June 1, 2001
By Elizabeth Judd
Why is everybody talking about the NYSSA forum?
For an IRO at a company with only one or two Wall Street analysts
covering it - or worse, no coverage at all - life's most pressing
concern can be discovering just what makes sell-side analysts tick.
Thanks to the New York Society of Securities Analysts (NYSSA), any
and all IR professionals can tap into the collective consciousness
of a large member group of analysts simply by attending the regular
public events sponsored by its various committees.
NYSSA's forums are usually quiet events, typically with 15-20
participants at a luncheon presentation. But this year, the society
began attracting crowds and making headlines after its corporate
governance and shareholder rights committee took aim at Amazon.com.
The committee, led by chairman Peter Brennan and co-sponsor Gary
Lutin, demanded that the online bookstore be more forthcoming and
specific in its financial disclosure. Only then, argued Lutin, could
Amazon and other dot-com companies be realistically valued in the
While a handful of IR professionals have attended the Amazon forums,
the bulk of participants have been analysts, securities lawyers,
portfolio managers, journalists and activists in the corporate
governance arena, says Brennan. John McCabe, NYSSA's president and
CEO as well as chief investment strategist for Shay Assets
Management in Manhattan, emphasizes that IROs are welcome at all
events: 'We like to have investor relations people. Many times they
can be surrogates for management since many managers don't have the
time to come to society meetings.'
Interestingly, NYSSA's corporate governance committee is so
ecumenical that its leaders aren't even securities analysts. Brennan
is a co-founder of MidCap Investors in New York City, and Lutin is a
former investment banker with a background in mergers and
acquisitions. Lutin doesn't even count himself among the
approximately 7,000 members of NYSSA, which was founded in 1937 and
in 1999 became a chapter of the Association for Investment
Management and Research (AIMR). In short, the chief rabble-rouser of
the committee is an outsider.
First and foremost the goal of the corporate governance committee -
and of all NYSSA's many committees - is education. 'If,' says
McCabe, 'investors don't fully comprehend what they own - and we
have a seller's panic or a buyer's strike - we could have a longer
consumer-led recession than we've ever had before. Our theme is that
with an increase in knowledge generally comes a change in behavior.'
One reason the Corporate Governance Committee chose to highlight
Amazon in a program called 'Amazon.com: Responsibility for
investment information' is that the company's stock, like that of so
many other dot-coms, tended to trade at dizzying and seemingly
undeserved heights. 'In the case of Amazon,' explains Lutin, 'the
stock was selling at literally 100 times invested capital. It was
typical for a lot of dot-coms to be trading at 50-100 times invested
capital when there were no earnings and no analysis of what money
the company was really going to make.'
The committee requested specific information regarding Amazon's net
sales and cash flows. It questioned whether the cash flows actually
generated or used by operations were consistent with Amazon's
published reports and other communications; if not, it asked the
company to consider how it could better present such information to
avoid confusion. Finally, the committee protested the use of pro
forma numbers or of any other numbers that aren't clearly defined.
Lutin has also publicly taken Amazon to task for dismissing
blistering reports by former Lehman Brothers analyst Ravi Suria as
chock full of errors without specifying what those errors are.
Amazon's high profile image was another reason it made such an
attractive case study, says McCabe. 'Jeff Bezos [Amazon's CEO] was
[Time's] man of the year. The media is involved and the public is
involved.' In the case of runaway successes like Amazon, there's
often not much financial history for analysts to go on; what's more,
the boards at dot-coms tend to be 'small and made up of insiders,'
Lutin sees the irrational exuberance over dot-com companies - many
of which have yet to earn a dime - as an extension of what he
believes has been 'a dysfunctional marketplace' for the past 15
years, ever since the era of junk bonds. McCabe makes a similar
point, noting that analysts were slow to appreciate the importance
of corporate governance until the mid-1980s, when corporate raiders
held sway and a company's takeover defenses became a critical part
of its internal make-up.
