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Computer Associates: Sexy? No. Profitable? You Bet


Information Processing: SOFTWARE

COMPUTER ASSOCIATES: SEXY? NO. PROFITABLE? YOU BET

Software "plumbing" keeps CA hot

In Silicon Valley, Charles B. Wang would be considered a heretic. The CEO of software maker Computer Associates International Inc. restricts his workers' use of E-mail, which he says is used mostly for office politics as a "cover-your-ass tool." He shuns investment bankers but has made more than 60 acquisitions. When the company hit $1 billion in annual sales in 1989, Wang froze hiring, fearing that CA would lose its small-company culture. Believing that CA was being unfairly criticized, he cut off contact with Gartner Group Inc., an influential market-research firm that most high-tech companies kiss up to. ("I refuse to be blackmailed and extorted," he says.) And while his Silicon Valley peers are off chasing the Internet, Wang sees it as just another system for his company's software to manage. "Cool, with-it, and wired are not words you usually associate with CA," says Don DePalma, an analyst at Forrester Research Inc.

But smart, aggressive, and consistently profitable are. And from the unlikely base of Islandia, N.Y., the Long Island corporate enclave where CA is headquartered, Wang and his company are doing just fine, thank you. The company's 500 or so products are used in most big and midsize companies to do everything from crunch mainframe data to troubleshoot sprawling networks of computers. Think of them as software plumbing--the infrastructure that keeps big systems and big networks running.

CA's plumbing products may not be glamorous, but they certainly are lucrative. With $3.5 billion in revenues for its fiscal year ended in March, CA is the third-largest independent software company. Only Microsoft Corp. and Oracle Corp. are larger. CA shares are worth 140 times as much as when the company went public in 1981 and are up 35% this year, to around 57. Wall Street analysts expect the company to earn close to $1 billion on revenues of $4.3 billion for its current fiscal year.

This street-smart company is very much created in the image of its tough-talking 52-year-old founder. "There's a bluntness in CA people that borders on rude, but you never have to wonder where you stand. You have the right to fail at CA," says Wang. In 1952, when he was 8, Wang immigrated to the U.S. from Shanghai with his parents and two brothers. Wang's father, who had an international law degree from Harvard University and was a supreme court justice in Shanghai, had to start over in the U.S. "We were true two-suitcase immigrants," recalls Wang. After attending Brooklyn Technical High School, Charles went on to earn a degree in mathematics from Queens College. (Anthony, the eldest son, was sent to Yale University and then Cornell for a law degree.) In 1967, Wang took a job as a programming trainee at Columbia University's Riverside Research Institute and went on to become vice-president for sales at Standard Data Corp., a software developer.

RUNNING ON PLASTIC. It was there that Wang got wind of a Swiss software company, Computer Associates, that was looking for a U.S. partner. With college friend Russell M. Artzt, Wang began distributing the company's CA-Sort, a program for sorting and merging data on mainframe computers. IBM had a similar product that it gave away to its customers, but the CA product was much faster. By 1980, Wang and Artzt had done so well that they bought the Swiss company. Wang's brother Tony joined as CA's general counsel.

The early days were a struggle. Computer Associates, Wang likes to point out, did not have venture funding or influential venture capitalists to help pave the way. Wang bartered computer services for office space in midtown Manhattan and ran the company on plastic. "When we ran out of money, we went and got a new credit card," he recalls. Once, Wang drove to Boston to collect a bill so he could make his payroll.

The days of scrimping left a lasting legacy. Aside from the recreation and day-care facilities at CA's recently built headquarters, the company is pretty much a no-frills operation. "We're long on technology, short on B.S.," says Wang. Although his 5% stake makes him a member of the software billionaires club, Wang hasn't strayed far from his roots. He's still a regular at Canton, a restaurant in a seedy stretch of Manhattan's Chinatown, run by a childhood friend. Wang, who likes to rattle the pans himself, has published a Chinese cookbook, Wok Like a Man.

