There's a reason I post all this stuff on TALK. There's really some easy money here on the short side now that the stock has doubled from its low. Here's another article from TheStreet.com, the full story. This guy Borislow actually looked at merging with a company run by a convicted crack dealer. This article gets better as you go...patience please - on this board I know that's a tough request.
Phil
Tel-Save's Tortured Tale: A Bull Market Fable
By Alex Berenson
Senior Writer
11/13/98 5:22 PM ET
Investors like to think that public companies are more refined than private ones, and big companies are better run than small ones. Chief executive, Six Sigma, Total Quality Management. They're comforting phrases, giving shareholders a sense that behind every company are officers working carefully to make investors, employees and themselves richer.
Unfortunately, that's not always so. Sometimes, even top executives lose their cool, revealing themselves to be as short-tempered and short-sighted as the rest of us. Last year, in the heat of a messy takeover battle between Hilton Hotels (HLT:NYSE) and ITT, well-respected Hilton CEO Stephen Bollenbach blew up like a kid in a sandbox, calling ITT Chairman Rand Araskog "pathetic" and a "superweenie."
But sometimes the buzzwords and veneer of respectability cover even worse sins. Sometimes public companies, even big ones, are mismanaged to the point of absurdity.
This is the story of one of those companies, Tel-Save Holdings (TALK:Nasdaq), and Daniel Borislow, its chairman and CEO. Borislow has a criminal record, lied to Fortune about whether he graduated from high school, and once concluded a business letter by telling its subjects to "go back to the section of hell you came from ... Sincerely, Daniel Borislow." More recently, he responded to a question with the retort, "I hear you have a small dick. Is that true?"
But despite Borislow's background -- and his repeated failure to deliver on his promises -- investors were convinced his company was worth $2 billion only a few months ago. Some of the biggest companies in America, including America Online (AOL:NYSE), are his partners, and one of the biggest names in investing, Fidelity Investments, still owns more than 10% of the company.
In other words, this is a bull market fable, a story of greed unmitigated by common sense. Only it happens to be true.
The Rise of Tel-Save
Tel-Save, based in New Hope, Pa., first sold shares to the public in September 1995, raising around $40 million to help finance its expansion in the highly competitive field of long-distance phone service. At the time of its offering, Tel-Save's main business was buying huge blocks of long-distance time from AT&T (T:NYSE) and reselling it to small and medium-sized companies at a discount.
Reselling is a tough, highly competitive business. Still, Tel-Save was making decent money when it went public, with earnings of $5.5 million on sales of $81 million for the first six months of 1995. In less than three years, the company's sales and profits had grown tenfold.
Those gains helped minimize a disclosure near the back of Tel-Save's IPO prospectus: "In 1992, Mr. Borislow pled guilty in New Jersey to the unlawful possession of a weapon. Mr. Borislow was fined $300 and satisfactorily completed six months probation." Discussing the case several months ago, Borislow said he was arrested when he accidentally brought a handgun from Pennsylvania, where it was legal, to New Jersey, where it wasn't. "Possession of a registered firearm in the wrong state. Big whoop."
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Tel-Save's revenue jumped steadily during 1996, and profits also rose, although not as strongly as its top line. The company's stock followed, almost tripling between its 1995 IPO and the end of 1996. Borislow's fans, including several telco analysts, viewed him as an iconoclast -- a smart, tough executive challenging bureaucratic giants like AT&T.
Then Borislow took his biggest gamble yet. On Feb. 25, 1997, Tel-Save announced a deal to become the exclusive marketer of long-distance service to America Online subscribers. For Tel-Save, that privilege didn't come cheap. The company agreed to give America Online at least half of its profits from the deal, and as part of the agreement, Tel-Save gave AOL a $100 million nonrefundable cash payment.
But from the start, skeptics wondered about the value of the deal to Tel-Save and questioned the wisdom of the company's new ambitions. Since the breakup of AT&T 15 years ago, consumer long distance has become a brutally competitive business, with AT&T, Sprint (FON:NYSE) and MCI WorldCom (WCOM:Nasdaq) spending billions of dollars each year on advertising and marketing. In comparison, Tel-Save entered the fight with barely $75 million in working capital after its payment to AOL.
Tel-Save Begins to Struggle
Tel-Save's thin wallet was only one of its problems. Since deregulation, long-distance service has become a relatively minor expense for most consumers. While Tel-Save's offer of 9 cents per minute undercut the Big Three, the deal simply didn't stand out in a crowded marketplace.
As a result, Tel-Save's marketing expenses began to spiral upward, and the company lost $21 million in 1997, its first annual loss ever. To rebuild its war chest and prepare for the fight to come, Tel-Save returned to the public markets, raising $500 million in convertible debt in late 1997.
