Sunday, June 19, 2005

This Just In: “Spin” Becomes “Lying”

"It seemed to us he [ex-Tyco CEO Dennis Kozlowski] told a few lies."--Tyco juror.
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"A lot of people felt he [ex-Tyco CFO Mark Swartz] was an extremely good liar."--Tyco juror.

Friday afternoon the headline came across my Bloomberg: Dennis Kozlowski and Mark Swartz had been found guilty of conspiracy, fraud and grand larceny in their roles as CEO and CFO of Tyco International.

I instant-messaged my partner, “yesssssssssssssss,” and he understood immediately, catching the same headlines at the same moment.

It felt terrific—Dennis and Mark had misled not just Wall Street analysts, who should have known better, but thousands of investors who bought the Dennis-Kozlowski-as-the-next-Jack-Welch public relations scam, and lost millions as a result—and I personally and professionally had gone out on a limb discussing Tyco and the problems-behind-Dennis-and-Mark's-curtain in “The Street.com” as well as on Kudlow & Cramer.

It was nice to feel vindicated, even though it took three years and two trials, and millions of taxpayer dollars.
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Oddly, however, I also felt a twinge of guilt for reveling in the misfortune of other human beings. After all, the ex-CEO and ex-CFO are not threats to anybody anymore, except the taxpayers funding the three-years-and-counting prosecution of their cases.

So I began looking back at their public pronouncements while Dennis and Mark ran Tyco, just to recover the atmosphere of the moment. In so doing, I revisited a piece I’d written in May of 2002, called “When Does Spin Become Lying?” and intended for Street.com, where I was writing at the time.
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Now, that title got watered down—lawyers, you know—and editors removed some of the stronger language before it was published as "Hook, Line and Sinker." I was very disappointed at that time.
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After all, the piece was constructed almost entirely out of quotes from Dennis and Mark themselves—I was "not making this up"—so I didn't understand the sensitivity to whatever legal ramifications there might be to pointing out that the CEO and CFO of a major public company couldn't seem to keep their stories straight.

Still, I acquiesced to the edits and the title change. But today, after re-reading the original, unedited "When Does Spin Become Lying?," I wished I hadn't.
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What is remarkable about the piece is not that I wrote something wildly terrific or profound, because I didn't. In fact, it's a bit choppy and probably deserved every edit that was made to it.
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What is remarkable, I think, is simply this: there is nothing that took the Feds three years to prove "beyond a reasonable doubt" to a jury of their peers that wasn’t evident to anybody with a pair of ears and an open mind who listened to Dennis and Mark’s carefully rehearsed sessions with Wall Street’s Finest in the months before their arrests.

Those two guys said stuff and took it back like third-graders trying to explain what exactly happened on the playground during recess; only Dennis and Mark were not spinning lies about who threw the first punch to some gray-haired, hard-of-hearing spinster: they were, as the jury finally concluded, spinning lies about businesses, earnings, cash flows and asset sales to millionaire MBAs and Wall Street veterans.

Yet during that period of time, throughout all of those conference calls, not one of Wall Street's Finest ever called 'em on it.

So here it is, as originally written—provocative, lawyer-scaring headline and all:
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When Does Spin Become Lying?

This Thursday Tyco International will hold its earnings conference call for analysts and investors. Despite Tyco’s rocky history and recent earnings and cash flow disappointments, don’t expect much in the way of fireworks on this call—at least from the so-called analysts recommending Tyco stock.

Over the course of the last four months, since launching their surprise split-up plan, Tyco International’s CEO Dennis Koslowski and CFO Mark Swartz, have hosted a series of conference calls with the analyst community to discuss the plan itself, earnings releases and accounting issues.

In that brief period of time, Tyco’s Plastics business was put on the block for $3 to $4 billion and pulled off the block after expected proceeds had dropped by as much as one-quarter.

A promised separate audit of Tyco Plastics was “ceased,” in management’s word, before it could be completed—leaving potential buyers of Tyco Plastics, and the investment community at large, in the dark regarding any issues that might have been uncovered.

Furthermore, Tyco’s earnings and cash flow guidance were reaffirmed and then slashed by as much as one-quarter; and the need to take a goodwill charge was denied again and again, before a $3.3 billion impairment charge was taken in the second quarter.