Wang is leery of just about anything that distracts from creating new products or landing new sales. The bottom line: CA has the highest revenue per employee in the industry--$432,000 for the past 12 months, vs. $422,000 for Microsoft and $180,000 for Oracle. "They believe software is a business, not a hobby," says Charles Federman, chairman of Broadview Associates LP, an investment-banking boutique. "That's atypical in this industry." So, unlike other software makers, CA does not have a stable of techno-celebrities. "If your chief technology officer is always on TV or on the news, he's not doing much technology," says Wang. CA does have a chief technology officer, though. She's Nancy Li, a longtime CA employee and Wang's second wife.

NEXT PHASE. By maintaining a tight focus, Wang methodically took the company from a single-product outfit to where it is today. Initially, growth came from products that CA cooked up itself. Whenever IBM came out with new versions of its mainframe operating systems, CA pounced--rewriting programs such as CA-sort and CA-Dynam, which customers relied on to squeeze better performance out of their costly machines. By 1980, it had 20 products and $17.8 million in sales, setting the stage for an initial public offering in 1981.

The IPO raised just $3.2 million, a ludicrously small sum by today's standards. But it was enough to get Wang started on the next phase of his growth plan. He used the new shares to acquire Capex Corp., a maker of about 20 "utility" programs for IBM's MVS operating system, including one to make programs written in the then popular COBOL programming language run faster and another to manage tape storage.

That deal immediately brought in new customers and boosted revenues by 50%. Emboldened, Wang and brother Tony began targeting other acquisitions. The formula was to find a troubled company with a widely used, if maturing, product line. Usually for a bargain price, CA got a new customer base and a revenue stream from upgrades and annual maintenance contracts.

As CA grew, so did its targets. In 1987, when revenues were just $628 million, it paid $800 million for rival UCCEL Corp. By 1990, CA was the dominant force in mainframe utilities--which still amounts to a $1 billion annual market.

Along the way, Wang and his team developed a reputation as the scavengers of the software industry. They were also relentless in making their deals pay off, slashing costs and eliminating employees. Customers quickly sensed the change when CA took over a company: The new owners vigorously enforced license agreements, often in the courts. A cottage industry soon sprang up to advise companies on how to negotiate with CA. Heavy-handed tactics did little to endear CA to its customers or partners, such as giant Electronic Data Systems Corp., which only recently settled a protracted and bitter dispute with CA over software licensing in outsourcing deals.

By the early 1990s, critics--including a host of short-sellers--were poking holes in the CA story. They argued that the buy-and-slash strategy would eventually backfire. Worse, with almost all its revenue tied to mainframes, CA seemed vulnerable to the shift to personal computers and so-called client-server computing networks.

LEGENT BET. Wang delights in having proved the doubters wrong. With the help of Sanjay Kumar, a young development manager who came to CA with the UCCEL acquisition and who has risen to president and chief operating officer, Wang began plotting a new course. He put more and more resources into developing CA-Unicenter, a program that would do many of the systems management tasks that the company's mainframe software did--but for the new client-server setups. He bought ASK Group for $310 million in 1994 to get the Ingres database-management program, which runs on minicomputers and network servers.

He quickly followed with the $1.8 billion purchase of Legent Corp. in May, 1995. The deal, like other recent buys, was all cash, to avoid dilution of CA's stock. The price, paid for with new borrowing, raised some eyebrows. But the company has big plans for Legent's networking and messaging technology, which will reemerge early next year in a client-server product called Unicenter TNG (The Next Generation). "You'll see Legent pay off in a big way," says Kumar.

Thanks largely to Unicenter, a little more than one-third of CA's sales today come from client-server software, up from almost none three years ago. Wang expects client-server to grow to half of revenues by 1998. Unicenter alone will make up 25% of CA's sales next year, he says.

