Thursday, 17 November 2011

CSC takeover rumors again, but let’s not get excited yet

The Wall St Journal (WSJ) today reported fresh rumors about a possible buy-out of CSC,

The rumors involve private equity institutions as potential acquirers. This may seem like an opportunity from heaven for the long-suffering CSC shareholders, but let’s not get excited yet.  

There were similar rumors a few years ago and CSC is said to have refused bids of around $60 per share in the belief that remaining independent would generate greater shareholder value.

Things are different today. CSC’s market capitalization is only about 40% of what it was when these bids are said to have occurred. The company has a weaker market position than 5 years ago.  It has lost ground in terms of market and technology positioning.  It has become a vanilla-flavored “me too” player, overtaken by many competitors. It has a weak top management team.

A private equity buyer would de-list CSC from the NY Stock Exchange. This could be an excellent move, as it would give CSC the opportunity and breathing space to address the strategic issues it faces without being hampered by the need to publish  quarterly earnings.

But before we get that far, there are two key questions. First, how much would an acquirer be willing to pay for CSC?  The issues noted in the previous paragraph, allied to CSC’s poor financial performance, will have a negative impact on the price.  So we should not expect a large premium over the current share price.

But more important could be the uncertainties surrounding CSC. What will be the outcome of the class action lawsuits? What will be the outcome of the SEC investigations which now include Australia? What will be the outcome of the UK NHS IT discussions? In the US the Federal and Commercial infrastructures are intertwined and relaint on one another. How can a possible suitor unravel these if they intend to break up the company as has been rumoured? What are the prospects of the Public Sector business in the current economic climate?  How many of CSC’s executives are capable of doing what is needed to turn the company round?   Can employee morale and enthusiasm, see  be re-kindled to the levels needed for a successful transformation?   These are uncertainties that could make an acquirer “kick the tires” to use the WSJ expression…. then decide the risks are too great and to withdraw at least until the outcomes of these situations are clearer.

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