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."

Kumar's fate was thrown into question when Ira Zar, the company's former CFO, pleaded guilty earlier this month to obstruction of justice and fraud in the accounting scandal and agreed to cooperate with prosecutors. David Rivard and David Kaplan, former vice presidents of finance at CA, pleaded guilty to obstruction of justice and securities fraud conspiracy and face a maximum sentence of 10 years in jail.

"We believe the decisions we have made today are fair and responsive to the situation and in the best interests of CA's customers, shareholders and employees," Ranieri was quoted saying in a release announcing the firing. "The audit committee's and the entire board's exhaustive review of these matters resulted in the removal of a number of individuals from the company.

"The changes in Sanjay's role are not based on the conclusion that he engaged in any wrongdoing. Nonetheless, the conduct in question occurred during his tenure, and the board felt this action was appropriate," Ranieri said.

Richard Petersen, who follows the company for Pacific Crest Securities, said that despite the alleged wrongdoing, Kumar deserves at least some of the credit for CA's vastly improved relations with customers. "In the past, customers did business with CA because they had to. Now, they do business because they want to," he said.

Still, his ouster was necessary. "Investors were reluctant to be involved cause of the scandal's overhang. Getting rid of that distraction is a key step," he said. (His firm has not done investment banking for CA.)

To be sure, an indictment of the company isn't out of the question. It's also possible that the European Union could levy a harsh fine against the company.

But for now, it appears that CA is on the road to recovery.

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