Remarkably, throughout the on-and-off sale of Plastics, the on-and-off audit of Plastics, the earnings and cash flow reductions, and the newly impaired goodwill, most Wall Street analysts have retained their “buys” on Tyco shares.

Yet it may not be so remarkable. For one thing, Tyco is selling off its CIT finance subsidiary in one of the largest public offerings in history, while employing a good many of these same analysts’ firms to handle the fee-rich deal.

For another, Tyco management did such an excellent job “spinning” the news of each disappointing turn of events that the analysts appeared to take everything at face value. A review of the Tyco conference calls from the January 15th first quarter call, to the April 25th second quarter call, hosted by either or both CFO Mark Swartz and CEO Dennis Koslowski, show a management team consistently eating their own words.

What follows are the words of Dennis Koslowski or Mark Swartz, either directly from my own notes, or from Dow Jones wire stories, or from transcripts.
You be the judge!

1. Sale of Tyco Plastics
[NB: All dates are 2002]

What they told the analysts about the sale of Plastics:
1/22 “We’re estimating $3 to $4 billion from Plastics.”
2/6 “…we will have $3 to $4 billion” from a sale of Plastics.
2/6 “Tyco has received strong interest from both strategic and financial buyers.”
2/13 “We…will sell Plastics.” “It’s not the best business….”
2/19 “[We’re] looking at $2.5 to $3 billion…after taxes on the proceeds from Plastics”
3/19 “We are on track within the ranges that we had expected on the Plastics.”
3/26 “…the bids came in within the range of expectation.”

What they said upon announcing they will not sell Plastics (4/25):
“We want to keep Plastics. It is a solid business with substantial free cash flow…Tyco Plastics’ operations generate excellent returns…Our decision to retain Plastics…had nothing to do with pricing or accounting.”
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2. So-called “Distractions”

What they told analysts about distractions caused by the break-up plan:
2/6 “A nickel or so” per share from “distractions.” Ship is in “good” shape. “Now back to spending time with people and customers, to crank out earnings and cash flow.”
2/13 “Other sides of business [outside electronics] have recovered and are doing well.”
2/19 “No incremental adverse competitiveness seen from any [healthcare] competitor.”

What they said upon announcing how distractions hurt earnings (4/25)
“We had many concerns by customers and employees… And, as I saw this first-hand and spent most of my time visiting with customers, visiting with employees, the shock, the dismay that we were putting the organization through made us recognize we did make a mistake here….Many units suffered productivity declines due to volume issues as well as just simply losing a bit of focus.”

3. Healthcare Business


What they told analysts about the strength of the healthcare business:
1/15 “Revenue growth [in healthcare] is not sensitive to the economy.”
1/15 Margins for healthcare “will go up.”
2/6 “All other businesses continue to show good growth, particularly healthcare…”
4/2 “Our healthcare business and fire and security continue to perform well.”

What they said upon announcing weaker-than-expected healthcare results (4/25):
“Our major competitor had played some havoc within the healthcare customers…We did lose some business at the same time.” “We had difficulty within the last quarter and some pricing pressures in order to hold on to customers.” “Our competitors…charged in and tried to take advantage. We certainly lost business.”

4. Goodwill Impairment


What they told analysts about not taking a goodwill charge, particularly in telecom:
2/19 “Impairment review should be done…end of March. We are not expecting impairment.”
3/19 “We are not looking at an FASB 142 impairment charge on goodwill.”
3/16 “I continue to believe there will not be a charge…”
4/2 “I will reaffirm…that there will not be an impairment charge on goodwill… The reason for that…we paid very reasonable purchase prices for those businesses, and the same can be said looking at even the electronics business.”

What they said upon announcing a large goodwill impairment charge (4/25):
“The vast majority of the [$3.3 billion impairment] charge is the result of the fierce decline in the electronics and telecom markets.”


5. FY 2002 Free Cash Flow Guidance


What they told analysts about FY 2002 Free Cash Flow:
1/15 “Free cash flow exceeding $4 billion [in 2002].”
2/19 “As we look here right now we’re able to make very clear we’re able to get to the $4 billion.” “We’ve always been conservative on the guidance we’ve given on cash flow, regularly we have far exceeded the guidance we’ve given.”
4/2 “As I have said over the past few weeks, based on January and February’s numbers, we see no need to revise earnings or cash flow guidance for the quarter.”

