Computer Science Corp no longer looking for a buyer

In July, the executive board at IT services giant Computer Science Corp (CSC) was forced to make an embarrassing admission: they were no longer looking for a buyer for the company. So why would one of the big five IT services companies be looking for a buyer in the first place, and what does that say about the overall state of the industry?

To understand the significance, that admission needs closer scrutiny. It is perhaps surprising enough that a company of such standing would be looking to sell out in the first place; more jaw-dropping is the absence of prospective buyers. In a climate where private equity investors are falling over themselves to seize well-established technology companies, the lack of suitors for CSC is damning.

“One has to conclude that no buyer thought that CSC was actually worth much more than its then-current share price,” notes Richard Holway, director of market watcher Ovum. The very public sales effort has also given “the impression of a company that has given up aspirations for growth.”

Such a conclusion is in stark contrast to the proclamations made by CSC’s CEO Van Honeycutt: “New technologies, new markets and new market demands are reshaping the information technology industry, and we’re confident that CSC will remain a leading player.”

On the face of it, Honeycutt has a point: the global market for IT services is expanding; grid technologies and service-oriented architecture promise to reshape the corporate computing landscape; enterprises are embracing game-changing mobile and wireless technologies.

Furthermore, bread-and-butter areas for the services companies, such as business process outsourcing are booming. IT advisory group Gartner estimates global BPO activity to be worth $132 billion in 2006; within three years that figure will have risen to $172 billion. So why is CSC in the doldrums, and why are other giants of the IT services industry also suffering?

“Many of the obvious trade candidates to purchase CSC are not in the finest state themselves to go embarking on a venture of this magnitude and risk,” says Holway. Much of the current woe felt by traditional IT services leaders can be traced to the Indian subcontinent. The rise of the Indian outsourcing companies has exposed the cost models of Western IT services companies, especially those – like CSC – with large numbers of government contracts that make exploiting offshore capabilities politically difficult.

Indian companies such as Infosys, Wipro and Tata Consultancy Services can boast growth rates in the 30% to 40% range and operating margins that their Western rivals can only dream of. CSC is predicting 2% to 3% growth for its fiscal 2007, despite a 22% surge in US Department of Defense (DoD) revenues.

Tata Consultancy Services’ CEO Subramaniam Ramadorai, says growth remains an absolute priority for the company. And while he acknowledges that scaling up through acquisition would help TCS get on shortlists currently dominated by the likes of IBM and EDS, he suggests that any acquisition moves will be targeted at niche companies. Moreover, he sees no advantage in inheriting traditional companies’ cost models. “We wouldn’t make an acquisition that added substantially to our costs and lowered our margins,” he says.

CSC has also suffered more than some of its rivals such as IBM and Accenture because it was late to India’s party. It still has a large European workforce, while in India, it only has 5,400 workers, compared to Accenture’s 15,000 and IBM’s 30,000.

However, the Indian phenomenon is not enough to explain CSC’s malaise entirely. In its most recent annual results filing, the problems facing the US administration were flagged up as a potential weak spot. Budget deficits, natural disasters and the on-going conflict in Iraq could “reduce the federal government’s demand for IT projects”.

Government contracts account for about a third of CSC’s revenues (almost $1 billion a quarter comes from the DoD alone). This public sector was a source of succour for the entire IT services industry in the lean post dot-com years, but that revenue source may also slow outside of the US. In the UK, the NHS IT improvement programme is believed to be the last blockbuster IT project undertaken within the foreseeable future. The public sector has also been the most resistant to using Indian providers, fearful of reaction to paying for jobs to go offshore or sensitive to security concerns.

Elsewhere, large enterprises are growing evermore reluctant to sign single-contractor deals; the so-called mega deals are now going to coalitions. With the old certainties gone, it is not just CSC that will feel the strain. And while it may have failed to find a suitor for the time being, further consolidation looks inevitable.

Pete Swabey

Pete Swabey

Pete was Editor of Information Age and head of technology research for Vitesse Media plc from 2005 to 2013, before moving on to be Senior Editor and then Editorial Director at The Economist Intelligence...

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