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Business shadowed by ills

Newsday Staff Writer

November 3, 2006

The stars have never quite fallen back into alignment after the company formerly known as Computer Associates acknowledged a $2.2-billion accounting scandal in 2004.

As the company last night reported a 15 percent increase in earnings to $53 million, on revenue that increased 5 percent to $996 million, observers took note of the impact of the lingering effects on CA on a morning when former chief executive Sanjay Kumar received a 12-year prison sentence.

For CA in the wake of Kumar's reign, periods of stability, of promising revenue numbers, strategic acquisitions and new management talent have all been eclipsed by financial restatements, revenue shortfalls and an unprecedented management exodus.

Yesterday's earnings announcement had a familiar ring. While earnings were "above our expectations," changes to CA's sales organization "caused a drag on our bookings," leading to a "negative effect on cash flow," CA chief executive John Swainson told analysts last night. Yet, "We believe the issues that affected our second quarter performance are behind us and we are confident in our ability to execute in the second half."

He noted CA was in a "multiyear transformation."

For Swainson, the former IBM software chief who took over in January 2005, the once-welcome task of acknowledging the past in order to put it behind his newly renamed CA Inc. has become a task of "Groundhog Day"-like repetitions.

This year has been a particularly challenging one for his regime, which has been forced to acknowledge improper stock options grants, a broken sales commission program, weak financial controls and further restatements of past results.

Employees have had no easy go of it either. CA is in the process of laying off some 1,700 workers after earlier eliminating a discretionary 401(k) payment and trimming other perks. Morale at headquarters in Islandia is said to be suffering under the weight of a company that has shifted some important corporate jobs to an expensive new headquarters in Manhattan.

And yet, for a company whose former top executives and top lawyer pleaded guilty to one of the most staggering obstruction of justice conspiracies in Department of Justice history, bouncing back is no easy feat.

"I think they're trying to change the culture," said Michael Cornacchia, a Manhattan lawyer and former prosecutor at the U.S. attorney's office, who at one point led the CA investigation and helped secure some of the first guilty pleas. "I think everybody's on notice there."

Cornacchia pointed to CA's appointment last year of Gary Brown, a former head of the criminal division in the Long Island office of the U.S. attorney, as a sign the company is serious about putting the corporate culture right. There had been much to change, Cornacchia said. "Nobody has ever seen this type of corporate obstruction at the top levels" of a company.

Wall Street analysts, meanwhile, might be willing to forgive past problems, and even some newly discovered ones, if the financials looked more promising.

"On the execution front, things are still weak in our view," said John Moore, vice president and senior analyst at Moody's Investors Service in Manhattan, who was one of the first to send up warning signs about CA in 2002. "If the business were truly firing on all cylinders, you would be able to offset these blemishes that keep sprouting up."

Martin Schutz, research analyst at Hochfeld Independent Research Group in Manhattan, said the issues are no longer necessarily tied to the past.

"The conviction of Kumar is not going to do anything to fix CA's problems," Schutz said. 


Copyright Newsday Inc.



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