Business

Computer Sciences Explores Sale, Plans Job Cuts

Computer Sciences Corp. (NYSE: CSC) may find it a challenge to nail both the right buyer and the right price if it ends up on the block. The company has announced it is exploring various alternatives including an outright sale.

On Tuesday, CSC said its board of directors “decided to explore strategic alternatives to enhance shareholder value, including a potential sale of the company,” and had hired Goldman, Sachs & Co. to be its financial advisor.

CSC made the decision “in response to recent expressions of interest” from unnamed suitors, it said.

CSC intends to reduce its labor force in order to get costs further under control, with plans to cut as many as 4,300 workers from its headcount between now and April of 2007 and another 700 in the following years. Most of the cuts are expected to come in Europe.

The cuts should help make CSC more palatable to potential buyers by improving cash flow and reducing expenses, but the company said the changes are needed regardless of what happens on the acquisition front.

“For some time, it has been apparent to us and to other companies in our industry that there is excess capacity in certain geographies, particularly Europe,” said Chairman and CEO Van B. Honeycutt. “After lengthy consideration, we have decided that this is an appropriate time to deal with the issue through a restructuring. This action is designed to enhance shareholder value regardless of any strategic alternatives we may explore.”

Strong Business

CSC will hold off on commenting further “unless and until the Board of Directors has approved a specific transaction,” the El Segundo, Calif.-based company said in a statement.

CSC, which posted 2005 revenues of around US$14 billion, saw its shares surge on the news, climbing more than 4 percent during trading Tuesday. In midday action Wednesday, the company’s shares were virtually unchanged, trading at $59.80.

The search for a buyer may be a difficult one, even with interested parties already knocking on CSC’s door. Two deals said to be percolating late last year fell through, as did a nearly consummated bid to merge CSC with Computer Associates nearly eight years ago.

The most likely sticking point will be price, with many analysts believing CSC wants to get at least $63 per share, or about $12 billion for the company — considerably above recent trading levels.

Likely suitors include Hewlett-Packard and private equity firms, which have recently invested heavily in publicly traded tech firms, often taking them private and later bringing them public again through an IPO after revamping the businesses to meet new market realities.

Potential buyers would likely be after CSC’s strong consulting unit and its long history of winning major federal and private IT contracts.

Price Tag at Issue

The job cuts could save the company about $450 million over the next two years and make CSC a more enticing takeover target, said Bank of America Securities analyst Abhishek Gami. Still, he predicts a gap between the current consensus estimates of what the company is worth — in the $10 billion to $11 billion range — and what it might want from a buyer.

Companies will be especially interested in the federal data outsourcing unit of CSC, which is a “very good business” that is both fast-growing and profitable, Gami added.

The sale comes at a time when corporate IT outsourcing, while still growing, is not expanding as rapidly as it was in recent years, with double-digit annual expansion a thing of the past, Morningstar analyst Giridhar Krishnan said in a research note.

That combination of slower growth makes the industry “ripe for consolidation,” he concluded.

Still, price questions have squelched earlier deals, including one in which Lockheed Martin and a group of private equity funds hoped to buy CSC and divide it into smaller parts.

HP remains a likely potential buyer, since it could use CSC’s consulting and outsourcing businesses to drive hardware sales, according to Needham & Co. analyst Charles Wolf. HP is still emerging from the lengthy integration of its controversial Compaq purchase and adjusting to a new strategy after last year’s departure of longtime CEO Carly Fiorina, Wolf noted.

Leave a Comment

Please sign in to post or reply to a comment. New users create a free account.

More by Keith Regan
More in Business

E-Commerce Times Channels