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CA in software mega-deal
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February 14, 2000: 4:52 p.m. ET
Business software firm to buy Sterling Software for $4 billion in stock
By Staff Writer David Kleinbard
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NEW YORK (CNNfn) - Business software giant Computer Associates International added to its recent string of acquisitions by agreeing to purchase Sterling Software Inc. for $4 billion in stock in what the two companies described as the largest acquisition in the history of the software industry.
The agreement, which has been approved by both companies' boards of directors, calls for Computer Associates to offer 0.5634 shares of its stock for each Sterling share. The transaction is valued at about $39.50 per Sterling share, based on the average closing price of Computer Associates stock over the previous 10 days. The agreement caps the dollar amount of Computer Associates' stock that Sterling shareholders can receive at $43.45
Julie Kupp, the investor relation's spokesperson for Sterling, said that the two companies have not yet determined what will occur to Sterling's top management, including Sterling Williams, or whether there will be layoffs at the Dallas-based company.
Both Computer Associates and Sterling have been acquisitive software firms. Computer Associates completed its $3.5 billion acquisition of competitor Platinum Technology last June. That transaction held the previous record for largest software deal. Sterling has made more than 30 acquisitions since it was founded in 1981 by its current president and CEO, Sterling L. Williams. Computer Associates also acquired Cheyenne Software for $1.2 billion, Legent for $1.8 billion, and Uccel for $808 million.
Sterling (SSW: Research, Estimates) makes business software for data storage management, systems management, applications development, and business intelligence and also engages in consulting for the federal government.
Computer Associates (CA: Research, Estimates), based in Islandia, New York, sells a broad range of enterprise systems management, storage management, and database software to corporate customers.
Systems management consists of back office software to manage large data center operations, including software to back up databases. Business intelligence tools give computer users the ability to access, combine, and analyze information from a wide variety of sources.
In early afternoon trading, Computer Associates' stock was down 3/4 at 69, and Sterling's stock was up 1 3/4 at 36 3/16.
Securities analysts and money managers said that Computer Associates is buying Sterling at a bargain price.
"I'm a little surprised at how low the valuation is," said William Schaff, the chief investment officer at Bay Isle Financial Corp. in San Francisco, who also manages the Berger Information Technology Fund. "The cap at $43 per Sterling share is too low, given that Sterling was expected to earn $2.40 to $2.50 per share next year." Schaff's funds own about 250,000 Sterling shares.
"We feel that historically we have been undervalued and under-appreciated," said Sterling's Williams.
In its fiscal first quarter ended Dec. 31, Sterling's revenue increased 19 percent to $207 million from $174.5 million in the first quarter of 1999. The company's first-quarter operating profit increased by 26 percent to $40.7 million, up from $32.4 million. Sterling has reported 45 consecutive quarters of revenue and earnings per share growth.
Analysts expect the transaction to add much more to Computer Associates' revenues than to its earnings. Damian Rinaldi, an analyst at First Albany Corp., forecasts that the purchase will add 10 cents per share to Computer Associates' earnings in fiscal 2001; Rinaldi had forecast that Computer Associates would earn $3.73 per share that year before today's deal was announced. More importantly, Sterling will add about $1 billion in revenue to Computer Associates' $8 billion this fiscal year, Rinaldi said.
Analysts say that Computer Associates probably will not encounter opposition from the Justice Department's anti-trust division because its business has relatively little overlap with Sterling's.
"The two companies are more complementary than competitive," Rinaldi said. "There is not a tremendous overlap in their products, and Sterling is much more of a mainframe-oriented company."
On a conference call today, executives from Sterling and Computer Associates emphasized that the merged company would be a dominant force in data storage software. Sterling is a leader in software for data storage on disk drives, while Computer Associates is strong in tape drive storage software.
"We are extremely focused on being the leading provider in storage and network management, business intelligence and portal solutions, and in the design, deployment, and integration of enterprise applications," said Sanjay Kumar, Computer Associates' president and chief operating officer.
The stocks of competing makers of data storage software declined after the Sterling acquisition was announced. In mid-afternoon trading, Rational Software (RATL: Research, Estimates) was down 3 3/8 at 65 1/2, Veritas (VRTS: Research, Estimates) was off 6 7/8 at 165 5/8, and Legato Systems (LGTO: Research, Estimates) was down 1 5/16 at 33 3/8.
Computer Associates' Kumar said that the Sterling purchase will help his company become a one-stop shopping source for business software. Computer Associates plans to integrate its Jasmine database software with Sterling's COOL suite of products. Computer Associates is best known for its Unicenter TNG software, which enables organizations to visualize and control their entire information technology infrastructure, including applications, databases, systems, and networks. 
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