CEO Ouster a Positive Step for Computer Associates

Updated from 12:30 p.m. EDT

Computer Associates(CA) on Wednesday stripped Chairman and Chief Executive Sanjay Kumar of his power amid a federal probe into the software company's accounting practices.

Kumar, who was handpicked in August 2000 to succeed company Founder Charles Wang, was also removed from the company's board and given the face-saving title of chief software architect at the Islandia, N.Y.-based company.

He will be succeeded as chairman by board member Lewis Ranieri, founder of the Hyperion Partners investment partnership and a famous Wall Street bond trader. A search for a new CEO is under way.

CA's board met Tuesday to weigh Kumar's fate amid a federal probe that this week resulted in the firing of nine people in its legal and finance departments. The company is alleged by prosecutors to have backdated software revenue to make it appear that its previous quarters were up to expectations, primarily during fiscal 2000.

Reaction to the demotion was swift and largely positive. CA's stock was recently up $1.12, or 4.4%, to $26.69 and the talk on Wall Street was about recovery.

"This makes CA a much more investible company," said analyst Nitsan Hargil of Friedman Billings Ramsey, who has been outspoken in his criticism of Kumar. "The big danger was an indictment of the company itself and that seems very unlikely now." (His firm has not done investment banking for CA.)

A criminal indictment would have probably taken the company out of the running for lucrative government contracts, the lifeblood of many high-tech outfits.

A fine is still possible, but with CA sitting on $1.35 billion in cash and marketable securities, it's not likely to be a crippling blow.

The shadow of the $1 billion scandal has made it difficult to even talk to institutional investors about CA, even though the company's core business has been strong, said Hargil. "They'd stop me at the first sentence."