Software // Enterprise Applications
Commentary
3/19/2004
01:30 PM
William Schaff
William Schaff
Commentary
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Taking Stock: Enterprise Software: Let's Make A Deal

CACI may have gotten the best deal in recent activity in this market

Despite the recent turmoil in technology, I still have fun reading about all the activity going on in enterprise software. Larry Ellison can't let go of PeopleSoft; Microsoft continues to fight the European Union on penalties. On pages 9 and 10 of The Wall Street Journal, you can see deals announced almost daily. A couple of items caught my eye. One is fairly big news: EDS spinning off its UGS PLM (product-life-cycle management) division for $2.05 billion in cash. The other is the acquisition of American Management Systems by CGI, one of Canada's largest IT services companies, and a related asset sale to government-services specialist CACI International.

The EDS deal is clearly driven by the company's need to raise cash for current operations. By selling its PLM unit, it gets liquidity at the expense of losing some stable cash flow from operations. EDS's PLM unit came from its 2001 acquisition of Structural Dynamics Research, which was merged with EDS's Unigraphics Solutions unit. EDS spun off a 14% interest in Unigraphics in 1998 and bought it back for $170 million when it made the Structural Dynamics deal. EDS then combined the firms to make up the PLM unit. Given the acquisition value and price tag of Structural Dynamics ($950 million in cash), the combined entity was valued at roughly $2.16 billion. Now, almost three years later, it sells the same unit for $2.05 billion in cash. The funny thing is that the combined revenue of the unit in 2001 was about $1 billion. In 2003, revenue was about $900 million. I'm not sure EDS is losing much in this transaction. I could even argue that it got a pretty fair value for a declining business.

CGI's acquisition of American Management Systems is the more interesting story. American Management Systems had revenue of $961.6 million in 2003, of which about $250 million was from its defense and intelligence group. While buying American Management Systems, CGI is expected to sell off all of the defense and intelligence group business through the asset sale to CACI. For CACI, defense and intelligence revenue was about 64% of revenue in 2003. Federal nondefense and nonintelligence business makes up most of the balance. The deal makes CACI even better equipped to compete in this fast-growing space, as it also includes homeland-security services. CACI paid $415 million, but its tax benefits from the purchase are expected to be around $60 million, making the net cost closer to $355 million. This is less than 1.5 times revenue for a business that's expected to grow revenue in the high double digits over the next few years.

EDS was at $19.27 last week, trading at 37.5 times 2004 and 19.0 times 2005 consensus earnings per share of 51 cents and $1.01, respectively. However, there's a lot of business risk in the near term, and any earnings projection for 2005 is highly suspect. Meanwhile, CACI, priced at $42.27, trades at 22.6 times fiscal 2004, ending June, and 19.4 times fiscal 2005 consensus EPS of $1.94 and $2.26, respectively. Yet, CACI is projected to grow EPS at a steady rate of 15% to 20% from both internal growth and acquisitions. Given the recent downturn in technology stock prices, the bargain may actually be CACI, not EDS.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.


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