Case Study: Computer Associates International Inc.: Governance and Investor Communication Challenge
Computer Associates has undertaken a major change in its business model, followed more conservative financial reporting, and improved its corporate governance. Despite these changes, the company has taken a beating:
(i) It has come in for some harsh criticism in the financial press. E.g. NY Times:? As measured by standard accounting rules, Computer Associates' sales have fallen almost two-thirds over the last six months. To cover that, the company has begun presenting its financial results in a way that confuses even the Wall Street analysts who follow it.
(ii) Its stock price has suffered
(iii) It faces a proxy contest with a large dissident shareholder (Sam Wyley) who argues that: The company has abused and alienated customers, employees and shareholders alike. Management's use of accounting gimmicks and its excessive compensation for lackluster performance have strained credibility with the financial community.
(iv) Short sales in the company are high.
The objectives of this case analysis are to explore the changes made by the company, to try to understand why the company found it so difficult to get acceptance of the changes, and to recommend a course of action for the CEO, Sanjay Kumar.
Questions to Be Addressed
1. What was CA trying to accomplish by the change in its business model? How did the changes accomplish these goals? What risks does the new model create?
2. How does the change in accounting fit with the new business model?
3. Do you agree with the company's decision to produce pro forma earnings numbers?
4. What action plan would you recommend for Sanjay Kumar?