Computer Associates to Acquire Sterling Software: An Acquirer Acquires Another

On, February 14, 2000, Computer Associates International, Inc. announced an agreement to

acquire Sterling Software, Inc. The $4 billion stock-for-stock acquisition, which would be

the largest ever in the history of the software industry, has been approved unanimously by

the Boards of Directors of both Sterling Software and CA. The acquisition is expected to be

accretive to CA’s earnings per share, excluding any one-time research and development charge

and amortization of acquisition intangibles, and is subject to certain closing conditions,

including regulatory approvals. The acquisition will be accounted for using the purchase

method. Under terms of the agreement, a subsidiary of CA will commence an offer to exchange

0.5634 shares of CA stock for each outstanding Sterling share. The exchange ratio is subject

to a collar.

ANALYTICAL ASSESSMENT:

We are taking a neutral stance on Computer Associates’s announcement of its intention to

acquire Sterling Software. Both CA and Sterling are still in the process of digesting other

recent acquisitions (i.e., Sterling with Information Advantage and CA with PLATINUM). While

CA stands to gain a collection of solid products and staff as well as opportunities, this new

acquisition adds major complications to the integration process.

Sterling Software, with trailing twelve month revenues of $840 million and profits of $16

million, and Computer Associates, with trailing twelve month revenues of $6.27 billion and

profits 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 and

non-mainframe worlds. The combined entity will cut across systems and storage management, as

the acquisition will augment CA’s storage and network management capabilities, especially

since Sterling’s mainframe presence will enable CA to provide an “end-to-end” storage and

network management solution. There are also numerous synergies from a data warehousing and

business intelligence perspective.

In the data warehouse space, Sterling’s Eureka product set includes query and reporting

products, a powerful OLAP server and supporting products, and the pioneering Eureka business

intelligence portal. When combined with CA’s Nuegent data mining technology, its repository

and Jasmine object-oriented database, and the ETT products (e.g., DecisionBase, InfoPump, and

InfoRefiner) and design (e.g., ERwin), the components for a full data warehouse offering are

present. However, we will remain neutral until we see how these pieces will be combined and

how the two companies’ resources will be integrated.

In addition to its Federal Group (which should augment CA’s Federal Sales unit), Sterling

Software concentrates on four major software groups: applications development, business

intelligence, information management, and systems management, with the business intelligence

and information management groups representing its data warehouse offerings. Since its

founding in 1981, Sterling Software has acquired over 35 other companies including the

September 1999, acquisition of Information Advantage, a ROLAP pioneer that had acquired query

and 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 billion

acquisition, one of the largest to date, could lead to additional acquisitions of companies

that may have been thought of as “out of reach.” While we were right in our prediction, we

didn’t think Computer Associates would strike again so soon with its $4 billion acquisition

of 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 its

disappointed and increasingly impatient stockholders, but Sterling is a thriving company and

the acquisition supports the belief that CA is aggressively trying to dominate market

segments and has moved well beyond its heritage of acquiring unsuccessful companies merely to

capture their maintenance revenues.

We do have concerns about CA’s ability to integrate all of its recently acquired pieces, but

the company certainly has the resources and management discipline to pull it off. As far as

the two recent major acquisitions (i.e., PLATINUM and Sterling) are concerned, one might

argue, perhaps only somewhat facetiously, that CA feels that it is more productive to acquire

other acquirers rather than to target numerous smaller companies individually.