CSC’s Profit Forecasts Raise the Ante for CA
New profit forecasts from Computer Sciences Corp. may do what three weeks of legal maneuvering and business strategizing have so far failed to accomplish--put a severe crimp in an unsolicited $9.8-billion takeover bid from Computer Associates International.
The El Segundo-based computer services and consulting firm on Wednesday released revenue and profit projections that top analysts’ expectations.
Although several analysts think the Computer Sciences projections are overly optimistic, many still agree that Islandia, N.Y.-based Computer Associates may need to significantly sweeten its $108-per-share bid to succeed.
“It certainly makes a $108 offer pale as pretty wimpy,” said Stephen McClellan, a veteran analyst with Merrill Lynch in San Francisco, who agrees with CSC’s forecast.
“A substantially higher number than that is probably unaffordable to CA.”
Patrick Burton, a computer services analyst with Lehman Bros. in New York, said he projects a 17% growth rate for CSC, below what the company is estimating. But Burton nonetheless said a fair takeover offer from Computer Associates would have to be at least $120 a share.
In a filing with the Securities and Exchange Commission, Computer Sciences said it expects to record $6.58 billion in revenue and earnings of $3.41 per share for the 1998 fiscal year ending April 3--toward the high end of analysts’ estimates.
For 1999, CSC is forecasting earnings per share of $4.12--well above the $3.94 average analysts’ consensus from IBES International Inc.--based on revenue of $7.83 billion.
The company’s forecast for 2000 is even rosier, with revenue of $9.31 billion and earnings per share of $5.55.
CSC’s chief financial officer, Leon Level, emphasized that the three-year compound annual growth rates of 18.4% for revenue and 21.1% for earnings before interest, taxes, depreciation, amortization and special items are well within the company’s annual growth rates from 1995 to 1997.
“The visibility of such strong growth has the potential to effect significant appreciation in our stock price and underscores the inadequacy of the CA offer,” said Van Honeycutt, CSC’s chairman, president and chief executive.
Based on the new forecasts, analyst McClellan raised his own forecast of CSC’s stock price a year from now to $139 from $115 and said Computer Associates’ $9.8-billion takeover attempt is all but dead.
Computer Associates, a major software developer, had no comment on Computer Sciences’ disclosures.
In New York Stock Exchange trading Wednesday, Computer Sciences shares fell $2 to close at $105, while Computer Associates shares gained $1.44 to end the day at $47.56.
Strong international growth, opportunities in new markets, lower tax rates and the possibility of acquisitions all contributed to CSC’s upbeat forecast, said company spokesman Bruce Plowman.
Computer Sciences also told analysts that it is close to winning big contracts with banks and other blue-chip firms.
“We have won or implemented $6.7 billion in large outsourcing contracts over the past 12 months, and our new business development pipeline is full,” Level said.
Still, it is not price but a court hearing in 11 days in Nevada that will have a greater impact on CA’s ability to persuade Computer Sciences’ shareholders to back the deal and force CSC management to the negotiating table, analysts said.
On March 16, U.S. District Judge Lloyd George will hear arguments from Computer Associates that he should invalidate CSC’s anti-takeover measures designed to make it more difficult for shareholders to vote on the CA bid.
CA wants the judge to strike a provision that would require a 90% majority of CSC shareholders to remove or change the company’s board of directors, along with other measures that would delay a vote.
A decision is expected within days of the hearing.
“If they massively lose in court on the 16th, then they’re gone,” said Robert Johnson, an analyst with ABN AMRO in Chicago.
Charles Wang, chairman and chief executive of Computer Associates, and Sanjay Kumar, CA’s president, have acknowledged recently that their takeover bid would be difficult to pursue if the Nevada court rules against them.