But investors weren't yet worried, preferring to believe Borislow's view that "1997 was an excellent year for the company." Tel-Save stock climbed fitfully through the winter of 1998 and reached its all-time high on Feb. 20, when the company announced that it had hired Salomon Smith Barney "to advise the Company with respect to the possible sale of the Company." Salomon's telco analyst, Jack Grubman, is one of the best-known deal makers on Wall Street, and a takeover seemed imminent.
For a few minutes that February day, Tel-Save stock touched 30. At that price, investors valued Tel-Save stock at almost $2 billion, about as much as Northwest Airlines (NWAC:Nasdaq). Borislow's stake in the company was worth some $500 million, a sum that would have put him solidly on this year's Forbes 400 list of America's richest people.
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But that moment didn't last. Tel-Save's results began to deteriorate, and Borislow became increasingly erratic. On March 25, he said in a rambling press release that "I have decided that any talk of a takeover will have to start with the first digit of a takeover price being a three (3). We will make a final determination by April 15, 1998... I will abide to my date certain (April 15, 1998)."
The release raised eyebrows on Wall Street, since CEOs generally don't negotiate takeovers in public, and Tel-Save stock fell more than 10%, to 24. But worse was to come. Two weeks later, Borislow delayed a decision on any possible takeover, breaking his "date certain" pledge.
Then, on May 15, on the brink of the SEC's deadline for announcing its first-quarter results, Tel-Save reported earnings far short of analysts' expectations. The company lost $42 million in the first quarter, compared with a profit of $5.4 million for the same period a year earlier. The news pushed Tel-Save stock down almost 10%, to 21 1/2.
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Even so, Borislow had his fans. In its May 25 issue, Fortune ran a largely positive story about Borislow, calling him "one of the most talked-about guys in telecom." While the article noted Borislow's "brusque personality," it concluded on this upbeat note: "If a big name does grab Tel-Save, Borislow won't stick around. 'I could never work for a large corporation,' he says. 'I got expelled in the 11th grade. I'm not much for structure.' His next gig? Taking on the Donald. 'I think I could run Trump's casinos better than he can.' Hubris, sure, but it has served him well thus far."
Other executives of publicly traded companies might have been wary of revealing they'd been expelled from high school. But the anecdote fit perfectly with the street-smart persona that Borislow cultivated.
There was just one problem with the story: It wasn't true. According to principal Patricia Campbell, Borislow graduated from Plymouth-Whitemarsh High School on June 11, 1980, with his class. Campbell says school records show that Borislow spent his senior year of high school taking classes at a local community college, but that wasn't unusual. He was never expelled from Plymouth-Whitemarsh.
Asked about the discrepancy earlier this fall, Borislow said he "couldn't remember" whether he'd graduated from high school.
The Downward Spiral Accelerates
In private, too, Borislow was behaving unusually. On May 7, two shareholders in Group Long Distance (GLDI:Nasdaq), a company that markets Tel-Save service to businesses, accused Tel-Save of shifting expenses off its books and onto GLD's. "A full disclosure of Telesave's (sic) relationship with GLD must be made," the shareholders wrote.
The accusation, which was supported by SEC filings from Tel-Save and GLD, was a serious one. If true, it raised questions about Tel-Save's reported financial results.
But Borislow apparently wasn't interested in a serious discussion of Tel-Save's accounting methods. In a four-paragraph response, he called the letter's authors "stupid" and "scumballs" and continued, "You are not worthy of being in business maybe life. Take your letter and shove it up your ass, criminal."
Borislow's response concluded: "You guys are a bunch of ungrateful bastards, go back to the section of hell you came from, and tell Gerry, Sr. [the father of the president of Group Long Distance] I said hi when you get there." (TSC published a detailed look at Tel-Save's relationship with Group Long Distance on May 22.)
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Tel-Save's takeover follies continued over the summer. On Internet investment chat forums, where Tel-Save is a hot topic, speculation raged about who might acquire the company. The two favored candidates were GTE (GTE:NYSE), said to be looking for a way in to the long-distance business, and AT&T.
But the offers never materialized. And by mid-July, when Borislow said he was "talking to a number of parties ... We're close to a deal," his words rang hollow.
Meanwhile, Tel-Save's finances worsened. In July, hoping to build its customer base, the company began offering AOL subscribers $50 each to sign up for its service. Other big telcos, including MCI and Sprint, say they no longer use cash incentives to get new customers, because up-front payments don't build long-term loyalty. Even AT&T, which still uses incentive payments, says its research shows customers feel most negative about the company at the moment they receive the check. "No surprise there, because they feel like their business is being bought," a spokesman says.
But Borislow disagreed. "I want to lose as much money as possible. That means I'm signing up as many accounts as possible," he said in an interview on July 16.
Tel-Save stock closed that day at 18 5/8.
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If losing money was Borislow's goal, he was achieving it in spades. On Aug. 14, Tel-Save announced that its second-quarter loss had tripled to $29 million from $9.6 million the previous year. And the company warned that its losses would continue, since it expected to spend another $190 million on marketing by the end of 1998. Still, in a press release discussing the earnings, Borislow said Tel-Save would have the "opportunity to earn" as much as $100 million, of $1.50 per share, in 1999.
