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Source: Investor Relations Magazine, June 1, 2001 article


Forum report

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 marketplace.

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,' says Brennan.

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 greasy piglet.'

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 50-75 participants.

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 fair.

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 says.

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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Material presented on this page was distributed to participants in a "Forum Program" conducted for public educational purposes, co-sponsored by Gary Lutin with the New York Society of Security Analysts ("NYSSA") Committee for Corporate Governance and Shareholder Rights from January 1999 to July 2001.

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