Thursday, May 05, 2005

The Spin-Job of Their Lives


There's a fine line between "spin" and "lying."

That notion--so important to the investment process--came to mind as I was writing the following piece about two executives I once kept a close eye on. Those two executives are Mark Swartz and Dennis Kozlowski, and the company they used to run is Tyco.

The reason I'm thinking about them is that Swartz, the CFO during all those years when he and Dennis were, um, adding value to both Tyco itself and to their own bank accounts, has taken the stand in his own defense against government charges of "grand larceny" and other things. Swartz's move follows on the heels of Dennis himself testifying before the jury.

Being out of the country, and thus unable to procure The Newspaper of Record in these types of juicy trials (the New York Post) I haven't seen any take on the testimony itself. So I have no idea how Dennis came across to the jury, nor how Mark is doing.

But I'd love to know, because I always thought they were two of the best spin-doctors I've ever seen in 25 years on Wall Street.

Dennis with his awe-shucks manner, his weird, high-pitched voice and dead earnestness; Mark with his Velvet-Fog demeanor and drench-them-in-data-and-make-them-feel-stupid-for-asking-the-follow-up modus operandi.

Tyco, as it happened, was a major short for me back in the days when the bloom began to come off the rose at the "Poor Man's GE": specifically, the very day Dennis and Mark held the analyst meeting at the Plaza Hotel to discuss their surprise plan to break-up the company.

If I recall the sequence correctly, that analyst meeting was announced the Friday before Martin Luther King weekend, and its stated purpose was to put to rest the various assertions of accounting gimmickrey allegedly used by Dennis and Mark to prop up Tyco's earnings and stock price.

It was to be, as I took it, a sort of a "Mark and Dennis explain it all" session, to get the company back in Wall Street's good graces.

That press release caused at least one hedge fund--mine--to buy options to hedge a short position in Tyco the minute it hit the tape. (I saw the release, figured, "we're dead," and immediately bought some insurance via the calls; others did likewise, because, as I remember it, Tyco stock reversed upward almost immediately.)

So, when I arrived at the Plaza after the long weekend, I was short Tyco stock and long Tyco calls, ready to see how the company dealt with the accounting issues which Jim Chanos had correctly identified and had continued to harp on during conference calls, despite both Mark's assurances that all was above-board at Tyco, and the impatience of the Barking-Seal Wall Street analysts--most of them thoroughly taken in by the Swartz/Kozlowski spin--with anybody who raised such boring, off-topic, hopelessly naiive questions. "This is the Next GE," they told themselves and their clients: "who cares about the goodwill amortization?!!"

Thus the stage was set for a knock-down, drag-out battle between Jim Chanos and the Shorts, and Dennis, Mark, the Barking Seals and the Longs.

The Plaza was in fact a madhouse when I got there--shorts, longs, and the press all packing a crowded hallway, trying to get their hands on the thick press release. But when I finally got a copy, instead of an accounting primer on why Tyco was not doing anything funky when it came to loading the balance sheet with goodwill-heavy acquisitions, I found myself holding a break-up plan being proposed by Dennis and Mark.

Everybody was scratching their heads--shorts, longs and even the Barking Seals--trying to understand why two guys who had built a company through relentless, ever-bigger acquisitions, would suddenly--just like that--do a 180 on the whole "Dennis-as-Jack-Welch" routine.

Oh, and there was not a word in the document about the accounting issues.

When I read it through, I remember thinking: "This is it--Chanos is right. They have no answer to the accounting stuff--they're just trying to hide the problems by selling the good stuff and taking the leftover garbage private."

Sure enough, during the meeting itself, when Jim asked an accounting question, Old Mister Velvet Fog--instead of explaining for once and for all the accounting issues at hand--did his usual smarmy, you-don't-get-it-everything's-fine tap-dance. I sold out our calls on the open and bought puts instead.

During all the sturm und drang which ensued over the next couple of years, the most remarkable aspect to the entire situation, in my opinion, remains the pronouncement by David Boies, the hotshot attorney Tyco hired to look into the mess left behind by Mark and Dennis, that there had been "no major fraud" committed at Tyco.

This is, after all, a company that wrote off over $6 billion in impaired goodwill and other assets during the 1992-1993 fiscal years.

Yes, Dennis and Mark were very very good indeed at spinning their story to Wall Street.


I wonder how it will play on Main Street.



Jeff Matthews
I Am Not Making This Up



The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

No comments: