SCHEDULE 14A
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Commission Only (as permitted
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NETEGRITY, INC.
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This filing consists of an email sent by Barry Bycoff, President and
Chief Executive Officer of Netegrity, to Netegrity employees on October 6, 2004
and the transcript of a conference call held on October 6, 2004.
E-MAIL TO EMPLOYEES OF NETEGRITY
TO: Team Netegrity
FROM: Barry Bycoff
RE: Today's Announcement
DATE: October 6, 2004
Today I am very pleased to announce that we signed a definitive agreement with
Computer Associates (CA) to acquire Netegrity. While it would always be my
preference to share such news with employees prior to issuing a press release,
SEC rules mandate that we make any announcements that could impact the stock of
the company to all shareholders at the same time.
I'd like to begin by saying that together we have accomplished a great deal over
the last eight years. Today Netegrity is recognized as a technology pioneer, a
market leader, and a valued partner to over 850 of the largest companies in the
world. While the decision to sell the company is a very difficult one, I believe
that it is the best way to ensure our continued growth and success.
With that said, I feel that it is extremely important for me to personally
convey how we arrived at the decision to be acquired. To give you more in-depth
information, we will be holding a company wide meeting and teleconference at
10:30 am EST today at the Newton Marriott and ask that you attend either in
person or by phone. The meeting will be held at the Newton Marriott and the
call-in numbers are:
US Dial: 866-606-4717
International Dial: 309-495-0763
Access Code: 7438543#
During that meeting, I would also like to take the opportunity to introduce you
to several key members of CA's team. Joining me will be Russell Artzt - CA's
executive vice president responsible for their security product line, Toby Weiss
- SVP of eTrust Marketing and Product Management; Stacy Leader - VP of Brand
Management, who will also play key role in the integration and Kevin Long - SVP
of Employee and Community Relations.
Prior to the meeting this morning, I would like to share some of the background
that led to today's announcement. Over the past couple of years Netegrity has
been approached by a number of companies who have expressed interest in
acquiring the company. At those times it was not in the best interests of our
constituents - employees, shareholders and customers - to pursue discussions. In
the past 6-12 months however, a number of factors have changed that strongly
influenced my decision to re-consider engaging in these discussions. The most
influential factors were:
- Identity and access management technology has become a key
investment area for many of our current and potential
customers. As a result, the number
of acquisition overtures by larger technology vendors who want
to take advantage of the opportunities of this high growth
market has increased.
- We have been very successful moving from a start-up to a $100M
company. However, we now find ourselves at a critical
inflection point - considering the investment required to move
from a $100M company to a $250M one. The move to this next
level requires significantly greater investment in sales and
marketing in order to capitalize on this global opportunity.
- While such investments could benefit us in the long run, they
have the potential to negatively impact our stock price in the
short term because today's investors have a heightened focus
on quarterly revenue and earnings results.
- The size of the competitors we are meeting in the market today
are much larger than in the past and therefore our leadership
position is threatened unless we can scale to the next level
at a more accelerated pace.
The decision to be acquired by CA came after many weeks of careful analysis,
weighing the synergies of our respective businesses. I believe that CA's
significant presence in the security market and broad complement of products
would enable us to provide a highly competitive offering to customers. In
addition, CA's large customer base and broad market reach, with over 15,000
employees worldwide, would allow us to expand our global presence.
I know that this is a great deal of information to absorb, so starting today at
10:30 am ET, and over the next couple of days, the senior leadership team will
meet with you to answer as many of your questions as they can. We will also
continue to update you over the next few weeks as we move forward with
integration plans. In the interim, I am available to attend any departmental
meetings or to answer individual questions in person or by phone. I look forward
to speaking with you this morning.
Regards,
Barry
IMPORTANT ADDITIONAL INFORMATION WILL BE FILED WITH THE SEC
Netegrity plans to file with the Securities and Exchange Commission and
mail to its stockholders a Proxy Statement in connection with the transaction.
The Proxy Statement will contain important information about Computer
Associates, Netegrity, the transaction and related matters. Investors and
security holders are urged to read the Proxy Statement carefully when it is
available. Investors and security holders will be able to obtain free copies of
the Proxy Statement and other documents filed with the SEC by Computer
Associates and Netegrity through the web site maintained by the SEC at
www.sec.gov. In addition, investors and security holders will be able to obtain
free copies of the Proxy Statement from Netegrity by contacting Investor
Relations, Netegrity, 201 Jones Road, Waltham, MA 02451, 800-325-9870.
Computer Associates and Netegrity, and their respective directors and
executive officers, may be deemed to be participants in the solicitation of
proxies in respect of the transactions contemplated by the merger agreement.
Information regarding Computer Associates's directors and executive officers is
contained in Computer Associates's Form 10-K for the year ended March 31, 2004
and its proxy statement dated July 28, 2004, as amended. Information regarding
Netegrity's directors and executive officers is contained in Netegrity's Form
10-K for the year ended December 31, 2004 and its proxy statement dated March
31, 2004, which are filed with the SEC. As of October 5, 2004, Netegrity's
directors and executive officers beneficially owned approximately 4.8 million
shares, or 12%, of Netegrity's common stock.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Statements in this document regarding the proposed transaction between
Computer Associates and Netegrity, the expected timetable for completing the
transaction, future financial and operating results, benefits and synergies of
the transaction, future opportunities for the combined company and any other
statements about Computer Associates or Netegrity managements' future
expectations, beliefs, goals, plans or prospects constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Any statements that are not statements of historical fact (including
statements containing the words "believes," "plans," "anticipates," "expects,"
estimates and similar expressions) should also be considered to be
forward-looking statements. A number of important factors could cause actual
results or events to differ materially from those indicated by such
forward-looking statements, including: the ability to consummate the
transaction, the ability of Computer Associates to successfully integrate
Netegrity's operations and employees; the ability to realize anticipated
synergies and cost savings; the emergence of new competitive initiatives
resulting from rapid technological advances or changes in pricing in the market;
market acceptance of new products and services and continued acceptance of
existing products and services; risks associated with the entry into new
markets; business conditions in the distributed systems and mainframe software
and hardware markets; uncertainty and volatility associated with Internet and
eBusiness-related activities; and the other factors described in Computer
Associates's Annual Report on Form 10-K for the year ended March 31, 2004 and
its most recent quarterly report filed with the SEC and in Netegrity's Annual
Report on Form 10-K for the year ended December 31, 2003 and its most recent
quarterly report filed with the SEC. Computer Associates and Netegrity disclaim
any intention or obligation to update any forward-looking statements as a result
of developments occurring after the date of this document.
