The Facebook IPO Trainwreck

No one is covering themselves in glory in the aftermath of the Facebook IPO.

Lead underwriter Morgan Stanley is battling allegations that it priced the deal too richly.

Facebook insiders are being called greedy for the last-minute increase in the number of shares they sold in the offering.

Facebook’s management is being criticized for signaling analysts to lower their revenue estimates just days before the deal priced – a move that could be a violation of securities laws.  It also appears some institutional investors were informed of the analysts’ downgrade but retail investors were not.

If all that wasn’t enough, Nasdaq has endured a barrage of complaints for breakdowns in its system on the first day of trading that left investors in the dark about the status of their orders.

Predictably, regulators are launching investigations, legislators are scheduling hearings and plaintiff attorneys are filing lawsuits.

This is hardly the place Facebook wanted to be after completing its IPO.  Nor is it encouraging to other firms that are thinking about going public.

Morgan Stanley is clearly in the hot seat. The firm issued a statement late Tuesday defending its actions, but it is standing on narrow ground, asserting that its procedures were “in compliance with all applicable regulations” and that it handled Facebook in the same manner as every IPO.   That’s not enormously reassuring but it may be all it can say right now as it gathers the facts.

Nasdaq also has a lot to answer for.  Its systems are meant to handle high transaction volumes, and its people are expected to test and monitor the infrastructure to prevent these kinds of problems.  It’s not reassuring to hear Nasdaq executives admit they underestimated the scale of the technical problems.  Nasdaq needs to give guidance quickly on how it will address investor losses and repair the weaknesses in its systems.

Even if Facebook shares recover, the events of the past few days will linger in the minds of investors.  It’s too early to know if it will lead to changes in the IPO book-building process, which hasn’t changed much in the past half-century.  If it does, Facebook in its own way will disrupt Wall Street, just as it upended the media and technology sector.

Reuters Scores a Big Win on its Chesapeake Coverage

Reuters can take a well-earned bow for its coverage of Chesapeake Energy and its CEO, Aubrey McClendon.  The news service has broken several major stories in the past three weeks that brought to light McClendon’s questionable financial dealings, including his borrowings against stakes in the company’s wells and investments in a hedge fund.  The reports forced the board to strip McClendon of his chairmanship and led to an investigation by the SEC.  Chesapeake shares are down nearly 19 percent.

Reuters stood by its initial report about McClendon’s loans as Chesapeake made a strident denial of any impropriety.  The company was forced to backtrack after it issued an embarrassing statement that said the company’s board was not “fully aware” of McClendon’s finances. (See my earlier post on this issue for details.)

Reuters has been relentless, filing about 20 articles on Chesapeake over the past three weeks, including a 2,700-word gusher today on the company’s complex deals with Wall Street banks.  (See the full catalog of the coverage here.)

The multiple scoops and their aftershocks are a vindication for Reuters’ strategy of bulking up and pushing for high impact business news.  For much of the past year, Reuters has been scooping up talent from The Wall Street Journal and elsewhere, even coaxing a few seasoned reporters out of retirement.   A piece in the Huffington Post last September captures the scale of Reuters’ ambitions:

“Reuters’ recent hiring spree — including a handful of Pulitzer Prize-winners – has quickly gotten the media world’s attention. At the same time, Reuters has relaunched its website to better showcase its vast reporting in a more consumer-friendly way, stepped up social media efforts and increased analysis, opinion and enterprise reporting — all elements that may play better on the web than in straight wire copy.

“Reuters isn’t giving up on breaking financial news that paying subscribers want or reporting international wire stories that cash-strapped newspapers, lacking foreign budgets, increasingly need. However, Deputy Editor-in-Chief Paul Ingrassia says the company wants to go beyond breaking news. ‘I think what we’re making a bigger effort to do is not only be first with events,’ Ingrassia said, ‘but very quickly and analytically … report the meaning and impact of those events.'”

The big issue for Reuters is whether it can really make the impact it wants without a major print publication.  As old-fashioned as it sounds in today’s digital age, a print title can complement other media properties.  Look at how Newsweek has helped the Daily Beast and how Bloomberg has taken BusinessWeek to new heights.

Reuters enjoys a strong position among traders, fund mangers, corporate chiefs and policy makers, but that’s a small audience compared to that of, say, the New York Times.   The Reuters website doesn’t even place in the top 50 news sites, according to ComScore data released last fall.

I’d expect Reuters to look for a way to get a bigger payoff for its great journalism.

So don’t be surprised if Forbes becomes a purchase target.   Its private-equity investor Elevation Partners might be open to selling after enduring a horror show of red ink since buying a stake in 2006.

