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IMS sees some positive impact from Cognizant sale

Eric Auchard in New York

IMS Health Inc. officials on Friday said the split-off of its former Cognizant Technology Solutions Corp. software services unit will have a neutral to positive impact on its 2003 earnings.

IMS Health, a provider of health information services to the drug industry, filed on Thursday to sell all 11.3 million, or 56 per cent of the outstanding shares of Cognizant, that IMS owns in 'split-off exchange' to IMS shareholders.

The deal marks the culmination of a process that began in 1994 when financial services firm Dun & Bradstreet, now D&B, spun out IMS Health and its Cognizant unit. Cognizant then went public in 1998, but IMS retained a 56 per cent stake.

"This transaction amounts to a very large share buyback," IMS investor relations spokeswoman Darcie Peck said in a joint conference call in which executives spelled out to analysts and investors the variables at work in the planned transaction.

For its own part, Cognizant executives asked shareholders to look past the near-term impact of the flood of IMS-held shares, arguing for the benefits of greater liquidity and the elimination of the uncertainty caused by IMS share ownership.

Cognizant shares, one of the rare US technology stocks still trading within range of its all-time high -- near $74 -- fell $3.07, or 4.26 per cent, to $68.95, on news of the deal.

The shares of IMS Health, which trade in the middle of their prior 52-week range, settled back 1.66 per cent to $16.54.

IMS also expects to post a first-quarter gain of "hundreds of millions of dollars," offset partly by a charge of $9 million to $14 million to cover investment banking fees. The exact earnings impact will depend on investor reception of its planned split-off exchange of Cognizant share for IMS shares.

Cognizant, of Teaneck, New Jersey, is a fast-growing supplier of software development services by Indian programmers to big corporate customers, boosted its fourth-quarter revenue forecast to $67 million, up from prior fourth-quarter guidance of $64 million.

It raised its earnings per share view 1 cent to 47 cents.

Cognizant chairman and chief executive Kumar Mahadeva said the transaction would clear the way for Cognizant to pursue independent strategies. IMS will remain a significant customer of Cognizant software services in the future, he stressed.

"We are looking at small acquisitions which fill in certain gaps in our product line and geographic presence," Mahadeva said during the conference call, repeating Cognizant's prior selective acquisition policy. "We may have a little more flexibility in terms of using our equity for acquisitions."

Meanwhile, executives of Fairfield, Connecticut-based IMS said business conditions in the health information field remained gloomy, especially in Japan. The challenge of generic drug makers to its blue-chip pharmaceutical makers was also taking its toll, IMS said.

It said it was planning on 2003 revenues to grow around 4 per cent to 5 per cent after Cognizant is excluded, in line with expected 2002 growth.

The 2003 margins would be "flat to slightly down," IMS said.

IMS 2002 revenues are expected to grow 7 per cent to 8 per cent in constant-dollar terms, including the still-consolidated results of Cognizant, while earnings should be in the range of 98 cents to 99 cents per share, it said.

IMS officials said that, in advance of the Cognizant share repurchases, it planned to make no further share buybacks during 2002. So far in 2002, it has bought back 14 million shares.

Every line of the IMS 2003 profit and loss statement, as well as balance sheet, will have to be altered, but the figures will depend on the final terms of the Cognizant split-off.

IMS expects the US Securities and Exchange Commission to have largely completed a review of its planned offer by the end of December and to then begin a roadshow to encourage IMS investors to accept the offer.

The exact terms of the offer will be determined by taking the closing share price of both IMS and Cognizant to shareholders on the day before the 20-day exchange offer begins. In addition, Cognizant shareholders can expect a premium to be added to the offer, officials of both companies said.

One analyst on the call said prior split-off exchange offers -- an uncommon, but accepted Wall Street financial transaction -- usually carried a premium of 15 per cent to 18 per cent to shareholders. IMS officials declined to comment on what premium IMS shareholders might expect in their own deal.

If successful with the exchange, it plans to distribute Cognizant shares to IMS shareholders by mid-February of 2003. IMS reserved the right to restructure or extend the deal over a longer period if it fails to generate enough shareholder support for the initial exchange offer.

The split-off exchange was one of four option presented to the companies by IMS advisors Goldman Sachs and Bear Stearns. Other choices for IMS had included an additional secondary offer, sale of the company or a spin-off.

"We are very confident that a split-off transaction is the best first step to us," Peck said.

IMS Health Chief Financial Officer Nancy Cooper said: "This transaction is attractive under a wide range (of potential stock prices)."

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