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Is Computer Associates' Investment in CHS Really a Kiss of Death?

Also, prescient insider selling at Racing Champions, and AMD angst.

Don't get suckered into thinking that a $50 million investment in

CHS Electronics



Computer Associates

(CA) - Get CA, Inc. Report

, which was finalized last Friday, is the friendly business alliance CHS tried to portray when the deal was first announced in May. This is really one of those last-ditch, we-desperately-need-the-money-and-we-need-it-now types of financing known more commonly (and for obvious reasons) as a "death spiral" convertible. I like to think of it as loan sharking for troubled corporations. Unless the company somehow pulls off a miracle and turns itself around and the stock rises, the debenture holders can wind up owning some, most or all of the company.

The big losers, if that happens, are existing shareholders, because the more shares the debenture holders get through conversion -- assuming the price falls -- the smaller chunk existing holders own of the company. (Yep, dilution, and not in a minor way.)

CHS, which distributes electronics products to everywhere but the U.S., has been

under siege by short-sellers for the better part of a year. Early on, the company

declared war on the shorts and denied allegations of aggressive accounting. As part of the controversy, short-sellers had suggested that CHS execs tended to stretch the truth. That's just what it appeared a few months ago, when CHS was forced to admit its sales and profits weren't quite what they appeared. The company restated its 1998 fiscal second- and third-quarter earnings as well as its preliminary results for its fourth quarter. CHS admitted that it overstated vendor rebates for three quarters of the year and that some overstated vendor rebates were supported by "invalid documentation."

But the telling-the-truth part of the story has one final twist: When CHS first disclosed the deal with Computer Associates, it was billed in a press release as little more than a $50 million investment as part of a strategic alliance. There were no details about the terms and no mention that the investment really consisted of floating-rate convertible debentures (the buzzword for death spirals). That was left to private conversations with analysts, and after one such conversation,

Credit Suisse First Boston's

Joel Pitt told his clients that he found it "reassuring that in our discussions with HS, the company has assured us that the conversion price will be fixed without floating rate or reset provisions." If true, that would've meant the existing investors would have had little to worry about in the way of dilution.

But, as luck would have it, that wasn't true. Last Friday, after reading the terms of the Computer Associates deal in an 8-K, Pitt issued a press release that said (reading between the lines) that the company had lied to him. He then lowered his earnings estimates for this year and next. Contacted yesterday, Pitt didn't disagree with my interpretation.

CHS officials couldn't be reached. A spokesman for Computer Associates, meanwhile, says his company has no intention or desire to control CHS. "We're looking to enhance both businesses here, with an opportunity for an investment gain."

Assuming, of course, CHS didn't fool them, too.

Short Positions

Too close for comfort?:

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Racing Champions


disclosed it would report a second-quarter loss, instead of the expected 17-cents-per-share profit. Its stock responded by plunging 60% to 6 11/16. It has since rebounded some today and recently traded at 7. Still, you can't help wondering who knew what when. Director Victor Shaffer, whose company was bought by Racing Champions last year, sold 45,000 shares of Racing Champions on May 28 at $17.44 per share. "Extremely prescient selling" was the way Bob Gabele put it. Gabele is director of insider research at

First Call/Thomson Financial

(and a columnist for


). Inquiries regarding the sale were directed to CFO Curt Stoelting, who couldn't be reached.

AMD angst:


Advanced Micro Devices

(AMD) - Get Advanced Micro Devices, Inc. Report

, to repeat what this column

asked in March, how is it that AMD CEO Jerry Sanders continues to get away with such lousy performance? The item was written


the latest proxy was issued. At the time, I noted that AMD's stock hadn't done anything for the better part of 15 years, yet Sanders boasted a $1 million salary in 1997. While he wasn't paid a bonus, he took home an additional $617,000 owed from prior years and $257,000 in the form of cars and personal security. Last year was pretty much the same: $1 million plus an additional $802,000 in bonuses and other compensation. Not bad for screwing up so badly.

Herb Greenberg writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at Greenberg also writes a monthly column for Fortune.