Thursday, 15 December 2011

CSC – no takeover as its “fundamentals are failing” and a credit rating downgrade

Jim Kramer’s “Lightning Round” of  December 13 suggested that the hoped-for take-over of CSC won’t happen as its “fundamentals are failing”.   I agree.  The major financial uncertainties surrounding the company (shareholder lawsuits, SEC investigations, customer disputes, NHS etc) would scare off any buyer unless they could acquire at a rock bottom price low enough to cover all of the related risks.  I can’t see the shareholders agreeing to sell at bottom price,  so CSC is likely to remain independent for a while.

Meantime, Morningstar has downgraded its credit rating of CSC by two notches from A- to BBB, its second downgrade this year, citing the high uncertainties, falling margins and a deteriorating cash situation. CSC has issued $500m debt this fiscal year but has $1billion of debt falling due in 2013.

Morningstar points out that CSC has certain advantages, including its long-standing relationships with large clients.  Historically one of CSC’s differentiators was its reputation for reasonableness in its dealings.  It consistently tried to do “the right thing” by clients in handling disagreements and disputes. Bringing in lawyers and quoting the letter of its contract was a last resort rather than an opening gambit. However, reports of its stance in its dispute with the UK NHS suggest that CSC is changing its ethos to a harder approach of “compliance with the letter of the contract”.  If this is correct, CSC’s relations with long-term clients could follow the same downward direction as its relations with many of its employees.  

To the above can be added J P Morgan’s rating of “Five Stocks To Absolutely Avoid” as discussed here in The Street:-

While it is interesting to note that many analysts, who by the way are paid, mega-bucks and have enormous resources and tools at their disposa; for getting their advice right, are finally spotting the “Blindingly Obvious” as per the great sage Basil Fawlty, Cassandra has shown through detailed and in-depth analysis and reporting, see posting in June 2011, that this has been a stock to avoid. However, it is better late than never, as at long last the long suffering investors whether pension holders, or indeed CSC’s 0wn employees who are sitting on value less stock options will perhaps see some action to correct what has been a dire and long lasting situation.

Posted by Long John and Friends

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