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CSC rejects hostile bid
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February 19, 1998: 8:27 p.m. ET
Company soundly rejects $9.8 billion hostile bid, CA vows to press on
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NEW YORK (CNNfn) - Computer Sciences Corp. Thursday rejected Computer Associates International Inc.'s $9.8 billion offer and vowed to use every legal means necessary to defeat the hostile takeover.
In a forceful letter Computer Sciences said a takeover would lead to a lower credit rating, numerous employee defections and a parade of customer cancellations.
"We are always prepared to give serious consideration to strategic options which fairly reflect the value of our corporation and which make business sense," Computer Sciences Chairman Van Honeycutt said to Computer Associates Chairman Charles Wang.
"Clearly, your offer does neither. Charles, we respectfully suggest that you withdraw your offer immediately and move on."
Computer Sciences writes custom computer programs for government agencies and large companies. The company also operates those systems on its own bank of computers, a business that is quickly growing and highly lucrative.
Computer Associates, which specializes in computer system software used by large companies, would like to use Computer Sciences as another sales tool for its software products, allowing the company to compete with giants such as IBM Corp.
The rejection marks the latest salvo in what is quickly becoming one of the nastiest takeover battles in the technology industry.
Last week, Computer Associates, which has been trying to negotiate a friendly deal with Computer Sciences for more than two months, went public with its offer to acquire the company at about $114 a share. However, when Computer Sciences failed to embrace the offer, Computer Associates responded by launching a formal tender offer at $108 a share, arguing that the lower price reflected the additional expense it would likely incur to mount a hostile campaign.
In a statement, Computer Associates vowed to press ahead, adding the company modified its Hart-Scott Rodino notification in order to shorten the waiting period under antitrust law to 15 days. The company also identified 15 nominees for Computer Sciences board, including Wang, Sanjay Kumar, its president and chief operating officer, and Russell Artzt, its chief financial officer.
Industry experts said Computer Sciences, by rejecting the bid so forcefully, may be hoping to attract a friendly suitor, or "white knight". However, they said such a move is risky.
"They've been saying that they didn't want any part in this, and I don't think anyone has taken them seriously, and now they've said it unequivocally that they don't want to be bought out," said Harvey Saferstein, an antitrust attorney at Chadbourne & Parke.
"I think the problem is that there doesn't seem to be, at least from what we see in the press, much of a chance for a white knight coming around," he added. "So they may have to tough this one out. And it's not clear that there's an antitrust defense for this one."
Among the companies mentioned as possible friendly suitors are AT&T Corp. (T), IBM, (IBM) and Hewlett Packard Co. (HWP). All three companies have declined to comment on whether they would be interested in a merger with Computer Sciences.
Computer Sciences has already taken several steps to try to keep Computer Associates at bay, including changing its bylaws to prevent a shareholder with more than a 20 percent stake from calling an early meeting of the shareholders and creating a rich severance plan for 17 of its top officials.
In addition, the company disclosed in a filing to regulators Thursday that it raised the percentage needed for approval of a shareholder vote to 90 percent from 50 percent.
Earlier this week, Computer Associates asked a Nevada court to declare that it only needs two-thirds of Computer Sciences shareholders to vote for a new slate of directors.
Experts say Computer Sciences could also enact a defensive mechanism known as poison pill provision, a move which would make an unfriendly takeover much more expensive. On Thursday, the company said it plans to distribute a dividend of one preferred stock purchase right for each share of CSC's common stock, setting the stage for a possible poison pill defense.
For now, Wall Street is still trying to determine which side will get the upper hand.
Computer Associates shares rose to 1/16 to 47-1/16 while Computer Sciences dropped 5-3/4 to 103-1/2.
In outlining its case against the takeover, Computer Sciences said more than 25 percent of its projected fiscal 1999 revenues are derived from contracts that contain provisions that allows customers to opt out if Computer Sciences changes hands.
"We have already been notified by a number of such clients that they will either exercise such provisions or curtail or reduce the flow of new business to CSC should a CA takeover occur," the company said.
-- By staff writer Jamey Keaten
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