Wednesday, 30 March 2011

CSC/iSoft - How the accounting for this deal could get CSC out of an earnings hole this fiscal year .........and next

According to an article in "The Australian" CSC could buy iSoft for $300million this week.

"Dream ends for iSoft with $300m buyout | The Australian"

CSC will move heaven and earth to get this deal completed before its fiscal year ends on Saturday April, 2, as it could solve their problems regarding the earnings of this quarter and of future quarters.

Here's why:

CSC is in trouble with the NHS program. As reported by Cassandra on March 27, they missed a significant milestone this month, which must impact its profits. It is a fair assumption that one of the reasons CSC dropped its earnings forecast for this quarter in February was the expectation of more problems and costs with NHS.

But if they buy iSoft, CSC can deem that these NHS problems are due to iSoft and its software product, not due to CSC shortcomings. So on acquiring iSoft, look out for CSC putting a big provision in iSoft's accounts for present and future losses on the NHS project. How big will the provision be? As big as the auditors will allow. But by accounting for the costs and losses in this way, it does not touch CSC's profit at all. Magic isn't it? Instead, it increases CSC's "goodwill", which is an intangible asset on the balance sheet representing the difference between the net book value of iSoft's assets at the time of acquisitionb by CSC and what CSC paid for iSoft. And by putting in more and more provisions for future losses, you reduce the value of iSoft's net assets, thus you increase CSC's "goodwill" , and reduce the amount which will be charged against CSC's profits. Intangible assets, of course, are ....well.....intangible..Meaning you can't touch them or move them. Like beauty, they only exist in the eye of the beholder. And it certainly does not mean iSoft is worth more.

Everyone will be happy with this piece of accounting magic. It will make no difference to the price the iSoft shareholders receive from CSC. It will make no difference to their joint customer, NHS, who will remain just as unhappy as before. It will make no difference to the overall NHS project which will remain a mess. But it could increase CSC's profit significantly, just by keeping costs out of the Profit and loss account and putting them on the balance sheet as an intangible asset instead...which is what CSC tried to do in Nordics 12 months ago. So Mr Laphen will be able to tell shareholders and market analysts how he has managed to improve the company's profitability.

So if it acquires iSoft, look carefully at CSC's goodwill account when they publish their year-end financial statements. One stroke of an accountant's pen could make more difference to CSC's profit than all the work and value-added by all the work done for customers in many of its businesses. But while this accounting magic may change the reported profit, it will not change the dismal reality of the business situation at all.

Posted by Littlejohn,

Sunday, 27 March 2011

iSoft goes to the wall - CSC Next?

iSoft the under performing health care software company has put it self up for sale. We warned some time ago that this company would fail because its product is not fit for purpose. See earlier posts published two years ago for details.

Now much wiser critics than Cassandra have woken up to the iSoft problem. See The Guardian News Edge for information.

If CSC, the failing IT Services company were to buy iSoft this would leave the UK NHS with a single supplier with a strangle hold on the worlds largest, and failing (see below), IT project.

Does Andrew Lansley have the balls to sort this out? He's been in past for nearly a year and has let this mess continue. How will he deal with the inevitable 'contract renegotiations' that will almost certainly occur soon?

Guardian article follows:-

NHS supplier iSoft suspends shares and puts itself up for sale
(Guardian Web Via Acquire Media NewsEdge) Troubled healthcare software firm iSoft, a major supplier to the government's crisis-stricken £12.7bn overhaul of the NHS's IT systems, has suspended its shares and put itself up for sale.
Story continues below ↓

The company has for years struggled to meet agreed delivery targets to replace near-obsolete systems together with its NHS supplier partner Computer Sciences Corporation (CSC).

Virginia-based CSC, listed in New York with a market value of $7.5bn (£4.6bn), is now regarded as the most likely buyer for iSoft given their contractual ties across the Midlands, east and north of England, particularly in relation to the software group's controversial next-generation Lorenzo platform.

That would make CSC one of the biggest operators of hospital computer systems in the NHS, taking over about 70 acute hospital operations as well as a large part of the community healthcare IT market.

CSC and subcontractor iSoft were set a deadline of this month by which to install Lorenzo at Pennine Acute Hospital Trust before they would receive already delayed milestone payments from the Department of Health.

That deadline has been missed and healthcare officials are refusing to sign a long-awaited contract renegotiation with CSC as a result. CSC is expected to give fuller details of any losses from its work with the NHS following its financial year-end next month.

