A new “Forum”
program for shareholders of Computer Associates International, Inc.
(“CA”) is being initiated in 2004 to address essentially the same
issue that concerned participants in the 2001 CA Forum: eliminating a
substantial stock price discount associated with corporate governance
conditions. The current Forum’s objective is to support effective
shareholder oversight of the actions required to achieve that value
enhancement within a year.
Conditions Impairing Value
pricing of CA stock at the end of October 2004 was discounted more than
30% below the $40+ price range that would be realizable if CA were
valued at the average ratios for its industry.
Most or all of this discount may be attributable to the following risk
– After years of public controversies about compensation and accounting
issues, the Department of Justice and SEC brought criminal fraud and
obstruction charges against seven top executives, including the CEO, and
imposed a Deferred Prosecution Agreement on the company requiring
corporate reforms within 18 months.
– Although the company’s auditors and regulatory agencies are satisfied
that fraudulent financial statements have been corrected, professional
securities analysts continue to find the current form of company reports
difficult to understand.
– Most of the top level of executives were dismissed or resigned in
relation to the corruption investigations, and the company is currently
operating without a permanent CEO or CFO.
must of course rely upon the company’s board of directors to establish
at least acceptable standards and average values, either (a) by
developing a new management team that can make the required changes or
(b) by selling the business to a company with existing management
resources to assure viable operations. Forum attention will therefore
be focused on the information needed by shareholders to responsibly
select and monitor the directors. Subjects of review are expected to
§past performance of each
incumbent director standing for re-election in 2005;
§shareholder nominations of
§qualifications of all
candidates for election to the board;
§qualifications of the
company’s auditor; and
§liability claims against
directors for unjustified compensation or the costs incurred by the
company for shareholder claims and the September 2004 Deferred
To address these
and other issues that may be defined, the Forum will conduct a variety
of activities to provide investors with the kind of access to
information and free exchange of views that might be sought at a
traditional shareholders meeting, but with independent control of the
process and continuous operation until shareholder interests are
resolved. CA’s management will be invited to support the Forum, and it
is hoped that the responses of the company’s directors and
representatives will permit cooperative communication for the benefit of
all decision-makers. However, even in the absence of management
participation beyond obligatory responses to shareholder requests, the
Forum may conduct board inquiries, panel reviews, professional
workshops, shareholder surveys, open meetings or other activities as
required to produce the information investors need for their evaluations
and decisions, and also to present management with information they need
to consider in the performance of their duties to shareholders.
Participation in the Forum will be open
to all CA shareholders and any professionals concerned with their
decisions, without charge, according to standard Forum conditions.
Investors with sufficient interests in CA will be encouraged to consider
additional participation in advisory panels to help define the issues
addressed by the Forum. All participants are expected to make
independent use of information obtained through the Forum, and Forum
participation will be considered private unless the party specifically
The Forum will
be managed by Gary Lutin, the investment banker who conducted the 2001
CA Forum as well as the forum programs to resolve investor interests in
public demonstration cases regarding Amazon.com, Chesapeake-Shorewood
Packaging, Crowley Maritime, Dun & Bradstreet, Farmer Bros., Lone Star
Steakhouse, National Presto, and Willamette Industries.
Professionals with relevant expertise may be engaged for services or
advice as required to support the evolving information needs of Forum
November 1, 2004
Compared with the averages for all companies in the Reuters Software
& Programming Industry index as of the October 29, 2004 market
close, CA’s $27.71 stock price was 33.2% below the average ratio to
book value, 31.4% below the average ratio to revenue, and 46.0%
below the average ratio to free cash flow.
"Moody's Investors Service
has confirmed CA's Ba1 senior unsecured rating and assigned a
negative rating outlook, concluding a review for possible
downgrade initiated on June 30, 2006. The Ba1 rating
confirmation reflects the company's completed accounting
review and reestablishment of current filing of its 10-K and
subsequent 10-Q's, including the company's filing of its 10-K
for its March 2006 fiscal year on July 31, 2006.
"The negative outlook reflects challenges the company has to
implement effective financial controls, remediate material
weaknesses to its financial reporting, contain sales force
compensation costs, and revive client billings performance.
...Moody's notes that for fiscal 2006, the company's former
sales compensation plan resulted in an unexpected $75 million
increase to commission expenses (2% of total expenses), while
client billings declined slightly, excluding acquisition
related products and accelerated customer payments. In Moody's
opinion, current revisions to the former sales force
compensation plan could negatively impact morale, the
retention of key sales executives, and financial performance.
