Tuesday, July 18, 2006

Reading Between the Lines


Barron’s had an unusual cover story not long ago. Instead of an interview with a hot-shot money manager or yet another story about the housing bubble, the paper asked, “Is Your CEO Lying?”

Given that Congress seems more focused on helping troubled CEOs shift the blame for self-inflicted problems onto short-sellers, Barron’s question was a helpful reminder that at the heart of the Enron, Worldcom, Tyco, Lernout & Hauspie and Media Vision collapses—just to name a few—were CEOs who blamed their declining stock price and negative news flow on, among other things, short-sellers.

And in each of those particular cases that CEO landed in jail.

The Barron’s article describes how some enterprising money managers are going beyond the classic forensic accounting techniques pioneered by shorts, and analyzing the “body language” and “non-verbal cues” of CEOs and CFOs to discern whether execs are telling the whole truth and nothing but.

That notion is not quite as groundbreaking as it sounds—hedge fund types and fast-money mutual fund managers especially used extensive, close-up Q & A sessions in their offices and at conferences to gauge management’s “body language” as long as I’ve been in this business.

Some friends think Reg. FD has made it useless to meet with management, owing to the fact that management is expressly forbidden to disclose any material information in private that is not shared publicly. In fact, some investors—and they get written up in Barron’s once in a while—say it’s better to invest strictly by numbers, instead of visiting their companies and looking the CEO and CFO in the eye, because management always sugar-coats the truth anyway.

Still, I find it still useful, for all the reasons Barron’s mentions. After all, Enron’s numbers looked great for a while. (I know a long-only money manager at a firm which puts prime importance on management meetings; he never owned a share of Enron because he had met Jeff Skilling twice, and didn’t trust him as far as he could throw him.)

So anybody who thinks it doesn’t pay to sit in a room with a guy and take his measure is not only missing one of best parts of this business—meeting the interesting and brilliant along with the scummy and the devious—but also the chance to read what’s going on behind the mask.

Now, it is entirely coincidental that Barron’s produced its “Is Your CEO Lying?” cover story two days before a product-recall conference call from Boston Scientific—the former high-flying institutional fave now lurking on the new-low list, owing to several not-meeting-the-number-related disappointments, an 11th-hour bidding frenzy for problem-plagued cardiac care giant Guidant, and product recall announcements that seem to be dropping like errors from the glove of A-Rod.

In light of the latest Guidant recall, I thought it might be interesting to apply some of Barron’s guidelines to the recent conference call. So let’s parse the highly regarded BSX CEO Jim Tobin’s opening comments on that call—courtesy of the indispensable Briefing.com—to see we can see.


Thank you, Larry. I appreciate everybody’s joining us this morning. What I’d like to do is just sort of give you kind of my impressions at the eight-week plus mark of sort of how we are doing here and how things are coming…

I guess basically the question that I get asked the most often is, are you surprised at some of the issues you are finding and are things going with way you expected them to? Are you having buyer’s remorse? You know, those kinds of things. Essentially, here is the deal.


Lots of qualifiers and verbal tics in there. “Sort of” appears twice, along with “just,” “I guess,” “basically,” “essentially” and “you know.”

We knew when we did our due diligence that the CRM business of Guidant had not had its last recall; we know that coming in. And to date we have seen issues that have arisen that were anticipated to arise…. This is not unexpected; actually, this is not our last recall, probably not anybody’s last recall. So from that point of view I would say that we are no better off, no worse off, than we expected to be.

Here he goes with a double-negative “not unexpected” and more qualifiers: “probably,” “to date” and “I would say,” which also starts off the next sentence:

I would say, though, the biggest surprise I’ve had has been around the people at Guidant and how many good ones there are…

Nice, patriotic, cheerleading—entirely setting up the heart of the matter, in my view:

I think the Guidant organization, and for that matter the world, seems to have bought into the idea that the events of last year [product recalls and FDA flaps] were essentially a communications problem, and that all we had to do was communicate better and that would be the end of it. In truth, there are deeper issues than that that will require time to address that lead to the problems that then have to be communicated.

Despite the qualifiers and double-negatives in the setup, Tobin identifies a deep-seated problem, and makes it very clear this is going to take time, although without getting into specifics of how the company will address the “deeper issues.”

So the program that we’re implementing here is aimed at getting to the foundation of those kinds of issues so they don’t recur and so that we can not have to be so good at communicating because we won’t have anything to communicate….

