November 15, 2011 1:33 pm
This article is provided to FT.com readers by dealReporter—a news service focused on providing insightful intelligence on event driven situations to investors. www.dealreporter.com
Computer Sciences (NYSE:CSC) is already busy dealing with a multitude of issues, but the company may have to add an activist investor to its list, dealReporter reports.
Over the last few weeks, two industry bankers said they have picked up on chatter that there is mounting interest in the investment community to put pressure on the Falls Church, Virginia-based technology services firm.
The first banker said he heard market rumors that Bill Ackman of Pershing Square Capital Management may be looking to get involved. The same banker said he also heard the activist may be reaching out to top tier financial sponsors, like Blackstone, TPG, KKR and The Carlyle Group, to gauge the leveraged buyout crowd’s interest in a potential transaction. Other bankers said they had not heard the Ackman rumor.
A Pershing Square spokesperson declined to comment. A CSC spokesperson said in an emailed statement that it is against company policy to comment on market rumors and speculation. TPG declined comment. Blackstone, KKR and Carlyle were not immediately available for comment.
“Today’s chatter is that there are attempts to push the board to consider a broader review of businesses,” said the second industry banker last week. This banker did not identify parties behind possible activist action and he said he doubts the firm will pursue such a review.
The second banker said it was his understanding that CSC is being pressured by a few shareholders and board members to consider a strategic review on the back of continuous margin squeeze, an SEC investigation which was disclosed earlier this year, and pressure related to potential Department of Defense budget cuts.
A third industry banker claimed CSC is currently having a variety of internal discussions regarding restructuring. The same banker said no decision had yet been made.
On 9 November, CSC announced its F2Q12 earnings, disclosing that it had just missed quarterly earnings estimates, lowered guidance, and is facing accounting issues. Executives implied on a conference call that it has been advised by its counsel that it cannot buy back stock because of the ongoing SEC investigation. CSC reported USD 978m in cash at the end of September.
Adding to the company’s vulnerability, is its lack of a permanent chief. Last month, chairman and CEO, Michael Laphen announced his retirement. Laphen is slated to stay on until no later than 31 October 2012 as the company seeks a replacement alongside search firm, Heidrick & Struggles.
Speaking on the conference call discussing results, Laphen said candidates are being identified and some interviews have taken place. He reiterated, however, that CSC “has expressed desire to remain as an independent party, and we are continuing with that thought process and moving down that path.”
The second banker said it is not unusual to receive financial advisor pitches for a broader strategic action at a time when a company is looking for new leadership. But, the same banker said, at this time it does not appear that investor pressure is strong enough for the company to hire an adviser.
One of the bankers and a lender, however, said a few of CSC’s close relationship banks might be trying to “engage” the company.
Irrespective of an advisor, CSC’s board will not consider sale of the company at the current trading levels, according to two of the bankers. CSC lost a considerable amount of market value this year. In early February the company’s stock hit its highest point this year at USD 56.54; it currently hovers at around USD 25.
Between 2006 and 2007 talk of a CSC takeout was rife. The company was reported to have received takeout interest from parties including Blackstone, Cerberus Capital Management, Oracle (NASDAQ:ORCL), Hewlett-Packard (NYSE:HPQ) and Lockheed Martin (NYSE:LMT). Late last year, rumors of Oracle’s interest resurfaced, but this news service downplayed the enterprise software company’s interest on grounds of CSC’s low margins.
According to two of the bankers, no single buyer would be likely to take on CSC whole, given its disparate businesses. One of these bankers claimed strategics that have been previously talked about as potential suitors, including Oracle and Lockheed Martin, would not be willing to take the business on in its entirety.
“People have been poking around the company for a while,” said a fifth industry banker, noting that strategics and private equity firms alike arrive at the same conclusion that the “numbers do not work.” The company does not have sufficient cash flow and the new business areas it has entered have not produced results that potential suitors have found attractive, said the same banker.
Instead, two of the bankers said the company could see interest in its specific pieces if it were broken up. This is a “perfect” activist target, commented one of the bankers, noting that there is a good amount of upside to be had for an activist investor.
CSC is divided into three sectors: North American Public Sector (NPS), Managed Services Sector (MSS), and Business Solutions and Services (BSS). One of the bankers said each of the sectors would be large enough to stand on their own.
According to dealReporter’s analysis, based on historical EBITDA margins, calendar year 2012 revenue estimates and comparable trading values, CSC’s NPS unit might be worth between USD 2.5bn to USD 3bn. That is based on 11% EBITDA margins, a revenue estimate of USD 5.6bn and a multiple of 4.5x, which is a full turn lower than comparable government service companies.
A similar exercise for the Business Services unit, using an EBITDA margin of 12%, a revenue estimate of USD 4bn and a multiple of 7.5x, would generate somewhere in the neighborhood of USD 3.5bn to USD 4bn in value. CSC’s enterprise value has been fluctuating at around USD 6.2bn.
While the buzz is keeping deal makers busy running valuation models, given current market conditions, where access to leverage is virtually absent, the board has every excuse to hunker down and not sell, said the bankers. “Let’s see if an activist actually shows up,” said one of the bankers, noting that CSC has long been on the radar as a target.
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