Maybe so. But Tel-Save's 10-Q, filed the same day as the earnings release, offered a much more negative picture. It disclosed that Tel-Save had taken an extraordinary one-time charge of almost $80 million to write off its "deferred tax losses." Under accounting rules, companies can keep tax losses on their books only if they believe there is a better-than-even chance they will ever generate earnings. By taking the write-off, Tel-Save was implying that it didn't expect to make money anytime soon.
Aug. 14 also marked the end of Tel-Save's attempts to sell itself. The company's discussions with potential buyers "have ceased," the 10-Q reported flatly. Now, instead of looking for a buyer, Tel-Save was considering an acquisition -- a California telephone company called WorldxChange. Tel-Save said it planned to spend up to $600 million in stock on WorldxChange, which it described as "a privately held telecommunications company with 1997 revenues of approximately $325 million."
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Tel-Save's description of WorldxChange was true enough. But it omitted a few facts investors might have found pertinent.
For example, there was the fact that the California Public Utilities Commission had barred WorldxChange from providing phone service in its home state. The CPUC imposed the penalty, its harshest, after receiving 57,000 complaints that WorldxChange switched customers to its service without their consent, a practice known as "slamming." The CPUC's director of enforcement says WorldxChange is "arguably the worst slamming case" in the history of the commission.
Then there was the fact that WorldxChange was unable to complete a $180 million debt offering in May after Standard & Poor's slapped it with a triple-C rating. In releasing the rating, reserved for low-grade junk bonds, S&P noted the fact that WorldxChange didn't generate enough cash flow from operations to cover its interest costs during the fiscal year ended Sept. 30, 1997.
Then there was WorldxChange's CEO, Roger Abbott. Abbott served three years in California state prison for cocaine trafficking. Disdainful of the secrecy generally required in his line of work, Abbott traveled around Southern California in style before his arrest. His red Porsche was adorned with vanity license plates that read "CRACK."
(Three hours after TSC published a story disclosing Roger Abbott's background and WorldxChange's corporate history, Borislow said Tel-Save wouldn't buy WorldxChange. "Great company, wrong time," he told Reuters. He declined to elaborate.)
Borislow vs. the Shorts
By mid-August, Borislow was fighting a pitched battle with investors bearish on his company, who'd sold tens of millions of shares of his company's stock short. (Short-sellers borrow shares, then sell them, hoping to buy them back later after a company's stock price has fallen. Reversing the usual sequence, they want to sell high, then buy low.)
On an Aug. 17 conference call, Borislow said Tel-Save would spend up to $300 million, most of the company's remaining cash, to buy back its stock. His plan: to buy back so much stock that the shorts would be forced to cover their positions on the open market, driving Tel-Save's stock higher.
For a few days, the buyback did just that. But while the Tel-Save's rising stock caused the shorts temporary pain, it did nothing to alter the company's fundamental problems. And on Oct. 7, Tel-Save made a stunning announcement, revealing in an SEC document that it planned to sell back to the public the shares it had purchased less than six weeks before.
Borislow wouldn't explain the reasons for his change of heart, although short-sellers argued the stock sale proved that Tel-Save's losses have left it badly short of cash.
By the close of trading on Oct. 7, Tel-Save shares were hovering just above 5, down more than 80% from their highs less than eight months earlier. Borislow alone had lost hundreds of millions of dollars, and some $1.6 billion in shareholder value had disappeared.
Since then, Tel-Save stock has recovered slightly. It now trades around 10. Meanwhile, Borislow has again reversed course. On Oct. 29, Tel-Save announced that it would again begin buying back shares "from time to time." Yet on Nov.2, a trust that Borislow created in August to hold 4 million Tel-Save shares for himself and his children registered with the SEC to sell those shares. A Tel-Save spokesman told Bloomberg News that the filing was "a mistake." He declined to comment further.
As Tel-Save spends its cash buying stock, its competitors have aggressively moved to steal its customers. MCI is now offering service for 5 cents per minute on Sundays. AT&T has its own full-time rate of 9 cents per minute, an offer that exactly matches Tel-Save's. Tel-Save still hasn't reported results for its third quarter, which ended six weeks ago, but the company has said it will have a large loss.
So what's Borislow's strategy? It's hard to know, because he's not talking. After agreeing to a face-to-face interview last month, he canceled the day before the interview was to happen and didn't respond to repeated attempts to reschedule. It might also be nice to know what Fidelity sees in Tel-Save. Or Salomon Smith Barney, or America Online. All three companies declined repeated requests to comment for this story.
In the past few days, as investors again grow frenzied for Internet-related stocks, Tel-Save has battled slightly higher. The company's shares traded Friday at 11, up about 5.5%. Not bad. But still a far cry from Tel-Save's high of 30 earlier this year. |
