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Wyly's big day at CA falls flat

The Texas financier's "liberation day" for Computer Associates' shareholders doesn't materialize as the company re-elects 10 incumbent board members.

ISLANDIA, N.Y.--Sam Wyly's "liberation day" for Computer Associates' shareholders failed to materialize Wednesday as the company re-elected 10 incumbent board members.

The Texas financier's two-month battle to win control of CA's board came to its climax in Wednesday's vote at the company's shareholder meeting here. Official results will not be known for two to three weeks.

Based on CA's estimates, the company's current board members won 75 percent of the shares voted. All 10 CA nominees--Russell M. Artzt, Linus W. L. Cheung, Alfonse M. D'Amato, Willem F. P. de Vogel, Richard A. Grasso, Shirley Strum Kenny, Sanjay Kumar, Roel Pieper, Lewis S. Ranieri and Charles B. Wang--were elected, while Wyly's nominees were defeated.

Kumar and Wang said they weren't sure what the outcome of the vote would be. "We took confidence in some of the signs along the way," Kumar said. "But we didn't know until the end."

The decision was tough for some of the shareholders. "I was really torn," said one, who didn't want to be identified.

In a meeting with the press at the Islandia Marriott after the shareholders meeting, Wyly said that by his own "'pro forma arithmetic,' the Rangers had won." Ranger Governance is an investment company Wyly established and that has funded the proxy fight.

"There was a last-minute bargaining process with half a dozen large institutions," Wyly explained, which resulted in two concessions announced by Computer Associates Friday: CA will hire a governance consultant, and two directors will resign by the end of the year and be replaced.

Wyly outlined his original plan to take over the entire board in late June. His argument was that under Chairman Wang, there is "chronic abuse of customers and employees," and he alleged that widespread accounting tricks were used to hide slumping sales.

Wyly, who sold two companies to CA--Sterling Software and University Computing--had enough experience with the company's business that some believed his claims carried weight.

He proposed that the company, based here, be broken into four divisions--storage, security, systems management and knowledge management--and that he become the chairman of a completely new board.

But after Institutional Shareholder Services and Proxy Monitor, two influential companies that advise shareholders on proxy issues, rejected the proposal as too radical, Wyly scaled back his plans.

Ranger Governance tried to replace just four members of the CA board: Wang; Executive Vice President Artzt, a co-founder; former Sen. D'Amato, R-N.Y.; and de Vogel. The company did not contest CEO Kumar's seat and ditched its plan to make Wyly chairman.

The plan won the approval of CalPERS (California Public Employees' Retirement System), a state pension fund that said Wyly's decision to give up his board member bid gave his proposal more legitimacy.

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  Billionaire Sam Wyly wrong?
Charles Wang, Computer Associates chairman, and Sanjay Kumar, Computer Associates CEO
Wyly's revised roster included Richard Agnich, a former Texas Instruments executive; Stephen Perkins, who co-founded Sterling Commerce with Wyly; Cece Smith, former director of the Federal Reserve Bank of Dallas; and Elizabeth VanStory, former vice president of

Gartner analysts Cameron Haight and Donna Scott say that despite Sam Wyly's loss in the proxy fight for Computer Associates International's board, it is likely that his intense focus on the company will improve some areas.

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"Although we are disappointed with the outcome of today's vote, we are nonetheless very pleased that many shareholders, independent corporate governance experts and most importantly the board and management of CA have recognized that the issues we raised need to be rapidly addressed by the company," Perkins said in a Ranger Governance statement Wednesday.

"As an interested CA shareholder, Ranger is hopeful that the company's board and management will continue to use the opportunity created by this proxy contest to get the company growing," he said.

Wyly said he plans to continue promoting good governance and sees Ranger as having the potential to become something similar to CalPERS.

The fight was a long shot. Though Wyly owns 1.5 million CA stock options and has a stake in 630,000 shares, he actually owns just 100 shares in the company. In addition, CA's largest shareholder, Walter Haefner, who holds 21 percent of the shares, pledged to support Wang. To win, Wyly would have had to get about 70 percent of the vote at Wednesday's meeting.

But CA saw Wyly as a threat, judging from the full-page advertisement it took out in The Wall Street Journal on Tuesday.

"CA's stock price is up over 70 percent this year; don't let Sam Wyly derail our progress," the headline said in capital letters. The messaged topped a jagged graph charting the stock's ascent and touting the fact that it has performed better than other bellwethers such as Microsoft, Intel and IBM.

The Wyly influence
Despite the failure of his proxy fight, Wyly may have prompted CA to become a more open company.

"The past two months have afforded us a unique opportunity to communicate CA's direction to our investors and customers, and to listen closely to their concerns and recommendations," Kumar said. "We intend to continue this stepped-up level of communications with our key constituents."

Analysts say the company is already living up to some of Wyly's expectations.

One of the businessman's biggest beefs was with the company's accounting practices. CA has gotten lots of flak since it switched its accounting policies to a subscription-based system, reporting revenue over the life of a contract instead of all at once. Some said the change was a move to cover up declining sales, an allegation CA has denied.

But the company is now close to clearing up those issues.

"With its efforts to disclose more and more data, CA may finally be winning investor comfort with the subscription model," SG Cowen Securities analyst Drew Brosseau said in an Aug. 17 research note.

In its latest earnings release, CA gave 14 pages of supplemental financial information, Brosseau noted.

Merrill Lynch analyst Peter Goldmacher said the outcome of the proxy battle should have little effect on CA stock. Goldmacher, who has a "neutral" rating on the stock, wrote in an Aug. 17 research note that he is cautious about shares in the near term regardless of the outcome of the proxy solicitation.

The analyst did add that if Wyly had succeeded it could have diminished the board's voting power and slowed down governance.

What the company has to do now, analysts say, is reduce its dependency on sales of mainframe software, improve sales execution on its new business model, and return to reporting that's compliant with generally accepted accounting principles.

One wild card, a strong economy, is out of the board's control. According to Goldmacher, CA will just have to wait for "improved macroeconomic conditions to reignite IT spending."

Ranger Governance and CA said they don't plan to hold talks in the future. "It's a chapter, let's close it," Kumar said.