Event
Summary
In a series of radical moves, Computer Associates (NYSE: CA) appears to
be trying to re-direct its gargantuan operations (it is the third largest
software firm in the United States, behind Microsoft and Oracle). After
missing its numbers in the first calendar quarter (CA's 4th fiscal quarter),
its stock was down 59% at one point.
Here
is a partial summary of the moves CA has made:
- Charles
Wang (one of the founders of CA over 20 years ago) stepped down as Chief
Executive Officer in August. He was replaced by Sanjay Kumar, formerly
the Chief Operating Officer. The exact effect this will have on corporate
leadership is unknown at this point, since Mr. Wang is still the Chairman
of the Board.
- CA has
made a major change to its business model. Throughout its corporate
history, CA has gained new products through the acquisition of the companies
that owned or developed them (examples being Sterling Software, Platinum
Technology, Legent, Cheyenne, and Cullinet). It has bought over 60 companies
in the last ten years, and many of those companies had made major acquisitions
themselves. Its new strategy, according to Mr. Kumar, is to "spin off
businesses rather than make acquisitions in an effort to bolster [CA's]
sales and stock price". It has already announced the sale of Sterling
Software's Federal Systems Group to Northrop Grumman, the number five
U.S. defense contractor. CA has only owned Sterling since mid-2000 (for
more information see Resistance
is Futile: Computer Associates Assimilates yet another Major Software
Firm)
- CA has
reorganized into 4 divisions:
- Federal
Sales, being sold to Northrop Grumman
- interBiz
Solutions, including ACCPAC, Supply Chain, and BizWorks
- Viewpoint
Digital, a new subsidiary which will work on 3D for the web
- DistribuPro,
the products that apparently didn't fit anywhere else, such as the
offerings from Platinum Technology and Centura (formerly Gupta)
- CA has
de-emphasized its consulting and education practices. The company was
experiencing difficulty selling these offerings and staffing the practices
with qualified personnel. In addition, the delays in the release of
Windows 2000 affected the profitability of the Mastering Computers education
arm (acquired with Platinum) drastically.
Market
Impact
Computer Associates announced on October 3rd that preliminary results
for the second quarter ending September 30, 2000 should be between $1.67
billion and $1.70 billion. Analysts' expectations varied widely due to
market uncertainty with respect to the enterprise software marketplace.
This uncertainty comes as no surprise based on the beating taken by CA's
competitors in this market. These included BMC Software (currently priced
at $16 after a 52-week high of $86) and Compuware (trading at $6 versus
a 52-week high of $40). For more information see: System
Software Suppliers Slip Seriously.
In
an attempt to put a positive spin on the situation, Mr. Kumar stated,
"We are very pleased with our performance given the current business environment.
As preliminary results would indicate, the entire CA team pulled together
to deliver approximately $400 million of sequential growth in contract
value quarter over quarter. Our software products and services continue
to deliver tremendous value to customers around the globe, as more and
more enterprises turn to CA to support their mission critical eBusiness
requirements. While we are pleased with the progress that we have made
against our recovery plan, we intend to stay focused on the challenges
and opportunities that are ahead."
TEC
believes that the major impact of this reorganization will be to allow
CA to "move at the speed of e-business" (the current buzzphrase in the
market). If they execute properly, they will be more nimble, and be able
to 1) see trends coming sooner, 2) design and execute marketing and development
plans more quickly based on those trends, and 3) most importantly, get
the product(s) to market before their competitors.
User
Recommendations
Customers should consider Computer Associates products, especially in
the mainframe arena, on a list of potential candidates. Indeed, given
the breadth and depth of their product offerings, CA will be difficult,
if not impossible, to ignore.
Careful
negotiations should take place to make sure the contract carefully spells
out per-CPU pricing models, tiered pricing (i.e., the bigger the computer
the more it costs for the same software), per-seat versus concurrent user
licensing, and, most importantly, the structure of the software maintenance
agreement(s). Leverage can also be applied by attempting to close the
contract close to the end of a quarter or CA fiscal year, when the sales
representative is desperate to make his quota and be invited to the annual
"President's Club" extravaganza.
Editor's
Note:
This article has been modified from its original form since the original
publication date.