Woodland Hills Company Called Top-Heavy in Administration : High-Level Staff Cuts Seen at Informatics in Event of Sterling Takeover
If Sterling Software completes its planned takeover of Informatics General, there will be personnel cutbacks--perhaps extensive ones--at Informatics’ Woodland Hills headquarters, say Wall Street analysts who follow the company.
Informatics executives were unwilling to discuss the company’s future and Sterling’s top officials have not disclosed their plans. But some of those who know the company say cutbacks are inevitable.
Some moves will simply eliminate duplication that occurs when two public companies merge, some analysts said. But others, calling Informatics top-heavy with administration, said much deeper cuts are likely. There also is speculation that Informatics’ headquarters will be moved to Dallas, where Sterling is based.
“Sterling will go in and cut a lot,” said Charles Frumberg, who follows the company for the New York brokerage firm of Mabon, Nugent & Co. He said Sterling’s management can probably produce “several million in instant savings” without any reduction in performance.
Firm ‘Overhead Heavy’
Frumberg called Informatics “overhead heavy,” and Joseph Kapka, a former Informatics executive now in the Santa Clara office of Bateman Eichler, Hill Richards, a brokerage firm, agreed.
“Their general and administrative spending is pretty high,” he said. “And there’s plenty of room for cuts.”
Informatics does not separate marketing costs from “general and administrative expenses” on its income statement. Last year, the figure for all three was $43.2 million, up from $36.5 million in 1983. Earnings for the same period fell from $8.6 million to $4.7 million, while sales grew from $152.1 million to $191.2 million.
“The effect of that overhead was to lay a burden on performance and profitability,” said Bernard Goldstein, a partner in Broadview Associates, a high-technology merger specialist in Fort Lee, N.J. “There will be many cutbacks. A lot of executive blood will flow from Woodland Hills.”
Not a Stellar Performer
Informatics has about 2,600 employees worldwide, about 400 of whom are in the San Fernando Valley. Of those, 65 to 70 have corporate functions, company spokeswoman Carol Hayes said.
The company makes software for business and government, and sells entire computer systems, including hardware. It has been particularly successful in selling its products to law and accounting firms.
The company has not been a stellar performer in recent years. Despite strong sales growth, profits have been lackluster, and, before Sterling started buying its stock in mid-March, shares were trading at around $17, or close to book value. Software companies usually trade for more than book value, analysts say.
After rejecting Sterling’s bids of $25 and $26 per share, Informatics’ board announced on June 21 that it had accepted an offer of $27 per share from Sterling, culminating what Goldstein and other specialists said is the first unfriendly takeover of a sizable software company.
Use of ‘Junk Bonds’
Sterling must arrange financing for the deal by July 17 and is considered likely to succeed, using what analysts call “junk bonds,” low-grade but high-yield securities commonly used to finance takeovers.
Informatics said profits were off in 1984 because some unprofitable units were sold and because of poor sales and high costs associated with a new software product, the Answer series, designed to let little computers communicate with big ones.
But analysts complain privately that a new set of problems seems to occur every year with the company.
Whether there are sharp cuts or not, most analysts predicted that, if the takeover is completed, a number of top executives would not stay.
‘Unfriendly Takeover’
“I think you’ll see a number of top officials leaving, either voluntarily or otherwise,” said one analyst, who asked not to be identified.
Despite the veneer of cordiality that prevailed in recent weeks, “this was an unfriendly takeover,” said another analyst, who also asked for anonymity. “You just don’t wipe out the bitterness that was there in one shot.”
Not all analysts agreed. “I don’t think there’s that much animosity,” said John Kolozsi of Wentworth, Hauser and Violich, a San Francisco investment firm. “I think you’ll see a lot of people stay.”
Informatics Chairman Walter Bauer, who founded the company with some former co-workers in 1962, apparently will not be among them, analysts said. “The chances of Bauer sticking around are probably not very high,” Kolozsi said.
Senior Management Cuts
Nor did all agree that sharp cutbacks are in the offing. Curt Monash, for example, an analyst at PaineWebber in New York, said he expects Sterling to “reinvigorate” a company that has been sagging. Such reinvigoration, he said, “implies hiring.”
But Monash was in the minority. Most analysts predicted cuts in senior management. And some, such as Scott Smith of the Gartner Group in Stamford, Conn., said they expect many functions to be consolidated in Dallas, if Informatics headquarters is not actually moved there.
Smith and others said Sterling might divest some of Informatics’ sprawling divisions. But most analysts said it is far too early to be specific about that.
“I think the real issue here is to reduce the very significant corporate headquarters cost that was characteristic of Informatics, and to prune the tree that has many branches,” Goldstein said.
