Newsday, June 5, 2006 article

BY MARK HARRINGTON
Newsday Staff Writer

June 5, 2006

No one can accuse John Swainson of failing to hit the ground running.

But after a dizzying year marked by a dozen acquisitions, a roster of executive appointments and an effort to put the worst days of Computer Associates in the past, the rookie chief executive and his newly named CA Inc. face nothing less than a crisis.

In just the past month, a year of encouraging progress has been threatening to be undone by financial missteps and executive departures that observers and analysts have described as bewildering. Last week, the business software company said it would restate third-quarter results and delay a fourth-quarter report because of miscalculations of commission payments to its sales force and income taxes on cash repatriated from overseas operations.

The revelations, coming amid a parade of executive departures with persistent rumors of more to come, left Wall Street scratching its head over how so much high-priced executive talent could somehow have missed unexpectedly ballooning commission payments. (On Friday, the company declined to comment on a report that a top-level CA sales executive also would soon depart.)

"They ought to be able to add the numbers properly," Bert Hochfeld, principal of Hochfeld Independent Research Group in Manhattan, said last week. Wall Street responded by battering the stock to a 52-week low of $20.80 before recovering slightly. Moody's Investors Service lowered its outlook to negative from positive, and Lazard Capital Markets predicted the stock would likely tumble to under $20.

While the latest setbacks have left investors and analysts anxious and demanding more information, most appear willing to give Swainson the benefit of the doubt - for now.

Executive turnover

Swainson came to CA in late 2004 after 26 years at IBM, most recently as general manager of software sales.

John Moore, vice president and senior analyst at Moody's, praised Swainson in an interview last week as a "heavy hitter" with coveted technical and administrative experience, but added there's no getting past the executive turnover. "He's a great choice," Moore said of Swainson, "but it's a loss when you see all these other people go. It would be nice if there were greater stability at the senior level."

Internally, repercussions from the missteps continue to reverberate. Most management bonuses and a discretionary retirement-fund payment for employees were axed, and commission payments were delayed, heightening concerns about motivating the sales staff to produce in future quarters.

At the same time, a new corporate jet, executive cars with drivers and a new Manhattan executive office on Madison Avenue have employees grumbling in ways not seen since they were asked to sign a Ferrari given to former chief executive Sanjay Kumar in the Islandia headquarters lobby in the 1990s.

"Having a grumpy workforce can't be good for the long-term financial health," said Con Hitchock, outside counsel and spokesman for Amalgamated Bank LongView Funds, which owns CA shares and has proposed a proxy vote to oust CA chairman Lewis Ranieri and board member Alfonse D'Amato. "The amazing thing is, just when you think nothing else can happen, something does." He stopped short of blaming Swainson directly for the problems, but added, "It's certainly not good these problems are happening on his watch."

'A sense of urgency'

Swainson declined to be interviewed. But Bill Hughes, a former IBM spokesman recently recruited to the top communications post at CA, said Swainson understands the challenges he faces.

"He is injecting a sense of urgency into the company especially over the past four weeks," Hughes said in an e-mail last week. "He understands what we need to go do, and the challenges that we face. What you are seeing has been the result of poor execution - mostly self-inflicted. We know what the problems are and they will be fixed."

For Swainson, the immediate challenge is to shore up his management ranks, particularly in the finance department, while allaying investor concerns of more unpleasant surprises to come. One expert said finding good people to fill the vacancies won't be easy - and will come at a price.

"The whole world knows morale at the company is at an all-time low," said Steven Speter, a long-time CA shareholder who is executive vice president of executive search firm DHR International in Manhattan. "That certainly makes it more difficult to attract the quality of people you want to put in there." CA, already criticized for overpaying executives, will have to sweeten the pot "with a fistful of options. There's no question they'll have to dig deeper," Speter said.

That could rankle shareholders, but Speter said there's no avoiding it. "You really have to do that at a distressed company."

Problems with the board?

Gary Lutin, an investment banker who oversees a CA shareholder forum, said Swainson's problems may be the result of pressures from above.

"Swainson seemed to show good leadership instincts when he first got there, but it's not possible for anybody to be an effective leader when they're constrained by a board of directors that's compromised," he said, noting that several of the directors were in place during CA's accounting and obstruction of justice scandals.

Alluding to the company's decision to withhold discretionary 401(k) payments to offset commission expenses, Lutin added, "You have to assume that Swainson simply isn't free to do what's right and what's fair. I've never seen anything like that. They're acting like this is the Senate and you can just dump the cost on the taxpayers."

Moore, of Moody's, said it would be unfortunate if Swainson ultimately were forced to take the fall for the missteps.

"I've got my fingers crossed" that he stays, Moore said.