Firm Drops $9.8-Billion Quest for CSC

Faced with resolute intransigence on the part of Computer Sciences Corp., Computer Associates International on Thursday effectively dropped its $9.8-billion hostile bid to acquire the much larger computer services and consulting firm.

Computer Sciences’ stock promptly tumbled $11 in New York Stock Exchange trading Thursday, but its $94 closing price was still above the $92.19 it had been the day before Computer Associates unveiled its offer three weeks ago. Shares in Computer Associates rose $1.38 to end at $48.94 on the same exchange, as investors rewarded the company for avoiding an expensive and drawn-out battle, analysts said.

Analysts said both companies could return to business as usual without having to make any significant changes in their strategies. Computer Sciences’ shareholders can expect to see their stock rise back to the neighborhood of Computer Associates’ offering price within a year, they said.

In a letter to CSC Chairman, President and Chief Executive Van Honeycutt, Computer Associates Chairman and Chief Executive Charles Wang said he would let his $108-per-share tender offer expire on March 16 rather than continue his campaign to give CSC shareholders a chance to vote on the proposed deal. In bowing out, Wang told analysts that a prolonged battle would harm both companies, their shareholders and the information technology industry in general.

“I am simply unwilling to let this happen,” Wang said. “Unless there are significant changes in the landscape, we will not extend our $108-per-share tender offer.”

But at Computer Sciences’ headquarters in El Segundo, executives felt it would be premature to celebrate. The company called on Computer Associates to “immediately terminate its tender offer and stockholder solicitation activities in order to eliminate any uncertainty as to [Computer Associates’] intentions.”

In an interview, Wang said he couldn’t foresee a scenario in which Computer Associates, an Islandia, N.Y.-based software developer, would revive its bid. But the firm’s general counsel, Steve Woghin, said the company hasn’t made any plans to drop its lawsuit to invalidate CSC’s anti-takeover provisions. A hearing on the matter is scheduled for March 16 in Nevada.

“In between now and March 16, there are events that could occur that would want us to proceed,” Woghin said.

Despite the ambiguity, Wall Street viewed the deal as dead.

“It’s about time it went away and died its own quiet death,” said Stephen McClellan, a Merrill Lynch analyst in San Francisco who expects CSC’s stock to level out around $105. “Computer Associates obviously saw the light. It was looming as a hugely destructive and self-defeating hostile deal.”

Analysts said Computer Sciences will not have to find another merger partner or consider any spinoffs--two possibilities the company had considered to thwart a Computer Associates takeover. However, they expect the company to become more forthcoming than it has in the past with earnings forecasts and other business news.

“The best takeover defense they have is that it would cost $10 billion to buy them,” said John Puricelli, an analyst with A.G. Edwards in St. Louis, who expects CSC’s stock to trade in the $112-to-$115 range a year from now. “I think they understand the need to be a little higher profile because that does help the stock value.”

Wang said Computer Associates would probably continue to build its own consulting unit internally and then augment it with a series of smaller, non-dilutive acquisitions over the next two years instead of going after another large target. Analysts generally applauded that strategy.

“It’s not like they were in dire need of making a major change and it’s not a company in distress by any standards,” said Bruce Raabe, senior equity analyst with Collins & Co. in San Francisco.

“They could really grow on their own, and it might be a little bit cheaper for shareholders” to buy several smaller companies, added Neil Cooper, senior research analyst for Cruttendon Roth in Irvine.

Hostile takeover battles usually turn acrimonious, and the Computer Associates-CSC battle featured flatly contradictory statements that left both camps implicitly accusing each other of lying. But Wang took the rhetoric to a new level by accusing Computer Sciences of using racist tactics to scuttle the merger.

Computer Sciences counts among its customers the Central Intelligence Agency, the National Security Agency and other members of the federal government’s intelligence community. The company questioned whether intelligence officials would approve of a merger that put CSC under the control of a company with extensive foreign ties. Wang, a Shanghai native, has been an aggressive promoter of business development in China. In addition, Swiss billionaire Walter Haefner owns 23% of Computer Associates’ stock.

“There has been a tremendous amount of mudslinging and even some with racial overtones that question [Computer Associates’] loyalty as a trustworthy government contractor, and all this because my family had immigrated to this country from China 45 years ago,” Wang said.

However, he refused to identify any specific statements or allegations that he considered to be racist. “I’d just like to end it, not prolong it,” he said after repeated questioning from reporters.

Computer Sciences spokesman Bruce Plowman denied any racist motives in exploring Computer Associates’ ties to foreigners.

“We don’t understand that,” Plowman said. “They’ve got a 23% Swiss investor, and there is also concern about Charles’ extensive activities in China. But if it had been Bill Gates, it wouldn’t have been any different. If that’s interpreted as racism--well, it certainly wasn’t.”