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Computer Associates: Up in Flames on the Fourth

Markets don't like surprises - especially now. It seems that every day a high-tech company announces that its quarterly results will not meet expectations. The result is a massacre of shareholder value.

On the Fourth of July, Computer Associates lit a firestorm in its stock price, as the company reported dire news. The stock plunged $21-3/4 to $29-3/8 - for a loss of $12 billion in market capitalization. About 31 million shares traded.

While Wall Street was expecting $1.6 billion in revenues for the quarter, Computer Associates disagreed. The amount will instead be between $1.25 billion and $1.3 billion. Earnings per share will range from 26 to 31 cents per share - compared to analysts expectations of 55 cents.

What caused all this? Well, there was a slowdown in Europe (especially in France and Germany). There has also been major changes in the sales force structure.

However, the big reason for the downfall was the core: the mainframe business. Computer Associates was slammed by two trends:

1. Companies that were using mainframes for Y2K testing are now using the machines for operational corporate uses. This means less demand for mainframes.

2. IBM will launch its new line of mainframes in the last quarter of 2000. Thus, corporations are waiting until IBM makes its move.

Since Computer Associates is a major developer of mainframe software applications, these two trends mean deceleration of revenues and profits. What's more, these problems will likely last for at least two quarters.

Despite the bad news, the fact remains that Computer Associates is a great company. The company has had major setbacks before and has returned. The management team is compensated with company stock; so, there is definitely much desire to get the stock upward (the CEO lost over $700 million yesterday). Although, it will likely take until the end of the year. So there is no need to jump into the stock quickly - but it is one to keep on your watch list.