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COMPUTER ASSOCIATES INTL, INC.

ACQUISITION OF
STERLING SOFTWARE, INC.

ANNOUNCED ON 2/14/2000


CUNY-BARUCH
MERGERS & ACQUISITIONS
PROF HARVEY PONIACHEK
SPRING 2014
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CONTENTS
THE TRADITIONAL MERGER PROCESS
STRATEGIC OBJECTIVE
IDENTIFYING THE TARGET, NEGOTIATION, AND TIME
LINE
TENDER OFFER, ACQUISITION VEHICLE AND
STRUCTURE
PRICE AND CONSIDERATION, COLLAR
CORPORATE GOVERNANCE
ACCOUNTING & TAX
GOVERNMENT REGULATIONS, CORPORATE
GOVERNANCE
EXCHANGE AGENT, POST MERGER OWNERSHIP
RISKS

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THE TRADITIONAL MERGER PROCESS
1. CORPORATE OBJECTIVE AND MERGERS
2. IDENTIFYING TARGETS, SELECT POSSIBLE ACQUISITIONS,
AGREE ON A FIRST CHOICE CANDIDATE, CONDUCT
PRELIMINARY ANALYSIS, VALUATION
3. APPROACH THE TARGET, CONVENE PRELIMINARY
DISCUSSIONS, NEGOTIATION, AND SET TIME LINE
4. FORMULATE A LETTER OF INTENT, COMMENCE DUE
DILIGENCE
5. COMPLETE FINANCIAL NEGOTIATIONS ON PRICE &
CONSIDERATION, TERMS
6. SIGN THE AGREEMENT, MAKE THE ANNOUNCEMENT,
CLOSE THE DEAL
7. IMPLEMENT THE AGREEMENT, ISSUE A TENDER OFFER,
FORM AN ACQUISITION VEHICLE, STRUCTURE THE DEAL
8. POST MERGER INTEGRATION

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STRATEGIC OBJECTIVE--WHY MERGER?

AN INTERNAL STRATEGIC AUDIT IDENTIFIED
SEVERAL AREAS FOR COMPUTER ASSOCIATES
INTL, INC. (CA) IMPROVEMENT, INCLUDING
DATA STORAGE, APPLICATION DEVELOPMENT
AND SERVICES MERIT IMPROVEMENT
CA WAS SEEKING TO ACQUIRE NEW PRODUCTS,
OBTAIN PRODUCT MIX AND DIVERSIFICATION,
INCREASE MARKET PRESENCE AND GREATER
OPERATING EFFICIENCIES
CA GROWTH HISTORY IS ASSOCIATED WITH
NUMEROUS ACQUISITIONS

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IDENTIFYING THE TARGET, TIME LINE

HOW WAS THE TARGET IDENTIFIED?
IN LATE 1999, MORGAN STANLEY & CO CONTACTED CAS
PRESIDENT, SANJAY KUMAR, TO INQUIRE WHETHER
THEYD BE INTERESTED IN ACQUIRING STERLING
SOFTWARE, INC (SST), BUT CA DECLINED
ON JAN 14, 2000 KUMAR MET WITH MORGAN STANLEY TO
HEAR THEIR INDUSTRY AND STRATEGIC VIEWS ON THE
ABOVE
FOLLOWING THE MEETING, KUMAR MET SSTS
CHAIRMAN TO DISCUSS POSSIBLE COMBINATIONS, AND
ON JAN 18 MR KUMAR FLEW TO DALLAS FOR FURTHER
DISCUSSION
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IDENTIFYING THE TARGETCONT.
ON JAN 23, SST MADE A PRESENTATION TO CAS SNR
MGT, AND ON JAN 26 CAS BOARD OF DIRECTORS WAS
ADVISED ON THE POSSIBLE ACQUISITION OF SST
OM FEB 6, KUMAR ADVISED SST OF THEIR INTEREST IN A
COMBINATION, THE APPROX PRICE AND TERMS--SUBJECT
TO DUE DILIGENCE REVIEW
ON FEB 9, CA AND SST AND THEIR OUTSIDE LEGAL
ADVISORS MET IN DALLAS AND SIGNED A
CONFIDENTIALITY AGREEMENT TO COMMENCE DUE
DILIGENCE
CA BOARD OF DIRECTORS MET (VIA A CONFERENCE
CALL) ON FEB 10 AND 13, AND APPROVED THE
ACQUISITION OF SST
ON FEB. 14, 2000 CA AND SST ENTERED INTO A MERGER
AGREEMENT AND ANNOUNCED THEIR TRANSACTION
BEFORE THE OPENING OF THE NYSE

