KUHN CAPITAL Wednesday, December 13, 2017
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Party Down at CA

October 25

Today we’re rubber-necking the slow-motion train wreck that is Computer Associates. CA’s the giant and formerly high-flying software conglomerate that:

First made waves bailing out “Flip” Filipowski of his hodge-podge of unintegrated software acquisitions at Platinum (thus freeing Flip to launch even more imaginative wealth-destroying adventures at divine);

Then attracted the unwelcome attentions of a disgruntled shareholder, Sam Wyly, who cried wolf on alleged fraud and other accounting shenanigans to little avail. Wyly battled entrenched CA managers Charles Wang and Sanjay Kumar in a hostile takeover effort that was successfully resisted by CA’s board using the standard toolkit – various arcane legal maneuvers and government special pleadings, all designed to preserve the scheduled stops of the insider gravy train.

(Expensive for shareholders this gravy train was: share value plummeted from $70 in early 2000 to about $7 in the spring of 2002: today the company is marginally profitable.)

Then, lo, last Spring the regulators arise from their slumber and take CA to task on all sorts of now tiresomely familiar irregularities, some of them criminal: gross overstatements of sales, executive enrichment schemes (to the tune of a billion dollar stock award and insider trading allegations), etc. Kumar’s now looking at 100 years hard time; they’re teeing up Wang next.

Now here’s an update. First, CA announces in the midst of these management indictments its acquisition of PestPatrol, an anti-spyware software vendor. Then several weeks ago it agrees to buy Netegrity -- vendor of identity management applications, perhaps the most recognizable being its eTrust brand -- for a breathtaking $430 million. Breathtaking since Netegrity’s revenue is about $47 million.

But wait… isn’t this the sort of hyperactive M&A activity -- the hard work of integration can wait -- that characterized the old CA, and before that, Platinum? And what about that other lesson the “new” CA we hope has learned: don’t overpay? You’ve got to admire these CA guys for their animal spirits in the face of indictments: we’re not going to let those burly guys in the black T-shirts ding office morale!

Wyly’s also baaack. He’s upset that the class action payoff against CA he engineered last year before all this apparent fraud surfaced now seems to be based on, well, even more fraudulent representations by CA. So he wants more dough. CA’s current management doesn’t agree. Meet the new CA boss; same as the old boss.

CA’s stock is currently trading at 4.7x trailing 12-month’s sales, and 6,800x trailing 12-month’s earnings. Considering the circumstances, that looks real high to us. Sell it short.


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