Software Companies to Combine
Computer Associates, Sterling Plan Stock Deal
The Dallas Morning News
February 15, 2000

Sterling Software Inc. said Monday that it has agreed to be acquired by Computer Associates International Inc. in a stock swap valued at $4 billion. The deal, announced jointly by the companies, will bring together former rivals in the business of selling software solutions to corporations and governments.
Computer Associates executives said the deal was driven by strategic considerations, not cost savings. Some jobs will be lost, however, they said.

"This is being done on the merits, not based on head count or savings,” said Sanjay Kumar, president and chief operating officer of Computer Associates. Sterling Software, based in Dallas, employs 3,800 people worldwide, about a third in the Dallas area.

Sterling L. Williams, president and chief executive of Sterling Software, said employees shouldn't fear for their jobs in the merger. “These aren't the bad guys,” he said. “These are the good guys.”

Terms of the agreement call for a subsidiary of Computer Associates to exchange 0.5634 shares of the parent company for each outstanding share of Sterling. The exchange ratio is subject to changes in the price of the buyer's stock. Each share of Sterling could be worth between $35.55 and $43.45 when the transaction is closed.

Computer Associates has been growing through acquisition. With revenue of $6.27 billion last year, the Islandia, N.Y., company is the No. 3 software maker in the United States behind Microsoft Corp. and Oracle Corp. Sterling Software posted revenue of $807 million last year. If another party comes forward and successfully bids Sterling away from Computer Associates, it would have to pay a breakup fee of $175 million, according to Mr. Williams.

Mr. Kumar said he approached Sterling Software founders Sam and Charles Wyly about a merger about a month ago. “We said, ‘If we are going to do this, let's do it when we're strong.’”

Mr. Kumar said the deal would add to Computer Associates' earnings before interest, taxes and special one-time charges. Analysts said they expect Sterling Software to add from 5 to 10 cents to Computer Associates' earnings per share this year.

Also, Mr. Kumar said, the addition of Sterling's products to Computer Associates’ lineup will make the newly combined company the largest storage and network provider in the world. Data storage capacity has become a hot commodity in the business-to-business e-commerce market.

Sterling also has a business intelligence portal which will give Computer Associates a new position in the Internet economy. The portal provides access to data in corporate databases much like Internet portals give individuals access to information on the World Wide Web.

“This is a new chapter for Computer Associates. It gives us a whole new set of markets as well as give us leadership of the ones we're already in,” Mr. Kumar said.

The acquisition must be approved by the Department of Justice, which enforces U.S. antitrust laws, as well as the Securities and Exchange Commission. A majority of Sterling shareholders must also tender their stock. Some analysts said that the price is on the low side but that there are enough other good reasons for the combination - its tax-free status among them - to make the deal worth doing.

Mr. Williams said the company negotiated the best possible price given what he called the software company's undervalued position in the market. Analysts generally applauded the deal. “The price is a little lower than I might have expected,” said Bob Johnson of ABM Amro in New York. “But I think it's a win-win transaction.”

Shares of Sterling Software traded up $1.812 to $36.2544 a share Monday. Itzs 52-week high is $37.50. Computer Associates fell 44 cents to $69.31.