Best Buy’s Executive Exodus

When the CEO exits, other senior executives often follow.  At Best Buy, the resignation last month of CEO Brian Dunn has been followed by the departure of the chief marketing officer (Barry Judge), the chief technology officer (Robert Stephens) and the CFO of the international division (David Demo).

An exodus of senior talent isn’t good news for Best Buy, but the company has made a bad situation worse by hiding the news.  Best Buy was forced to react to either news reports of an official’s departure or a regulatory filing by the executive’s new employer.  To its credit, Best Buy’s statements about the departures in news reports have been pretty good, but reacting to events is never a strong position.  It feeds perceptions that Best Buy is in a crisis and lacks a coherent strategy.

The executive turmoil is unlikely to end until a permanent CEO is named.

Herbalife: An Update

 

Herbalife didn’t get much of a bounce today, a day after investor David Einhorn raised questions about the company’s accounting that sent the shares tumbling.  After rising early in the day, the shares fell another 6 percent, even after the company provided additional information in response to Einhorn’s questions.  (My earlier post discussed the company’s response strategy.)

It looks like investors see too much risk and simply want out, regardless of the what the company says, and Einhorn’s prescient calls on Lehman Brothers and Green Mountain (which announced weaker-than-expected earnings today) make it risky for investors to bet against him.

 

 

What to Do When David Einhorn Strikes

Herbalife shares are rebounding a little after a 22% drop yesterday, when questions from investor David Einhorn during the company’s earnings call sent investors fleeing.  Einhorn is known for spotting accounting problems at companies and backing up his skepticism by taking big short positions. His sharp questioning of Lehman Brothers highlighted issues that ultimately brought about the firm’s bankruptcy.

Herbalife did a reasonably good job of responding to the issues Einhorn raised.  First, it addressed them directly on the earnings call where Einhorn spoke.  Later, the company put out a short statement reiterating its views.  It was a little defensive but conveyed the message that the company regarded the issues as unimportant, and that it had a share buyback plan to shore up its shares. Last, it enlisted support from several analysts who follow the company.  Their comments, which were included in many press reports, expressed confidence in Herbalife’s accounting and its management.

Herbalife isn’t out of the woods, though.  Its statement said it would provide additional detail on its response to Einhorn’s questions, but it has not yet done so.  Company insiders also have been selling a lot of shares in recent weeks, a sign perhaps that management believes the shares have peaked, at least for now, or that unpleasant disclosures might be in the offing.  The latter would be very bad news, both for shareholders and for management’s credibility.

 

Coke and Monster: What was That?

The Coca-Cola Company was compelled to release a short statement yesterday denying that it was “at this time, not in dicussionss” to acquire energy-drink maker Monster Beverage Corp.

Monster shares spiked on a report in the Wall Street Journal that Coke was exploring a deal for the company, only to fall back once Coke issued its statement.

It appears the WSJ wants to claim credit both for breaking the story about a possible deal and for killing it.  Its story is littered with unnamed sources (“persons familiar with the matter”), which are usually either disgruntled investment bankers unhappy about missing a fat payday, or anxious executives who were farther out on the limb than their bosses (or the board) realized.

This episode illustrates that there’s a very thin, almost nonexistent, line between rumor and news, and how quickly a deal can be scuppered if a leak occurs.

The careful wording of Coke’s statement and the updated article in the WSJ, in which it reiterates its earlier reporting, suggests there were serious talks between the companies.  That leaves Coke in the awkward position of needing to respond to shareholder concerns about its acquisition criteria, its strategy for growth and its designs for the energy-drink market, where it has been a laggard.

The next earnings call for Coke could be an interesting one.

At Barclays, Inaction Speaks Louder than Words

The Barclays annual shareholder meeting last week was a loud and lively affair, with howls of protest directed at CEO Bob Diamond and Chairman Marcus Agius over the bank’s pay practices.  Here’s how it was reported by the New York Times:

“The atmosphere at the meeting was hostile from the start, and the speeches were repeatedly interrupted by hecklers. Mr. Diamond was booed as soon as he stepped on the stage to take his seat, and when Mr. Agius said Barclays had “made progress” over the last two years in accepting that “remuneration levels across the industry have to adjust to the new reality,” the audience burst into laughter.”

Shaken by the ordeal, Mr. Agius said poor communication was the root of the problem:

Mr. Agius said Friday that he was sorry that some shareholders felt their views on executive pay had not been taken into consideration. “What we’ve not done well this year — and I admit it and I apologize for it — is handle communication,” he said.