In 2003 CSC became one of the largest contractors to the NHS's ambitious IT programme, which was set in train under Tony Blair and is said to be the largest non-military IT project in the world. The US firm has three long-term regional contracts, each worth £1bn, but each have had major problems, some of which have been blamed on delays in software development by iSoft.

The Australian software company was previously called IBA Healthcare, but changed its name after it acquired failing UK firm iSoft in 2007. The latest iSoft incarnation today requested its shares be suspended on the Australian stock exchange.

What are the minders of the CSC store minders doing?

Are CSC's non-executive directors doing their job?

Are CSC’s non-executives looking out for the interests of the shareholders, which is what they should be doing, particularly when the company is struggling? Or are they just going along with whatever the CSC executives want?

Look at what has happened in CSC in some of the major areas of responsibility of the non-executive directors’:

• Strategy: Non-executive directors should constructively challenge and contribute to the development of strategy.
What is CSC's strategy? CSC insiders may know, but it is not clear to the outside world. And whatever CSC’s strategy is, the results over the past 3 or 4 years suggest it has not been successful. So what are the non-execs doing about it?
Why does cost reduction seem to be CSC management’s major focus area? Is it because they do not know how to grow the business so have retreated to their comfort zone of expense cutting? Cost cutting will not buy CSC success, but it can buy time to fix operating problems and revitalize the revenue generation machine. Today CSC’s problems seem to be increasing and the revenue generation is still stalled. Why does CSC use its cash on ill-advised stock buybacks rather than investing in the business? In short, does CSC have a direction?
(By the way, would CSC tell the shareholders the financial loss incurred on these buybacks compared to the current share price of circa $49?).

• Performance: Non-executive directors should scrutinize the performance of management in meeting agreed goals and objectives .
Looking at CSC's performance over the past 5 years, it is inconceivable that they have met their objectives and financial targets. The financial results have been consistently disappointing, particularly the revenue. So what are the non-executive directors doing about this problem? CSC management tell shareholders and employees that the disappointing results are due to external factors, one-off problem projects, market softness and individual rogue executives in Nordic who invent $80million of non-existent profits before the CSC management notices it. Do the CSC non-executive directors really believe this? Do they not wonder why such problems appear to be more acute in CSC than in its competitors? Do they not notice that there is no improvement in the trends? Do they ever think that current CSC executive management might also be part of the problem?

• Risk: Non-executive directors should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust and defensible.
The Nordic accounting problem demonstrates that the financial controls were not sufficiently robust and thus the financial information was certainly not accurate. It begs the question of the extent to which these problems are related to CSC's apparent inability to retain senior finance staff in Europe. Or maybe related to its decision 3 or 4 years ago to run down the European finance function? Have the non-executives tried to get a first-hand view of the underlying causes of what happened in Nordic? Have they spoken directly to any of the former employees directly involved in the matter? Have they directly investigated this failure of CSC’s Corporate governance and demanded to know why CSC’s finance organization did not notice anything was wrong until the problem reached $80m? The Corporate governance problem is very concerning. With such weak financial controls, how can one be sure there are no similar Nordic-like accounting issues elsewhere in CSC which have not been discovered?.

• People: Non-executive directors are responsible for determining appropriate levels of remuneration of executive directors.
The judgement of the non-executives must be strongly questioned here. When Mr Laphen assumed his CEO role in July 2007, his annual remuneration was $4.5million. CSC stock price reached $60 per share that month. Today the share price hovers around $48, giving a loss of some 20% for the shareholders over that period. But Mr Laphen did not take a 20% reduction in pay to mirror the losses borne by the shareholders. His remuneration for 2010 was $15.5million (source:, an increase of 240% compared to 2007!
Does this seem sensible and right to the shareholder who has suffered a 20% loss? Does this motivate and energize the CSC employees who have experienced pay cuts, pay freezes and cancellation of their bonuses “to maintain the company’s profitability?” The top management of a company should lead by example, not by applying different standards for their own benefit. Why did the non-executive directors not make Mr Laphen apply to himself what he applied to the organization?

In summary, there must be strong doubts about CSC’s plans, strategy and performance. As noted above, there are significant challenges in all the areas the non-executive directors should focus on. So are they doing their job and developing Plan B? Or are they just rubber-stamping the decisions and actions of the CSC executives? Time will tell, but with few performance improvements in sight how much time should they be given?