When the corporate governance committee initially contacted Amazon,
the company was cooperative. However, recalls Brennan, the company
eventually began disregarding NYSSA's requests for more information
about cash flows. In February, Amazon stopped communicating with the
forum altogether. With Amazon, he says, 'We're trying to pin a very
Forcing Amazon's management to be more responsive and responsible is
only part of the corporate governance committee's agenda. Another is
encouraging the public - everyone from securities analysts to retail
investors - to rethink the valuation of dot-coms. In this respect,
the committee has been far more successful: several major news
organs have published articles critical of Amazon (Forbes.com called
Bezos 'incorrigible' and criticized his press releases as 'puffy');
and in March a class-action lawsuit was filed against Amazon for
allegedly violating securities laws by distributing false and
misleading statements about the company's financials.
That lawsuit also charged Bezos with having sold more than a million
shares of Amazon stock at artificially inflated prices. Bezos is
reported to be under informal investigation by the Securities and
Exchange Commission (SEC) for selling Amazon shares after some
Amazon executives saw one of Suria's not-yet-published Lehman
Brothers reports questioning the company's financial health.
The Amazon case study underscores many burning issues for IROs,
especially those who don't work for dot-coms. 'Real-world investor
relations officers,' says Lutin, 'should be concerned about the
irrationality that supported the dot-com bubble because that kind of
dysfunction distorts the marketplace and affects the allocation of
capital away from the real-world companies that can actually utilize
it effectively. That's not good for the real-world companies. It's
also not good for the real-world economy,' says Lutin. When capital
flows to the wrong places, the consequences, he avers, are grave:
'[This] could and does drive down the price of the real-world
companies relative to the dot-com companies.'
Concerns like these notwithstanding, McCabe emphasizes that the
corporate governance forum always sought balance in its dealings
with Amazon. Amazon management was invited to participate in all
forum meetings and an analyst recommending the stock made a
presentation at one gathering, as well. 'We're not advocates,' he
says. 'We don't want zealotry to get ahead of education.'
Ironically, one reason why the Amazon forums may have gotten so much
buzz is the freewheeling manner in which they're run. Meetings are
held on a strictly ad hoc basis because, as Lutin says, 'You can't
schedule breaking news.' The rest of NYSSA generally announces
luncheon meetings and speakers three months in advance - enough
warning to publish a notice in the NYSSA newsletter. The corporate
governance committee, on the other hand, schedules forums with no
more than two or three weeks warning and holds them in the late
afternoon. Even without much lead time, the corporate governance
forums have garnered an underground following and have attracted
Amazon perfectly illustrates what's different about NYSSA's take on
corporate governance; it's neither political nor academic but is
instead a Wall Street - or more applied - approach. The burning
question for Lutin is how changing the composition of a company's
corporate governance structure affects its shareholder value.
One of the corporate governance committee's former case studies, for
instance, focused on a pac-man takeover contest between Chesapeake
Corporation and Shorewood Packaging Corporation in which
shareholders had to consider which company should ultimately acquire
the other. That forum focused on issues such as which use of assets
would optimize benefits to shareholders and whether the terms
offered to shareholders of both corporations were reasonable and
In the end, Shorewood was acquired by white knight International
Paper. Meanwhile, Chesapeake's management remained in control but
the company's stock price drifted down over the next six months to
less than half of the Shorewood bid. 'Chesapeake-Shorewood got a lot
of interest from the professional community and those interested in
takeover defenses,' recalls Lutin.
One of the next items on the committee's agenda is an examination of
corporate governance activists. Brennan says that he'd like to
investigate how well 'value enhancers' such as Carl Icahn or the
Lens Group have performed at the companies they've acquired. McCabe
suggests that the committee will do more work centering on the role
of a corporation's board of directors. 'The investing public should
understand who are the directors and what are their backgrounds,' he
Finally, Lutin's goal is no less ambitious than ushering in 'a
return to reality in the marketplace.' With the highly publicized
scrutiny of Amazon, this has, he believes, begun to happen. Once the
markets are more rational, Lutin says, he'll return to active
investing - mission accomplished, case closed.
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