After a series of failed takeover attempts and accounting scandals, Computer Sciences Corp is attracting potential activist investors looking to take advantage of a weak share price to push for a breakup.
The $4.5 billion market cap company's shares have dropped 40 percent so far this year to below $30, valuing it at a steep discount to peers.
Its government services business faces an uncertain outlook amid prospective cuts in U.S. government spending, dragging down the value of its higher growth Information Technology services.
Adding to its problems, Computer Sciences is also caught up in an accounting investigation, shareholder lawsuits and a long dispute with the U.K. National Health Service regarding alleged delays in developing healthcare IT systems.
Activist investors are doing the math, evaluating a breakup and other ways to boost Computer Sciences' sagging share price, people familiar with the situation said. But Computer Sciences is aware of the pressure and has been reviewing it options as well, the people added.
Representatives for Computer Sciences declined comment.
Computer Sciences has been a target of multiple takeover attempts in the past and investors and potential buyers have long bet that separating the Falls Church, Virginia-based company's commercial IT services from its government services could boost value.
Its North American Public Sector, which provides outsourcing and consulting services to the Defense Department and other federal agencies, accounts for a little more than a third of its revenues.
The rest comes from data-center outsourcing and developing enterprise software applications. Computer Sciences' revenues totaled $16.2 billion in the 12 months ended July 1, 2011.
The company trades at about 6 times its earnings. Accenture Public Ltd Co, a close competitor in terms of size, scale and reach, trades at about 17 times earnings, said Morningstar analyst Swami Shanmugasundaram.
Shanmugasundaram said the commercial business has a higher growth profile and better margins than the government business, and splitting them up would "definitely" be good for shareholders.
"Because of its growth profile and execution issues ... I do expect CSC to trade at a discount (to peers), but this is too much of a discount," he said.
People familiar with Computer Sciences management's thinking said the company believes the two units belong together and it wants to sort out several pending issues before determining its strategic direction.
The U.S. Securities and Exchange Commission is in the middle of a probe related to Computer Sciences' accounting errors, which primarily involve accounting irregularities in Europe's Nordic region.
The issues could "divert management's focus, result in substantial investigation expenses and have an adverse impact on the firm's reputation and financial condition," Computer Sciences has said in a statement.
The U.K. government, meanwhile, is reviewing whether a contract to install next-generation healthcare IT systems in the country should be continued after Computer Sciences allegedly missed deadlines. The company said this week it would likely meet the U.K. health agency in September to discuss the matter.
These challenges could prove a hurdle for any activists looking to buy into the company.
Activists would also have to wait it out if they launched a campaign either against the board, as all 10 Computer Sciences board members have been just reelected for a full year. The current board members have served long terms, with only four of the directors joining after 2007.
Over the last decade or so, private equity firms, big technology companies and prime defense contractors have looked at the company as a takeover target, but its presence in both the commercial and government sectors proved to be a hurdle.
In early 2006, Computer Sciences received an offer in the low $60s per share from a consortium of three private equity firms and a large technology company, the sources said.
But Chief Executive Van Honeycutt wanted at least $65 per share and rejected the bid, they said.
Lockheed Martin Corp was also interested at the time, but was not prepared to buy the entire company and its efforts did not gain traction, these people said.
In 1998, Computer Associates -- now known as CA Technologies -- unsuccessfully made a hostile $9.8 billion takeover bid for Computer Sciences.
It is unclear if any of these or other potential buyers would still be interested. Hewlett Packard Co bought Computer Sciences competitor EDS for $13.9 billion in 2008, while others such as Dell Inc and Oracle Corp have different priorities for takeovers, sources said.
The sheer size of a deal would also be a challenge for private equity firms in the near term, sources said.
But if government and commercial businesses were separated in a tax-free spinoff, the two units would attract more buyers, the sources said.
"If the company is really going to earn what Wall Street thinks it's going to earn, it is extremely attractive from a value perspective," a source said.
"That said, the company needs to reposition strategically and the question is: Can they get there on their own?"