Computer Associates' (CA) recent move to walk away from its takeover CSC, but its sights are still set on the lucrative service market. battle of Computer Sciences Corporation (CSC) is unlikely to curb founder and CEO Charles Wang's voracious appetite for acquisitive growth.
Last week, CA decided not to pursue the ownership of CSC. CA had originally offered $114 per share - a total of $9.8 billion for CSC. However, CA then revised its bid down to $108 per share when it mounted a hostile takeover of the services operation, until it canned any desires.
CSC followed this action by filing a lawsuit in New York on 23 February, alleging that CA used illegal tactics and tried to bully CSC executives into accepting the merger, which was unfavourable to CSC. Shares prices of both companies dropped after details of the lawsuit emerged.
However feared and disliked Microsoft CEO Bill Gates is, Charles Wang is even more so. Employees swap stories about his competitiveness and gritty business practices, although lately he has been the subject of an image whitewash.
At last year's CA World, Wang gave the keynote speech and then disappeared from the stage in a puff of smoke, only to reappear at the back of the auditorium to invite the thousands of CA customers to enjoy the magic of the vendor's software. Only a supremely confident or very foolish CEO would risk staging such a trick, and Wang is certainly no fool.
Most of the time Wang prefers a low profile, although he mixes with his employees and endeavours to cultivate a boss-of-the-people image.
He is well known for dining with the factory staff and joining in ball games, although whether manners or tactics are the same when he is around is a moot point.
CA's reputation is of a lean predator looking for failing companies to snap up on the cheap. Tales abound of how it hikes up maintenance costs to clients who are locked in and pushes trapped customers to buy other products.
Unpopular though Wang and his 'acquire, develop and integrate' business tactics may be, and the image spinning notwithstanding, there is no doubt that the stock markets love him. His strategies work and CA is hugely successful. It is the third largest software company after Microsoft and Oracle but with fewer employees (11,000 compared with 23,000 and 19,500 respectively).
Critics say CA's strategy is to buy highly regarded but rather sleepy brands and products with locked-in customers and then live off lucrative support contracts without further investment in R&D. It has a reputation for aggressive company buyouts, virtual asset stripping and ruthless management.
This strategy perhaps accounts for CSC's knee-jerk 'no' response to a CA takeover, but it appears to work for CA.
CA's growth has been impressive but steady, and on paper it is doing well. Revenue has averaged $700 million per year for the past four years and the profits percentage rises by an average 30 per cent quarter on quarter, year after year.
Mainframe revenue grew by 20 per cent last year, accounting for two-thirds of CA's total sales, and revenue from client-server businesses grew by 50 per cent in the same period. And its Year 2000 consultancy activity is so busy that it is bound to figure largely in this year's returns.
Another star in its firmament is its distributed systems management product, Unicentre, which showed sales growth of over 50 per cent last year.
On the other side of the coin, the performance of Ingres, which CA acquired through the purchase of the ASK Group in 1994, is decidedly less rosy.
The product has been steadily losing market share over the last three years and a project to turn Ingres into an integrated object-relational database had to be abandoned.
The software developer entered the business applications market 10 years ago with an accounting package called BPI. Aside from Uni-centre, key products behind today's figures are Masterpiece, an open systems financial and distribution suite, AccPac, a PC-based accountancy package and MK Manufacturing, which incorporates the ManMan X manufacturing package bought from ASK.
However, exact analysis of the company's business is made difficult by its refusal to break down revenue precisely by product line or business unit. Estimated application revenue is in the region of $1 billion, but figures tend to get lost in the company's huge portfolio of over 500 products, most of which are targeted at the systems and database market.
Last year, CA introduced a strategy to build third party sales and cultivate the channel. It started from a position of only five per cent of indirect sales, despite the high percentage of client-server oriented business. The company has now given its direct sales staff quotas and bonuses to boost the indirect element, but it has a long way to go before it can convince resellers and Vars that it has their interests at heart as much as its own.
While the CA strategy is to follow trends, buy and exploit, it can claim to be an innovator in at least one area - it is ahead of SAP, Peoplesoft and JD Edwards when it comes to combining integrated management capabilities with its products. For example, last year it announced MK Enterprise, a product which combined Unicentre with enterprise resource planning functionality.
Allegations that CA does not invest in its acquisitions are not borne out by the facts. It is certainly not slow to research and develop key technology areas where it has a market edge, in order to maintain its lead. It is also reportedly taking a lead in 'self-learning' technologies - already used in help desk software - which can point out problems and suggest corrective measures based on previous experience. A new iteration of Unicentre is due, with this development as an integrated feature.
CA is also working on providing internet-enabled systems management although, like others in this field, it has yet to crack fully the security problems and the risk of unauthorised access.
The road so far has not been smooth. CA's history is littered with lawsuits and complaints from disgruntled customers and unhappily acquired partners and employees.
