Options Compensation Doesn't Matter--Until It Does
MARKET PLACE
Computer Associates Stock Slumps
in Heavy Selling
By DIANA B. HENRIQUES July 23, 1998
NEW YORK -- A tidal wave of selling hit the stock
of Computer Associates International Inc. on
Wednesday,
after the company announced late Tuesday that
unexpected ripples from the Asian economic crisis had
dampened its sales expectations.
On extremely heavy volume of more than 25 million
shares, the company's stock lost more than 30 percent
of its market value, closing at $39.50, down $17.50.
That represented a loss of $9.56 billion for investors
in the company, which is based in Islandia, N.Y.
Computer Associates derives only about 5 percent of its
revenues from customers in Asia, so news of
Asia-related sales weakness clearly caught Wall Street
by surprise. But the reaction may have been exacerbated
because the bad news came just two months after Charles
Wang, the chairman and chief executive, and two other
top executives received a remarkable $1.1 billion stock
grant that wound up costing the company about $675
million.
"It left a bitter taste in the mouth," James Mendelson,
managing director of Soundview Financial Group, in
Stamford, Conn., said. "Clearly, some portion of the
selloff is an emotional reaction."
The company included the warning about its sales
prospects for the next six months in an announcement of
its financial results for the three months ended June
30.
The report was released after the market closed on
Tuesday, after which senior executives participated in
a conference call with analysts. During that call, the
executives explained that many of their big
multinational customers seemed to be expecting slower
growth in their own businesses primarily because of the
problems in Asia. Those customers, who also have to
deal with the year 2000 adjustments, seemed to be
holding back on major software purchases, the
executives said.
The analysts swiftly scaled back their expectations for
Computer Associates' full-year earnings by about 7
percent.
That bad news swamped the good news that the company's
basic income had been slightly above expectations in
the most recent quarter. With analysts expecting
earnings of 33 cents a share, the company reported
operating profits of 34 cents a share, or $194.2
million, up almost 25 percent from the $155.8 million
the company earned in the comparable period last year.
However, those respectable quarterly results were
buried by the effects of the $675 million write-off
necessary to finance the stock grants to Wang and to
Sanjay Kumar, the president, and Russell Artzt, the
executive vice president. Because of the write-off, the
company reported a loss of $480.8 million, or 87 cents
a share, for the quarter.
The compensation plan, approved by shareholders in
1995, entitled the three executives to collect
substantial grants of stock as soon as the company's
shares had traded above a set price, $53.33 share, for
60 trading days -- a milestone that was reached on May
21.
As a result, Wang was awarded 12.15 million shares,
which at the time were worth $669.8 million; Kumar
received 6.075 million shares, which were worth $334.9
million, and Artzt received 2.025 million shares, which
were worth $111.6 million. The total package was valued
at $1.1 billion before taxes, but the executives
essentially returned some shares to satisfy income-tax
obligations, reducing the package to $675 million.
Restrictions on selling the shares will expire
gradually over the next seven years, so the three
executives actually suffered as much damage Wednesday
as their fellow shareholders, or more. Wang, for
example, saw the value of his recent stock grant fall
by more than $200 million on Wednesday.
Graef Crystal, an executive-compensation specialist and
editor of The Crystal Report, had been extremely
critical of Wang's generous compensation packages even
before the recent stock grants were awarded.
Wednesday's news did nothing to soften his opinion,
even though the selloff reduced the current value of
the stock grants to Wang.
"He limped across the finish line, collected his huge
stock award, and then suddenly they have just
discovered this Asia problem," Crystal said. "I think
we will see lots of lawsuits. This will be like
dropping 3,000 pounds of chum into a shark tank."
But even Crystal said he was surprised at how deeply
the stock declined Wednesday, and wondered aloud
whether Wall Street analysts had simply forgotten about
the potential impact of the stock awards on the
company's earnings.
Joseph Farley, a stock analyst with Donaldson, Lufkin
Jenrette, dismissed that speculation. "The compensation
plan was well known," Farley said. "There was no
surprise today from people just finding out about the
earnings impact."
But there may have been some lingering resentment,
Mendelson said. "There is some bitterness being
expressed," he said. But Mendelson defended the
company's decision to share its worries about the
future with its stockholders. "I think it reflects
their desire to be as straight with the investment
community as they can be," he said.
With the company's annual stockholders meeting
scheduled for Aug. 12, he added, "It must have been a
temptation to say, 'If we postpone the report a few
weeks, we won't have to face our shareholders until
next year.' But they did not say that."
Farley remains wary, however. "Is the selloff overdone?
I think we've all got about 5 percent of the
information we need to answer that question," he said.
"We have a company that has had a long period of very
strong revenue momentum and predictability of earnings,
and suddenly you are facing some vague, uncertain
developments and we don't really know what happened."
The Computer Associates announcement came in tandem
with a similar warning from Hewlett-Packard Co.,
reinforcing in several analysts' minds the need to look
more closely at how vulnerable technology companies are
to such secondary effects of the Asian crisis.
Crystal pointed out that Institutional Shareholder
Services, a company in Bethesda, Md., that advises
investors how to vote on proxy issues, had recommended
against approval of the stock-grant plan when it was
proposed in 1995. "But it was approved by investors
anyway," he added. "So I guess you could say
stockholders got their comeuppance today."
Copyright 1998 The New York Times Company |