SALES PUSH. To help the client-server push, CA announced plans on Oct. 7 to acquire Cheyenne Software Inc., a maker of programs for backing up and managing disk storage on local-area networks, for $1.2 billion in cash (using borrowing capacity left over from the credit line it set up to buy Legent). That will give CA an 85% share of the storage-management market for Novell Inc.'s NetWare networks, and new products to manage systems using Microsoft's Windows NT, an important new market for CA. Also, Cheyenne's dealer network gives CA access to a new set of customers.

Cheyenne is only the latest and most visible part of an effort to accelerate client-server sales. The company has created a special sales force, the Emerald Div., dedicated to selling its top products--Unicenter, OpenIngres, and a new database program called Jasmine--to nonmainframe accounts. "We were doing a really good job of selling products to our existing customers. But if we didn't know them, we didn't sell to them," explains Kumar. Meanwhile, CA has put its financial and manufacturing software into separate business units with their own sales and marketing and exited nonessential businesses. 4Home Productions, a consumer software unit that made Simply Money--a flop even as a giveaway--was sold off in October.

These moves should leave CA more focused on its core business--just when the need for better plumbing is soaring. After years of unchecked development, companies are trying to get a handle on their sprawling information systems--to understand what software and data they have accumulated and how much they are paying for it all. The continuing spread of client-server networks and the growing use of the Internet only makes the need for such technology more urgent. Yankee Group Inc. estimates that sales of systems-management software will grow from $3 billion today to almost $9 billion by 2000. "Computing is an expensive resource," says Steven Ruegmitz, a first vice-president at Lehman Brothers Inc. in charge of the firm's 10,000 workstations and PCs. Systems management software "puts us in a better position to manage our costs."

CA sees its shot: to create products that will give management a single, comprehensive view into all of its far-flung computers and networks so they can be managed centrally. That way, companies can pinpoint and fix trouble spots before they start hurting the organization's ability to do business. Such a system also lets companies enforce corporate policies, including ensuring that workers are using only sanctioned software.

This is where Unicenter TNG comes in. TNG is designed to give companies a way to manage everything on a network: from monitoring the mainframes to tracking and updating the versions of software loaded on desktop PCs on any local-area network, anywhere in the world. The system features a 3-D graphical view of a company's systems and networks, so computer managers can "fly" into a building and right into the computer giving them trouble.

BANK DEAL. TNG will have tough competition from Tivoli, a CA rival acquired by IBM earlier this year. Tivoli's systems-management framework is based on industry standards and in some ways is ahead of TNG. Now, with IBM's financial muscle behind it--and popular IBM mainframe products such as Netview to offer as well--Tivoli is giving CA a good fight. Its latest product, Global Enterprise Manager, is "the ultimate CA-killer," says Tivoli chief Frank Moss.

Igor Stenmark, a Gartner Group analyst, gives the early advantage to CA, even before TNG ships. In its first six months, CA's Emerald Div. has already snagged 125 deals, including a recent contract with Bank of America, where CA edged out Tivoli. CA's Unicenter will help the bank manage its 25,000 PCs and 5,000 servers. And with the help of new partner EDS, CA just nailed a megadeal with Xerox Corp. to manage its 70,000 PCs.

Another big bet is on Jasmine, an "object-oriented" database program that will let developers create multimedia applications. Unlike conventional databases, which handle text and numbers only, object databases can store and retrieve sound, video, and images. With all of the multimedia content going online, object databases "will be one of the biggest moneymakers" in Internet software, says Forrester's DePalma. But CA will be competing with database heavyweights such as Oracle and Informix Corp.

Database programs for Web content and 3-D interfaces? This doesn't sound like boring old CA. Indeed, CA's biggest challenge may be changing its image from a sharp-eyed financial scavenger to a technology innovator and cooperative partner. Some analysts figure CA has already lived down its bad old image. "You still have people with knee-jerk reactions to CA, but they have really cleaned up their act," says DePalma.

Is there a new, mellow CA? Wang scoffs at the idea but admits his company is trying harder to be a team player. "We weren't as bad as people said we were, and we're probably not as good as they're saying we are now," he says.By Amy Cortese in Islandia, N.Y.Return to top


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