Cleanup Firm Sets Sights on Computer Associates

Relational Investors, a money management firm with a reputation for forcing directors of ailing companies to shape up, has quietly amassed nearly 5.5 million shares in Computer Associates(CA).

With its $140.7 million investment, the San Diego, Calif., firm purchased just under 1% of the software giant's outstanding shares, making Relational the 16th largest institutional holder of the stock, according to regulatory documents filed at the end of June.

Relational's managers, Ralph Whitworth and David Batchelder, are more than just good governance types. Over the eight years of its existence, the privately held firm has earned an average return of 21%, nearly triple that of the S&P 500's 8.63% return during the same period.

"Whitworth doesn't buy a stock to make a statement. He's looking for value," said Nell Minnow, a former fund manager who now heads The Corporate Library, a watchdog and research group.

In the past, Whitworth has found value in National Semiconductor(NSM), convincing the chipmaker to focus on its analog business. And after gaining a seat on Mattel's(MAT) board several years ago, he pushed the company to dump its Learning Company computer games division. Both moves paid off.

Whitworth did not return calls asking him to comment for this article. But people who know him say that "consensus-building" and negotiations are hallmarks of his style. "It wouldn't surprise me at all to see him go for a seat on CA's board," said Minnow.

Others noted his interest in CA could be a sign that he believes the company is ready to turn a corner, and indeed there have been numerous rumors indicating that an air-clearing settlement with the government is in sight.

Relational's buy-in comes as Computer Associates struggles to shed the legacy of a scandal that led to the restatement of two years of financial results, including more than $2 billion in revenue, and the departure of most of its board and many top managers, including CEO Sanjay Kumar.

Although the company's acting CEO, Kenneth D. Cron, has taken a tough line on CA's history of unethical behavior, many investors think he hasn't gone far enough. In particular, there is concern that some executives who were awarded a total of at least $100 million in performance bonuses (including 80,000 shares and $3.2 million for Kumar) during the years the company misstated revenue have not been forced to return the money.

A so-called "clawback" resolution, aimed at returning the funds, was defeated at CA's recent annual meeting but received 24% of the votes, despite management's opposition. "If you didn't earn it, you shouldn't keep it," said a spokesman for the Amalgamated Bank Long View Collective Investment Fund, which submitted the proposal.