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Forum Report: Details of ISS report: policy requires "putting money on the table"

(August 11, 2001)

From: Gary Lutin
Sent: Saturday, August 11, 2001 10:32 PM
Subject: Details of ISS report: policy requires "putting money on the table"

ISS's report on the contest for CA's board, released after the close of business Friday and quickly spun out for news bites, is actually a thorough and carefully detailed analysis which may summarized in three basic points:
  1. It is virtually undisputed that the performance of CA's existing management has been unsatisfactory for several years.  Even existing management concedes this.
  2. ISS considers the Wyly-Ranger dissident slate of candidates to be qualified, actually referring to them as "an 'all-star' board whose credentials are nearly unimpeachable to oversee the implementation of Ranger's plan for CA."
  3. Based on ISS policy, as stated by them in the report, the dissident slate "nonetheless faces a very high hurdle in asking for the keys to the boardroom without first putting money on the table."  ISS notes that they would recommend a "short slate" to give the Wyly-Ranger group representation on the board, but in a vote for full control they are compelled to recommend continuing reliance on the existing management.
The ISS policy to rebuke rather than replace non-performing management is of course controversial, among their clients as well as other investors.  (Many of you, I know, believe that the demonstrated ability of investors to replace managers who fail to perform is essential to the effective operation of capital markets.)
But whether Forum participants agree or disagree with the ISS policy, the question of director candidates "putting money on the table" is clearly relevant to shareholder decisions about who can be relied on to "achieve mediocrity."  (Remember, that's $75 per share in the current market.)  The subject will certainly be included among the Forum's requests for candidate's statements of their positions.  ISS may of course reconsider their recommendation if the candidate responses justify it.
The news reports
Copied below are three news reports of the ISS analysis.  The first is from Newsday, which has established itself as the newspaper of record for the contest.  (You may want to refer to their very useful web site, titled "The Fight for CA," which maintains a thorough record of the contest with links to past articles, interviews, documents and other relevant information.)  The second is from the NY Times, which before the contest had published widely quoted and controversial reports about CA management practices.  The last is from Reuters, which has been providing the most active newswire coverage of the contest.
The Newsday and Reuters reports include some details of ISS's analysis and the reasons for their recommendation, as well as some marketplace context and comments from IRRC ("The bottom line is whom do you trust?”).  Please note that my quoted estimates of ISS's influence were applicable to general conditions, rather than to the specific CA situation.  As indicated in yesterday's note to Forum participants, I would guess that investor familiarity with the CA situation would reduce the reliance on ISS's recommendation to about half the usual level, and even among those who rely on ISS's report for facts and analysis it could be further reduced by the application of different policies.
                GL - 8/11/01

Wyly Bid Takes Hit
Research firm supports current CA management

By Mark Harrington
Staff Writer

August 11, 2001

In a blow to investor Sam Wyly's attempt to take control of Computer Associates International Inc., an influential research group has sided with existing management in a recommendation to institutional holders of CA shares.

Institutional Shareholder Services, an independent Rockville, Md., firm that advises more than 700 institutions on how to vote on proxies, said in a report yesterday it is recommending its investing clients stick with CA management rather than the insurgent slate of directors proposed by Wyly.

The ISS report follows one released earlier this week from Investor Responsibility Research Center that noted "troubling” issues at CA. But IRRC, as a rule, doesn't make recommendations. Another report, from Proxy Monitor, is due Aug. 15.

Ram Kumar, an ISS analyst, said his firm supported current CA management because Wyly was asking for too much, and offering shareholders too little.

"He's asking for the keys to the entire boardroom and not giving a premium [stock price] to shareholders,” the analyst said, explaining that more common attempts seek fewer board seats or offer to buy shares above the market price.

"It was a tough call,” he added. "Obviously CA has taken a lot of criticism on the governance front, and Wyly scores points for his director slate and his business plan. Wyly's plan [for splitting the company into four separate operating units] can't be laughed off. But at the end of the day it was not enough to push him over the top.”

Wyly owns 100 shares of CA, and his Ranger Governance has 1.4 million options to buy CA shares.

