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Computer Associates proxy fight heats up

Texas investor Sam Wyly takes his fight for control of the software company to shareholders, telling investors that their "liberation day" is coming.

Texas investor Sam Wyly took his fight for control of Computer Associates to shareholders Tuesday, telling investors on a conference call that their "liberation day" was coming.

The company's Aug. 29 shareholders' meeting "is going to be liberation day for CA employees. It's to be liberation day for CA shareholders, and it's to be liberation day for CA customers," he said.

Wyly's company, Ranger Governance, launched a proxy fight for control of the world's fourth-largest software company last week, asking shareholders to oust the current board of electors, elect his slate and name him chairman.

While Wyly was taking his case to shareholders via a Webcast Tuesday, CA fought back, casting aspersions on Wyly's claim that customers were unhappy with the company.

A customer survey conducted by Wyly purported to find "serious dissatisfaction" with CA from its customers. CA said the study's methodology was flawed and its results biased.

"While good enough is never good enough, customer satisfaction is paramount to our success and we believe we have made significant strides in recent years, most recently with changes to our business model, that respond directly to customer needs for increased choice and flexibility," CEO Sanjay Kumar said in a release.

In fact, it's that new business model that's behind much of the fighting. CA came under fire recently after a published report accused the company of using "accounting tricks" to inflate sales figures. The company recently switched its accounting policies to a subscription-based system, reporting revenue over the life of a contract instead of in one lump sum. While that method allowed the company to report smoother sales figures, critics charged that it allowed the company to cover up what were actually declining sales. CA has denied the accusations.

Ranger Governance executives said that the subscription model "is a good thing" for customers who want it. But they objected to its use in all customer contracts, saying "large software companies in today's market cannot be run monolithically."

Ranger Governance's plan includes dividing the company into four business segments--storage, security, systems management and knowledge management--each with its own CEO.

Ranger executives said Tuesday that the combined business should be able to grow 15 percent to 18 percent over time, but added that the storage management and security units should be able to grow by at least 30 percent.

Wyly lost a key faction Monday when Swiss billionaire Walter Haefner, who owns more than 21 percent of the company, said he was backing CA Chairman Charles Wang and Kumar. Wyly accused the pair of "kowtowing" to Haefner, and using his support "as an excuse to ignore all other shareholders."

CA's board, which includes Kumar, former U.S. Sen. Alfonse D'Amato and New York Stock Exchange CEO Richard Grasso, also voted to back its management Monday. The board also voted to add two members: Linus Cheung, the former chief executive of its partner, Hong Kong Telecom, and Lewis Ranieri, the owner of two investment companies and the former vice chairman of Salomon Brothers. The board owns about 6 percent of the company.

CA purchased two companies from Sam Wyly, paying $4 billion in stock and warrants for Sterling Software last year, and $840 million in stock and warrants for University Computing. Haefner had been an investor in University Computing.

Wyly currently owns about 2 million shares in CA, less than 1 percent of the outstanding shares. He also has 1.5 million warrants to purchase more stock at a discounted price.

The fight has intrigued analysts, who said that whatever the outcome, all the attention should be good for the stock because CA may become more responsive to head off future battles.

"The stock will likely get some boost as the two sides make their pitches to investors about how they each might drive increases in shareholder value," wrote SG Cowen Securities analyst Drew Brosseau.

And Merrill Lynch analyst Peter Goldmacher pointed out that breaking the company into four divisions would open up the possibility of spin-offs, which could help the company pay off some of its debt. But he cautioned that "regardless of the outcome," CA's near-term prospects were not stellar.

"The company remains in the midst of a significant sales model transition in a difficult macroeconomic environment," he wrote. "While a new board of directors would clearly have an impact on the company's direction going forward, the impact of any changes would not be immediate."