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Technology Stocks : Y2K (Year 2000) Stocks: An Investment Discussion
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To: Runner who wrote (9461)2/12/1998 2:56:00 AM
From: Hardware Heister  Read Replies (2) of 13949
 
I can't say I agree with their analysis on why CA is interested in CSC, but it's interesting reading nonetheless.

From the Motley Fool site:


CSC Receives Uninvited Bid

Computer Sciences Corp. (NYSE: CSC) gained $13 5/16 to $105 1/2 after receiving an uninvited bid to be acquired by enterprise software concern Computer Associates International (NYSE: CA) for $108 per share in cash. Because the acquisition offer was unsolicited and because Computer Associates has left the door open to a higher valuation, market players bid Computer Sciences above the offer price this morning. Investors figure Computer Sciences may exact better terms from the Computer Associates board or that another company may come in to make a better offer.

As we outlined in last week's industry snapshot, the large software and systems integration and consulting companies are the companies that will benefit the most from the whole Year 2000 (Y2K) problem. There are two reasons for this. First, the Y2K problem is a labor-intensive coding job that lends itself well to companies with huge data center resources and institutional strength. The ten-year cash flow models for the silver-bullet software companies such as Data Dimensions (Nasdaq: DDIM), Zitel (Nasdaq: ZITL), and Viasoft (Nasdaq: VIAS) look like a butte on a flat plain and thus offer a ton of risk. Once the Year 2000 problem goes away a couple years into the next millenium, companies such as Computer Sciences and Electronic Data Systems (NYSE: EDS) will still be around as highly viable companies. The same thing can't be reliably said for the hot Y2K companies. Second, the Y2K problem opens up a huge opportunity for the large systems and software companies to grab market share.

When an EDS or Computer Sciences, or smaller companies such as Computer Task Group (AMEX: TSK) or Computer Horizons (Nasdaq: CHRZ) come into a company to do a Y2K remediation job, it's also a huge marketing opportunity for their outsourcing capabilities. Computer Sciences and EDS will walk away from such jobs with new contracts and market share. The Y2K problem isn't the only reason Computer Associates wants Computer Sciences, but the earnings windfall that comes about from the problem does increase the attractiveness of the companies. Think of them as a bond with a couple years of spiked up coupon payments -- the Y2K bug spikes the value of the bond. At 25.6 times earnings (backing out restructuring charges and one-time items), EDS still offers investors an opportunity to acquire a company similar to Computer Sciences but at a 25% discount to the initial valuation that Computer Associates has offered for Computer Sciences. It's not just the immediate Y2K problem that Computer Associates is looking at, because it is willing to wait out a few years of earnings dilution to do the deal. However, the long-term benefits of owning Computer Sciences are augmented by the immediate opportunities with the Y2K bug. EDS gained $1 3/4 to $43 15/16 on this morning's news.

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