In a statement released last night, Charles Wang, CA's chairman, said the ISS recommendation "reaffirms our position that the company's current leaders are the best choice to continue to grow CA in an increasingly complex market.”

Wyly was unavailable for comment last night, but Ranger Governance did release a statement. "We are disappointed that ISS has endorsed the incumbent board of a company we believe is not growing in any meaningful way,” the statement said. "We believe that the board and the management of CA needs to change in order to improve the company's performance, culture and growth.”

ISS' recommendation is considered important since almost two-thirds of CA shares are held by institutions, according to Newsday estimates. Thus far Wyly has received the public backing of one -- J.W. Seligman & Co., of Palo Alto, Calif., which holds slightly more than 1 percent of CA stock and whose manager has issues with CA management.

Other institutions aren't expected to publicize their intentions, at least not until the final days before the vote. But observers said the ISS recommendation bears weight.

"In a passive situation, ISS tends to have a significant influence among indexed portfolio holders,” said investment banker Gary Lutin, principal of Lutin & Co., who heads a forum of CA shareholders.

"To the extent that a lot of [institutional holders] are following this proxy contest actively, the influence may be a little less,” Lutin noted. "But I'd say their recommendation is likely to influence 10 percent to 15 percent of institutional holders, or be coincident with the views of 10 to 15 percent.”

In releasing its separate report this week, Washington, D.C.-based Investor Responsibility Research Center called "most troubling” contentions about CA's alleged "accounting irregularities,” citing Wyly's camp as its source.

It cites the comments of an "observer” criticizing CA's apparent inability to thrive in a market upturn, but also cites analysts' worries that the Ranger plan for CA doesn't "add much value.”

"There are obvious governance issues at CA,” said Jason Montgomery, a senior analyst at IRRC, noting top executives' stock payout of 1998, its extension of a recently adopted "poison-pill” provision to help fight off hostile takeovers, and "accounting irregularities.”

"If there was ever a board of directors that needed to be examined it's this one,” he said. At the same time, he suggested "there are issues with Ranger Governance,” including a past investigation of Wyly by the federal Securities and Exchange Commission.

"The bottom line,” Montgomery added, "is whom do you trust?”

Copyright © 2001, Newsday, Inc.





August 11, 2001


A Setback for Billionaire's Bid to Run Computer Associates




An influential shareholder-rights group dealt a potentially fatal blow yesterday to the flagging bid of Sam Wyly, the Texas billionaire, to take control of Computer Associates International.

Institutional Shareholder Services, which advises big investors how to vote in proxy fights, recommended last night that Computer Associates shareholders vote against Mr. Wyly's proposal to elect a new board, with him as chairman. A spokesman for Ranger Governance, Mr. Wyly's investment company, said it was disappointed by the recommendation.

Shareholders will vote on Mr. Wyly's proposal on Aug. 29, at the annual meeting of Computer Associates, the world's No. 4 software company.

The endorsement of Computer Associates by the shareholder-rights group probably spells doom for Mr. Wyly's quixotic bid, which ran into serious obstacles almost immediately after it was announced in June. Mr. Wyly argues that Computer Associates needs new directors because the current board has allowed the company to alienate its customers, mistreat its employees and overpay its top executives.

Computer Associates is not particularly well-liked on Wall Street, and its stock price has languished over the last half-decade, while competitors like Oracle and SAP of Germany have prospered. But Mr. Wyly's plan to split the company into four parts has not won much support among investors. The company argues that its size is one of its greatest assets, enabling it to satisfy customers who need different kinds of software.

In addition, Mr. Wyly's newfound interest in shareholder rights and corporate governance has puzzled some investors, because Mr. Wyly has faced criticism for giving himself and his family preferential treatment at companies he has run. Mr. Wyly says he is a "born again" believer in good corporate governance.

Only days after Mr. Wyly announced his bid, Walter Haefner, a reclusive Swiss billionaire who owns 21 percent of Computer Associates, said he would support the company's current board. Computer Associates' top executives own an additional 7 percent of the company, so Mr. Wyly must win 70 percent of the company's remaining shareholders for his bid to succeed. The recommendation by Institutional Shareholder Services will make that goal even harder for Mr. Wyly to reach.

