Saturday, August 24, 2019

When CEOs Resign

  Our inbox was humming this week when news broke that Patrick Byrne, the founder, CEO and guiding light of (OSTK, $20.58 for you home-gamers), had resigned from his post as CEO and from the Overstock board of directors, following the disclosure that he had been involved in FBI probes concerning “political espionage conducted against Hillary Clinton and Donald Trump” since 2015.
  We cut our blogging teeth with Patrick Byrne stories, as many longtime readers know, starting with the one we're reproducing below, from early 2005, a good decade before Byrne and the FBI became an item.
  Our interest in Byrne and began innocently enough when a good friend and the best short-seller we have ever known suggested looking at as a short.  Since this advice came from a guy who could--and still can--smell a scam before he even meets the scammers, we began to take a look.
  Around the same time, however, another friend, one of the best retail and apparel investors we ever knew, suggested going long  He had visited the company and thought Patrick Byrne was the best CEO I've ever met, quote/unquote.
  So we stayed on the sidelines, short-selling-wise and going-long-wise, but started listening to the Overstock earnings calls, and we're glad we did, blogging-wise.
  It was like dropping down Alice's rabbit-hole and finding a Strange New World of conspiracy theorists, the likes of which we had never heard on the earnings calls of a publicly-traded company--their main conspiracy theory being that short-sellers were brazenly selling shares of stock without first borrowing them, as required by every regulator known to Wall Street (so-called naked shorting).
  Since we'd never worked with, or known of, a short-seller who did that, and since we had worked with several professional short-sellers and knew most of the rest, it was a conspiracy theory we found hard to fathom.
  So we wrote a blog about it.
  In hindsight, your editor kind of wishes he had let the conspiracy theorists stew in their own juices, without trying to help them understand the way the world of professional short-selling actually worked.
  But--and this is a big But--it turned out the conspiracy theorists were right about one thing: shares of Overstock really were being sold without having been borrowed.  It's just that the prime-brokers were the bad actors, not the short-sellers.
  All that wouldn't come out until the financial crisis, however, well after the damage was done.  In the meantime, Patrick Byrne's obsessions became the gift that kept on giving, blogging-wise, and not merely from his commentary during the public earnings calls: your editor has long suspected Dr. Byrne himself contributed to the comments here in these financial columns, under an assumed name.
  But now the curtain has come down on his role at, and, in truth, we harbor no ill-will towards Patrick Byrne or the company he built.  For one thing--let's give credit where it's due--Patrick kept going long after many, many, many dot-coms fell by the wayside, or worse. 
  For another, your editor actually visited the company, long after the dust had settled on the naked short-selling conspiracy battle, at its then-new peace-symbol-shaped building at the suggestion of the short-seller who long ago had suggested looking at as a short...only this time, he was, correctly, long the stock.
  We went there to size up the company's then-nascent efforts in bitcoin, and found the building full of very smart, very hard-working people who all seemed to share an honest respect for Patrick Byrne.  And, full disclosure-wise, your editor did go long, and profitably, until, as unfortunately tended to happen over the years, the rabbit hole kept leading nowhere, results-wise. 
  Patrick wasn't there the day we visited, but we did peak into his office.  There aren't many CEOs with a Bob Marley poster above their desk.
  It made your editor wish he'd visited Patrick back in the day, face-to-face, instead of trading comments on these blogging pages sub rosa.  We could have instead swapped stories about the Bob and the Wailers concert at the Music Hall in Boston, in the summer of 1978, a few months before we started in this business of getting and spending as a junior analyst at a once-great but long-since-gone company called Merrill Lynch, Pierce Fenner & Smith.
  It was a great show, Patrick.


When CEOs Obsess is a high-flying company whose CEO, Patrick Byrne, has a problem with success. His problem, specifically, is that the success of his company has attracted short-sellers of's stock.

While I do short stocks occasionally as part of my investment strategy, I am not one of the short-sellers Mr. Byrne--actually, Doctor Byrne--goes after on his earnings calls and in his erudite shareholder letters. The shorts he goes after are so-called "naked" shorts, meaning they have not actually borrowed the shares of Overstock which they have sold short.

Not only is naked selling short illegal, it is, from my vantage point: a) stupid; and b) not the way any professional short sellers I know go about their business.

So I think Doctor Byrne is identifying a problem that doesn't exist. And if it does exist in the case of, then those so-called naked shorts, whoever they are, will eventually have to buy back the shares of Overstock they have shorted--a good thing for the Doctor and other shareholders of Overstock, should they ever need an exit strategy. He should be thanking the idiots doing the illegal deed--not obsessing about them.

Why write about Overstock without having a dog in this fight? Simple: I have found in my 25 years' investment experience a very high correlation between companies whose CEOs obsess about short-sellers and the eventual self-destruction of those companies.