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TENDER OFFER &
ACQUISITION VEHICLE / STRUCTURE

WILLIAMS ACTREQUIRE 20 DAYS WAIT, SUBJECT TO
EXTENSIONS, OFFER EXPIRES ON MARCH 20, 2000 AND THE
LATEST BY 9/20/00
ACQUISITION IS VIA SILVERSMITH ACQUISITION CORP, A
WHOLLY OWN SUBSIDIARY OF CA, WHICH WAS
ESTABLISHED ON 2/11/2000 FOR THE SOLE PURPOSE OF
ACQUIRING THE SST SHARES TENDERED IN THE OFFER
THIS IS A REVERES TRIANGULAR ACQUISITION,
WHEREBY THE ACQUIRING ENTITYSILVERSMITH
WOULD MERGE INTO THE TARGET, AND THE SURVIVING
FIRM WOULD BE STERLING, A SUBSIDIARY OF CA



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PRICE AND PAYMENT TERMS:
STOCK-FOR-STOCK EXCHANGE OFFER
& COLLAR PROVISION



THE EXCHANGE OFFER: STOCK-FOR-STOCK, AT A FIXED &
VARIABLE EXCHANGE RATIO CUM COLLAR
STOCK-FOR-STOCK EXCHANGE OFFER AT THE EXCHANGE
RATIO OF 0.5634 CA/ SST BASED ON CAS AVG OF $77.12
AND A COLLAR
THE EXCHANGE RATIO WILL BE RESTATED IF THE AVG
CA PRICE (DURING THE WAITING PERIODFROM
ANNOUNCING THE AGREEMENT TO 10 DAYS PRIOR TO
CLOSING) IS GREATER THAN $77.12 OR LESS THAN $63.10
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PRICE &PAYMENT TERMS
THE COLLAR ESTABLISHES A CEILING AND
FLOOR: THE CEILING FOR SST IS AT $43.45 IN
THE EVENT THAT CA EXCEEDS $77.12 DURING
THE APPROVAL PERIOD AT AN EXCHANGE
RATIO OF CA/SST AT 0.5634 (43.45/77.12=0.5634; IF
CA=$80, THEN 43.45/80=0.5431WHICH RESETS
THE EXCHANGE OFFER)
THE COLLAR SETS A FLOOR FOR STERLING AT
$35.55 PER SST IF CA DECLINES BELOW $63.10
(35.55/63.10=0.5634; BUT IF CA=$30 THEN
35.55/30=1.185, TO AVOID DILUTION OF CA
OWNERSHIP, CA WOULD OFFER TO PAY 0.5634 IN
SHARES (0.5634x30=$16.902, AND THE BALANCE
OF $18.648 IN CASH (=35.55-16.902)

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PRICE & PAYMENTCONT.
IN THE CONTEXT OF OPTIONS ANALYSIS, CA IS SAID TO
HAVE PURCHASED A CALL ON SST WITH A STRIKE PRICE
OF $43.45 [ $77.12x0.5634=$43.45] FOR THE WAITING PERIOD
(MATURITY); AND SOLD A PUT ON SST WITH A STRIKE
PRICE OF $35.55 [63.10x0.5634=35.55], THUS CREATING A
COLLAR WHICH PROVIDES A HEDGE AGAINST A RISE IN
THE PRICE PER SST AND AVOID DILUTION IN THE EVENT
OF A FALL IN ITS SHARE PRICE
SIMILARLY, STERLINGTHE COUNTER PARTY TO THE
ABOVE OPTIONS TRANSACTION IS SAID TO HAVE SOLD
A CALL AND PURCHASED A PUT AT THE SAME STRIKE
PRICES AND MATURITY AS CA; THUS HEDGING AGAINST
THE RISK OF A DECLINE IN THE COMPENSATION PER
SHARE (IN EXCHANGE FOR CA SHARES) IN THE EVENT OF
A CA PRICE DECLINE

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PRICE & PAYMENTCONT.
TO AVOID CAS DILUTION OF
OWNERSHIP, I.E., ISSUE TOO MANY
OF ITS SHARES IN EXCHANGE FOR
SST IN THE EVENT THAT CA SHARES
DECLINE, CA HAS THE OPTION TO
PAY CASH IF ITS SHARE PRICE
FALLS BELOW $63.10


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CORPORATE GOVERNANCE ISSUES
THE BOARD OF STERLING HAS UNANIMOUSLY APPROVED THE
MERGER, DECLARING THAT THE OFFER IS FAIR AND IN THE
BEST INTEREST OF SSTS SHs, AND RECOMMENDED THAT SSTS
SHs ACCEPT THE OFFER AND TENDER THEIR SHARES
SST WAS ADVISED BY GOLDMAN, SACHS & CO.
THE OFFER IS SUBJECT TO SEVERAL CONDITIONS; 1. A
MAJORITY OF SST TENDERING THEIR SHARES; UNDER
DELAWARE CORPORATION LAW IF 90% OR MORE TENDER, NO
VOTE OF SST SHs WOULD BE REQUIRED; 2. WAITING PERIOD
UNDER ANTITRUST LAWS, 3. SEC ACCEPTANCE OF THE S-4
PROSPECTUS
SHs AND DIRECTORS ARE OBLIGED NOT TO SOLICIT, INITIATE
OR OR ENCOURAGE COMPETING OFFERS
QUESTIONHOW SHOULD THE BOARD REACT TO A COMPETING
OFFER?

