Proxy Fight Payoff May Buy Trouble for CA

Texas investor Sam Wyly has dropped his second proxy battle against Computer Associates (CA - Cramer's Take - Stockpickr), but the software maker may not be out of the woods yet.

The controversial deal between Wyly and CA, announced Wednesday, is generating discontent among other investors and prompting some influential observers to say it flies in the face of the good corporate governance practices that both sides claimed to endorse.

"I don't think this ends the story," said Pat McGurn, vice president and director of corporate programs at Institutional Shareholder Services. "I think, frankly, these issues and the scrutiny of CA still have legs."

On Wednesday, Computer Associates announced in a press release that Wyly's Ranger Governance has agreed to drop its proxy challenge for five seats on the CA board of directors. But that press release left out the fact that CA agreed to pay Wyly $10 million, which was disclosed in a filing with the Securities and Exchange Commission. CA also agreed to name another independent member to its board.

In return, Wyly agreed not to launch another proxy contest for five years and extend a noncompete agreement with the company for five years. The original noncompete agreement was part of CA's acquisition of Wyly's Sterling Software.

McGurn said he has heard from investors who are concerned and have questions about the deal. He indicated his firm may weigh in with its proxy analysis expected to be issued in mid-August before Computer Associates' annual shareholders meeting on Aug. 28. "I think depending on what the answers to those questions are, you're going to see some further fighting at the upcoming annual shareholders meeting," McGurn added.

He pointed to the company's stock price decline as evidence of investor discontent. Shares of Computer Associates have tumbled 11.6% since Tuesday to close Thursday at $7.61. News of investigations by the SEC and U.S. Attorney's office into the company's accounting practices have helped push the company's stock down 77.3% since the beginning of the year.

"It's kind of tough for management to make the case that the legal expenses in the fight against Wyly would have been more" than $10 million, said Prudential Securities analyst John McPeake, who believed Wyly would have lost the proxy battle anyway. "It smacks a little bit of '80s greenmail." McPeake has a market perform rating on CA, and his firm hasn't done any banking business with the company.

McGurn agreed the deal is reminiscent of greenmail of the 1980s, in which corporate raiders owning a company's stock would threaten a proxy battle and companies would buy back their stock at a premium in order to get rid of them. McGurn called the noncompete clause a "phony baloney wrapper put on ransom money."

"Companies should not under any circumstances pay noisy investors to go away," McGurn said. "It's not a good governance practice."

But Stephen Perkins, a candidate on Wyly's slate and president of Ranger Governance, defended the deal, noting that Wyly got what he wanted when CA last week named four new directors to the board.

"The fact of the matter is this is not about the money," he said, noting that Wyly has not recouped the full $12 million he spent on his unsuccessful proxy fight last year and $2 million he spent so far this year. "I think what CA is getting out of this is a better board."

Computer Associates spokeswoman Denise DesChenes also defended the deal, saying the noncompete clause is an important part of it. CA also spent about $12 million on the proxy fight last year, but that does not include management time.

Others, meanwhile, didn't necessarily like the looks of the deal, but said it makes sense given that it removes one more pull on management's time and attention.

"I'm glad it's over," added Merrill Lynch analyst Peter Goldmacher. "It was a major distraction for management ... I think CA did the right thing." Goldmacher has a neutral rating on CA and his firm expects to receive or intends to seek compensation for investment banking services from CA within the next three months.

As for Wiley, who owns only 100 CA shares but more than 1 million options, the deal raises questions about his overall goal in the proxy battle. But then, said Goldmacher, "I was never under the impression that Wiley was doing pro bono work."