CEOs who obsess about a non-operating issue such as short-sellers usually have a very fragile business model--otherwise, they would not waste a second of their time on such useless speculation. Or they simply have something to hide--sometimes fraud, sometimes not. In general, what comes to mind when CEOs obsess about shorts are the words of Queen Gertrude--from Shakespeare, with whose work I'm sure Doc Byrne is very familiar: "The lady doth protest too much, methinks."

And Patrick Bryne protests way too much.

Bill Gates, as one example of a CEO whose stock has, in the past, been heavily shorted, never bothered to get worked up about any short-seller on any Microsoft conference call, ever: he just ran the business and let the stock take care of itself, and take care of the shorts along the way. In fact, when I am short a stock, I get very nervous if the CEO does not obsess about the shorts. It usually means he's playing a very strong hand.

But don't try to tell this to Patrick Byrne, because today he's whining to Floyd Norris in the New York Times that "someone is manipulating our stock," and blaming the shorts for the recent 15-point drop following an earnings call that disappointed investors expecting positive surprises. (Bryne does not, by the same token, thank the shorts for facilitating the 60-point rise in the prior twelve months, nor does he grasp the fact that he and he alone is to blame for raising ridiculous expectations and then failing to meet those expectations during the company's earnings call.)

Speaking of that call, you should listen to it. The whole replay. Especially the last twenty minutes, when Doctor Byrne fields a call from a man identifying himself as Bob O'Brien. "The name is not familiar," O'Brien says to Byrne, "let me start out by introducing myself."

The "not familiar" Bob O'Brien then delivers a paranoid and wholly ignorant fantasy regarding the supposed short-selling conspiracy driving Overstock and other small cap companies into the ground, including factual errors regarding the mechanics of stock delivery and ramblings of an individual with far too much time on his hands and who probably has a difficulty distinguishing reality from The X-files.

You will hear Doctor Byrne patiently let the man ramble, expressing surpise and interest in the caller's fantasy, and you will hear Doctor Byrne act wholly ignorant of where this Mr. O'Brien came from. "I don't know any of the stuff you are talking about but it is interesting stuff," Bryne says.

Patently false.

Turns out Patrick Byrne helped an organization called "National Coalition Against Naked Short Selling" pay for two Washington Post ads attacking naked short sale tactics. Turns out this so-called coalition is run by none other than the paranoid X-Filian Bob O'Brien.

But don't take my word for it. It's all there in the interviews Byrne and O'Brien give to Floyd Norris in today's New York Times. Read the article and listen to the Overstock conference call, and tell me what you think.

If a CEO will fib to Wall Street the way Patrick Byrne appears to be fibbing on his earnings call by hosting an orchestrated short-bashing rant from his "not familiar" friend Bob O'Brien, you never know what he might do when it comes to running a business.

I am not making this up.

February 28, 2005

Friday, February 22, 2019

Activist Targets IBM: “Bring Out the Belgian Waffle!” (reprint from 2014)

Editor's Note: 
In light of the recent KHC disclosure that the geniuses at 3G have been underinvesting in brands, over-stating earnings, and milking their businesses for short-term earnings at the expense of long-term results—everything Warren Buffett professes to despisewe thought it worth reprinting this commentary on the 3G methodology from 2014JLM

IBM trades to highs on activist related speculation  (161.85 +0.95)
—, November 23, 2014

