ANALYSIS: Client Profile - How Computer Associates survived PRbloodbath

Computer Associates failed to sufficiently address media criticism

and subsequently found itself under attack. Last month's shareholder

revolt has left the software company's PR division somber, but wiser.

Jim Edwards reports.



Computer Associates may have emerged victorious after a two-month PR

battle against a renegade shareholder who used the press to draw

negative attention to the company's stock performance and its

management. However, the PR division is visibly shaken.



In June, Sam Wyly, a Texas shareholder and chief of an investment

vehicle called the Ranger Governance group, launched a surprise attempt

to replace the entire board of directors at Computer Associates. The

company's VP of PR Bob Gordon admits the fourth largest independent

software maker was "blindsided."



Two phone calls - one from The New York Times, the other from The Wall

Street Journal - arrived within two minutes of each other late on June

20. Both papers wanted comment on Wyly's bid to replace the board.

Gordon had to call them back to find out what they were talking

about.



Hindsight is 20/20, of course, but even so, Computer Associates might

have paid more attention to the storm clouds that were on the horizon as

far back as October 2000.



It was then that The New York Times' business reporter Alex Berenson

began a series of stories criticizing the company's accounting

methods.



The articles culminated in a lengthy piece on April 29 of this year,

headlined "A Software Company Runs Out of Tricks; The Past May Haunt

Computer Associates."



The story alleged that Computer Associates' success was no more than a

series of accounting maneuvers that hid a far worse picture. It also

stated that a change in its accounting procedures made it impossible to

compare past and current results. The company denies the allegations,

and in fact launched an all-out media campaign to refute the claims.



Whatever the reality of the situation, The New York Times headline

proved to be true. Wyly, using IR agency Joele Frank Wilkinson Brimmer

Katcher, cited criticisms raised by The Times and asked shareholders to

vote by proxy at the company's August 29 general meeting. Wyly took out

full-page ads in The Wall Street Journal and The New York Times to

propose his own slate of directors, and to pan the company's treatment

of its customers.



Fighting back



One of the first things Computer Associates' Gordon did was to call in

his own IR help. The firm hired Citigate Sard Verbinnen of New York, an

agency with a history of handling shareholder proxy fights. "I think

they knew right away you don't handle this on your own; they brought us

in the next day," says Citigate principal Owen Blicksilver.



Wyly had two months to prepare his attack; Computer Associates had much

less time to respond, says Blicksilver.



"We needed to get up to speed and take the time to prepare the

counterattack ... it took about a week." Citigate assigned about seven

people to the job, complementing the 18 PR staffers at Computer

Associates.



VP of investor relations Lisa Savino did much of the heavy lifting with

the institutional investors. That work was done the old-fashioned way,

with personal visits and phone calls. She saw a crucial win in the first

five days when Swiss billionaire Walter Haefner, who controls 21% of the

company, sided with Computer Associates. Other investors were a mystery,

however, such as the controllers of index funds who own the stock as a

matter of policy rather than because of a specific interest in the

company.



Usually, Savino says, "They're not interested. They don't generally go

to tech conferences ... but we did have an opportunity to speak with a

lot of these folks."



In the meantime, Citigate's Paul Verbinnen and Computer Associates

decided on focusing on Wyly's biggest weaknesses: the fact that he owns

only 100 shares (though his options are larger), and that he wanted to

split up the company. As Blicksilver put it, "If I have 100 shares of

stock in a company, I don't expect that I'm entitled to a seat on the

board."



The seriousness of the debate meant that PR execs at Citigate found

themselves in touch with CEO Sanjay Kumar and chairman Charles Wang on a

daily basis.



The two executives, plus CFO Ira Zar, made themselves available to IR

chief Savino whenever she needed them.



Complicating the picture, however, was CA-World, a conference for 10,000

Computer Associates customers and 400 or so journalists, which took

place in Orlando, FL in July. What was traditionally a time for Wang and

Sanjay to meet casually with industry hacks became a formal Q&A session

on the proxy vote issue, Gordon said.



By August, the war of words had heated up significantly, with both sides

regularly taking ads to express their views. But in the 40 days or so

between Wyly's announcement and the vote, Computer Associates' campaign

began to gain ground. Wyly's plan to completely replace the board seemed

too radical. It was later scaled back to request the replacement of four

board members. Even so, the California Public Employees Retirement

System, which owns 3.1 million of the firm's 577 million shares,

switched its support to Wyly in late August.



The dust settles



That still wasn't enough for Wyly to win. After the final vote on August

29, Computer Associates gained more than 60% of shareholders' votes,

with less than 20% voting for Wyly's team. The rest abstained.



Dan Katcher, principal at Joele Frank Wilkinson Brimmer Katcher in New

York, handled Wyly's crusade among investors and the public. The firm

was hired when Wyly found out that his first option, IR firm Robinson,

Lerer & Montgomery, was owned by Young & Rubicam, which is used by

Computer Associates for advertising.



Katcher declined to comment on the role his agency played, except to say

that Wyly's supporters preferred the less radical option over replacing

the whole board. "Shareholders were more receptive to a short slate,"

says Katcher.



Although proxy fights are rarely won by insurgents, Computer

Associates' victory came at some cost to its reputation - mainly from

The Times' stories and the non-stop ads. Nonetheless, the fight taught

Computer Associates' PR execs some lessons, according to Gordon and

others. It is perhaps to their credit that they appear to have quickly

learned and successfully applied those lessons during the 40-day

struggle.



The final vote was a vindication of their efforts. But Wyly may yet have

brought reforms to Computer Associates. PR execs Gordon, Savino, and

Blicksilver all say that Computer Associates intends to become much more

open about its business. The company that once released unfavorable

financial results at midnight on July 3 now knows that "we need to

communicate better ... it's something we need to improve on," Gordon

says.



Even the IR department is ready for change. "We'll be out banging on

people's doors (in the future) and making sure they have a better

understanding of what we're doing," Savino says.



Blicksilver agrees: "I think this is a company that would admit that

over time it has made mistakes in dealing with the media. In the wake of

this proxy fight, and leading up to it, the company has become more

accessible and better at communicating. I think going forward, that will

remain."



Even The New York Times' Berenson gives the company credit: "They

learned sometime this spring that they are a big public company, and

that it's appropriate for reporters to cover them and ask

questions."



While the press may be satisfied that Computer Associates has changed

its ways, Wall Street analysts are not yet totally convinced of the new

accounting methods.



Melissa Eisenstat, managing director of CIBC World Markets, says she

will remain suspicious of the firm's numbers until its new accounting

method is old enough to produce results that can be compared with the

prior year. "The company is so confusing to follow," she says. "People

are left hanging; there's not a lot of information you can get."



COMPUTER ASSOCIATES



Vice president of IR: Lisa Savino



Vice president of PR: Bob Gordon



Outside agencies: Citigate Sard Verbinnen (proxy fight); The Weber Group

(regular software business issues)



Budget: $10 million on proxy fight over 40-day period (Majority

of fee spent on PR/IR, advertising produced by Citigate. Figure includes

legal fees and proxy solicitor).



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