TRANSCRIPT OF CONFERENCE CALL
FINAL TRANSCRIPT
CONFERENCE CALL TRANSCRIPT
CA - NETEGRITY TO BE ACQUIRED BY COMPUTER ASSOCIATES
EVENT DATE/TIME: OCT. 06. 2004 / 9:30AM ET
EVENT DURATION: N/A
FINAL TRANSCRIPT
CA - NETEGRITY TO BE ACQUIRED BY COMPUTER ASSOCIATES
CORPORATE PARTICIPANTS
JEANNE GLASS
Computer Associates - VP Investor Relations
KEN CRON
Computer Associates - Interim CEO
JEFF CLARKE
Computer Associates - CFO, COO
RUSS ARTZT
Computer Associates - EVP
BARRY BYCOFF
Netegrity - Chairman, President, CEO
CONFERENCE CALL PARTICIPANTS
TRIP CHOWDHRY
FTN Midwest Research - Analyst
DREW BROSSEAU
SG Cowen - Analyst
JOHN DIFUCCI
Bear Stearns - Analyst
TODD RAKER
Deutsche Bank - Analyst
STERLING AUTRY
J.P.Morgan Chase - Analyst
JASON MAYNARD
Merrill Lynch - Analyst
RICHARD PETERSON
Pacific Crest - Analyst
GREGG MOSKOWITZ
Susquehanna Financial Group - Analyst
PRESENTATION
OPERATOR
Good morning. My name is Jenna and I will be your conference facilitator today.
At this time I would like to welcome everyone to the purpose of this morning's
webcast to review today's announcement that Computer Associates has signed a
(technical difficulty) All lines have been placed on mute to prevent any
background noise. After the speakers' remarks there will be a
question-and-answer period. (OPERATOR INSTRUCTIONS) At this time I would like to
turn the call over to Ms. Jeanne Glass, Vice President of Investor Relations.
JEANNE GLASS - COMPUTER ASSOCIATES - VP INVESTOR RELATIONS
Good morning, everyone and thank you for joining us. My name is Jeanne Glass,
Vice President of Investor Relations at Computer Associates. With me today is
our interim CEO, Ken Cron, our Chief Operating Officer Jeff Clarke, and our
Executive Vice President for our eTrust solution, Russ Artzt. The purpose of
this morning's webcast is to review today's announcement that Computer
Associates has signed a definitive agreement to acquire Netegrity. This will be
followed by a Q&A where Barry Bycoff, Chairman, President and Chief Executive
Officer of Netegrity will join us.
Before we begin please note that this conference call is being broadcast over
the phone and via a live webcast open to all interested parties. The content
which is being preserved by (indiscernible) is the property of Computer
Associates and is protected by U.S. and international copyright laws and may not
be reproduced, transcribed or produced in any way without the express written
consent of Computer Associates. We consider your continued participation in this
call to be consent to our recording.
I would also like to advise everyone that today's discussion may contain
forward-looking statements consistent with all of our public statements there
can be no assurances that future results will be achieved and actual results
could differ materially from forecasts and estimates. Please refer to the
forward-looking statement discussion contained at the end of today's press
release, our earnings announcement and our SEC filings for further elaboration
of the risks involved.
You should also note that in accordance with SEC regulations all guidance given
regarding our business and (indiscernible) performance will be disseminated in a
public forum such as this call which is webcast and available to any interested
party on our website. All future guidance and material information will be
publicly disseminated in accordance with requirements of regulation FD.
(indiscernible) in welcoming our interim CEO, Ken Cron.
KEN CRON - COMPUTER ASSOCIATES - INTERIM CEO
Good morning and thanks for joining us. Today we are announcing that Computer
Associates has signed a definitive agreement to acquire Netegrity, a leading
provider of security software solutions in an all-cash transaction valued at
about $430 or $10.75 for each Netegrity common share. I will talk briefly about
the acquisition and how it fits in to what we're doing at CA and where we are
heading as a company. Then I will turn it over to Jeff Clarke to provide some
details about the transaction. Russ Artzt will talk about how this transaction
strengthens and complements our security business. Finally I will come back to
open the lines for questions.
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CA - NETEGRITY TO BE ACQUIRED BY COMPUTER ASSOCIATES
Also with me today is Barry Bycoff, Netegrity's Chairman, CEO and President. If
you have any questions regarding Netegrity's preliminary third quarter financial
performance which they announced today, please contact Mindi Cole, (ph)
Netegrity's investor relations director. Let me take a couple of minutes to put
this acquisition in context for you. With the government's investigations
resolved, CA is in a position to move forward with focus on execution and
performance.
On the product side, we're moving ahead with an enterprise infrastructure
management strategy or EIM designed to enable IT organizations to optimize
assets, increase infrastructure performance, ensure enterprise security and
business continuity and help CIOs run IT like a business. Netegrity is a great
bid for our strategy. The addition of Netegrity security offering to our EIM
suite (indiscernible)lowering complexity, lowering risk and better leveraging IT
resources even easier for our customers.
I talked a lot in the recent past about CA's growth strategy; we are aligning
our resources and investment with the company's four key strategic growth areas.
Number one, product development. Two, geographic expansion. Three, new routes to
market CA software and four, acquisition. The Netegrity acquisition is simply
the latest demonstration of how we are moving ahead with that strategy. As you
know in August we acquired anti-spyware PestPatrol and rapidly incorporated it
into the eTrust Threat Management software portfolio which protects
organizations from diverse Internet dangers including virus, Spam and
inappropriate use of web by employees. As Russ will tell you, our goal is to
continue to be a major player in security. Netegrity helps ensure that we
achieve that goal.
I am very excited about this deal and what it means for our customers and
investors. Now I will turn it over to Jeff to give you some of the details about
the transaction.