And I think that was somewhat of a new perspective to the Guidant organization, at least to large chunks of it. …

An interesting comment, aimed squarely at Guidant, which speaks volumes about the Guidant culture versus his company’s own.

But he attempts to answer the core question—‘if you could do it over…?’ with an upbeat assessment, as one would expect:

And last but not least, we like the technology, we like the market, we like the people, and we’ve got the technology it takes to be a leader in this space, and that is what we intend to do. So from my perspective we are about where we would have thought we would have been at this juncture.

Hardly a ringing endorsement for the deal—qualified as it is with “from my perspective,” “about where we would have thought,” and “at this juncture”—but what you’d expect from a man who recently committed $25 billion-plus for a fixer-upper.

Then Tobin veers from his straight-ahead approach and flips the blame from his shoulders to Wall Street’s Finest:

And that is not good news for people who were optimistic that I had a magic wand, but it is not bad news either. We are right where we expected to be…

That last—“we are right where we expected to be”—must have come as a surprise to more than a few listeners, because BSX shares sold off during the call.

Still, Tobin wraps up with a characteristically upbeat spin:

So I guess basically at the end of the day, I would say that Boston Scientific remains as optimistic and as confident that this is going to, in the long run, turn out to be a major positive strategic move, that it does all the things for us that we expected it would, and that people will wake up two or three years from now and wonder what they were worried about.

He ends as he started—with a lot of qualifiers: “So I guess,” “basically,” “at the end of the day,” and “I would say” right up front, not to mention using the institutional, impersonal pronoun, as in “Boston Scientific remains as optimistic…” rather than the more urgent and personal pronoun, as in “I remain as optimistic….”

Does Tobin’s language fit the skeptical question of Barron’s cover story? I don’t think so. I think his assessment is about as frank—without going into all the dirty details Wall Street might like—as could be expected from a man trying to meld two organizations while at the same time cleaning up what appears to have been a long-festering mess.

And, stock-wise, he may in the end be right: in two or three year this could look like a great buying opportunity.

But anybody who thinks it’s going to be easy getting from here to there isn’t reading between the lines.


Jeff Matthews
I Am Not Making This Up


© 2006 Jeff Matthews

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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

5 comments:

whydibuy said...

One of the few things good about Cramer is his book about his hedge fund. In it he recalls his meeting a Cendant exec ( the name escapes me now ) at a gathering and at how aloof this guy was at a stockholder of XX millions of shares. Red flag there. Then he goes on to mention an issue with one of Cendants divisions, of which this exec gave him a totally quizical look, muttered something and walked away. Big red flag. But Cramer admits he was smitten with the numbers CD was putting out and kept the position to his regret as CD crashed on the phony numbers scandal. Warren buffet has said he just wants to see the numbers from a co, not get it through some ceo. The numbers would tell him everything he wants to know. I'm not so sure about that strategy after seeing more and more of these accounting shenanigans these days.

smits said...

Jeff,

I'm curious if you are more or less suspicious of an exec who uses a prepared script and never varies from what's on the page?

Jeff Matthews said...

We all have our Cendants--stocks you just can't give up on, even though...

As for whether I'm leery of an exec who reads from a script, I find them un-readable in person. However, when you hear the same person do a scripted conference call presentation enough times, you can tell when they're slinging it. Reminds of Mark Swartz, the old Tyco CFO...

BelowTheCrowd said...

Another great Cramer story is the one about he and Jeff Berkowitz meeting with "Chainsaw" Al during his Sunbeam days. Al was doing all this talking about their great new products, their cost cutting, etc. Berko periodically interrupted him with simple questions like "well, how are they selling through" and "how much of the product you've sold is still in the channel." Al got annoyed, Cramer asked him if he'd like to continue with him alone, Al said yes.

Cramer continued with the chit-chat, while Berko left the room and sold out their entire position.

Or something to that effect.

-btc

pondering said...

"I think the Guidant organization, and for that matter the world, seems to have bought into the idea that the events of last year [product recalls and FDA flaps] were essentially a communications problem, and that all we had to do was communicate better and that would be the end of it. In truth, there are deeper issues than that that will require time to address that lead to the problems that then have to be communicated."

This I find interesting since I have no training in cryptography. When Tobin mentions the "world" does he include Boston Scientific if so, why 25 billion for a flawed product that requires several years, a few recalls and a culture overhaul to perfect? If not, what is due diligence and is it useful? I realize this is off topic for that, I apologies.