Some say this is an inaccurate picture, but CA itself does little to cultivate a better public image. In 20 years, it has bought more than 60 companies, but it still has not learned the value of winning friends and influencing people. Jay Huff, CA's UK marketing manager, declined to be interviewed by PC Dealer, despite assurances that questions need not focus on the CSC bid. The official response to requests for interviews is apparently 'no comment'.
When commenting about CA a few years ago, Oracle CEO Larry Ellison, said: 'Every ecosystem needs a scavenger.' The comment is not as pejorative as it was probably meant to be. Many of the companies and products that CA has bought have been fading stars, well past their peak. They had large user bases which needed to be looked after but were largely neglected by their original licensers.
Rob Hailstone, who worked for CA for seven years and is now a chief analyst at Bloor Research, says the company is frequently misjudged. 'There was not the atmosphere of ruthlessness which people seem to think exists within CA,' he says. 'On the contrary, it looks after its staff quite well. But what it does do is manage a lot of products with the minimum of staff.'
That was all well and good when CA was just a product company, but as it moves into services, where people are the product, this approach will have to change. Hailstone believes a takeover of a services company could be successful, provided CA takes a hands-off approach. 'It managed to do that with Cheyenne, which it acquired in 1996,' he says. 'It has left the management and company intact and not tried to merge it with the CA organisation.'
But the failed merger increases the pressure on CA to find another suitable purchase in the services sector. If CA cannot grow into services, it is hard to see how it can hang on to the number three position or even remain in the top ten.
CA - THE MASTER OF TAKEOVERS
CA's defunct bid for CSC is part of an overall trend towards a smaller number of bigger firms. This has long been predicted, and many believe the CA bid is part of a long-running prophecy coming to pass. Recently we have saw Compaq acquire Digital for $9.5 billion, and in the couple of weeks since the CA bid was made public, Coda has been bought by Baan for z52.9 million.
According to the pundits, we are facing a wave of mergers and takeovers as companies attempt to buy their way into the lucrative services business.
Several companies are either ripe for acquisition or are entering programmes of acquisition over the next few years. Until now, the hardware companies have been trying to elbow their way into services by acquisitive growth, but now we are seeing software and services organisations using the same tactic to expand. Some analysts believe the time is right for consultancy firms such as KPMG and Ernst & Young (which recently called off plans to merge because of regulatory hurdles) to start acquiring or merging with IT services companies.
Acquisitions and mergers are notoriously difficult to manage, but CA has been doing them for so long, and has made some classic mistakes, that it should be able to do them right by now. Even though the CSC bid had failed, it is certain that CA will continue to hunt for a services company which is not delivering the profits it should, and stage either a hostile bid or friendly takeover.
CA could soon be up there with EDS and IBM as one of the leading services houses, not just a top software house. In the sea of whales and minnows, this company is a whale that won't go away.
WHAT HAPPENS TO CSC?
CSC, of course, is no chickenfeed and CA had bitten off more than it can chew. It has 44,000 employees worldwide compared with CA's 11,000.
With a main activity of systems integration, CSC reported growth of 15 per cent in the last quarter of 1997 on sales of almost $1.5 million, and net income of $57 million compared with $19 million in the same quarter in 1996. However, the company currently has $700 million of debt and management which needs a good shake-up.
CA's offer was worth $9.8 billion or $108 per share. It was a generous bid, but lower than the original offer ($114 per share), and represented 23 times next year's expected earnings per share, 12 times the operating cashflow and implied one and a half times annual revenue.
The first response from CSC's CEO Van Honeycutt was that the offer was 'ridiculous', 'irresponsible' and 'a joke'. He has subsequently stated that even the sweetened offer does not represent 'fair value or make business sense', and has urged CA to 'withdraw the offer and move on.' Honeycutt has also put together a 'poison pill' shareholders' rights plan, which makes the deal essentially unattractive to CA.
When news of the friendly bid by CA first became public, CSC's share price soared by 23 per cent, and there is no doubt that the bid was interesting for investors. Analysts thought the price high and CA's interest strong, primarily because of the global shortage of IT skills and the fact that a high percentage of CSC's 44,000 staff are skilled programmers and consultants.
However, CA's share price dropped 11 per cent on the news of the bid.
Analysts had believed all along that CSC would be successful in repelling the CA bid, but that it will not remain independent for long. There are rumours that its business with the US government has not been going well and it has not been attracting new business. Several other predators are lurking, including IBM, Hewlett Packard, AT&T and possibly EDS, any of which can afford the price tag set by CA and would make a more acceptable suitor to both CSC employees and shareholders.
Now that CA has wiped its hands of CSC, the question remains what will happen to the services company now. The issue needs a resolution - whether another suitor enters the fray or CSC decides to continue to go it alone. Hostile bids always leave a bad taste and before long disaffection may take hold among the staff and clients, the best of whom may go.
Industry analyst Richard Holway believes trouble is almost inevitable.
'Any hostile acquisition of a people-based organisation like CSC is bound to cause trouble,' he says.
CSC will now adopt a wait and see approach to see if anyone else makes a bid. All along, CSC was in favour of being bought, just not by CA.
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