JEFF CLARKE - COMPUTER ASSOCIATES - CFO, COO
Thanks. As Ken noted we believe the Netegrity acquisition is great news for
CA's customers and investors. It rounds out our technology portfolio and enables
us to better serve current and prospective customers with a more comprehensive
security management offering. Netegrity has more than 350 million users at more
than 700 active customer sites in multiple industries. They include
telecommunications, healthcare and financial services and serves 53 percent of
the Fortune 100. The company also has more than 200 strategic partners including
Accenture, HP, Sun Microsystems and Microsoft and works with more than 75
systems integrators to employ more than 2000 external consultants.
Netegrity operates in attractive, high-growth markets. (indiscernible)
authentication and Web access control market is growing at a 21 percent
compounded annual growth rate, and emerging new market segment for application
and resource provisioning is expected to grow at a 28 percent cagre through
2007. Ken indicated at $10.75 a share the acquisition is valued at about $430
million based on about 40 million fully diluted shares outstanding. Netegrity
has approximately 90 million in net cash and marketable securities, making the
net cash cost to CA to approximately $340 million.
The acquisition is subject to customary regulatory approvals and the approval of
Netegrity shareholders. We expect the transaction to be completed in the next 90
days. We were informed of Netegrity's need to preannounce its third quarter
results during our due diligence and we adjusted our offer accordingly. In
addition, we see a clear opportunity for cost savings associated with the
integration in a range of $15 to $20 million on an annual basis. We've
identified potential duplication, such as redundancies in back office functions
and the potential for facilities (indiscernible) in Boston and Israel.
The acquisition is expected to be neutral in fiscal 2005 and slightly accretive
in fiscal 2006 on a GAAP basis, based on CA's revenue recognition model and
conservative revenue synergies. Further, we are particularly excited about our
ability to grow faster in the security space by combining our company's products
and by utilizing both firms go-to-market strength. CA sells 90 percent of its
products through direct channels, an untapped engine for Netegrity. In turn,
Netegrity has done an outstanding job of building an ecosystem of partners for
sales integration that CA can leverage to augment our sales.
As (indiscernible) we are deploying rigorous analysis on CA's strategic
opportunities ensuring that all our investments delivers significant return on
investment to our business. In this case we evaluated the acquisition and
decided to proceed. Based on our analysis the acquisition would generate a
return on invested capital in excess of our weighted average cost of capital.
This is an important metric for us and our shareholders.
CA ended its first quarter by $2.2 billion in cash and marketable securities and
a net debt level of just over $100 million. We continue to be in a solid cash
position generating an average of about $100 million in operating cash amount.
Our next date for payment of $825 million is due in April 2006. Let me move
beyond the numbers for a moment and take (indiscernible) execution. We are
committed to a smooth and speedy integration, so we begin to realize the
benefits of this acquisition immediately. Russ.
RUSS ARTZT - COMPUTER ASSOCIATES - EVP
Thanks, Jeff. We are really excited about this acquisition and what it means
for CA's long-term growth opportunities in security management. To help put this
into context let's step back for a
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CA - NETEGRITY TO BE ACQUIRED BY COMPUTER ASSOCIATES
minute and look at CA's overall product strategy. At CA World in May we launched
our Enterprise Infrastructure management strategy which is designed to help our
customers simplify management of their IT infrastructures, increase utilization
rates, accommodate both real-time and on-demand needs and better align IT
infrastructure with the operations of that business. It is interesting to note
that in calendar 2003 management software actually outperformed business
application software in terms of new license revenue. And we think this is a
particularly interesting trend that bodes well for CA. Now more than ever our
customers are interested in products that work together seamlessly in suites and
help them better manage their businesses.
The end goal with EIM is one place to get all of your network and systems
storage and security information. And we will build out our products in this
fashion. In the last 12 months we have seen tremendous growth in these areas
with security representing more than 17 percent of CA's bookings in the first
quarter of fiscal '05. That's why it's important to understand CA's security
strategy and how today's acquisition fits into the company's growth plans. We
provide our customers with three integrated suites for managing their security.
The first suite is our Identity and Access Management. Managing users and
deciding what they can access, what resources they can access and auditing that
access for regulatory compliance purposes. The second big area is in the area of
Threat Management which consists of vulnerability management, secure content
management, anti-virus and anti-spyware where we just made a strategic
acquisition back in August and have a new eTrust product called, eTrust
PestPatrol. And the third area is in security information management. This is a
newer area for the industry and obviously for CA. It is all about gathering
security information from all the various and disparate systems within an
organization and distilling that information into usable knowledge. And then
making actionable business decisions based upon that information.
Now suites of integrated products allow enterprises to be more cost efficient
and provide better service levels to their customers. Nowhere is this more
apparent than in identity and access management or IAM. And IAM is absolutely
critical to enterprise security because this is where security starts. Managing
your users and deciding what resources or assets they are allowed to access.
CA already has a very strong suite in this space, and in fact we are ranked
today number one by IDC. They call it the Authentication Authorization and
Administration, or AAA space, based on our great products in the areas of host
access control, auditing, post single sign on, directory and provisioning areas.
Now by acquiring Netegrity we will make our IAM suite stronger and significantly
more compelling to our customers giving it more depth and more breadth. By
combining Netegrity's leading Web security products and externet access
management and provisioning technologies combined with CA's strong portfolio, we
will have the ability to provide our clients with both the best of breed modules
as well as the most comprehensive and integrated IAM suite in the industry.
Our strategy is to be complete, integrated and open and provide the most
powerful solutions for our customers. Enterprises can benefit from this
integrated suite because it ties together all of the various and disparate
systems giving employees, business partners and customers access to the systems
they need in an automated and much more efficient way. Integrated IAM solutions
not only enable the right people to have access to the applications they need,
but also protect the wrong people from having access. It is no wonder that IAM
is a rapidly growing area.
And in many large enterprises companies rarely remove all of an employees access
when he or she leaves the company. They usually aren't even aware of all the
systems a given employee has access to. These leftover accounts pose significant
risks to a business and can lead to identity theft and loss of intellectual
property. Our integrated suite helps customers automate all the creation and
deletion process so when John Smith leaves the company there is a record of all
the systems he has access to and it can automatically be cut off throughout the
organization.
So to wrap things up, Netegrity effectively rounds out CA's (inaudible question
- microphone inaccessible) business by adding the best web security product and
a strong user provisioning product to the company's already robust security
management portfolio. Netegrity has demonstrated leadership in the emerging
areas of Web services and federation, heading efforts to develop technical
standards. And these technical standards create the foundation on which
enterprises are building their next generation security management solution.
