Resistance is Futile: Computer Associates Assimilates yet another Major Software Firm

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Event Summary

"ISLANDIA, NY and DALLAS, TX, February 14, 2000 -Computer Associates International, Inc. (NYSE: CA) announced an agreement to acquire Sterling Software, Inc. (NYSE: SSW), extending its arsenal of software and services to build, deploy, manage and secure eBusiness solutions.

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. If the average trading price of CA stock for the designated period prior to the closing of the offer is greater than $77.12, the exchange ratio will be reduced so that each Sterling share tendered in the offer would be exchanged for $43.45 worth of CA stock. If the average trading price of CA shares for the period is less than $63.10, the exchange ratio will be increased so that each Sterling share tendered in the offer would be exchanged for $35.55 worth of CA stock. In this case, CA may elect to reduce the exchange ratio and make up the difference in cash and or stock.

The tender offer will be followed by a back-end merger on the same terms of those in the offer. The offer will be subject to customary closing conditions, including that at least a majority of Sterling's outstanding shares has been tendered and antitrust clearance obtained. The parties expect the transaction will be one of the first to take advantage of the SEC's new "fast track" exchange offer rules designed to expedite stock-for-stock transactions.

Sterling Software is a leading provider of software and services for the application development, business intelligence, information management, storage management, network management, VM systems management, and federal systems markets. The company is one of the 20 largest independent software companies in the world. Headquartered in Dallas, Sterling Software has a worldwide installed base of more than 20,000 customer sites and 3,800 employees in 90 offices worldwide. Computer Associates International, Inc. (NYSE: CA) has 18,000 employees worldwide and had revenue of $6.3 billion for the year ended December 31, 1999."

CA also intends to publish papers on product development strategies and directions shortly after completion of the acquisition.

Market Impact

On the upside, Computer Associates gains an additional 90 products to add to their stable of many hundreds of current offerings. Sterling's mainframe and storage management technologies, added to what CA already has, will create the industry's largest supplier. CA should also gain additional consulting resources from Sterling. "The merger of Sterling Software and CA brings together two outstanding organizations that share common values, and have compatible strategies and track records of achievement," said Charles B. Wang, CA chairman and CEO.

However, as evidenced by Computer Associates purchases of Cheyenne, Legent, Platinum Technology, and others, the assimilation of different corporate cultures and software products has led to a very high rate of employee turnover from the acquired firms, strained communication with the acquired employees, and a tremendous lag in software release dates.

CA has built a $6 billion dollar business by, in part, stabilizing products from acquired companies and maintaining substantial maintenance revenue streams without providing new major releases to customers. In addition, CA does not have a strong history of retaining employees of the acquired companies that have departed other CA acquisitions during the purchase process, or who have left CA proper. This potential loss of valuable employees could be damaging to product sales, development, and support.

User Recommendations

Customers evaluating Sterling products based on existing functionality should continue the selection process, keeping an eye on CA's announcements for future product direction. For customers who believe they can receive positive return on investment in a fairly short term, and can support the product in-house, it may be a safe investment. However, customers should keep in mind that potential major upgrades to other software in their environment (i.e., the operating system on which the tool runs) may cause Sterling's software to malfunction, and if the product has been stabilized, there may be no fix available.

Customers evaluating Sterling products based on future enhancements should be extremely cautious. They should press Computer Associates to provide firm release schedules and product visions in writing before purchasing any of Sterling's offerings. Computer Associates often has visions for integration of their products with acquired products (i.e., CA's plans to combine their Neugents neural network technology with Sterling's products), but this often has the effect of forcing delays in the general availability of products.

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