By JASON BOOTH
Staff Reporter
It’s one of the 10 largest public companies in Los Angeles, with nearly $6 billion in revenues in a cutting-edge, high-technology industry.
Its services are vital to the operations of the U.S. government and many of the world’s largest conglomerates.
And it’s been in the media spotlight in recent weeks as the subject of a hostile takeover.
Yet for all of that, El Segundo-based Computer Sciences Corp. remains a mystery. Even those who have heard the name might not have a good idea what it actually does.
In a nutshell, the firm makes most of its money analyzing, fixing and running the information technology, or “IT,” systems of major conglomerates and government agencies.
Its main competitors are Electronic Data Systems, Andersen Consulting and IBM’s consulting division.
“Market demand for IT consulting and systems integration is far in excess of what any company can supply,” said Hugh Shytle, an analyst at Cowen & Co. in Boston. Shytle said that the sector is expected to see annual growth in excess of 40 percent in the coming years.
For its third quarter ended Dec. 26, CSC reported net income of $69.1 million (87 cents per share), compared with net income of $57.4 million (73 cents) for the like period a year earlier.
Revenue for the most recent quarter was $1.66 billion vs. $1.42 billion a year earlier.
But the big growth might be yet to come. On March 4, CSC issued a statement forecasting that annual revenues would increase more than 65 percent, to $9.3 billion, by fiscal 2000, while diluted earnings per share would rise more than 120 percent, to $5.55.
It’s that type of growth that New York-based Computer Associates International wanted to tap into by launching its unsuccessful hostile takeover. As a producer of business-related network software, Computer Associates had much to gain by owning a company that specialized in installing software. In fact, CSC has been a major customer of Computer Associates’ software products.
But CSC itself had little to gain from being owned by a software company, said Karl Keirstead, an analyst at Lehman Brothers in New York.
“I don’t think it would have been a good fit at all,” he said. “I felt a lot of sympathy for Computer Sciences.”
Keirstead and other analysts said that the acquisition probably would have reduced CSC’s ability to recommend to clients software not made by Computer Associates. They also said the offer price of $108 grossly undervalued CSC’s long-term growth potential.
Merrill Lynch, for example, currently has a 12-month share-price target of $139 for CSC.
CSC got its start in the late 1950s writing software for NASA and the Jet Propulsion Laboratory. From there it expanded into the government arena.
The IT servicing industry has grown up around the fact that the government and large corporations are increasingly dependent on complex technology. As a result, many firms are discovering that it’s more cost effective to turn over part or all the responsibility for maintaining their IT systems to CSC and its competitors.
When a company has problems with its information technology, CSC will send a consulting team to identify the problem and develop a solution. IT problems can range from electronic mail, to mainframe computers, to Year 2000 compliance.
CSC, which employs 46,000 people worldwide and 1,600 in L.A. County, has an impressive client list that includes Amoco Corp., Merrill Lynch, Coca Cola Co., Siemens AG and the U.S. Department of Defense.
If the client company decides that its IT systems need the full-time care of CSC professionals, there is outsourcing.
In such cases, CSC will purchase all or part of the firm’s IT assets, including related employees, and operate them for the firm under a long-term contract often saving money for the client in the process.
Currently, CSC’s largest outsourcing customer is du Pont E.I.. In a deal worth $3.5 billion over a 10-year period, CSC is responsible for more than half of du Pont’s IT applications, governing such departments as agriculture, human resources, payroll and finance.
The firm also has multibillion-dollar outsourcing deals with General Dynamics Corp., insurance giant CNA Financial Corp. and J.P. Morgan & Co.
In 1997, outsourcing and consulting each accounted for a little over 40 percent of CSC’s revenues worldwide, while system integration contributed about 20 percent.
During the takeover fight with Computer Associates, much was made of CSC’s extensive contracts with the federal government and in particular with the Department of Defense.
As part of its defense strategy, CSC argued that because Computer Associates is partly owned by a Swiss investor, the acquisition could threaten CSC’s security clearance.
However, CSC’s reliance on federal business has been decreasing steadily for more than a decade and now accounts for less than 30 percent of CSC’s revenues, compared with about 80 percent as recently as 1986, said Bob Plowman, CSC’s vice president of marketing.
The transition resulted more from the phenomenal growth of the firm’s commercial divisions than an effort to reduce business with the government, Plowman said. Since 1986, revenues generated from CSC’s commercial business have risen from $120 million in 1996 to more than $5 billion in fiscal 1997. Revenue from government work has grown at a steady average of around 12 percent annually over the same period.
Despite its decreased profile, government work will always be an important part of CSC’s business, Plowman and analysts said.
“They will never leave the government franchise, it is their heritage,” Keirstead said.
