COMPUTER ASSOCIATES:
By: Mo Lidsky
Tags: Finance, Fraud, Investment

CREATING THE 35-DAY MONTH

There was a time when IBM had a virtual monopoly on the hardware industry, but regulatory pressure clamped down, forcing them to start selling a wide range of products. It was then that an unlikely partnership formed between bombastic Chinese immigrant Charles Wang and a quiet programmer Russell Artzt.

At first, they began selling and developing IBM products with moderate success. Then they aimed higher. They formed a partnership with Swiss company Computer Associates to begin selling a data management product, CA-Sort, which had sold well in Europe but never quite made it in the US. Combining aggressive sales techniques with a “steal” of a product, Wang had great success and realized that for his company to thrive, all he needed to do was sell products, not develop them.

Wang proceeded to go on an acquisition binge that lasted decades. In the early 1980s alone, he spent over $60 million acquiring other companies and gaining the rights to sell their products, including dishing out $22 million for a Phoenix-based software company and $27 million for an early Silicon Valley start-up. After seeing the early success of this model, Wang continued to expand even more until 1989 when his company, now renamed Computer Associates (CA), became the first software company to earn more than a billion in annual revenues. Based in Long Island, it emerged as one of the most powerful corporations in the region, with some well-known Long Islanders serving on the company’s board, eventually paving the way for Wang to later purchase the local hockey team, the New York Islanders.

Through it all, CA was heavily criticized for its unsatisfactory customer service, as they would sell products but offer no way of updating, refining or evolving them, leaving their customers with products that would soon become obsolete and without any helpful service. Fortune magazine would later describe CA as a “4 billion-dollar corporation run like a twenty-person start-up,” where the only thing that mattered was the sales department and how many sales it could push forward, with all other departments being essentially ignored. But who had time to care for the customers when Computer Associates was making so much money? It was this brash attitude that prompted Wang to attempt some hostile takeovers of other tech companies and in 1988, he was even sued for claims of bribery in a hostile bid to take over a computer consulting company. As the acquisition binge continued, Computer Associates made one acquisition that heavily changed the course of their existence. CA acquired UCCEL, originally a college start-up in Texas, for a sum of $800 million but even more important was their pickup of Sri Lankan immigrant Sanjay Kumar.

Kumar, who had fled Sri Lanka for South Carolina when he was just a teen, had advanced rapidly through the UCCEL system, despite having no college degree. At Computer Associates, he advanced even further and by 1993, Charles Wang’s older brother Tony Wang was forced to retire just to make room for Kumar on the board. Kumar then made his way up to CFO in the ’90s and, during that tenure, CA continued its success through buying more companies, including Platinum Technologies for $3.5 billion in what was then the software industry’s largest acquisition.

But as the end of the ’90s neared, Computer Associates faced a throng of negative publicity over ill-advised stock options. Wang, Kumar, and Artzt had taken stock options totaling $1.1 billion, an amount equal to the entire revenue of CA that year. Although some corporate greed is acceptable, this exorbitant amount was simply unprecedented. Now, CA didn’t just have unhappy customers; even shareholders were displeased. In the ensuing melee, Wang was forced out as CEO and he rechanneled his bombastic efforts to focus on running the New York Islanders, where his signature moves included firing a general manager after six weeks and replacing him with the backup goalie, along with dishing out (possibly) the worst sports contract in history, giving goalie Rick DiPietro a fifteen-year contract that lasted well beyond his playing years.

It came to the relief of many that Kumar was given full reign as CEO of CA. After all, while Wang’s pompous nature did a lot of good for the company, including its many acquisitions, his neglect of consumer and public relations left a black mark on the firm. With a wiry frame and sporting a thin moustache, Kumar projected an aura of serenity and promised to bring a calmer reign and “gold standard” to CA. He even managed to convince legendary former SEC accountant Walter P. Schuetze, an eventual member of the Accounting Hall of Fame, to join the board, which was previously comprised of insiders and members of the Wang family.

But if anybody thought Kumar was an improvement, they were markedly wrong. In a scheme that had preceded the stock option debacle, Kumar had already been cooking CA books for a few years. Conspiring with the head of sales, Stephen Richards, Kumar had been inflating CA revenues using the “35-day month.”

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To learn more about the case as well as the key takeaways from this case and best practices for investors, check out: Selling Snake Oil: Investment Lessons from the World’s Most Innovative Frauds. Please note that 100% of the proceeds from this book will be donated to the Prime Quadrant Foundation and the causes it supports.



About the Author: Mo Lidsky is the Chief Executive Officer at Prime Quadrant, Canada’s leading investment research and consulting firm. Mo is also the current Chairman of CAF Canada, the Prime Quadrant Foundation, and sits several the boards of several non-profit organizations including Hebrew University and Holland Bloorview Hospital. Aside from Selling Snake Oil: Investment Lessons from the World’s Greatest Frauds, Mo has authored or co-authored three additional books including, Partners in Preservation: How to Know Your Advisor Is Truly Protecting Your Wealth, In Search of the Prime Quadrant: The Quest for Better Investment Decisions, and The Philanthropic Mind: Surprising Discoveries from Canada’s Top Philanthropists. In recognition of Mo’s contributions to the community and leadership, Mo has been selected as the recipient of Canada’s Top 40 Under 40 Award. However, his greatest distinction continues to be his extraordinary wife and five adorable children.