Charles B. Wang, chairman of Computer Associates, said the company, based in Islandia, N.Y., was pleased with the endorsement.


Copyright 2001 The New York Times Company




Friday August 10, 8:10 pm Eastern Time


Shareholders advisors back CA's team in proxy fight

(UPDATE: recasts first paragraph, adds details, background, byline, company response, management's response)

By Ilaina Jonas

NEW YORK, Aug 10 (Reuters) - Institutional Shareholders Services Inc., an influential shareholder advisory firm, on Friday endorsed Computer Associates International Inc.'s (NYSE:CA - news) current leadership in its battle to retain control of the world's No. 4 software maker.

In a report issued Friday, Institutional Shareholders Services, or ISS, recommended shareholders stick by and vote for CA's board of directors at the company's annual meeting Aug. 29 instead of supporting a slate offered by challenger Sam Wyly and his Ranger Governance group.

``We conclude that shareholders vote in favor of the incumbent directors, thereby allowing management to continue its ongoing strategy to reposition Computer Associates for the future,'' the report concluded.

``The company is very pleased to have received the endorsement of this highly respected advisory service, and considers it an affirmation that CA is on the right track,'' said CA representative Owen Blicksilver.

ISS is an independent proxy advisory firm major institutional shareholders hire to make recommendations on contentious issues, like hostile takeover battles.

``Given the company's strong year-to-date stock performance, it is difficult to conclude CA is a company beyond hope of a turnaround, nor can one easily dismiss the merits of management's new business model,'' the report continued.

Still, the ISS report did not dismiss the merits of Wyly and Ranger's campaign. Instead the report said the timing of their proxy fight wasn't right, especially in the light of the rise of the company's shares since the beginning of the year.

Although CA's stock has trailed the S&P Computer Software Index over the term of about the past five year, it has jumped more than 73 percent since the beginning of the year.

``While Mr. Wyly's campaign might have merited support a year ago, and although a short slate would likely merit support today, we do not believe that circumstances warrant replacing CA's entire board at the present time.''

The ISS report also said the method by which Wyly is trying to take control-- a proxy fight vs. buying the company outright -- does not benefit shareholders, the report said.

``While the credentials of the Ranger team are unassailable and Mr. Wyly's record of generating value for shareholders is impressive, dissidents bear a sizable burden of proof in seeking to acquire CA without paying a premium to its shareholders,'' the report said. "We do not believe this burden has been met.

Responding to the ISS findings, the Ranger camp issued the following statement: ``We are disappointed that ISS has endorsed the incumbent board of a company we believe is not growing in any meaningful way,'' the Ranger team said in a statement. ``We believe that board and management of Computer Associates needs to change in order to improve its performance, culture and growth. We believe our message of corporate governance, accountable and flexible management, and enhancement of shareholder value is being heard and appreciated by shareholders.''

Wyly, the Texas billionaire who founded two companies later sold to CA, launched a fight to take control of the Islandia, New York-based software maker in June. His goal is to oust Chairman Charles Wang and Chief Executive Sanjay Kumar.

During the nearly past two months, Wyly has harshly criticized Wang and Kumar, accusing them of creating a culture that mistreats customers and employees.

Wyly also said the board served as only a rubber stamp that allowed top managers to award themselves a more than $1 billionaire compensation package while the company's stock price sagged. The insurgent also described the company's newly adopted and controversial accounting method, referred to as a business model, as ``tricks.''

His ultimate goal is to oust Wang and Kumar.

``Mr. Wyly and his colleagues have mounted a credible case for change at CA and now offer shareholders a business model that has clearly worked in the past,'' the report said. ``The dissidents have also put together an 'all-star' board whose credentials are nearly unimpeachable to oversee the implementation of Ranger's plan for CA.''

``While Mr. Wyly's campaign might have merited support a year ago, and although a short slate would likely merit support today, we do not believe that circumstances warrant replacing CA's entire board at the present time.''

Copyright © 2001 Reuters Limited. All rights reserved. Republication or redistribution of Reuters content is expressly prohibited without the prior written consent of Reuters. Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.


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