So as Jeff indicated, in addition to these leading technologies, we are also
acquiring a small but focused sales team enhanced by a skilled solution
architect team and software development team. We will do everything we can to
ensure we retain the talented individuals who have created such superior
products and do everything we can to ensure a seamless transition for employees
and customers.
I am very excited about this deal and what it means for the future of security
management at CA. And now I would like to turn it back to Ken Cron.
KEN CRON - COMPUTER ASSOCIATES - INTERIM CEO
The acquisition of Netegrity is another milestone in CA's journey to provide
our customers with the industry's broadest range of management software
solutions. It is the right acquisition at the right time for our Company, and
its customers and investors. Now I am happy to take your questions.
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CA - NETEGRITY TO BE ACQUIRED BY COMPUTER ASSOCIATES
QUESTION AND ANSWER
OPERATOR
(OPERATOR INSTRUCTIONS) Trip Chowdhry of Midwest Research.
TRIP CHOWDHRY - FTN MIDWEST RESEARCH - ANALYST
Congratulations on this very interesting acquisition. A few questions on
Netegrity, I recall that about eight months back Netegrity acquired Business
Layers, I believe, and I was wondering is that productline totally integrated
with your Netegrity offering? And then I have a follow-up, too.
KEN CRON - COMPUTER ASSOCIATES - INTERIM CEO
Rusty what to open up? (technical difficulty)
RUSS ARTZT - COMPUTER ASSOCIATES - EVP
Yes, that is very true. Netegrity did acquire Business Layers, and it is a very
important product in the provisioning space and I'll let Barry talk a little bit
abut how much integration has been done since that acquisition.
BARRY BYCOFF - NETEGRITY - CHAIRMAN, PRESIDENT, CEO
As some of you know, we actually had an OEM relationship with Business Layers
even prior to the acquisition and had done significant integration. And since
that time from a product point of view and organizational point of view and from
a cultural point of view the entire provisioning concept is fully integrated
into Netegrity. There is more work to be done in creating the entire suite. But
we've made tremendous progress in integrating both the acquisition and the
technology into our product suite.
TRIP CHOWDHRY - FTN MIDWEST RESEARCH - ANALYST
The second question I had was there are major initiatives around the globe on
cyber security and I do feel there is some (indiscernible) that as you guys
mentioned AAA was a missing link in traditional security vendors. I was
wondering how does your acquisition from your point of view change the security
dynamics in the industry? Especially with leadership positions of Symantec and
what does your acquisition of Netegrity give, change the dynamics in that space?
RUSS ARTZT - COMPUTER ASSOCIATES - EVP
Ken, I will be happy to take that. I think a few things, number one, CA's goal
is to be the major leading security management player in the industry. I think
everyone knows that the hacker community can be quite dangerous. There is all
kinds of hacking going on in the form of anti-phishing, phishing techniques
where users credentials are stolen. And our goal is to provide a secure and very
safe environment, both for the desktop user as well as across the enterprise and
across the networks.
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CA - NETEGRITY TO BE ACQUIRED BY COMPUTER ASSOCIATES
We have in our portfolio products that Ken mentioned for example, PestPatrol is
an anti-spyware product that really helps alleviate the whole problem of
phishing or fraud problems on a desktop where users' credentials are stolen. Our
identity and access management products also enable us to be able to protect the
user by identifying who the user is and what access permissions they are
allowed.
With the Netegrity acquisition we now have the premier Web security product out
there so that as users are trying to access Web resources, whether it is a URL
or a Web service or any Web application, the Netegrity products are the leading
products in that space and are equipped to protect the user and to protect the
enterprise from invalid or illegal use of these Web resources. So our products
are really designed to provide very pervasive and very complete solutions in the
area of security management. So anti-fraud and basically protecting the user is
one of our primary goals and that ability to do that and to execute has really
been strengthened by this acquisition.
TRIP CHOWDHRY - FTN MIDWEST RESEARCH - ANALYST
Thank you.
OPERATOR
Drew Brosseau of SG Cowen.
DREW BROSSEAU - SG COWEN - ANALYST
Thanks, I just wanted to follow a little bit along those lines. Can you
describe for us in a bit more detail where the overlap is, if there is any
between the Netegrity productline and your productline? And similarly where you
see the most integration taking place between what Netegrity has and what you
already have?
RUSS ARTZT - COMPUTER ASSOCIATES - EVP
Good question, Drew. You know what is beautiful about this acquisition is that
there is our solutions compliment each other so well. Netegrity has really been
a leader and is the leader in Web security. They have Web services security
products. They have the leading Web security product in Web single sign on
product. CA has focused on host access control, auditing IT auditing facilities,
legacy single sign on, directory products. So we are really very synergistic in
our ability to secure the user and to secure the enterprise with very little
overlap. The one overlap area that we'll be working on is in the very important
area, very strategic area called user provisioning. Netegrity through the
Business Layers has a strong provisioning product.
CA has a strong user provisioning product with some very, very large enterprise
clients using it. And we will rationalize our respective development groups
after when this deal is closed, our development groups will plan strategically
how we will collaborate on our respective provisioning product. So we have a lot
of technology there, and we will be rationalizing our provisioning productline.
But there will all be designs to work under one infrastructure. We believe that
it is important that we have one architecture, one infrastructure and we will be
building our products whether it's provisioning or other products on top of that
common, very solid infrastructure.
UNIDENTIFIED COMPANY REPRESENTATIVE
Barry, would you like to any comments?
BARRY BYCOFF - NETEGRITY - CHAIRMAN, PRESIDENT, CEO
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CA - NETEGRITY TO BE ACQUIRED BY COMPUTER ASSOCIATES
I think Russ has said it very well, this is a very complimentary acquisition on
the part of CA. What we do well, even in the provisioning space itself there is
some very complimentary technology. I see that even where there is overlap the
product in terms of best to breed comes out stronger, and when you add up the
pieces into the gestalt, we have an incredibly powerful suite together. It
really covers the network, the application infrastructure and goes throughout
the enterprise in, quite frankly as the industry moves from enterprise to
extended enterprise, a tremendous story to that as well. So I think this is a
very powerful statement CA is making.
