The computer industry is littered with the corpses of companies that choked on their acquisitions. And this is a big one. Should this deal go through, it would rank as the second largest transaction ever in the U.S. computer industry, just behind the planned Compaq Computer Corp (CPQ)-Digital Equipment Corp (DEC) deal. But CA has proved adept at pulling off multibillion-dollar pickups and integrating the operations of the acquired companies.

CA's stock price, which hit a 52-week high on Tuesday of $58.63, closed down $7.56 on Wednesday following the announcement of its bid for CSC. Still, with a 58.2 percent return-on-equity and five-year earnings-per-share growth of 15 percent, CA has rewarded investors with its growth-through-acquisition strategy. In the nearly two decades since Wang acquired CA in 1980, annual revenues have soared to $4 billion.

Analysts say the combination of the two companies would create an $11 billion juggernaut addressing a range of products and services. Whether CSC will be so impressed remains anyone's guess. A spokesman for CSC said executives were meeting to review the offer and declined further comment.

CA sought to dispel lingering fears that it planned another slash-and-burn outing. Officials went out of their way to say they envisioned vast new opportunities in combining CA's software development strengths with CSC's consulting services. What's more, Wang said he expected to retain all of CSC's 41,000 employees. In the same call, Sanjay Kumar, CA president and chief operating officer, held out hope that "a negotiated transaction" could still be reached, averting a takeover fight.

However, CA faces two to three years of earnings dilution if its all-cash $108-per-share bid for Computer Sciences succeeds, executives said.

On Wall Street, stock analysts said the company provided few comforting answers for how it intended to structure a deal to avoid the huge tax consequences of its $9 billion bid. In particular, the company gave no projection of the charges it would incur to write off the difference between the acquisition costs and the book value of CSC.

The Islandia, N.Y., company tendered the offer after failing to reach a friendly agreement with CSC. "We're not making a tender offer to CSC shareholders directly at this time," said Wang, who added that the CA offer represents a 35 percent premium over the closing price of CSC's stock on the day negotiations between the two companies began last December. He added that CSC's stock had been trading at an all-time high since then.

We won't raise price and we won't rule out a hostile bid. Or so said CEO Charles Wang and other CA execs following its $9 billion bid for Computer Sciences Corp.

Kumar, said the sticking point in negotiations with CSC management is over the price of the offer. "We prefer a negotiated transaction," Kumar said. "We want to do the right thing by CSC shareholders."

CA, which has a history of relying on third parties for service and support of its software offerings, wants to embrace that area as a "fourth leg" in its growth strategy, according to Wang. The other three strategic areas include internal development, acquisition, and integration. "CSC can help implement [CA's] Unicenter, Jasmine and Ingres [products]," Wang said. "With CSC, we become the only vendor capable of offering platform-neutral products and services."

However, the acquisition could sour CA's existing relationships with third-party services suppliers, said Traci Gere, an analyst at International Data Corp., in Framingham, Mass. "[This] is bizarre," Gere said. "CSC has a very broad set of capabilities, from mainframes to desktops. This could be messy and destroy some of the relationships CA has built with companies like Digital that compete with CSC. CA tries to sell products to these partners doing outsourcing, but if CA through CSC is going to compete with them, it could come back and bite them."

Additional reporting by John Dodge and Paula Musich of PC Week and Eric Fleming, Inter@ctive Investor