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ACCOUNTING & TAX
THE ACQUISITION OF SST BY CA WOULD BE ACCOUNTED
FOR BY THE PURCHASE METHOD OF ACCOUNTING (AND
NOT BY THE POOLING METHODS OF ACCOUNTING
WHICH WAS DISALLOWED BY FASB FROM MID-2001
ONWARD )
STOCK-FOR STOCK TRANSACTION--TYPE B TRANSACTION--IS
DEEMED TAX FREE UNDER CERTAIN CIRCUMSTANCES
HOWEVER, IF SOME CASH IS PAID, THIS PORTION WOULD
BE TAXABLE
FORMER SHs OF SST WOULD BE TAX EXEMPT IF THEY
CONTINUE TO HOLD CAS SHARES AND IF NO
SIGNIFICANT PART OF STERLING BUSINESS IS DIVESTED
WITHIN THE FIRST TWO YEARS
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GOVERNMENT REGULATIONS

THE MERGER IS SUBJECT TO SEVERAL REGULATORY
REQUIREMENTS:
1. SEC REGISTRATION REQUIREMENTS OF NEW SECURITIES;
2. WILLIAMS ACT (AN SEC AMENDMENT);
3. HSR DOJ-FTC;
4. DELAWARE CORPORATION LAW;
5. CORPORATE BY-LAWS;
6. IRS RULING ON THE TAX STATUS OF THE TRANSACTION
TENDER OFFERS ARE SUBJECT TO THE WILLIAMS ACT
AND NEED TO REMAIN OPEN FOR 20 BUSINESS DAYS FOR
SHs TO TENDER THEIR SHARES, SUBJECT TO EXTENSIONS
OF UP TO 15 DAYS; CAS OFFER EXPIRES ON MARCH 20,
2000 AND THE LATEST BY 9/20/00


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GOVERNMENT REGULATIONS
ANTITRUST CONDITIONS: UNDER HSR ACT, SOME
ACQUISITIONS MAY NOT BE CONSUMMATED UNLESS
INFO WAS FURNISHED TO THE ANTITRUST DIV OF THE
DOJ AND THE FTC FOR APPROVAL
THE INITIAL WAITING PERIOD UNDER HSR IS 30 DAYS
DURING WHICH EITHER THE FTC OR DOJ MAY ISSUE A
REQUEST FOR ADDL DATA, WHICH WILL EXTEND THE
WAITING PERIOD BY 20 DAYS AFTER COMPLIANCE WITH
THESE REQUESTS
DELAWARE ANTI TAKEOVER LAWS
SEC 253 OF THE DELAWARE GENERAL CORPORATION
LAW STATES THAT IF 90% OR MORE OF TARGET SHARES
ARE TENDERED, NO SHS APPROVAL IS REQUIRED


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RISK FACTORS
THE TRANSACTION COULD BE TAXABLE
THE FIXED EXCHANGE RATIO CA/SST
WOULD WORK TO THE DISADVANTAGE
OF SSTS SHs IF CA FALLS STEEPLY
POST MERGER INTEGRATION PROBLEMS
COULD OCCUR
GOVERNMENT APPROVAL MIGHT BE
DELAYED
A THIRD PARTY MIGHT ENTER THE
BIDDING CONTEST
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EXCHANGE AGENT & POST MERGER OWNERSHIP
THE EXCHANGE AGENT WOULD BE A
BANK THAT CA WOULD CONTRACT AND
SST WOULD AGREE TO
THE EXCHANGE AGENT WOULD
FACILITATE THE TENDER AND THE
PAYMENTS INVOLVED
STERLING SHs WOULD OWN APPROX 8%
OF CA (Why? How do we derive it? Apply the
exchange ratio model)

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POST MERGER INTEGRATION

I. THE TRADITIONAL MERGER PROCESS
II. THE INTEGRATED MERGER
PROCESSES
III. TO BE FURTHER DISCUSSED DURING
OUR LAST SESSIONSEE THE
SYLLABUS

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REFERENCE
BASED ON FORM S-4 (PROSPECTUS)-- REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933--
FILED 2/22/2000