JEFF CLARKE - COMPUTER ASSOCIATES - CFO, COO
While we talked about the technical things in your question, we are equally
excited about the go-to-market synergies and complimentary position of these
companies. Netegrity has a small direct sales force; as you know CA has a very
large 2000 plus person direct sales force which this will fit very well into our
distribution channel. In turn Netegrity has an outstanding systems integration
and external consultant sales force, which we believe will have synergies into
the CA product set as well. So certainly in a technical level this fits together
well but we are equally excited about the go-to-market opportunity for revenue
synergies on this deal.
BARRY BYCOFF - NETEGRITY - CHAIRMAN, PRESIDENT, CEO
If I could just add one thing, as we looked at potential partners it was clear
that we had an early market lead and it needed to be leveraged into a pervasive
market leadership position. And with CA's capabilities in the areas of sales and
marketing we think we more than accomplished our objectives.
DREW BROSSEAU - SG COWEN - ANALYST
Maybe this for Barry, I think you guys already had integrated some level of
integration between your technology and what CA had. Can you describe that, and
otherwise help us understand what kind of additional development work might be
necessary to get certain products working together as part of the CA
architecture.
BARRY BYCOFF - NETEGRITY - CHAIRMAN, PRESIDENT, CEO
Today the integration is with eTrust Directory and we feel that is a very, very
powerful integration story. Some of our largest customers are running their
business, I mean truly their business on the combined product. So that is in
place today, and quite frankly will be more leverageable now that the two
companies are together. Going forward we built a very open architecture. And as
we reviewed our products with the technology people from CA it became very clear
that we had to the application, the programming interfaces, the application
programming interfaces available to integrate our products to the rest of our
suite on a pretty rapid basis. So Russ, you can comment on this, but I felt very
optimistic having sat through the conversations.
RUSS ARTZT - COMPUTER ASSOCIATES - EVP
In talking about it, it was incredibly obvious to us that our respective
architectures were very much complimentary, not only our products, but the
various technologies that each of us offer are very complimentary. And I agree
with Barry. The systems we've designed are open, and it will be relatively
straightforward to be able to do the kinds of things we want in terms of
integration and really with the goal of providing added value to our respective
customer base. So it is a tremendous story here.
BARRY BYCOFF - NETEGRITY - CHAIRMAN, PRESIDENT, CEO
I may add just one other point. The foundation of Netegrity's technologies are
policy server, policy management capability. And the ability to now spread that
over, not only the Netegrity product set but the CA product set and base
everything on policy management is going to be a real
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competitive advantage for Computer Associates. So this is really I think a
marriage that will add a dramatic, competitive advantage on the side of CA.
DREW BROSSEAU - SG COWEN - ANALYST
Okay. Thank you very much.
OPERATOR
John Difucci of Bear Stearns.
JOHN DIFUCCI - BEAR STEARNS - ANALYST
Just a couple of questions. First, I'm just curious why this is not accretive
right from the start. Does it have to do with the subscription business model?
In other words now you will be selling Netegrity on a subscription basis? Jeff,
you gave some guidance on a GAAP basis, but will it be accretive earlier on a
cash basis or on a pro forma basis?
JEFF CLARKE - COMPUTER ASSOCIATES - CFO, COO
If you were to stick to Netegrity's accounting, the more traditional non
subscription based accounting that happens in the industry it would be
accretive. Obviously the reason that we will over time move Netegrity to a
subscription based model and that involves changing contracts, obviously it
involves the closure of the deal and all the legal requirements and so forth.
And that of course defers revenue in the future and so the answer is yes. The
lack of immediate accretion is limited by moving to subscription model but we
believe that is the most conservative model going forward. So it does better on
a cash basis to your point and on a traditional P&L basis.
OPERATOR
Todd Raker of Deutsche Bank.
TODD RAKER - DEUTSCHE BANK - ANALYST
This is a question for Barry. First, congratulations. Second, when you look to
partner up or sell the company did you talk to any other partners and was this a
competitive situation?
BARRY BYCOFF - NETEGRITY - CHAIRMAN, PRESIDENT, CEO
Thanks for your congratulations. It has been a journey, and I am glad you've
been part of it. The answer is as you would expect, yes, to both questions.
That's probably about as far as I could go.
TODD RAKER - DEUTSCHE BANK - ANALYST
And is there any form of breakup fee involved in this transaction?
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BARRY BYCOFF - NETEGRITY - CHAIRMAN, PRESIDENT, CEO
I will let Jeff answer that.
JEFF CLARKE - COMPUTER ASSOCIATES - CFO, COO
No, no breakup fee. I am sorry, not to my knowledge unless something got put in
very late last night.
TODD RAKER - DEUTSCHE BANK - ANALYST
Okay. Thank you.
OPERATOR
Bob Stimson of Banc of America Securities.
UNIDENTIFIED SPEAKER
This is (indiscernible) calling on behalf of Bob. I just want to follow-up Jeff
with your comment on your go-to-market strategy, obviously there is still
support to your strategy for building out your indirect channels. Can we expect
more of these types of deals going forward that will further build out your
channels, and my second question is, does this acquisition bolster your
strategies to go down market to target more of the midmarket customers?
JEFF CLARKE - COMPUTER ASSOCIATES - CFO, COO
Yes. Clearly this is complimentary to our channel strategy. When we've, when
both Ken and I have talked to different investors about it, we've talked about
the importance of OEMs, VARs, two chair (ph) distribution players, et cetera.
But from a solution's perspective, systems integrators is a real sweet spot and
this is absolutely complimentary to it. This is exciting because effectively
Netegrity has been able to drive $100 million of software business in this very
competitive space, primarily through this systems integration and
(indiscernible) consultant model and we expect to learn a lot from it and expect
to leverage that as I said earlier.
OPERATOR
Sterling Autry of J.P. Morgan Chase.
STERLING AUTRY - J.P.MORGAN CHASE - ANALYST
Wondering if this acquisition will have any impact on the Computer Associates
partners that you already have in security, maybe like an RSA security or any
others.
UNIDENTIFIED COMPANY REPRESENTATIVE
Russ, would you like to talk about that?
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RUSS ARTZT - COMPUTER ASSOCIATES - EVP
I think with this acquisition clearly in this space of identity and access
management which is growing so rapidly, CA clearly becomes the leader here. We
are already working with systems integrators. Netegrity has been working with
systems integrators longer than we have so they even have a more mature model
with systems integrators. And we believe that a key part of our success is going
to be to increase our usage of partners and the way we work with partners. We
think it is vital that we have a strategic systems integrators to help us with
the implementation of our products. Our products require in some cases some very
complex implementation, lots of planning. I am very impressed with Netegrity's
ability to architect solutions. But we need systems integrators to work closely
with us in some of these very large deployments that are in some cases
worldwide.
