CA Bid for CSC Seen as Bad News for Banks

Computer Associates International Inc.'s hostile bid for Computer Sciences Corp., if successful, would create a new powerhouse in banking technology.

A merger would bring together Computer Sciences' technical services expertise and Computer Associates' strength in software sales.

But bankers may not be overjoyed at the prospect, industry experts said.

Computer Associates, which is a huge provider of operating systems and other software to financial institutions, has a reputation for inflexible licensing policies that can complicate a bank's move to new providers of technology services.

If Computer Associates were to own a services company the size of CSC, it could use its leverage in the software business to "make it more difficult to compete" against CSC, said Lawrence A. Willis, managing vice president of First Manhattan Consulting Group in New York.

"The banking industry may be concerned or skeptical in certain instances" about the proposed combination, said Mr. Willis.

Officials of Computer Associates and Computer Sciences, at loggerheads over the former's $9 billion-plus tender offer, declined to comment.

Two of the largest bank technology providers-Electronic Data Systems Corp. and International Business Machines Corp.-have agreements with Islandia, N.Y.-based Computer Associates designed to minimize licensing hangups. But many other bank technology providers do not, and this could prove problematic for customers of these companies.

Another concern for banks is whether Computer Associates would continue to support competing sets of core processing software, Mr. Willis said.

Computer Sciences owns Hogan Systems Inc., a leader in core processing software for large banks. Computer Associates makes Infopoint, which is used by a considerable number of large and mid-tier banking companies.

M. Arthur Gillis, an independent bank technology consultant based in Dallas, noted that El Segundo, Calif.-based Computer Sciences has been trying for a few years to break into the club of bank outsourcing companies that includes EDS, IBM, Alltel Information Services Inc., Fiserv Inc., M&I Data Services Inc., and Bisys Group.

Among CSC's successes has been its lead role in the Pinnacle Alliance, a group of companies that joined forces in 1996 in a multibillion-dollar service contract with J.P. Morgan & Co.

CSC aspires to a larger share of the bank technology services market, said Mr. Gillis.

The computer services expertise CSC has displayed is what appeals to Computer Associates most, analysts said.

Computer Associates submitted a friendly acquisition proposal Feb. 11 at $108 a share. The all-cash offer, which would be worth more than $9 billion, turned hostile Feb. 17 when the target company's board took several defensive measures.

Computer Sciences formally rejected the offer in a Feb. 18 letter to Computer Associates chairman Charles Wang.

Van Honeycutt, chairman and chief executive officer of Computer Sciences, said the acquisition would cause CSC to "lose platform neutrality," which would hamper the company's ability to recommend the best software for customer needs.

"We would lose credibility in the marketplace," he wrote. "On the advice of counsel, we have moved to strengthen our protections against your ill- considered and unwelcome attempt to force an acquisition."

Karl Keirstead, an analyst at Lehman Brothers, estimated the deal had a 60% chance of success, and other observers see the probability diminishing. Computer Sciences may be open to a "white knight" bidder, but none has come forward.

Computer Sciences shares closed at $104 Friday, up 62.5 cents for the day but down $3.375 for the week. Since the announcement of Computer Associates' bid, CSC's stock is up $11.8125.

From Computer Associates' perspective, the deal would "make sense," Mr. Keirstead said. "Clearly, the need to wrap services around its core product offering is important."

But he added, "I'm less convinced that a product company knows how to run a services company. I am not sure if it makes sense to take away Computer Sciences' product neutrality."

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