"...the rating also reflects the uncertainties surrounding the
company's ineffective internal controls, subdued organic
client billings performance, unsettled fulfillment of the
terms of the Deferred Prosecution Agreement (DPA), modest
returns on net assets, competition from integrated and
non-integrated technology vendors, and exposure to mature
mainframe and Unix markets, which drive the overall Ba1
"Standard & Poor's Rating
Services said today that it lowered its corporate credit and
senior unsecured debt ratings on Islandia, N.Y.-based CA Inc.
to 'BB' from 'BBB-', and placed them on CreditWatch with
"'The rating action follows the company's announcement that
its board of directors authorized a $2 billion share
repurchase that partly will be debt-financed," said Standard &
Poor's credit analyst Philip Schrank. The rating downgrades
reflect our assessment that CA no longer possesses an
investment-grade financial policy in light of the announced
share repurchases. ...Additionally, CA did not meet the
deadline for filing its 10-K, and likely will need to restate
previously reported results and report additional material
weaknesses. The delay is from accounting issues surrounding
its stock option grants and revenue recognition."
"The Negative Outlook and ratings concerns
primarily center on CA's delayed earnings release for the
fourth quarter and fiscal year ending March 31, 2006, due to
additional accounting work necessary to accurately determine
sales commission expense and income taxes. ...Fitch is
concerned the material weaknesses in internal accounting
controls identified by CA management and its auditor, KPMG,
could lead to identification of further inaccuracies in the
company's financial statements and additional restatements.
Previous misstatements of CA's earnings in fiscal years 1999
and 2000 resulting from weaknesses in accounting controls were
the subject of shareholder lawsuits, which have required
significant litigation and settlement costs, and resulted in a
Securities and Exchange Commission (SEC) investigation.
"The negative outlook also considers what Fitch believes are
on-going risks for meeting corporate governance and internal
controls initiatives to satisfy any additional recommendations
by the government-appointed independent examiner as required
under the company's September 2004 agreement with the
Department of Justice (DOJ) and SEC. Although previously
anticipated to conclude in September 2006, Fitch believes the
independent examiner's report and presence at the company
could be extended due to the aforementioned earnings delay and
additional accounting challenges. A satisfactory and timely
conclusion to the independent examiner's reports could
stabilize the ratings.
"Also considered for the ratings are continued senior
"The outlook revision to
negative is prompted by the company's May 30th announcement
that it will delay the release of its fourth quarter and
fiscal year ended March 31, 2006 earnings report and has yet
to conclude its review of forecasting, processing, and
monitoring of sales commissions. The revision reflects
challenges the company has to implement effective financial
controls, the recent departure of key personnel, including the
company's chief software architect, financial officer, and
operating officer, as well as subdued billings performance,
which the company announced on May 30 declined slightly in
fiscal 2006, excluding acquisition related products and
accelerated customer payments."
"The outlook revision
reflects Computer Associates' recent announcement that it has
identified apparent improper accounting practices related to
transactions entered into between fiscals 1998 and 2001....
The company expects the impact of the adjustments to fiscal
years 2002 through 2004 to be minor and not affect current or
future cash flows. In addition, Computer Associates has
determined that former members of senior management, who are
no longer employed by the company, were involved in approving
the transactions in question. Nevertheless, Standard & Poor's
had assumed that Computer Associates' accounting issues were
"...while a legal agreement
was reached with the Department of Justice (DOJ) and
Securities & Exchange Commission (SEC) in September 2004, the
credit ratings for CA assume that the company will improve its
corporate governance and internal controls and satisfy any
additional recommendations by the government-appointed
independent examiner as required under the agreement."
"Moody's would view
positively CA's fulfillment of the terms of the Deferred
Prosecution Agreement (DPA) with the Department of Justice and
the SEC regarding their investigation of CA's prior accounting
mismanagement, recruitment of a permanent CEO and CFO,
continued evidence that the company has not suffered a
deterioration in bookings and billings due to adverse factors
over the past two years, and the company's maintenance of
financial flexibility from internal and external liquidity
sources. Continued progress on these matters could lead to a
positive outlook in the near term and a subsequent ratings
is open to all Computer Associates ("CA") shareholders, whether institutional or
individual, and to any fiduciaries or professionals concerned with their investment decisions.
Its purpose is to provide shareholders with access to information and a free
exchange of views on issues relating to their evaluations of alternatives,
as described in the Forum Summary.
There is no charge for
participation. As stated in the Conditions of Participation, participants are expected to make independent use
of information obtained through the Forum, subject to the privacy rights of
other participants. It is a Forum rule that participants will not be
identified or quoted without their explicit permission.
Inquiries and requests to be included in the Forum's
distribution list may be addressed to
The material presented on this web site is
as chairman of the Shareholder Forum.