KEN CRON - COMPUTER ASSOCIATES - INTERIM CEO
Just to add to Russ' comments, when we look at acquisitions, I think it is
critical to know that we evaluate a number of different ways that the
acquisition can really benefit CA and our go forward strategy. In the case of
Netegrity when you look as Jeff pointed out at the technical consulting talent
that we acquire it is something we were going to do anyway, and as a resultant
benefit of this acquisition. As well driving more product through the channels
of distribution which helps broaden our channel strategy, and of course most
fundamentally really delivering an enhanced suite to our largest customers
through our direct sales force. So it does all those things for us as well as
geographically expand our space. So those are all the benefits we derive
directly from Netegrity in addition to great products and great technology.
OPERATOR
Jason Maynard of Merrill Lynch.
JASON MAYNARD - MERRILL LYNCH - ANALYST
First on the Netegrity business model, converting it over to your model, have
you (indiscernible) had any (indiscernible) thoughts in terms of how you're
going to manage existing customers who are on maintenance streams and then
looking at retraining some of the sales folks around selling the
(indiscernible)? And then second question would be just a bigger picture, how
does this fit into your overall view on potentially repurchasing shares?
JEFF CLARKE - COMPUTER ASSOCIATES - CFO, COO
First of all we will obviously wait for the deal to close before we will engage
at all with the salespeople, we are still competitors in the market until the
deal does close. But after the deal does close we will then, we will talk to the
Netegrity customers. We will work with the sales force on the model and my
expectation although we will clearly be open to listening to customers on this,
actual (technical difficulty) transition maintaining existing contracts for
their life or for a period of their life, much as even today CA has some former
contracts that are still in place. And then as new contracts come up, we will
move to the subscription based model. Customers typically don't mind how we do
our revenue accounting.
The issues for them obviously are the terms and flexibility of the contract, the
duration of the contract and of course, when the cash is paid. So those are the
items that we will work with and we would just like to, as we have here at CA
for the main business we like to be as conservative as possible. But we also
want to be able to sell Netegrity products as a part of the overall, as a part
of the overall CA suite and many customers that buy the overall suite buy CA's
or use the subscription based or more flexible and more of a selection on their
contracts.
In terms of the overall cash position, I just want to comment a little bit. We
paid for this transaction or we plan to pay for this transaction with a net of
$340 million out of our treasury. We have as you know a little over $2.1 billion
of cash and continue to generate an average of about $100 million a month. So we
feel we have substantial capital resource to continue to pay down debt, to make
acquisitions of this size and also to over
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time, be able to return money to shareholders via the dividend program we have
today and also buying back stock. So we don't believe this limits us at all in
that manner.
The other comment is one of the ways to think about this and this is a follow-up
as well to Mr. Defujis (ph) question, that $340 million of cash that was sitting
on our balance sheet was earning a little over 1 percent or about $5 million a
year. So the earnings, the EBITDA over next year for stand-alone Netegrity was
about $22 million. We talked about cost synergies of about $15 to $20 million.
We are also going to pick up about $30 million of NOLs in this transaction. And
if you look at that before you even get to what we believe are really
substantial revenue synergies and certainly from a cash-flow perspective, this
deal looks very, very strong, right off the bat. So with that, I think I covered
the questions. Is that it?
JASON MAYNARD - MERRILL LYNCH - ANALYST
Yes, that got it.
OPERATOR
(indiscernible) of Citigroup.
UNIDENTIFIED SPEAKER
This question is for Barry. I was wondering if you saw any change in the
environment in Q3 or was the miss predicated on your distraction trying to get
this deal done.
BARRY BYCOFF - NETEGRITY - CHAIRMAN, PRESIDENT, CEO
There was no change in the environment. I think it is a combination of the focus
of the team and just the timing of deals. The deals (indiscernible) the time got
away from us a little bit which could have been a result of the focus of the
team. But the business is in very good shape, and I think if you read the press
release by CA, I think they have done some work to ensure that the business is
in very good health.
UNIDENTIFIED SPEAKER
And you had mentioned in Q2 that your provision pipeline had increased though
when those deals would close was sort of a question mark. There has been a lot
of talk about provision today. How much of a factor was that provisioning
pipeline in CA's interest?
BARRY BYCOFF - NETEGRITY - CHAIRMAN, PRESIDENT, CEO
I would probably let Russ answer that. I think the fact of the matter is that
they were impressed with the entire pipeline is my guess, because we've seen
good growth in all areas.
RUSS ARTZT - COMPUTER ASSOCIATES - EVP
we have, just to continue on what Barry was saying, we as part of our diligence
actually did check out some of the customers in the pipeline from Netegrity.
These customers are very, very interested in the technology at Netegrity, very
interested in the provisioning technology and how it works well with the leading
product SiteMinder. And I think it is very important to note that what we find
in many of our sales cycles in this
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space is that customers very often are first looking for either a Web security
product like SiteMinder from Netegrity or for a strong provisioning product as a
lead. And with this acquisition CA is equipped to handle either of those leads
very, very well.
We have very powerful provisioning products on both sides, and as Barry said
they complement each other very well in the provisioning space and certainly the
leading products in the Web security space. So we are very excited about the
provisioning product technology we are getting from Netegrity acquisition. And
it really does fit into our overall IAM strategy very well.
BARRY BYCOFF - NETEGRITY - CHAIRMAN, PRESIDENT, CEO
One of the things, Chris that we talked about Russ and I is the fact that we
didn't see each other in the marketplace in provisioning. They were going -- we
probably just didn't have enough depth. So I think our pipeline would be quite
frankly incremental to what they are already doing, which I think is exciting
given what we built here.
JEFF CLARKE - COMPUTER ASSOCIATES - CFO, COO
I just wanted to add a follow-up to one of the questions earlier. Look through
the contract and talked to (indiscernible) the fine points here and we do have a
breakup fee of $13 million, plus $2 million of expenses should this for some
reason get broken up.
OPERATOR
(indiscernible) from Thomas Weisel and partners.
