Will It Take a Higher Bid to Win Computer Sciences?

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Computer Sciences

(CSC)

may be waiting for a bigger diamond.

Computer Associates

(CA) - Get Report

on Wednesday offered $108 a share in cash for Computer Sciences in a deal valued at about $9 billion. The two have been in talks since December and have reached an understanding, says CA, on most aspects of a deal -- except for price. So CA went public with its bid in an effort to pressure Computer Sciences, a strategy known as a bear hug.

The deal would create a company with about 51,000 employees, $11 billion in revenue and $39 billion in market capitalization, based on Tuesday's close. CA, the third-largest software company in the world after

Microsoft

(MSFT) - Get Report

and

Oracle

(ORCL) - Get Report

, is a leader in developing business software. CA's strategy is to fill the growing demand for end-to-end systems solutions for large organizations, which requires a full range of service-oriented operations. Computer Sciences is a world leader in providing IT consulting, systems integration and management, and outsourcing.

But Computer Sciences has yet to make a statement on the bid. If it fights for more money, or better terms, CA could resort to a hostile bid.

In reaction to the announcement, Computer Sciences traded up dramatically from Tuesday's close of 92 3/16, rising in intraday trading above CA's $108 offer. It then slid back to close at 103 3/4, still up 11 9/16 points on the day.

Options activity Wednesday indicated that investors are betting the bid would rise to between $110 and $115. (Click

here for that story.)

Chatter abounds about another company offering Computer Sciences a better deal. But analysts had trouble pinning down any companies that would be interested. Big software or hardware companies catering to corporate clients are possible bidders -- if the industry moves in earnest toward combining services and consulting with a wide array of products.

Moreover, the management team at CA has a reputation for being energetic and focused in pursuit of acquisition targets, especially one that fits its strategy as snugly as Computer Sciences. "They'll try to make it happen as aggressively as they can," says analyst Paul Dravis at

NationsBanc Montgomery Securities

.

But if the only sticking point is price, Computer Sciences might not hold out for long. As for CA, the current offer, while dilutive, is generally considered reasonable but could quickly become too much of a burden if it went much higher, analysts say. CA is considered to be a pragmatic bargain hunter, as well as an aggressive acquirer. Despite the good fit, CA wants to move quickly and might not be willing to hang around if bargaining is dragged out and the price starts ramping up, says analyst James Mendelson at

SoundView Financial

.

CA, meanwhile, traded down, as investors heard that the deal would be dilutive for "some years," according to CA President and COO Sanjay Kumar. The stock closed at 50 3/8, off 7 11/16 points.

Trading of CA's competitors was mixed.

Hewlett-Packard

(HWP)

was down 7/8 to close at 62 1/2. Microsoft, a more recent competitor, closed down 5/16 points at 158 15/16. But rival IBM was up 1 13/16 points to close at 102 11/16.

Despite the negative investor reaction, the deal is a good one for CA's long-term strategy, says analyst Mendelson at SoundView Financial. He says the mainframe, client-server and enterprise businesses are becoming increasingly complex, and IBM has a strong service organization. Merging with Computer Sciences would allow the two parts of the combined company to focus on what they do best while allowing it to be an all-in-one stop for corporate and government customers.