COMMENTARY--Computer Associates' reaction today has been far more interesting than the article that spawned it.
Shares of the business software vendor were down more than 11 percent by early afternoon, following a Sunday New York Times piece painting CA as a company using accounting tricks to mask rapidly slowing growth. The stock might have been better off had the company not panicked.
In terms of broad themes, all the accusations contained in the Times article have been heard before by people who follow enterprise software. TheStreet.com's Herb Greenberg has questioned CA's accounting several times since last summer. Anecdotes about CA's shaky service and support (I don't know if they're true) have been floating around the IT industry for years. Skeptics have always picked on the company's strategy of cobbling itself together through acquisitions.
Whether these issues are legitimate concerns or not, they aren't new to anyone who follows CA. The Times did little more than give them a broader forum, spiced with quotes from analysts and anonymous people.
Despite the lack of news, Computer Associates, which didn't respond to the Times reporter's queries before the article ran, decided to fight back with an analyst conference call and a news release with point-by-point refutations of the newspaper's arguments. Paragraphs like this from CA's release represent bush-league investor relations at its finest:
"Claim (in the Times article): CA hires 'young, cute girls to basically resell maintenance contracts.'
"Fact: CA has women in senior management positions throughout the company...The Times' characterizations of female members of the sales organization was demeaning to the success these and other women have achieved and the respect they deserve."
But I'm just nit-picking CA's nit-picking. As always with Wall Street, it's the analyst call that really matters, although considering analysts are supposed to already know all about the company and its accounting, it would make more sense for CEO Sanjay Kumar to hold a conference call fielding questions from people who truly need the education: journalists.
Of course, reporters won't ask questions designed to make the company look good, but fortunately, Wit Soundview analyst Jim Mendelson hit the only point that really matters.
Mendelson: Sanjay, I guess another issue that was brought up in the discussion was the growth via acquisition, and I guess a lot of this overall commentary revolves around trying to understand what the underlying organic growth rate of CA might be, and I was wondering if you could make a few comments about your perceptions of that growth historically and prospectively.
Kumar: Good question, Jim. Well, I'm disappointed that more informed sources like analysts and others weren't consulted, but given where they are, given where the issues are...I believe at the end of the day, on a static basis, the mainframe business, as I've said before, is absolutely a single-digit grower (on a percentage basis). It's a low single-digit grower. I've been on the record saying that before, that is not news to anybody.
Our distributed computing business should grow in the 20s; I think it's a healthy business. People are buying and installing products. You all need to report to our Web site to understand this.
We're competitively replacing companies in other places, and that's another way we're growing the mainframe business at the end of the day. Customers installing more capacity. People where the large service providers are buying technology and licenses and the rights to use our products in their business. Overall, that's how I look at the business at the end of the day.
And some parts clearly are doing better than other parts. I mean, some parts of our business, there is no doubt, truly are declining because these products have a stagnant customer base. There's absolutely, positively a decline in--you can't say decline in growth, I'm not sure that's the right English--but decline in revenues, and other areas like storage and security, for example, and portal technology continue to do well.
So at the end of the day, I mean, you've got to look at growth through acquisition versus organic growth, and as I've said before, you've got to back out (separate) the numbers; and I'm talking about an organic set of numbers--(if you include) growth through acquisition the reported numbers are higher--but I think we publicly and analysts have said that before and I've backed out the numbers.
Mendelson: And so organic growth sounds like it might be very, very low double-digit on a weighted basis, and potentially augmented via acquisitions as it has been in the past?
Kumar: Well, I think large acquisitions, as I've said before, our focus today is in the six core areas?If there is acquisitions to be had to round out things in the six, we will do them. I can tell you, large acquisitions still exist, opportunities still exist. We have passed up a number of opportunities in the marketplace with respect to large acquisitions, so I think we're better off from a shareholder-value perspective today focusing on the core business and the new business model and its implementation. And clearly, on the pro forma, pro rata numbers, if you go look at the pro forma, pro rata numbers, our growth rate's actually come down, because it evens it out and smoothes it out as well.
Kumar gave a few numbers--mainly low single digits for mainframes and 20s for distributed computing--but you can't find a direct answer to the most important issue: How fast is the overall business growing? At the end of the day, if you will.
All CA executives had to do was answer that point concisely, with a list of clients to back it up, and Wall Street would essentially be satisfied. The stock would have lost no more than a few points. If CA is truly healthy, the facts will bear it out.
And by going into a defensive, self-righteous mode, Computer Associates gave the Times piece more attention and credibility than it would have gotten otherwise. CA should have answered with a simple, indignation-free news release contesting the main points, because eventually, corporate calm begets investor calm.
An excess of spin doctors doesn't make anyone feel better. It just makes people wonder if the company is really sick. 22GO >