UNIDENTIFIED SPEAKER
I would like to throw out my congratulations as well. First question on the
competitive landscape area, did you see any changes out there? Obviously IBM,
Sun, Citrex (ph) have started making more aggressive moves into the space over
the last year or so. And did that have any effect in your business, and can you
sort of walk us through maybe from the CA side of how you plan on competing up
against the product sets from those larger players?
BARRY BYCOFF - NETEGRITY - CHAIRMAN, PRESIDENT, CEO
From a competitive point of view the results in the quarter were unaffected. It
was clearly a timing point of view. We continue to see the larger players but
you know what, today we are the gorilla. So watch out IBM and watch out the
secondary players. I will turn it over to Russ to give you his answer.
RUSS ARTZT - COMPUTER ASSOCIATES - EVP
I couldn't agree more. We are finding yes we do run into IBM quite a bit. They
are very active in this space, and certainly some other players as well.
However, our clients are looking for more productivity and more efficiency. And
we, at this point with this acquisition, we provide integration. We provide a
complete suite of products. We will be working on making them more and more
cohesive as we move along. We are providing best of breed solutions, so for
clients who are looking for a best of breed solution we have it. If they are
looking for an integrated suite, we have it. But in the competitive landscape we
do run into IBM. But I agree with -- and Sun is starting to appear, but I have
to say that we are very confident with this acquisition in our position in the
marketplace. And we really see ourselves as the leader in this space.
UNIDENTIFIED SPEAKER
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Great. And then maybe you can walk me through the timing process here of when CA
and Netegrity decided to do this and maybe when CA was notified of Netegrity's
current quarter results, if you could.
KEN CRON - COMPUTER ASSOCIATES - INTERIM CEO
Jeff, do you want to discuss this?
JEFF CLARKE - COMPUTER ASSOCIATES - CFO, COO
I would be happy to take a (indiscernible). So Netegrity went through a process
by which we were notified along with other companies. And the process has gone
on for at least five weeks, Barry, feel free to jump in if there were processes
before that. CA was interested from the beginning; it is a company that we have
followed very closely; we understood the strategic fit for some time. In terms
of the point of the deal where we had the opportunity to move into an exclusive
situation, that happened just during this past weekend and the notification in
terms of the shortfall in Netegrity's quarter came to us very quickly, I believe
a day after the quarter closed. And so I thank Netegrity for being very open
with us in that process. Barry, did you want to add anything to that?
BARRY BYCOFF - NETEGRITY - CHAIRMAN, PRESIDENT, CEO
No, Jeff I think that is very accurate. I think the process involved a lot of
companies and some of those considered themselves major competitors in Netegrity
as well, so that speaks to the strength of Netegrity's products and
distribution. We were -- we went through a very thorough process and I am very
happy with the results in joining the Computer Associates' team.
UNIDENTIFIED SPEAKER
Again, congratulations Barry.
OPERATOR
Richard Peterson of Pacific Crest.
RICHARD PETERSON - PACIFIC CREST - ANALYST
There was some talk about growth rates, expectations for growth rates product
markets and I just wanted to, I'm sorry to ask you to do this, could you repeat
those and maybe clarify what you meant? Where those the expectations for the
actual products or for the market, I believe it is about 28 percent annual
(technical difficulty)
KEN CRON - COMPUTER ASSOCIATES - INTERIM CEO
You faded out a little bit there, we are having trouble, could you state the
question again, please?
RICHARD PETERSON - PACIFIC CREST - ANALYST
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CA - NETEGRITY TO BE ACQUIRED BY COMPUTER ASSOCIATES
Sorry, can you hear me better now?
UNIDENTIFIED COMPANY REPRESENTATIVE
Yes.
RICHARD PETERSON - PACIFIC CREST - ANALYST
Could I ask you to repeat and clarify some of the commentary you made about
growth rates and expectations for growth in the IAM market? Whether that was
your expectation for the market in general or for the product you just acquired?
I believe you talked about 28 percent, sorry I --.
JEFF CLARKE - COMPUTER ASSOCIATES - CFO, COO
In my prepared remarks I talked about IDC expectations for the market, the
authentication and Web access control market is going at about a 21 percent
compounded annual growth rate. And the emerging market of application and
resource provisioning is growing at about 28 percent and this is a compounded
annual growth rate through the year 2007. Those are IDC numbers. I urge you to
go to IDC; we were referencing them just as benchmarks here. We have not
provided any guidance in terms of what we expect the revenue synergies or the go
forward performance of either company in this area.
That being said we are very excited about those opportunities and believe that
we have just given you some market leading position and also just some
go-to-market opportunities that we noted earlier on the call.
OPERATOR
Gregg Moskowitz of Susquehanna Financial Group.
GREGG MOSKOWITZ - SUSQUEHANNA FINANCIAL GROUP - ANALYST
Thank you. Jeff just wanted to follow-up on some of your go-to-market comments
earlier. In the Web access and identity management space, sales cycles can
sometimes be a little longer than other areas of security, the technology has
predominantly been sold by Netegrity and others, I think about 80 percent in
Netegrity's case on a direct basis. So in a lot of ways it actually plays into
your strength given your direct sales force. You mentioned this acquisition
being pretty good component of your channel strategy. I was curious as to
whether you see that mix materially changing under the CA umbrella or will this
remain mostly a direct sale?
JEFF CLARKE - COMPUTER ASSOCIATES - CFO, COO
I think it is a question of our success. Netegrity has 26 quota carrying
salespeople. CA has about 25,000 -- I am sorry 2500, and so that obviously this
is a product that our 220 of that CA has 220 security specialists within that
2500 person sales force. This is a huge addition to the portfolio or the bag
that these salespeople will carry on the CA side and we are very excited about
that. In fact, one of the as Barry said, one of the reasons Netegrity was
interested in CA and even in selling the company was their ability to scale the
technology which was so well received by the marketplace. And it was easier to
buy or to resell to a company that had an established sales force as opposed to
building one over many years on its own.
On the opposite side, the 26 quota carrying salespeople don't drive all the
business for Netegrity, it is driven a lot through the system integration
relationships that they have. And then the external consultants that go into
companies as part of a solution, whether they are web (indiscernible) an
infrastructure, whether they are consulting on a particular application and this
is part of that application. This is an area where we at CA have
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not done as well on overtime, and an area that we want to learn from Netegrity
and leverage those relationships with the powerhouses like Delouitte (ph) and
Accenture and others.