  IBM Chief Counsel: “Ginni?  Fred here.” 
  IBM CEO Ginni Rometty:  “What’s wrong?”
  Chief Counsel: “Activists are circling.”
  Rometty: “Oh geez.”
  Chief Counsel: “Yeah.  I’ve got the biggest shark of all on hold.  He wants to talk.”
  Rometty: “Carl Icahn??”
  Chief Counsel:  “No.   Icahn watches Netflix and uses an iPhone.  He thinks we’re ‘old economy.’  Worse than Icahn.”
  Rometty: “Donald Trump?”
  Chief Counsel:  “No.   Even worse.”
  Rometty:  “Worse than Donald Trump?  How is that possible?”
  Chief Counsel:  “It’s possible.  It’s those guys from 3G.”
  Rometty: “Yikes.  The Brazilians?   The ones who took over Burger King and slashed and burned?”
  Chief Counsel: “Yeah.  And they bought Heinz with Warren Buffett—your pal.”
  Rometty: “Well, he’s not my pal after we had to reset the ‘earnings roadmap’ and the stock tanked.   Stupid roadmap.   How did Palmisano ever come up with that idea?”
  Chief Counsel:  “It worked, didn’t it?”
  Rometty:  “Only long enough for Sam to exercise his stock options.   Not me.”
  Chief Counsel:  “Well your options may be in the money soon enough, if these 3G guys go ahead.  You want to talk to them?”
  Rometty:  “Put ‘em on.”
  Chief Counsel:  “Right now?”
  Rometty:  “It’s better than watching these Fast Money yahoos trash talk me on CNBC.”
  Chief Counsel:  “Hold on… Okay, here we go.   Oscar?   You there?”
  Oscar:  “Yes.  I have seven minutes before I have to fire 37 people and figure out how to convince young males to buy hamburgers made with wood shavings.   Let’s get going.”
  Rometty:  “What do have in mind?”
  Oscar:  “We at 3G would like to buy IBM—”
  Rometty:  “Outright?   That’s not activism, that’s a hostile takeover!”
  Oscar:  “Call it what you like.   We see great opportunity to run IBM more efficiently.”
  Rometty:  “Oh yeah?   Starting where?”
  Oscar:  “Layoffs.   IBM has too many employees.”
  Rometty:  “Says who?”
  Oscar:  “You have over 400,000 employees!”
  Rometty:  “That number is so last week.”
  Oscar:  “You’ve had layoffs in the last week Well then, I must congratulate you.”
  Chief Counsel: “Careful, we haven’t publicly disclosed anything.”
  Rometty: “Okay.   So what else does 3G think we need to change?”
  Oscar:  “Well, according to our internal due diligence you have a very inefficient field staff reporting structure.  At Burger King we have 14,000 field staff reporting to seventy-five MBAs who all work out of their cars.”
  Rometty:  “That’s nothing.  At IBM our entire field staff of 80,000 reports to three college grads and a transfer student.”
  Chief Counsel:  “Ginni, that’s never been disclosed—”
Rometty:  “Relax, Fred.  The transfer student doesn’t even speak English.”
  Oscar:  “Somehow our due diligence did not discover that.   Well played.”
  Rometty:  “Thank you.  What else you got?”
  Oscar:  “Well, corporate overhead.   At Burger King we eliminated all corporate jets except mine, and everyone takes a Greyhound bus when they travel more than 300 miles.”
  Rometty:  “What do they do under 300 miles?”
  Oscar: “They hitch-hike.”
  Rometty:  “That’s nothing.  All travel requests at IBM have to get approved by a cardboard cut-out of Dilbert.”
  Oscar: “Brilliant!”
  Rometty:  “It’s called returning value to shareholders, not employees.”
  Oscar:  “And we admire that.  But your headquarters staff appears bloated to us—”
  Rometty:  “That’s because it doesn’t exist.”
  Oscar:  “Doesn’t exist?”
  Rometty:   “No.  It was outsourced to India years ago.”
  Oscar:  “Then why do our satellite images of the IBM headquarters parking lot show so many cars?”
  Rometty:  “That’s my security detail.   And my lawn service.”
  Chief Counsel:  “Ginni, I really think this is inappropriate—”
  Rometty:  “Not at all.  If this guy thinks he can tell me how to run IBM even less for employees and customers than we already do, he’s got another thing coming.  He’s a piker.”
  Oscar:  “Well let’s discuss your taxes.  We at 3G know how to operate tax-efficiently across all multi-national jurisdictions—”
  Rometty: “Our tax rate was 15.6% last year.  How do you beat that?”
  Oscar:  “We think applying a ‘Dutch Sandwich’ could move billions in pre-tax income to a lower tax rate nation without any change in your corporate headquarters—”
  Rometty:  “Been there, done that.”
  Oscar:  “Well, a ‘Double Irish’ would reduce taxes on intellectual property by shifting—”
  Rometty:  “You’re five years too late pal.  Next?”
  Oscar:  “A ‘French Cuff’?”
  Rometty:  So '90s.”
  Oscar:  “The ‘Jamaican Bobsled’?”
  Rometty:  “Who do you think invented the ‘Jamaican Bobsled’?”
  Oscar:  “What about a ‘Hong Kong Stir-Fry’...a ‘Singapore Sling’...a ‘Portuguese Man-O-War’?”
  Rometty:  “Is this the '80s calling now?  Puh-leeze.”
  Oscar:  “Well, I must say, your tax avoidance strategies seem quite advanced.   I’ve run out of options.”
  Rometty:  “You didn’t ask about the ‘Belgian Waffle.’”
  Oscar:  Fala sério!  We heard the rumors about it, but believed it to be a myth, like Bigfoot.  You mean there is such a thing?”
  Rometty:  Wouldn’t you like to know?
  Oscar:  “Please?  I beg of you.”
  Rometty:  “If you guys drop this takeover idea, I might—.
  Oscar:  “Consider it dropped.”
  Rometty:  “Alright.  But first, make sure your door is closed, your auditor is nowhere nearby, and listen carefully...  Now just imagine you found a way to merge with an entire country, whose citizens could be made to unwittingly pay your taxes for you.
  Chief Counsel:  This conversation is finished!   Ms. Rometty has nothing further to add!”
  Oscar:  “El Diablo!”

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2014)    Available now at

© 2014 NotMakingThisUp, LLC

The content contained in this blog represents only 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 investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.