CSC puts out the ‘for sale’ sign

Computer Sciences Corp.’s recent acknowledgment that the company might be acquired closed one avenue of speculation but opened numerous others.

Takeover rumors that first surfaced in November 2005 suggested that the $14 billion integration and outsourcing vendor was in play. CSC initially remained mum on the subject, but earlier this month, company officials said the board would consider selling CSC in light of expressions of interest from parties that they didn’t identify. Now speculation has shifted to the structure of a possible sale and its effect on customers, rivals and business partners.

CSC carefully noted that its willingness to consider its options does not mean that any such transaction is certain. But the mere possibility is enough to have partners, competitors, analysts and customers pondering the ramifications.

The acquisition of CSC would significantly reshape the information technology services market, some analysts say.

“CSC is so large. They have a global delivery capability that very few companies in their space have,” said Andy Efstathiou, research director at NelsonHall, a market research firm that follows the outsourcing market.

If a competitor purchased CSC, the roster of IT services firms with a global delivery presence would narrow significantly, Efstathiou said. Along with CSC, Hewlett-Packard, IBM and EDS are among the relatively few companies with that kind of reach, he said.

General Dynamics’ agreement last year to purchase Anteon was another indication of a shrinking top tier among integrators. Anteon, which has grown rapidly in recent years, topped the $1 billion mark in 2003.

“Anteon was migrating up, but then [it] got swallowed,” said Mark Amtower, founding partner of Amtower and Co., a federal marketing consulting firm.

The General Dynamics/Anteon deal is expected to close by the end of June.

Although government buyers may see fewer choices and less competition at the high end of the market, the customer impact should otherwise prove minimal, industry watchers say. A buyer can take over contracts held by the acquired firm through a process called novation, said Ray Bjorklund, senior vice president and chief knowledge officer at Federal Sources. That suggests that agencies receiving CSC services at the time of an acquisition probably will not see much difference in the ongoing work.

CSC seemingly has little reason to sell, but Efstathiou said the company’s management may have a fiduciary responsibility to explore all options because several firms have tried to interest the board in talking about a deal.

An acquisition could have a much greater effect on CSC’s peers than on its customers, but much depends on the specifics of any acquisition scenario that unfolds.

Scenario 1: Large integrator buys CSC
The combination of CSC and another large integrator could create an enormous force in the federal IT services market. When speculation of a possible sale began last November, many observers envisioned this juggernaut scenario. A group of equity investors was to buy CSC’s commercial business, while Lockheed Martin was to purchase the company’s government side, according to published reports.

A Lockheed Martin/CSC union would have about $10 billion in annual government IT services revenue.

Scenario 2: Buyer provides products
Large IT product and service providers are also said to be interested in CSC. The speculation focused on HP in January and, more recently, on IBM. Representatives from both companies declined to comment.

Efstathiou said an acquirer such as IBM or HP would likely look to rationalize operations to lower the cost of service delivery.

From the competitive standpoint, HP would have the most to gain in acquiring CSC’s services capability, industry analysts said. Efstathiou said HP has done less outsourcing and systems integration work than other potential suitors.

“They have the size to leverage CSC’s capabilities more than most other possible suitors, and they have less overlap than other large suitors,” he said of HP.

Scenario 3: Buyer breaks up CSC
In another scenario, the buyer would break up CSC and establish the company’s government business as a separate entity.

Such a spinoff effort “would give even the large integrators a reason to pause and reflect on the potential competitive edge a smaller CSC might have,” Bjorklund said. A government-only company would have about $4.7 billion in revenue, based on CSC’s results in fiscal 2005.

A remnant of CSC strictly focused on government could become a more aggressive competitor because its managers would not have to deal with anything else, Bjorklund said. “They could be very, very focused.”