RUSS ARTZT - COMPUTER ASSOCIATES - EVP
And just to add one thing to that, Jeff, I think it's important one of the keys
to success here is being able to help our clients architect the solutions, to
make sure that the solutions that we are selling from CA will add value to the
customer and add value to their environment. And we are very excited about the
expertise we are getting from Netegrity in the areas of technical, not just
technical development people, but technical pre-sales people, some of the
technical sales folks, and in particular the solution architects who are very
technical and are capable of architecting a solution for our clients. That is
very important and that is a very valuable ingredient to success and really adds
a lot of strength to our overall efforts in this space.
OPERATOR
Kathryn (indiscernible) of Jefferies & Co.
UNIDENTIFIED SPEAKER
Ken you said in your introductory comments that Netegrity helps you round out
your security portfolio. I am thinking are there any other ways in which you
will be rounding out this portfolio, i.e., any holes in the product line?
KEN CRON - COMPUTER ASSOCIATES - INTERIM CEO
Our goal is to be the leader in security management. As I said earlier, identity
and access management is a very, very strategic area for us, and I think as we
said before the Netegrity acquisition really makes it this area very complete.
There's always other smaller areas we can look at. In other areas of security
management we recently announced an acquisition of a very fine anti-spyware
product, PestPatrol, which has become vital to our Threat Management strategy.
And we will continue to grow those particular areas. Threat Management is
another area that is very important in security management and is also important
to us in terms of strategic growth in the security area. So yes, we are always
looking to expand our productline and to expand our business. So we will
continue to do aggressive development, and we will look at our complementary
acquisitions in this area.
UNIDENTIFIED COMPANY REPRESENTATIVE
Jeff, what I would like to do now is would you please update us on guidance for
CA's second quarter?
JEFF CLARKE - COMPUTER ASSOCIATES - CFO, COO
Yes, based on our preliminary results, we are about a week into the close
process now. We expect to meet or exceed our Q2 '05 guidance for revenue, and as
a reminder the revenue was, range was $830 million to $850 million for the
quarter. We also expect to meet or exceed the current consensus operating
earnings per share of 16 cents earnings per share. As you may recall our
guidance was between 15 and 17 cents of earnings per share on an operating
basis.
As previously discussed, we expect to take a charge of approximately $215
million (ph) related to establishing a restitution fund for shareholders as a
result of CA resolving the DOJ and SEC investigations. Also as announced last
week we expect to take a $25 million restructuring charge in the quarter. If you
take these -- given the preliminary operating results I just discussed and these
charges along with the reconciliation of amortization for acquired intangibles
and purchase accounting, our expectation for GAAP EPS for the quarter will be a
loss of 23 cents on an
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approximate basis. And so again, the highlight there being there that operating
earnings per share, we do expect to meet consensus or meet or exceed consensus
of 16 cents earnings for share. For more detailed information about the second
quarter guidance, please go to our website CA.com/invest and you get all the
details.
KEN CRON - COMPUTER ASSOCIATES - INTERIM CEO
Thank you, everyone, for being on the call today. We are quite excited about the
opportunity with Netegrity, and we are looking forward to driving CA strategy of
growth for the future. Thank you for being on the call.
OPERATOR
This concludes today's conference. You may now disconnect.
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CA - NETEGRITY TO BE ACQUIRED BY COMPUTER ASSOCIATES
IMPORTANT ADDITIONAL INFORMATION WILL BE FILED WITH THE SEC
Netegrity plans to file with the Securities and Exchange Commission and
mail to its stockholders a Proxy Statement in connection with the transaction.
The Proxy Statement will contain important information about Computer
Associates, Netegrity, the transaction and related matters. Investors and
security holders are urged to read the Proxy Statement carefully when it is
available. Investors and security holders will be able to obtain free copies of
the Proxy Statement and other documents filed with the SEC by Computer
Associates and Netegrity through the web site maintained by the SEC at
www.sec.gov. In addition, investors and security holders will be able to obtain
free copies of the Proxy Statement from Netegrity by contacting Investor
Relations, Netegrity, 201 Jones Road, Waltham, MA 02451, 800-325-9870.
Computer Associates and Netegrity, and their respective directors and
executive officers, may be deemed to be participants in the solicitation of
proxies in respect of the transactions contemplated by the merger agreement.
Information regarding Computer Associates's directors and executive officers is
contained in Computer Associates's Form 10-K for the year ended March 31, 2004
and its proxy statement dated July 28, 2004, as amended. Information regarding
Netegrity's directors and executive officers is contained in Netegrity's Form
10-K for the year ended December 31, 2004 and its proxy statement dated March
31, 2004, which are filed with the SEC. As of October 5, 2004, Netegrity's
directors and executive officers beneficially owned approximately 4.8 million
shares, or 12%, of Netegrity's common stock.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Statements in this document regarding the proposed transaction between Computer
Associates and Netegrity, the expected timetable for completing the transaction,
future financial and operating results, benefits and synergies of the
transaction, future opportunities for the combined company and any other
statements about Computer Associates or Netegrity managements' future
expectations, beliefs, goals, plans or prospects constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Any statements that are not statements of historical fact (including
statements containing the words "believes," "plans," "anticipates," "expects,"
estimates and similar expressions) should also be considered to be
forward-looking statements. A number of important factors could cause actual
results or events to differ materially from those indicated by such
forward-looking statements, including: the ability to consummate the
transaction, the ability of Computer Associates to successfully integrate
Netegrity's operations and employees; the ability to realize anticipated
synergies and cost savings; the emergence of new competitive initiatives
resulting from rapid technological advances or changes in pricing in the market;
market acceptance of new products and services and continued acceptance of
existing products and services; risks associated with the entry into new
markets; business conditions in the distributed systems and mainframe software
and hardware markets; uncertainty and volatility associated with Internet and
eBusiness-related activities; and the other factors described in Computer
Associates's Annual Report on Form 10-K for the year ended March 31, 2004 and
its most recent quarterly report filed with the SEC and in Netegrity's Annual
Report on Form 10-K for the year ended December 31, 2003 and its most recent
quarterly report filed with the SEC. Computer Associates and Netegrity disclaim
any intention or obligation to update any forward-looking statements as a result
of developments occurring after the date of this document.