Computer Sciences to Buy Continuum for $1.4 Billion

Continuing an acquisitions spree that has vaulted it to the top ranks of the fast-growing computer services business, El Segundo-based Computer Sciences Corp. said Monday that it will pay about $1.4 billion in stock for Continuum Co., an Austin, Texas-based competitor specializing in software and services for banks and insurance companies.

“Continuum catapults us into a strong position in financial services and continues the shift of our business toward the commercial sector,” said Van Honeycutt, who took over as chief executive at CSC last year.

Analysts applauded the combination as a good fit that would help give CSC the heft it needs to compete with giant rivals Electronic Data Systems (a unit of General Motors Corp.) and International Business Machines Corp. “This shows the new CEO [Honeycutt] being much more aggressive about moving in new directions,” said Stephen T. McClellan, an analyst at Merrill Lynch who called the deal an “excellent strategic move.”

The computer services sector is booming as major corporations--and increasingly banks and insurance companies, which spend about $60 billion annually on information technology--cut costs by turning to companies such as CSC to take over and manage their computer systems, a practice known as outsourcing.

CSC is the third-largest company in the industry, with about a third of the $12 billion in annual revenue of market leader EDS. CSC has built itself readily through acquisitions in recent years, buying 28 companies since 1986, and the Continuum merger would boost its revenue by more than 10%. CSC is expected to report sales of $4.2 billion for the year ended March 31.

Analysts say size is an important factor in competing in the outsourcing business. The larger the computer service company, the more liable it is to have the geographic reach, the technical skills and the software tools for taking on the complex information-system needs of large multinationals.

“You have to be big enough to have a broad technical offering so you can respond to all of the concerns of customers,” Honeycutt said. Bigger companies such as CSC are also better positioned to borrow the sums--sometimes $100 million or more--required to buy the customers’ computer assets, hire their computer system employees and take on the new employees’ pension obligations.

CSC, founded in 1959, was a pioneer in computer services and originally grew by designing and operating computer systems for such giant federal agencies as the Defense Department and the Environmental Protection Agency. But EDS, founded just three years after CSC, grew more rapidly by targeting not only government agencies, but large corporations such as GM.

CSC began a major push into the commercial sector in the mid-1980s as it became clear that many companies were dropping their traditional resistance to handing critical computer operations over to outsiders. In the last decade, CSC’s revenue has jumped 500% on the back of its acquisition strategy and strong growth in the commercial sector.

Today, CSC gets about 70% of its business from commercial customers, although it still takes on lucrative federal contracts, including the design of advanced-weapons software.

A continued weakness of CSC has been its limited presence in the rapidly growing Pacific Rim, which makes it less attractive for potential customers who have a large presence in those markets. Continuum gets 50% of its revenue overseas, and its strong presence in the Pacific Rim helps fill that need.

Continuum began as a software developer for the insurance industry and has more recently moved into computer services. The company recently developed an “expert” software system that uses artificial intelligences to make estimates used to settle bodily injury claims. Continuum’s banking expertise came from an acquisition last year of Hogan Systems, a developer of banking software.

W. Michael Long, Continuum’s chief executive, said the planned merger with CSC would put the company in a stronger position to win large outsourcing contracts in the financial sector. Long will continue to head the company when the deal closes and Continuum becomes a CSC subsidiary.

Future CSC acquisitions could concentrate on widely used new technologies such as client-server systems.

“They aren’t known for being on the cutting edge of technology,” said Chris Leuchtenberg, analyst at Cambridge, Mass.-based market researcher Forrester Research.

Although analysts see the purchase of Continuum as a good fit, the 36% premium CSC is paying over Continuum’s Friday close helped pull down CSC’s stock price by $2.75 to $75.375 in New York Stock Exchange trading Monday, while Continuum shares rocketed $12.25 to $57.625.

CSC will pay 0.79 share for each of Continuum’s 23.9 million shares. Based on CSC’s closing stock price Monday, a Continuum shareholder would receive the equivalent of $59.55 a share and the overall deal would be worth $1.42 billion.

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Technology Takeover

Computer Sciences Corp. has agreed to buy Continuum Co. for $1.5 billion. A look at the firms:

Computer Sciences Corp.

Headquarters: El Segundo

Chief executive: Van B. Honeycutt

Employees: 32,900

Major products: Develops communications and computer-based systems. The federal government is a primary customer.

1995 revenue: $3.4 billion

1995 profit: $110.7 million

Monday stock price: Down $2.75 at $75.375 on the New York Stock Exchange

Continuum Co.

Headquarters: Austin, Texas

Chief executive: W. Michael Long

Employees: 2,953

Major products: Develops and sells computer software for life, health and annuity insurance companies.

1995 revenue: $323.5 million

1995 profit: $26.2 million

Monday stock price: Up $12.25 at $57.625 on the New York Stock Exchange

Source: Bloomberg Business News

Researched by JENNIFER OLDHAM / Los Angeles Times