October 7, 1996 4:45 PM PDT

CA buys Cheyenne

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After months spent dancing around the issue, Computer Associates (CA) and Cheyenne Software (CYE) will finally tango to the tune of $1.2 billion.

The acquisition of Cheyenne by systems management giant CA extends the company's products to the LAN (local area network) and desktop. Cheyenne's ARCServe backup and storage management product is the dominant player in the Novell NetWare LAN market, although it has been slow to enter the Microsoft Windows NT market.

The two companies had already been involved in various licensing agreements. The cash offer by CA had been rumored for months.

Charles Wang, CA chairman and chief executive, had said the company was not interested in any more mergers after a flurry of acquisitions over the past few years.

Evidently, he changed his mind.

CA and Cheyenne have already benefited from a close relationship, with CA blending storage management capabilities into its flagship product, CA-Unicenter. Wang said in a press conference that talks with Cheyenne Software began in earnest last week. The heads of the two companies have been friends for a number of years.

He added CA initiated the offer because there is synergies in four areas: Cheyenne's people, software, distribution, and partners.

Cheyenne's workforce will be retained and the company will operate as a division to Computer Associates, which ReiJane Huai, Cheyenne chairman and chief executive, will oversee. Wang praised Cheyenne's strong team of NT and netware engineers.

CA will also integrate Cheyenne's antivirus software with its security offering. After integration, CA will include a mainframe to desktop policy-based security with active antivirus protection--which in essence will find viruses before they are delivered to the desktop, Wang said.

The distribution systems of the companies are also complementary. Cheyenne uses 95 percent indirect channels and Computer Associates taps into direct channels 90-percent of the time.

But there are some issues that will have to be resolved. Cheyenne has storage management software products that have no overlap with CA. Wang did note, however, that under the combined company, CA will be able to offer fully integrated end-to-end hierarchical storage management.

In contrast, there is too much overlap in the area of partners. In answer to this charge, Wang stated the closeness of the working relationships with the partners differs between the two companies.

The buyout finally sets a course for Cheyenne, which has been the subject of heated merger discussions during the past year. LAN management and security vendor McAfee made a public bid for the company, but it failed amid veiled threats of legal actions. McAfee has since entered into a licensing deal with Windows NT backup market leader Seagate Software, Storage Management Group.

Huai discounted the richness of McAfee's $1 billion offer, which it rejected in May. Based on the current stock price of McAfee, the deal would have been in the $50 a share range. CA will purchase all outstanding Cheyenne's stock for much less--$30.50 per share.

But at the time of the offer, Huai said the deal was not as rich and the synergies were not as great was what it would receive with the CA deal.

"We have to do what's in the best interest of the shareholder," Huai said.

Cheyenne reported fiscal 1996 revenues of $174 million and net income of $27 million in August. CA reported revenue of $3.5 billion for the fiscal year ending in March, with income of $750 million before factoring in charges related to the acquisition of Legent, a database vendor.

Ironically, analysts say CA has paid an inflated price for a company near the end of its high-growth curve that has technology available from a variety of other vendors at less cost.

"I'm at the moment baffled," said Paul Mason, an analyst with the market research firm International Data Corporation. He wonders how CA can justify a price that is eight times the fiscal revenue for Cheyenne. "Seems like a lot of money to me," Mason observed.

 

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