Informatics Deal Improves Sterling’s Profit, Not Stock
At the time it was viewed almost as something of a joke. Sterling Software, a computer software company in Dallas with $20 million in annual sales, launched a hostile takeover bid in mid-1985 for Informatics General, a Woodland Hills software firm 10 times Sterling’s size.
Informatics, then the nation’s fourth largest independent computer software company, was being dragged down by two unprofitable divisions that had caused the company’s overall profits to tumble. Its stock had plunged as well, falling to half of the $34 a share it was trading at in 1983. In addition, the company had $40 million in cash on its books, worth about $8 a share.
Still, hostile bids in the software business were, and still are, rare. Conventional wisdom says it doesn’t make sense to attack a company whose main asset--the people who write the programs--can bolt if they don’t like the new bosses.
But conventional wisdom proved wrong, and the gnat swallowed the elephant. Sterling bought Informatics for about $135 million, or $27 a share, in the first major hostile takeover in the software business.
In the nearly four years since then, Sterling has made the deal into a fairly successful one. The company now posts healthy profits on its continuing operations. After it bought Informatics it moved quickly to trim nearly 200 jobs in Woodland Hills and Canoga Park, largely corporate staff posts that Sterling’s own corporate staff could do in Dallas. Today the company employs 184 workers in the West Valley.
“The people who had their hands on the business stayed. The people who were hangers-on are gone,” said Werner L. Frank, a former Informatics executive who is now executive vice president at Sterling and heads operations at its Canoga Park offices. The belt-tightening has helped one Informatics unit swing from a $3-million annual loss before the deal to a $3-million profit today, executives said.
Sterling also divided Informatics into three units, selling off six former Informatics operations with $50 million in combined sales. And Sterling restructured its debt to relieve the drain of interest payments to holders of the high-yield junk bonds it had to issue to raise money for the acquisition.
In the year that ended last Sept. 30, Sterling lost $1.8 million, although the main reason was a one-time, $8-million write-off stemming from the sale of assets. Its profit from continuing operations in the fiscal year was $4.6 million on sales of $169 million. And for the six months that ended on March 31, Sterling announced Monday a $5.3-million profit, up 56% from the same period a year earlier, with sales increasing 8% to $85.7 million.
But dividend payments on preferred stock issued to finance the takeover continue to take a big chunk of Sterling’s profit. For the year that ended Sept. 30, Sterling paid out $3.2 million of its net income in preferred dividends. For the six months that ended March 31, $1.6 million of its net income was paid out in preferred dividends.
Low Stock Price
Maybe the dividend payout is one reason why Sterling’s performance has yet to be sterling when it comes to its stock price. On Monday, Sterling’s shares closed at $6.50 a share on the American Stock Exchange, less than one-third the $21 a share it sold at three years ago shortly after the Informatics acquisition.
Indeed, if Sterling’s officers and directors did not own nearly half of the stock, the company might find itself in the same vulnerable takeover position that Informatics did before Sterling launched its bid.
“Our stock is at an extremely attractive price,” concedes Sterling Williams, the company’s president and chief executive.
Sterling executives say last year’s net loss helped depress the stock as did a slowdown in the overall computer business. Williams said he believes that investors are not very familiar with Sterling’s basic operations. He said he believes the price will respond in time.
Last year, a group led by Sterling’s managers briefly considered buying Sterling for about $9 to $10 a share, or about $60 million. But no formal offer was made. The company instead bought back about one-third of its stock.
Sterling supplies software for mainframe computers and minicomputers, mainly to users of big IBM machines. Its software is designed for three main applications: to increase programmer productivity; for use in banking, retail and other businesses, and for defense and National Aeronautics and Space Administration work.
Sterling was started in 1981 by brothers Sam and Charles Wyly. The company’s growth has been something like a smaller version of Computer Associates, a New York firm that has also grown through acquisitions and with $1 billion in annual sales is the nation’s largest software company.
Except for Informatics, most of Sterling’s acquisitions have been modest ones. Sam Wyly, who was one of the investors in the recent purchase of the Dallas Cowboys, is Sterling’s chairman. But the company is run by Williams, whose first name inspired the name Sterling Software.
Sterling’s bid for Informatics at the time seemed audacious. But as other targets of raids have learned, size doesn’t matter when a company is well armed with funds that can be raised through junk bonds issued through Drexel Burnham Lambert, the investment banking firm whose junk-bond pioneer, Michael Milken, is under indictment for securities violations. About $114 million in debt was raised by Drexel for the Informatics acquisition.
“We could not have taken this step if it had not been for Drexel and their junk bonds,” Williams said.
Sterling has since cut its debt from $114 million to $74 million. Sterling wanted to trim its hefty annual interest payments, so it refinanced its debt. Interest payments, which were as high as $14.5 million in the year that ended Sept. 30, 1986, fell to $9 million in the last fiscal year.
Walter Bauer, the former Informatics chief executive, said he does not follow Sterling’s activities since the buyout.
Bauer, 65, was brought in during 1986 to serve as chairman and chief executive for Delphi Information Systems, a fledgling software firm in Westlake Village. Bauer has since turned over chief executive duties to Delphi’s president, Richard Janssen. He says he is hoping to have more leisure time.