Systems Integrators Command New Attention
Many systems integrators are now in play thanks to last week's aggressive move by megasoftware company Computer Associates International to buy Computer Sciences Corp. in a deal valued at more than $9 billion.
The bid for CSC has stirred renewed interest in integrators like Fairfax, Va.-based American Management Systems Inc., which has a lower price-to-earnings ratio and higher profit margins than CSC. Other integrators garnering attention include CACI, Arlington, Va.; Electronic Data Systems Corp., Plano, Texas; and Nichols Research of Huntsville, Ala.
CSC, a massive El Segundo, Calif.-based computer services company that made its name doing work for the federal government, was fending off press queries about the deal, or non-deal if you believe CSC.
There was speculation CSC would seek a "white knight" to deflect the Computer Associates offer. Industry colossus Lockheed Martin Corp., Bethesda, Md., and software giant Oracle Corp., Redwood Shores, Calif., were among those mentioned by analysts. Others were: AT&T, Basking Ridge, N.J.; Cap Gemini, Paris; EDS; GTE Corp., Stamford, Conn.; and IBM Corp., Armonk, N.Y.
The consensus among analysts is that CSC almost certainly will be acquired in the coming months. "Once you are in play, you are in play," Moshe Katri, an analyst with the New York investment firm UBS Securities, told Washington Technology staff writer Nick Wakeman.
CA's offer, which seemed to catch both industry gurus and Wall Street off guard, should not come as a huge surprise. Its founder Charles Wang said just one year ago that he would lay low for six months. At the time, he left the impression that it would be open season thereafter. And why not? His company had already acquired 60 companies since 1976.
But why the sudden interest in CSC?
CSC had 1997 revenues of $6.3 billion from systems integration work and outsourcing projects. About 27 percent of the company's business is with the federal government. That's a far cry from 10 years ago, when roughly 70 percent of Computer Sciences' revenue came from government work.
These days, hardware and software companies are scrambling to add services to their offerings because of the vast growth potential in that niche.
"More and more customers are looking for end-to-end solutions, not just products, but implementation, IT consulting and, in some cases, outsourcing," one leading analyst who tracks integrators closely tells Wakeman for his cover story.
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. "What we'd like to do is to be able to offer management consulting, software development, system integration to outsourcing."
Some investors had been rapidly accumulating CSC stock last year, citing the company's winning contract streak and its untapped bounty of potential year 2000 business with the feds. Indeed, one analyst speculated in a 1997 online column in TheStreet.com that the indefinite-delivery, indefinite-quantity contracting mechanism available to federal agencies could make CSC "the mother of all Year 2000 providers."
In that same column, an unnamed fund manager predicted that the year 2000 would become the government's single biggest technology initiative and that CSC would be there "to reap the rewards."
While the U.S. government is inching along in its year 2000 software conversion efforts, much still needs to be done by its foreign counterparts. (See our year 2000 stories.) Computer Associates does considerable year 2000 work around the globe; a combined CA-CSC offers intriguing possibilities for meeting this demand.
Computer Associates executives have not dropped many hints about their plans, but they did try to ease the concerns of their channel partners about such a deal. In a Feb. 13 letter to "valued" channel and systems integration partners, Sanjay Kumar, CA's president and chief operating officer, said that the "merger transaction" would bring good things. Among them would be significant benefits through "new and expanded opportunities," he said.
We'll see. The melding of a major software company with a large, independent systems integrator could have a big market fallout, especially if it turns out to be an unfriendly takeover bid.
At least this business is not dull.
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