On, February 14, 2000, Computer Associates International, Inc. announced an agreement toacquire Sterling Software, Inc. The $4 billion stock-for-stock acquisition, which would bethe largest ever in the history of the software industry, has been approved unanimously bythe Boards of Directors of both Sterling Software and CA. The acquisition is expected to beaccretive to CA's earnings per share, excluding any one-time research and development chargeand amortization of acquisition intangibles, and is subject to certain closing conditions,including regulatory approvals. The acquisition will be accounted for using the purchasemethod. Under terms of the agreement, a subsidiary of CA will commence an offer to exchange0.5634 shares of CA stock for each outstanding Sterling share. The exchange ratio is subjectto a collar. ANALYTICAL ASSESSMENT: We are taking a neutral stance on Computer Associates's announcement of its intention toacquire Sterling Software. Both CA and Sterling are still in the process of digesting otherrecent acquisitions (i.e., Sterling with Information Advantage and CA with PLATINUM). WhileCA stands to gain a collection of solid products and staff as well as opportunities, this newacquisition adds major complications to the integration process.Sterling Software, with trailing twelve month revenues of $840 million and profits of $16million, and Computer Associates, with trailing twelve month revenues of $6.27 billion andprofits of $761 million (both for the period ended December 31, 1999), will produce a $7+billion company which should have a major industry influence in both the mainframe andnon-mainframe worlds. The combined entity will cut across systems and storage management, asthe acquisition will augment CA's storage and network management capabilities, especiallysince Sterling's mainframe presence will enable CA to provide an "end-to-end" storage andnetwork management solution. There are also numerous synergies from a data warehousing andbusiness intelligence perspective.In the data warehouse space, Sterling's Eureka product set includes query and reportingproducts, a powerful OLAP server and supporting products, and the pioneering Eureka businessintelligence portal. When combined with CA's Nuegent data mining technology, its repositoryand Jasmine object-oriented database, and the ETT products (e.g., DecisionBase, InfoPump, andInfoRefiner) and design (e.g., ERwin), the components for a full data warehouse offering arepresent. However, we will remain neutral until we see how these pieces will be combined andhow the two companies' resources will be integrated.In addition to its Federal Group (which should augment CA's Federal Sales unit), SterlingSoftware concentrates on four major software groups: applications development, businessintelligence, information management, and systems management, with the business intelligenceand information management groups representing its data warehouse offerings. Since itsfounding in 1981, Sterling Software has acquired over 35 other companies including theSeptember 1999, acquisition of Information Advantage, a ROLAP pioneer that had acquired queryand reporting provider IQ Software approximately one year earlier (see "Sterling Software:Seeking an Information Advantage," 190716-0014-01.NV, and "Information Advantage: Raising Its(Software) IQ,"180629-0010-01.NV).When Computer Associates acquired PLATINUM technology, we speculated that the $3.5 billionacquisition, one of the largest to date, could lead to additional acquisitions of companiesthat may have been thought of as "out of reach." While we were right in our prediction, wedidn't think Computer Associates would strike again so soon with its $4 billion acquisitionof Sterling Software (see "Computer Associates: Going for the PLATINUM," 190329-0005-01.NV).The PLATINUM acquisition might have been positioned as a way for PLATINUM to placate itsdisappointed and increasingly impatient stockholders, but Sterling is a thriving company andthe acquisition supports the belief that CA is aggressively trying to dominate marketsegments and has moved well beyond its heritage of acquiring unsuccessful companies merely tocapture their maintenance revenues.We do have concerns about CA's ability to integrate all of its recently acquired pieces, butthe company certainly has the resources and management discipline to pull it off. As far asthe two recent major acquisitions (i.e., PLATINUM and Sterling) are concerned, one mightargue, perhaps only somewhat facetiously, that CA feels that it is more productive to acquireother acquirers rather than to target numerous smaller companies individually.