Seesawing Decision in Comdisco Disaster Recovery Unit Sale

The plot thickened in the contested bidding process for Comdisco Inc.’s disaster recovery business as a bankruptcy judge ruled in mid-November that SunGard Data Systems Inc. would be the winning bidder for the unit, despite a pending antitrust suit filed in late October by the U.S. Department of Justice (DOJ) against a SunGard acquisition of the business. Previously, Comdisco had agreed to sell the business to competing bidder Hewlett-Packard Co. – even though the company had submitted a substantially lower offer – because that deal lacked antitrust implications. The seesawing over who would get Comdisco’s unit goes back to July, when Comdisco accepted an initial bid of $610 million from HP, subject to obtaining a better offer through an auction process. SunGard stepped in and topped HP’s offer with a $775 million bid in August, which later increased to $825 million. Comdisco initially rejected SunGard’s bid, because of antitrust concerns, in favor of HP’s offer, but during the auction process several groups of creditors indicated their approval for SunGard’s much-higher bid. In October, the DOJ filed a lawsuit seeking to block SunGard’s acquisition of the Comdisco unit. In an attempt to compete against SunGard’s offer, HP increased its bid to $750 million. Following the filing of the suit, the creditors withdrew support for SunGard’s offer in favor of HP’s sweetened bid. But in a reversal of fate, a bankruptcy judge ultimately ruled against HP’s attempt to snatch the business away from SunGard, saying that it violated the auction rules established by the court. Comdisco then named SunGard the winning bidder in mid-November, despite the pending suit against the company. However, the complex deal will not be completed until the antitrust case is settled. If the ruling goes against SunGard, Comdisco will have to determine what to do next. Comdisco had put its disaster recovery division on the block in July, when it filed for Chapter 11 bankruptcy court protection. The DOJ’s antitrust suit comes at a time when the disaster recovery business has been thrust into the spotlight following the September 11 terrorist attacks. Companies use the services of SunGard and its rivals to help rebuild after losing equipment, data, communications lines, or office space. Comdisco and SunGard are the No. 2 and No. 3 players, respectively, in the disaster recovery field. International Business Machines Corp. is the only other big competitor in the market. Those three companies together control nearly 80% of the market. If a sale to SunGard were to go through, it would markedly strengthen SunGard’s position in the industry. Plagued by dwindling sales in its hardware business, HP is vigorously pursuing Comdisco’s valued assets in an effort to move into the computer services arena. It is not clear on what grounds the DOJ is seeking to halt the acquisition by SunGard, since details of the filing have not been made public, but Bill Jeffery, vice president and head of the global technology solutions practice at A.T. Kearney, surmises that the main sticking point is decreased competition. “If SunGard were to buy the business, it would mean that most companies would have to look to either SunGard or IBM, and that would dramatically reduce competition. I can’t think of too many other markets in the technology space where there is a paucity of options. So, I think the Justice Department’s concern is appropriate,” he says. He adds that it is unusual for the DOJ to “come into the midst of approved bidding procedures that a bankruptcy court has sanctioned and say it is going to second-guess the outcome.” “Is there anything that would be analogous to this? I think we’d have to go back to the savings and loan bailout – that’s how rare this problem is. In that situation there were probably some asset sales that were tied up by the Justice Department as it tried to sort through how not to give any one financial institution too much power in a given market.” he notes. In dismissing the DOJ’s suit, SunGard chief executive James Mann stated that in light of the terrorist attacks it would be “contrary to public policy” for regulators to oppose a deal that would strengthen SunGard’s ability to service the country’s disaster recovery needs. Commenting on SunGard’s argument, Jeffery says, “I don’t see how September 11 is relevant to the discussion. What is relevant is market dominance and fair trade.” Additionally, a purchase by SunGard could “increase the risk to the company’s client base,” since consolidation of unutilized facilities or capabilities might be one of the planned deal synergies, he notes. “So you could make the case that two competitors with lean operations could end up having a lower total capacity of recovery services than three players would.”