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.