Covansys, Computer Sciences: IT Outsourcing Merger Update

Includes: CVNS, DXC
by: The M & A Researcher

The potential Covansys (OTC:CVNS) - Computer Sciences (CSC) merger looks to be a standard acquisition by CSC in terms of regulatory issues and timing. CVNS is essentially an outsourcing operation in the information technology field -- a field which is defined by competitive fragmentation on all levels. An example of this can be seen in this chart of the 50 best managed IT outsourcers, where CSC is ranked #49 and CVNS has dropped from the list since last year. The bottom line is that these types of deals just are not on the FTC radar and probably will not be in the foreseeable future. HSR early termination is therefore a virtual certainty for this deal.

It should be noted that CSC's 2000 cash tender offer acquisition of Policy Management Systems/Mynd [YND] did in fact receive an HSR second request (following an HSR withdrawal/refiling). As seen in this FTC press release, the issues in that deal involved "Claims Assessment Systems," which YND were divested in order to obtain FTC consent. The overlap in that deal involved an insurance industry niche product, and the resulting FTC review took almost six months to resolve. Nevertheless, the current deal is an outsourcing combination and therefore the chances of an overlap/competition issue surfacing are almost nil.

CVNS' recent history with the SEC includes three separate quarterly report problems over the last three years. Once in 2004 and twice in 2005, the company was required to amend quarterly reports several times, indicating there has been some fairly significant reporting issues. While in most cases a random 10-Q review would be viewed as a positive (in terms of SEC familiarity), the repeated quarterly report problems could easily translate into a proxy review situation for this transaction. CVNS' last three 10-Q have gone through without difficulty, so it is entirely possible that the merger proxy could be pulled for review if the SEC's oversight of the company remains consistent.

This is not to say that the deal is likely to encounter any major regulator delays. Most cash-only deals go through the SEC process with little difficulty. However, it must be pointed out that in this case a proxy review waiver is not a given, even in this period of fast SEC merger proxy review. It would not be terribly surprising if the proxy review exceeded 45 days in this case, which would push the close into the latter part of the third quarter, rather than allowing to close in a July/August time frame.

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