NEWSWIRE - November 15, 1999

Source: "Decompensation: Executives Ordered to Return Millions," by William M. Bulkeley, Wall Street Journal, Wednesday, November 10, 1999, page A1.

Synopsis of Article:

A recent court ruling required three top executives for Computer Associates to return 9.5 million shares of stock awarded under an incentive grant. The court ruling was filed on behalf of shareholders who believed that the award was far too generous given the recent performance of the firm. However, the decision was not based on the principle of fair pay for performance, it resulted from a technicality in the award itself. Shareholders had agreed to provide up to six million shares for this particular incentive plan. Since that agreement in 1995, the stock had split 3-for-2 on two occasions. Hence, each original share became 2.25 new shares. The board of directors adjusted the executives' stock awards in this manner, but the court sided with investors who argued that the plan specified the maximum number of shares that could be awarded without any reference to split adjustment.

Questions:

1. What is a stock split? Computer Associates stock split 3-for-2 in July of 1996 and again in November of 1997. A single share was worth $65.50 in November of 1995. The recent price (November 1999) per share is 45 7/8. What is the capital gain for a shareholder during this period?
2. What's the purpose of a stock split? How do markets typically react to such events?
3. Why were shareholders particularly concerned by the split adjusted awards provided to investors?

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