Even as Computer Sciences Corp. continues its recovery from an accounting scandal that will cost it at least $600 million, it is moving ahead with another significant acquisition.
This time the El Segundo-based information technology company has set its sights on First Consulting Inc., a Long Beach information technology and consulting firm that should help boost Computer Sciences’ health care practice.
The $365 million deal, announced late last month, is among a series of aggressive moves taken by Computer Sciences to help it compete in the growing but hotly competitive global IT services sector even as it lost its longtime Chief Executive Van Honeycutt just last June amid its accounting problems.
The company competes with Electronic Data Systems, Accenture and IBM Global Services. It has 87,000 employees in 92 countries but is trying to lower its cost base with additional overseas talent.
The company in July brought its India employee headcount to 14,000 with its $1.3 billion acquisition of Covansys, a Michigan-based vendor that specializes in low-cost outsourcing services. First Consulting, which has 2,500 employees worldwide, would give Computer Sciences an additional 600 employees in India and an additional 580 in Vietnam.
Deward Watts, Computer Sciences vice president in charge of global health solutions, said First Consulting’s India workforce is particularly valuable because it can be deployed to service clients around the world as well as in India, where the company wants to grow.
“First Consulting aligns very nicely with our vertical strategy,” said Watts, referring to Computer Sciences’ efforts to deepen its expertise in targeted industries, including health care, aerospace-defense and financial services
First Consulting offers a wide array of services. It has proprietary database management software, for example, that helps track medical trials for drug and pharmaceutical firms. It also consults with hospitals on information technology issues.
But the company has been a sluggish performer in recent years and took a big hit in April when the University of Pennsylvania Health System declined to renew an outsourcing contract that brought in close to $27 million in annual sales.
However, First Consulting’s expertise should assist Computer Sciences, which recently took on a $3.7 billion project to overhaul the computer system serving United Kingdom’s National Health Service agency.
And Watts noted that First Consulting’s valuable proprietary content management and other software should be in strong demand as the health care industry looks to technology and information systems to cut costs.
So far several Wall Street analysts are giving the thumbs up to the deal. George Price, an analyst with Stifel, Nicolaus & Co., told investors in a research note that it’s “a logical tuck-in acquisition for Computer Sciences” in a health care market that still “holds promise for IT spending.”
Computer Sciences’ $13 a share offer reflected a 30 percent premium from First Consulting’s share price the day before the Oct. 31 announcement. Despite the premium, the deal has prompted at least one shareholder lawsuit alleging First Consulting management should have held out for a better offer.
The company said the suit is without merit. And considering that First Consulting’s share price continues to hover close to Computer’s Science’s bid, it appears Wall Street also expects the deal to close in the first quarter, following a federal anti-trust review and vote by First Consulting shareholders.
Accounting Overhang
Less certain is the outcome of Computer Sciences’ efforts to recover from its own accounting scandal through an initiative it has dubbed Project Accelerate. It has been unwilling to publicly discuss the initiative, aside from briefing Wall Street analysts.
Bryan Keane at Credit Suisse Securities LLC recently told his clients that the company was about halfway though the restructuring program, designed to improve operating margins and free cash flow while shifting its employee base overseas. He expects Computer Sciences will achieve $300 million in cost savings by the end of its 2008 fiscal year, which ends in March.
The company will need those savings as it recovers from the accounting debacle, which forced the company to restate at least a decade’s worth of financial statements. The controversy was seen as contributing to the early retirement of Honeycutt.
While the company has been under fire for past executive stock option practices, management blamed the restatements on errors relating to its accounting for income taxes and for the effect of foreign currency exchange rate movements. In all, there is likely to be at least $600 million in charges to earnings for the fiscal years 1997 to 2007.
After an internal review, the company said accounting for options backdating practices was specifically going to cost $60 million. (The company concluded that its executives did not intentionally backdate their options grants to maximize returns.)
The company’s stock has lagged as a result of the uncertainty over the restatements, which has delayed the filing of any financial statement since the end of the 2006-2007 fiscal year on March 30. And even those figures were nothing to excite investors.
The company reported annual net income of $389 million, down 26 percent for the year, on relatively flat revenue of $15 billion. Shares, trading at $52.84 as of Nov. 14, are up less than 2 percent from the beginning of the year.
“Company restatements have slowed down Computer Sciences’ momentum,” said Credit Suisse’s Keane, though he notes that the company’s fundamentals are improving, with stronger organic growth through new contracts and expanding operating margins.
In its second quarter, the company said it has signed 123 government contracts, mostly with the Department of Defense, worth as much as $1.1 billion.