For the record these are directors, average age 64, who seem happy with CSC's pathetic performance:-
Are their own companies performing like this?

Board of Directors
The Board is currently comprised of the following ten directors:

Irving W. Bailey, II
Senior Advisor, since 2005, and Managing Director, from 2001 to 2005, of Chrysalis Ventures, LLC, a private equity fund. Former Chairman and Chief Executive Officer of Providian Corporation, retired as of 1997. Mr. Bailey is also Vice Chairman and a director of AEGON N.V. and a director of Hospira, Inc. He has been a director of CSC since 1992. Age 69.

David J. Barram
Chairman, since 2007, and Chief Executive Officer, from 2006 to 2007, of Mobibucks Corporation, a provider of an alternate payment system and electronic loyalty card and coupon system. Former Administrator of the U.S. General Services Administration, retired as of 2000. He has been a director since 2004. Age 66.

Stephen L. Baum
Former Chairman of Sempra Energy, a publicly held energy-services company, retired as of January 2006. Prior thereto, Chairman and Chief Executive Officer of Sempra Energy from 2000 to 2005, and President from 2000 to 2004. Mr. Baum is also a director of TransAlta Corporation. He has been a director of CSC since 1999. Age 69.

Erik Brynjolfsson
Director of the MIT Center for Digital Business since 2002, the Schussel Family Professor at the MIT Sloan School since 2001, Research Associate at the National Bureau of Economic Research since 2006 and the Chairman of the MIT Sloan Management Review since 2007. He lectures worldwide on technology strategy, productivity and intangible assets. He has been a director since 2010. Age 48.

Rodney F. Chase
Chairman, since 2005, of Petrofac Ltd., a provider of facilities solutions to the oil and gas industry. Senior Advisor, since 2003, to Lehman Brothers, an investment bank. Former Deputy Group Chief Executive and Managing Director, from 1992 to 2003, of BP p.l.c., an oil and gas company. Mr. Chase is also Deputy Chairman of Tesco p.l.c. and a director of Nalco Company and Tesoro Corporation. He has been a director of CSC since 2001. Age 67.

Judith R. Haberkorn
Retired President of Consumer Sales and Service, Verizon Communications (formerly Bell Atlantic), provider of broadband, wireline and wireless Communications for business, government and consumers, from 1998 to 2000. Ms. Haberkorn is also the director of Armstrong World Industries, and a Express Jet Holdings. She has been a director of CSC since November 2007. Age 63.

Michael W. Laphen
Chairman of the Company since July 2007, and President and Chief Executive Officer since May 2007. President and Chief Operating Officer from 2003 to May 2007, Corporate Vice President from August 2001 to April 2003, and President of the European Group from August 2000 to March 2003. He has been a director of CSC since February 2007. Age 59.

F. Warren McFarlan
Professor, Harvard University, Graduate School of Business Administration since 1973. T.J. Dermot Dunphy Baker Foundation Professor since 2004. Senior Associate Dean and Director of Harvard's Asia-Pacific Initiative from 2000 to 2004. Professor McFarlan is also a director of Li & Fung Limited and INVESTools Inc. He has been a director of CSC since 1989. Age 72.

Chong Sup Park
Former Chairman and CEO of Maxtor Corporation from November 2004 to May 2006, prior to its acquisition by Seagate Technology, a manufacturer and designer of hard disk drives. Director of Maxtor Corporation from February 1994 to May 2006 and director of Seagate Technology since May 2006. Dr. Park is also a director of Brooks Automation, Inc., Smart Modular Technologies Inc. and Ballard Power Systems Inc. He has been a director of CSC since July 2007. Age 62.

Thomas H. Patrick
Chairman, since 2004, of New Vernon Capital LLC, a private equity fund. Former Executive Vice Chairman, Finance and Administration, from 2002 to 2003, and Executive Vice President and Chief Financial Officer, from 2000 to 2002, of Merrill Lynch & Co., Inc., an investment banking and securities brokerage. Mr. Patrick is also a director of Deere & Company and Baldwin & Lyons, Inc. He has been a director of CSC since 2004. Age 66.

Mike Laphen is our Chairman, President and CEO. The Board has determined that each of the remaining nine directors — Irving Bailey, David Barram, Stephen Baum, Erik Brynjolfsson, Rodney Chase, Warren McFarlan, Judith Haberkorn, Chong Sup Park and Thomas Patrick — are independent, for purposes of CSC's Corporate Governance Guidelines.