By SARA FISHER
Staff Reporter
More than a year after fighting off a hostile takeover attempt by rival Computer Associates, Computer Sciences Corp. again finds itself facing another potential predator.
The El Segundo-based computer services outsourcing and consulting company has landed so many multimillion- and billion-dollar contracts in recent months that it is rumored to have attracted the acquisitive eye of Sun Microsystems Inc.
As speculation spread through the market on May 19, CSC shares shot up by 7 percent, to $64.38. A Sun Microsystems spokesman refused to comment about the rumor, and CSC executives were unavailable for comment last week.
The stock has since fallen back to the low $60 range as analysts expressed skepticism that Sun would make such a move. One even said that he believed the rumors to be fueled by shareholders hoping to galvanize stock value.
“(CSC Chairman and Chief Executive) Van Honeycutt was so forceful in recently arguing that service companies are eroded if acquired by product companies such as Sun Microsystems that the potential of him letting something like this happen is almost nil,” said Lehman Brothers analyst Karl Kierstead.
CSC has also demonstrated that it prefers the role of buyer to that of seller. In May, it bought four small Italian computer services companies and a majority interest in an Austrian information technology consulting firm.
Regardless of whether a takeover bid emerges, CSC presents an attractive target.
The company recently reported a record-high quarterly performance, though it did fall short of the increasingly high Wall Street expectations. Net income for the fourth quarter ended April 2 was $116.8 million (72 cents per share), compared with $80.1 million (50 cents) for the like period a year ago. Revenue was $2.1 billion, up from $1.9 billion.
The increase in net income was disproportionate to the rise in revenue because of a $13.9 million one-time charge in the year-earlier quarter related to the costs of fending off Computer Associates’ unsolicited takeover bid.
CSC announced similarly strong year-end results. Net income was $341.2 million ($2.11), up from $260.4 million in 1998. Revenues were $7.4 billion versus $6.6 billion.
“Computer Sciences has shown very stable growth and a remarkably strong order flow,” said Gary Helmig, an analyst at SoundView Technology Group. “Their (business) pipeline is filling up.”
The company landed $1.6 billion worth of new contracts in the fourth quarter alone, not counting a massive multi-year contract with the Internal Revenue Service it won in December that could total as much as $10 billion. Its next quarter is off to an even better start; CSC has signed new contracts worth billions with Pratt & Whitney, Enron Corp. and Raytheon.
“CSC has great industry expertise, such as in aerospace, which is giving them an edge over (competitors) IBM and EDS,” Kierstead said. “And since they are extremely diverse active in both the U.S. and Europe, the government and commercial sectors, outsourcing and consulting CSC’s revenue stream is predictably consistent.”
The recent spate of acquisitions abroad signals an intention to continue growing on the international front. Revenue from its European, Australian and Asian operations rose by almost 24 percent in the fourth quarter. Analysts expect the revenue from abroad to further escalate, especially as Asian companies continue to regain their footing after their economy’s meltdown last year.
Though its stock is trading at a fairly high price-earnings ratio of 30.2, analysts say CSC is undervalued in terms of other tech service companies and its own future potential.
That, some analysts believe, is because CSC executives led by Honeycutt are not communicative with either investors or Wall Street. The company recently hosted its first-ever conference call with analysts to discuss its latest earnings an unusual reticence for a company with a market value of over $10 billion.
“The stock is not behaving well largely because they have done a less-than-great job of communicating with the Street,” Helmig said. “Their relationship with their investors also needs to improve if they want to adequately explain their story and see their stock rise.”
