Mainframe Software Firm to Buy Rival : Technology: Computer Associates International said it will pay $1.78 billion for smaller Legent. Analysts praise deal.
In what would be the largest acquisition ever in the computer software industry, Computer Associates International Inc. said Thursday it will purchase smaller rival Legent Corp. for $1.78 billion in cash.
The deal combines the second- and third-largest makers of software for mainframe computers--giant machines that are used mainly to handle corporate computing tasks such as payroll and inventory management. It’s also the latest in a long string of acquisitions by Islandia, N.Y.-based Computer Associates, the nation’s second-largest independent software firm.
Wall Street was delighted with the proposed acquisition: Legent’s shares soared $13 to close at $44.25 on Nasdaq, while Computer Associates shares rose $5.875 to $71.50 on the New York Stock Exchange.
“It’s a very good deal,” said Peter Rubicam, an analyst with Dean Witter Reynolds. “It’ll give Computer Associates broader product offerings and some new customer accounts.”
Thursday’s announcement came less than a week after Microsoft Corp., facing an antitrust suit from the Justice Department, backed out of an agreement to buy personal finance software vendor Intuit Inc. for $2.4 billion in stock. Some analysts believe Computer Associates’ deal could face antitrust problems of its own.
“I’m surprised that considering all the acquisitions that Computer Associates has done, there hasn’t been a challenge already on the basis that these deals are anti-competitive,” said Kirk Klasson, a vice president with The Yankee Group, a Boston consulting group. The acquisition will be reviewed either by the Justice Department or by the Federal Trade Commission.
Although it is relatively unknown, Computer Associates, has grown at a torrid pace in recent years and boasted revenue of $2.6 billion for its most recent fiscal year. Its obscurity, especially when compared to the notoriety of industry leader Microsoft, is largely due to the fact that Computer Associates makes software that manages information stored on mainframes. It is thus largely invisible to the consumers who buy millions of copies of Microsoft’s personal computer software.
Herndon, Va.-based Legent, which also makes mainframe software, had $501.7 million in revenue last year and earned $51.2 million--but has a history of uneven performance. And Legent has had a difficult time moving away from mainframe software--considered a low-growth segment of the computer industry--and into new markets like that for so-called client-server software, which manages the workings of a cluster of smaller computers.
In January, Legent hired Jerre L. Stead, then the well-regarded head of AT&T;’s computer business, to turn the company around.
But his turn at the helm now looks to be short-lived. Underperforming companies like Legent are just the kinds of properties that Computer Associates likes to acquire. Since it was founded in 1976 by computer programmer Charles B. Wang, an immigrant from Shanghai, Computer Associates has bought more than 50 software companies. Typically, Wang looks to buy struggling companies at bargain-basement prices and then quickly slash costs to restore profitability.
For Legent, Wang is paying $47.95 a share--52% more than the company’s stock price at market close Wednesday and three times Legent’s sales in its last fiscal year. By Computer Associates’ standards, that’s a pricey acquisition.
But by buying the third-largest maker of mainframe software, Computer Associates moves closer to market leader IBM in a segment of the computer industry that is showing a late-life-growth spurt. Mainframe software is a $25 billion market, according to The Yankee Group.
Computer Associates President Sanjay Kumar said the Legent operations will be profitable within two years.
“We integrate these acquisitions into our company,” Kumar explained. “It doesn’t make any sense at all for us to have divisions. Within a week or two weeks of closing the deal we’ll tell people where they stand. If someone doesn’t have a career with Computer Associates, I’ll tell them.
“Some people might call it ruthless, but we have a belief that it is fundamentally unfair to drag these things out,” Kumar maintained.
Although Wang doesn’t enjoy the fame of Microsoft Chairman Bill Gates, the two men do share a reputation as a tough businessmen with a keen eye for opportunities.
“Wang understands what to buy, when to buy and why to buy it,” said Klasson of the Yankee Group.
Wang is also known to be tough with customers. Three years ago, Computer Associates customer Electronic Data Services filed suit against the software maker on the grounds that its rigid software licensing practices were unfair. The two settled the dispute with a rewritten software licensing contract signed in early 1994.
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Computer Associates’ Buying Spree
August, 1987: Dallas-based UCCEL, maker of mainframe software for banks, for $800 million in stock.
October, 1988: Princeton, N.Y.-based Applied Data Research, maker of mainframe database software, for $170 million in cash.
September, 1989: Westwood, Mass.-based Cullinet, maker of mainframe database software, for $330 million in stock.
September, 1991: Ft. Lee, N.J.-based On-Line Software, maker of mainframe systems management software, for $120 million in cash.
October, 1991: Lisle, Ill.-based Pansophic Systems, maker of applications software for mainframe and mid-range systems, for $290 million in cash.
June, 1994: Santa Clara, Calif.-based Ask Group, maker of manufacturing software for mainframes, for $310 million in cash.
