September 20, 1999 3:00 PM PDT

European firms eye possible Cambridge Technology deal?

Cambridge Technology Partners is a logical acquisition target for several European services companies hungrily eyeing potential United States expansion, analysts say.

Once a Wall Street darling, the Cambridge, Massachusetts-based company is now struggling with a reorganization, executive turnover, plummeting stock worth, and revenue shortfalls. Employee turnover of about 30 percent is expected this quarter--compared with the overall 22 percent industry average.

The company's shares are trading at about $12 today, down from a 52-week high of $32.25. In a research note issued last week, Lehman Brothers lowered its third-quarter estimates to 70 cents per share from 87 cents for the year, and cut its price target to $22 from $25. The company has a market cap of about $775 million.

J.P. Morgan analyst Robert St. Jean said a takeover has been long-rumored and that, on valuation, CTP is "extremely cheap."

"The board would be remiss not to consider a fair offer," he said.

"If they are going to be acquired, now is the right time," said Mark Wolfenberger, analyst at Credit Suisse First Boston. "The company is more than half way done with its reorganization. Probably now is the prime time for anybody who's a suitor to take a serious look at CTP."

"The biggest issue blocking a sale is probably price," he added. In addition, Cap Gemini, a rumored likely suitor, has extremely complicated financial dealings that analysts and investors are perpetually trying to unravel, a factor to consider in any possible sale, analysts said.

If the price is right, analysts say the most likely takers will be either Paris, France-based Cap Gemini Group or U.K.-based Sema Group, both which are reportedly talking to CTP, according to Wall Street analysts. Both European firms are seeking a U.S.-based partner to boost their global presence and would likely allow the company to continue operating as a semi-independent unit. Cap Gemini has bought U.S.-based services company Beechwood in April to boost the clout of its American arm, Cap Gemini America. Cap Gemini Goup is an approximately $5 billion company with about $643 million in U.S. revenues. Meanwhile, Sema Group is a $4.5 billion company with little U.S. presence, making an acquisition particularly enticing.

"We think CTP is gong to be sold in the next six to 12 months," said Bill Loomis, a financial analyst at Legg Mason. Loomis said potential buyers may have hesitated over concern for the company's stability since chief executive and co-founder Jim Sims' left in July. Jack Messman, a CTP board member, replaced Sims.

CTP management has repeatedly said the company isn't for sale. The company, reached by phone, had no comment on a possible sale, citing a quiet period before its third-quarter earnings are announced.

"I think [a sale] makes a great deal of sense," said Richard Holway, a U.K.-based analyst who follows the services and consulting industry. "We have been anticipating Cap Gemini undertaking a purchase in the U.S. for a long time." Cap Gemini, Europe's largest computer services firm, is reportedly seeking a U.S. acquisition in the $1 billion range, which is in the ballpark of what the company would have to pay for CTP.

Sema Group, meanwhile, has tried unsuccessfully to break into the U.S. market for the past three years and could potentially score with a CTP deal, according to Susan Scrupski-Miranda, head of IT Services Advisory.

"It's a market the European service providers have been looking at for five years," she said. Besides Cap Gemini and Sema, Europe-based Logica is also looking for a U.S. partner, she said.

Despite its troubles, Cambridge offers a potential buyer blue chip customers, a solid reputation, a base of consulting talent, and a newly focused e-commerce practice the company recently launched, analysts say.

"CTP has deep design skills, a very good history of systems integration work; and, frankly, there aren't that many properties right now with that caliber," Wolfenberger said.

On the down side, Cambridge's top talent has fled the company to hatch smaller consulting firms formed around Internet services. Bob Gett now runs e-services company Viant, Bill Seibel is CEO of e-services startup Zefer, and Gordon Brooks, a CTP co-founder, now heads Breakaway Solutions. CTP top executive Malcolm Frank also left Cambridge recently to help found a start-up called NerveWire, while Sims said he was leaving to pursue new projects.

Whether new chief executive Messman is intent on trying to return the company to Wall Street favor or striking a deal remains to be seen.

"They're not going out of business any time soon," Wolfenberger said. "Their situation clearly can be fixed, the business model could be changed. If they were bought, they'd have an opportunity to reinvent the company."

 

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