CA Officials Feel a Credit Pinch As Stock, Used as Collateral, Falls
By MARCELO PRINCE and JERRY GUIDERA
Staff Reporters of THE WALL STREET JOURNAL
With the stock near seven-year lows, the top two executives of Computer Associates International Inc. don't have to look far for motivation when it comes to reviving the software giant's stock.
Chairman Charles Wang and Chief Executive Sanjay Kumar set up personal credit lines with two banks several years ago, pledging nearly $400 million worth of Computer Associates stock as collateral, according to documents filed with the Securities and Exchange Commission. Those shares are currently worth about $197 million. The 11.6 million shares they had set aside were more than enough at that time to meet the banks' requirements, based upon where the stock was trading in July 2001, regulatory filings show.
According to people close to the matter, Messrs. Kumar and Wang drew on the credit lines to pay taxes on stock rewards from a controversial 1995 grant by Computer Associates to the firm's three most senior executives. The credit lines were for between $100 million and $125 million, according to people close to the matter.
Computer Associates' share price fell 53% in February -- erasing $10.5 billion in shareholder wealth -- amid news of a federal investigation into the company's accounting and concerns about its financial flexibility. The shares were slightly higher Monday, trading at $16.95, up five cents, in 4 p.m. composite trading on the New York Stock Exchange, recovering from a low of $14.30 set two weeks ago.
If Messrs. Wang and Kumar borrowed a sufficiently large enough amount, that type of drop could trigger margin calls or require the borrowers to add collateral to maintain their credit lines, executive compensation experts say.
"The public and investors want corporate officers to own more and more shares and get nervous when they sell," says Steven Hall, managing director of Pearl Meyer & Partners Inc., a New York compensation-consulting firm. Companies and executives established these types of arrangements with the assumption, since shown to be flawed, that the stock won't drop enough to prompt margin calls, he says.
Regulatory filings show Mr. Kumar pledged 2.4 million shares, or roughly half the 4.5 million CA shares he owns, as collateral for lines of credit and outstanding loans with UBS AG. At the time of the filing, on July 5, 2001, those shares were "in excess" of the minimum required based upon the then-price of $33.90 a share. Mr. Wang, who controlled about 34.4 million shares as of July 5, pledged 9.2 million of them as collateral for credit lines and loans with UBS and Bank of America Securities, the documents show. That also was "substantially in excess" of the minimum number required in July.
In the wave of investor angst after the company confirmed Feb. 22 the preliminary investigation by regulators at the Securities and Exchange Commission and prosecutors from the U.S. Attorney's office in Brooklyn, UBS sold about 5.8 million Computer Associates shares, according to people familiar with the transaction. The bank liquidated Mr. Kumar's total Computer Associates holdings in trust, and more than half of the shares it held from Mr. Wang, for proceeds between $80 million and $85 million, according to people familiar with transaction.
Robert Gordon, a spokesman for the Islandia, N.Y., software maker, declined to comment on the executives' "personal finances," but noted any personal loans "are not guaranteed by Computer Associates." Officials at UBS also declined to comment.
Under SEC regulations, a change in executive holdings -- such as a margin call that resulted in sale of stock -- would have to be reported to the SEC within 10 days of the end of the month in which the sale occurred. Detailed records are expected with regulators by the end of the week, according to people close to the transaction.
Messrs. Wang and Kumar aren't alone. Many executives have borrowed money against their holdings of company stock. But these arrangements aren't risk free and some, including Enron Corp.'s former chief Kenneth Lay and WorldCom Inc.'s Chief Executive Bernard Ebbers, ran into financial trouble recently when their company's share prices collapsed.
When a stock price drops precipitously, these loans can backfire and a company "may or may not step in" to avoid wholesale selling of its shares or the embarrassment associated with questions about executive solvency, says Judith Fischer, managing director of Executive Compensation Advisory Services in Alexandria, Va.
Computer Associates, unlike WorldCom and other companies, hasn't guaranteed the credit lines set up by Messrs. Wang and Kumar, a company spokesman said. So the software maker isn't on the hook for any troubles the executives might encounter. Still, the executives could have pledged cash, other personal assets or more of their Computer Associates stock as collateral for the outstanding loans.
Write to Marcelo Prince at marcelo.prince@dowjones.com and Jerry Guidera at jerry.guidera@wsj.com
Updated March 5, 2002 |
