Relationships Key Piece of CA Puzzle

Relationships Key Piece of CA Puzzle

By Nick Wakeman
Staff Writer

Even if Computer Associates International Inc. pulls off its gutsy takeover bid for Computer Sciences Corp., it will face the daunting task of maintaining solid working relationships with key customers and partners in the federal market, analysts say.

"Relationships are the biggest potential problem," said William Loomis, an analyst with Legg Mason Inc. in Baltimore. The systems integrators and other vendors that Computer Associates currently works with could react negatively to the combined company, he said.

"The risk to CSC is that [customers] will think you are tied too closely to one software vendor," said Thomas Meagher, an analyst with the investment firm Ferris Baker, Watts of Baltimore. "Traditionally, you look to the system integrator to be independent and bring you the best product for your solution."

Van Honeycutt

Computer Associates has been a subcontractor to a host of integrators in the federal market. They include BDM International Inc., McLean., Va.; Electronic Data Systems Corp., Plano, Texas; and NCR Corp., Dayton, Ohio. CSC also has been a major partner with Computer Associates.

Computer Associates' interest in CSC is more geared to helping its commercial business, Loomis said. "But [the acquisition] will help them on the federal side because of all of CSC's channels into the market," he said.

Computer Associates' proposed acquisition of CSC, valued at more than $9 billion, would combine two companies with such different backgrounds and cultures that many analysts wonder if CA can ever pull off the deal. Computer Associates, Islandia, N.Y., had 1997 revenues of $4.5 billion selling software products such as Unicenter, its network management product. El Segundo, Calif.-based CSC had 1997 revenues of $6.3 billion from systems integration work and outsourcing projects. About 27 percent of CSC's business is with the federal government; only 5 percent of CA's overall revenues are from government work.

Analysts also speculated that CSC might seek a "white knight" to deflect the Computer Associates offer. Among the names bandied about were: Lockheed Martin Corp., Bethesda, Md.; AT&T, Basking Ridge, N.J.; Cap Gemini, Paris; EDS; GTE Corp., Stamford, Conn.; IBM Corp., Armonk, N.Y.; and Oracle Corp., Redwood Shores, Calif.

In announcing its bid Feb. 11, Charles Wang, chairman and chief executive of Computer Associates, said he wanted his company to add a strong services capability. "We want to be the leading provider of end-to-end solutions - offering what we call platform neutrality for our clients," he said. Computer Associates wants to be able to offer management consulting, software development, systems integration and outsourcing, Wang said.

The melding of a major software company with a large, independent systems integrator has several potential pitfalls, especially potential fallout from an unfriendly takeover bid, analysts said.

"It is axiomatic in this industry that you can't do an unfriendly takeover because what you are acquiring is people and culture," said Douglas Schmidt, managing director for Legg Mason. "To make a services acquisition work, you have to have a lot of consensus from both companies, a lot of team building up and down the line."

That has not happened yet. Van Honeycutt, CSC chairman, president and CEO, called the offer "unsolicited" and "hostile."

Computer Associates has held two meetings with CSC and claims to have an understanding - except for price - of what CSC requirements are for an acquisition.

But CSC officials claimed the meetings were neither long nor substantive. "There were no negotiations and no agreements," said Bruce Plowman, CSC's vice president of corporate and marketing communications.

CSC's board of directors is expected to respond to the offer by Feb. 20, Plowman said. "We'll do what is in the best interest of our employees, our clients and our shareholders," he said.

If the takeover continues on an unfriendly track, it could spell trouble for Computer Associates, some analysts said.

A sure sign of an unhappy acquisition is employee turnover, said Richard Leggett, an analyst with the investment firm Friedman Billings, Ramsey & Co., Arlington, Va. In service industries, "the people are the revenue," he said.

Turnover in the IT industry is already on the rise, and an unwanted acquisition is just another reason for employees to jump ship, Schmidt said.

Charles Wang

There also has been speculation that Lockheed Martin will spin off its federal IT services unit into a separate public company within the next two years, Katri said. The unit accounts for about $4 billion in revenue. CSC's federal business would complement that unit, Katri said.

Ron Meder, a Lockheed Martin spokesman said the company would not comment on any plans to buy CSC or spin off its federal IT services unit.

Computer Associates' bid for CSC has triggered interest from other hardware and software companies in systems integrators such as American Management Systems Inc. The Fairfax, Va., company has a lower price-to-earnings ratio and higher profit margins than CSC, Katri said. "That puts AMS into play," he said.

Analysts noted that many companies are scrambling to add services to their offerings because of the vast growth potential. The U.S. market for commercial and government IT services was $126 billion in 1997 and is expected to grow 18 percent over the next five years, according to data from Legg Mason.

"More and more customers are looking for end-to-end solutions, not just products, but implementation, IT consulting, and in some cases, outsourcing," Loomis said. "Computer Associates is trying to fill in those areas."