What they said upon announcing weaker than expected free cash flow guidance (4/25):
“We do believe that our free cash flow estimate for the full fiscal year of ’02 is $3 to $3.5 billion.”


6. FY 2002 EPS Guidance:


What they told analysts about FY 2002 Earnings Guidance:

1/15 “Committed to full year earnings guidance of $3.70 per share.”
1/22 “We foresee strong earnings growth through then [2003]...”
4/2 “As I have said over the past few weeks, based on January and February’s numbers, we see no need to revise earnings or cash flow guidance for the quarter.”

What they said upon announcing weaker than expected earnings guidance (4/25):
“Including the impairment charge and other unusual items, I expect [FY 2002] earnings to total around 98 cents to $1.08 per share. Excluding these items...$2.60 to $2.70 per share."

Like barking seals clapping their flippers when fed baitfish by their trainer, the Wall Street analysts have, for the most part, accepted the steady diet of disappointing news with remarkable aplomb and sustained zeal for Tyco stock.

“We reiterate our buy” is a phrase that appears in the First Call notes of the analysts following Tyco with almost as much regularity as “We reduce our price target.” Bob Cornell of Lehman takes the cake: after steadily reiterating his buy while taking numbers down, he recently cut his price target on Tyco stock from the nicely round $100 per share to the equally clean $50 per share, just like that. Overnight. Oh, by the way: Lehman Brothers is acting as an underwriter of the CIT initial public offering.

These professionals don’t seem to understand the lessons of Enron. It is no longer enough to accept at face value the numbers typed into a press release or the soothing, upbeat words of a conference call, nor is it deemed “analysis” to repeatedly recommend a stock whose management the bankers are courting for a deal and whose fundamentals are deteriorating. Enron bull Curt Launer of CSFB appeared before Congress and said, in effect, “I can’t do my job if the company doesn’t give me the right numbers.” And he was laughed at, for he is supposed to be an analyst, not a stenographer.

This is serious stuff—this is people’s retirement accounts and pension plans. It is college educations going up in smoke. The analysts who can, with a straight face, accept the kind of spin practiced by so many companies—and recorded above—are risking severe professional liability by accepting spin at face value, without due diligence of their own.

For we have seen that “spin”—the art of putting a good face on potentially bad news—can become what lawyers and Attorneys General regard as “lies.” And this usually happens when the spin stops working—as when Enron’s stock fall triggered the hidden liabilities which blew apart what good spin and a thousand press releases had kept together.

Thursday’s conference call should be interesting. Let’s see if Tyco’s spin is still working.


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Yet even today, in a Sarbanes-Oxley world brought about thanks to people like Dennis and Mark, there are companies as egregious in their spin-doctoring and as opaque in their accounting as Tyco ever was—and they are being touted by Wall Street’s Finest, who don’t seem to bother asking themselves when, exactly, does "spin" become "lying."


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.

7 comments:

Jim Chanos said...

Yesssssss, anyway!

Its_strange said...

Its to bad the SEC and the NYSE and the rest in power still don't get it either

cdub said...

Of course, anybody who followed the "buy" recommendations in mid-2002 would be up a minimum of 50% today.

Its_strange said...

when does spinning become lying ? I say they learned if from our political leaders (both parties )and thier lawyers........And just what does Lanny Davis do now ?

BelowTheCrowd said...

And now two Rigases (Rigi??) gone for 15 and 20, respectively.

Ed said...

Jeff - Great piece. Kurt Eichenwald also had a good piece following the Tyco verdict in the NY Times about how being higly paid means CEOs can't claim ignorance - "ringleaders instead of cheerleaders". Keep up the great work on the site!

http://ddo.typepad.com/ddo/2005/06/good_news_for_r.html

The Unknown Broker said...

Jeff,

I remember admiring this piece when you wrote it and upon re-reading I am impressed all over again.

I have a hard time remembering where I left my car keys and keeping the pencils and paper clips straight in my desk drawer. Compiling, cataloguing and then clearly presenting this compilation of the lies by Denny and Marky was no small task. Job well done on your part.

This nail-after-nail-after-nail-in-their-coffin piece rather reminds me of some work you've done lately with the assorted tall tales of another lia...uhh..spin-meister.

To quote the immortal words of Men At Work: "Who can it be now?"