If only that were true.  Mr. Agius has spoken about compensation in a clear and consistent manner.  Here is what he said about it in the 2011 annual report (emphasis added):

Remuneration continues to be the subject of considerable discussion. It remains our policy that we only pay for performance, not failure, and that we only pay the minimum necessary to be competitive. Historically, there has been intense competition for talent, particularly in the investment banking industry. The difficult economic environment and the impact of regulation on the profitability of investment banking lessened this competition in 2011 and, as a consequence, performance related pay across the Group reduced significantly. We recognise that compensation has to adjust to the new reality of lower returns for the sector and we will continue to ensure that our remuneration policies and practices are aligned with the long-term interests of our shareholders.

Those are fine, brave words; they are music to shareholders’ ears.  Except when you realize the pay reduction to which Mr. Agius refers was only in the aggregate and that Mr. Diamond was exempt from it.

A year ago, in the 2010 annual report, Mr. Agius gave shareholders similar assurances about pay restraint (again, emphasis added):

“As Chairman, I am acutely aware of the public disquiet over remuneration in the industry. Barclays is committed to acting responsibly in this area. We are fully compliant with all regulatory requirements and our remuneration systems are designed to reward success, not failure.”

In fact, you can look back at Mr. Agius’s remarks on pay in any year and see strong, purposeful words, carefully crafted and oozing sincerity.  Here’s the 2008 vintage (once again, emphasis added):

“As a Board, we very much regret what has happened to the banking sector in general and to Barclays share price in particular. We fully recognise that banks must review their internal governance systems and remuneration structures to ensure there can be no repeat of the turmoil that has impacted the industry, and the wider economy, over the last 18 months. The Board HR and Remuneration Committee is reviewing compensation policy and structures across the Group to ensure maximum alignment both with the interests of our shareholders and with best practice. The Board is also committed to ensuring that Barclays plays its full part in contributing to the restoration of the health of the global economy and, with that, the reputation of the industry.”

Saying the right thing hasn’t been Mr. Agius’s problem.  But effective communication involves actions, not words, and that’s where Agius and the Board have failed.  That is why shareholders – and the public – are so irate.   Despite all of the nice language about “aligning shareholder interests,” pay for Mr. Diamond and other senior executives went up while shareholder returns went down.

No amount of communication can change those facts.

Five years of lovely, meaningless words.  No wonder shareholders are in revolt.

Chesapeake Shows Why Lawyers Shouldn’t be Communicators

The board of Chesapeake Energy (NYSE: CHK) just released a statement in which it denied knowing of CEO Aubrey McClendon’s borrowings related to his stakes in the company’s wells, contradicting a statement made by the company’s general counsel earlier in the week:

“Chesapeake also wishes to clarify a statement appearing in its April 18, 2012 press release captioned “Chesapeake Energy Corporation General Counsel Henry J. Hood Issues Statement.” The statement that “the Board of Directors is fully aware of the existence of Mr. McClendon’s financing transactions” was intended to convey the fact that the Board of Directors is generally aware that Mr. McClendon used interests acquired through his participation in the FWPP as security in personal financing transactions. The Board of Directors did not review, approve or have knowledge of the specific transactions engaged in by Mr. McClendon or the terms of those transactions.”

Details of McClendon’s borrowings first came to light in a Reuters article on April 18.  Chesapeake quickly mounted a stern rebuttal, creating a webpage with a statement, links to regulatory disclosures and a lengthy Q&A with Reuters as the story was being developed.

Unfortunately, while the strategy to use a purpose-built website and shine light on the reporting process was good, the company’s responses were lawyerly, defensive and at times needlessly combative. Here’s an example:

Question [from Reuters]: More than a dozen academics, attorneys, Wall Street analysts and corporate governance experts who have reviewed the loan agreements say that the mere existence of as much as $1.1 billion in loans taken out by Mr McClendon against his share of the company’s wells raises the potential for conflict of interest in multiple ways. As a result, they say the loans should be disclosed in more detail than is currently provided by the references to “financing transactions” in the annual proxy. What is Chesapeake’s response to this view?

Answer: The question is improper on a number of levels. First, it does not specify the supposed conflict of interests nor does it include any analysis that reflects the information reviewed by the speaker, the information the speaker considered important, the speaker’s experience in the oil and gas industry or what assumptions were made by the speaker. Thus, one cannot tell if the conclusion was based on a short email with a leading narrative (as we have seen from your emails that have been provided to us), incomplete information or a thorough review of the pertinent information. Second, the concept of an “expert” is that the individual’s reputation and training supports a conclusion that the person’s opinion on a given topic is worthy of respect. That is inconsistent with hiding one’s identity, analysis or bias. Third, disclosure is an intricate regulatory scheme of multiple laws and rules that can be made unworkable by adding multiple disclosures of transaction details just because a small group of shareholders might think it is helpful. This is exacerbated where there are multiple small groups, each with their own special data request to fit their own special agendas.

Ugh.  There’s more where that came from, and it’s just as unhelpful.  As a result, Chesapeake reinforced the impression that the CEO had a lucrative deal that was obscured from shareholders.  And with today’s disclosure, we now know the response wasn’t truthful, either.

 

Lines Drawn in Wal-Mart’s Mexico Scandal

The question for Wal-Mart is how long its public statement about bribery allegations in Mexico will stand as pressure mounts on the company from several fronts.  A report surfaced today that the U.S. Justice Department has opened a criminal investigation into the matter – news that likely was responsible for a further 2% slide in Wal-Mart shares.  Since Monday, the scandal has clipped the company’s market cap by about 7%, some $12 billion.

Wal-Mart responded promptly to the bribery allegations in a statement and video message immediately after the article was posted on the New York Times website on Saturday.  Its response indicates it has adopted the following communication strategy:

1. Remind everyone that the alleged activities happened a long time ago, so they’re not that important.
2. Emphasize that the board began an internal investigation, disclosed it publicly and will act on its findings as necessary.
3. Defend broad principles, but avoid a defense of specific facts.

As crisis-management goes, this is a solid first-day response, both in terms of content and tactics, like the use of video in English and Spanish.  Importantly, Wal-Mart’s statement allows it to buy time while it assesses the damage from the article.  The question is: how long will these statements hold up before some further action is needed or they’re compromised by new information?

Congressional hearings and law enforcement investigations will ratchet up the pressure and could force a shift in Wal-Mart’s public posture.  But investigations and hearings follow well-charted paths and generally give their targets ample time to prepare.  What could really pressure Wal-Mart is the online availability of the source material cited in the Times article.  It included links to a half-dozen excerpts from these documents, but the trove is huge:

“The Times obtained hundreds of internal company documents tracing the evolution of Wal-Mart’s 2005 Mexico investigation. The documents show Wal-Mart’s leadership immediately recognized the seriousness of the allegations. Working in secrecy, a small group of executives, including several current members of Wal-Mart’s senior management, kept close tabs on the inquiry.”

Online access to the emails, video interviews, internal reports and correspondence could intensify the pressure on Wal-Mart.  Instead of contending with prosecutors limited by tight budgets and political considerations, Wal-Mart could face a vast army of industrious bloggers, analysts, and reporters.  They’re capable of keeping the story alive for a long time.  It’s a scenario that recalls the release by WikiLeaks of US diplomatic cables in 2011, which generated news articles for months afterwards.

The New York Times has not said whether it will make the documents available.

Wal-Mart is hoping of course that the story fades with time, and there’s a good chance of that.  Bribery scandals don’t have obvious victims or high-impact visuals to maintain the public’s interest.  (Few people would remember the Archer Daniels Midland price-fixing scandal of the early 1990s were it not for Matt Damon’s starring role in The Informant!)

Wal-Mart has a challenging road ahead, but it might have weathered the worst of the storm – unless new details on the scandal emerge.

 

Things get messy at Best Buy

Best Buy Co has accomplished something remarkable.  In a few short hours, it took a fairly routine CEO resignation and turned it into a scandal.

Early this morning, just after the opening of trading, Best Buy issued a brief statement saying CEO Brian Dunn resigned.  It wasn’t a big surprise; after all, Dunn had been criticized for failing to address the company’s serious competitive challenges.  The press release included nice words from Dunn, and from the interim CEO, Mike Mikan.  So far, so good.

But that apparently wasn’t the whole story.

In the afternoon, a company spokesperson was forced to acknowledge – following an inquiry by the Minneapolis Star-Tribune – that Best Buy’s board of directors had initiated in investigation into Dunn’s “personal conduct.”  The second statement said:

“Certain issues were brought to the board’s attention regarding Mr. Dunn’s personal conduct, unrelated to the company’s operations or financial controls, and an audit committee investigation was initiated,” the company said in a statement. “Prior to the completion of the investigation, Mr. Dunn chose to resign.” 

This is a great example of how a company can lose its credibility in the blink of an eye.

It appears that the board thought it could keep the existence of the investigation from becoming public.  Or it might have believed they could not say anything until the investigation was completed.   They were wrong on both counts.

Now the company will be under intense pressure in the coming days to say more about the circumstances of Dunn’s departure.  His severance package will be a flashpoint for critics.  Media attention will continue unabated.  Speculation will ignite on the blogosphere.  Nervous investors will head for the exits.

The only way out of this mess for Best Buy is to tell the entire story – quickly and by a senior executive.