Thank You very much ..this is the kind of thing we discuss on my website..how the crooks rip off the public and most crooks are licensed
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Devalue America ? or how an underwriter has done it to us again
BancBoston stretched the limits in relentlessly backing this dog of a stock
The ValueAmerica.com home page: The marketplace for the new millennium? Hardly.
OPINION
By Christopher Byron
MSNBC CONTRIBUTOR
Jan. 6 ? It?s amazing ? just amazing ? what Wall Street?s IPO sleaze machine has been getting away with in the current bull market. This week?s example? An imploding Internet e-commerce stock called Value America Inc.
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THIS COMPANY, HEADED by a man whose most recent previous business achievement had been to preside over the Chapter 11 bankruptcy of an earlier public company he had led, was taken public back in April by BancBoston Robertson Stephens for $23 per share.
Propelled by the hype surrounding almost any IPO in the e-commerce game, the stock leaped to $69 per share on its very first trade in the aftermarket. Then reality set in, and as the company?s executives bickered and quarreled over how to run the business, the company?s prospects clouded over and the shares began a long, relentless slide that has now carried them down to less than $6 per share.
Value America, Inc. (VUSA)
price change
$5.06 -0.375
Full quote data:
price
-0.375
% change:
-6.90%
volume:
493,800
day high:
$5.47
day low:
$4.88
Data: MSN MoneyCentral Investor and S&P Comstock
We?ll get more deeply into the details in a minute, for they show how the underwriter, BancBoston, having taken this dog public at $23, thereafter began issuing happy-faced ?buy? recommendations to the public even though the stock ? still trading weeks later at nearly $40 on nothing but hot air and momentum day-trading ? was nonetheless selling for close to double the underwriter?s own original offering price.
Many questions arise from that situation ? starting with the fact that if Value America were indeed a ?buy,? as the Robbie Stephens analyst recommended May 4 when the stock touched an intraday high of close to $40 per share, then why hadn?t the the underwriter priced it at $40 ? or even $50 or $60 ? when it took the company public only 18 trading days earlier? Did the company?s prospects suddenly improve by roughly 100 percent in a mere three weeks? time? I don?t think so.
Data provided
by MSN MoneyCentral Investor
FIASCO NOT UNIQUE
But before getting into what was really going on in the marketing of Value America, let us first step back from the particulars for a minute to say that the Value America fiasco is by no means unique. Rather, this is what more and more of the IPO market has become: a way for fee-crazed underwriters ? among them many of the best known and most highly respected names in the business ? to loot the vault of American capitalism..
The scandal is not simply that the looting is occurring ? though that is bad enough. More than that, the scandal in the situation is that this wholesale ransacking of the capital market is taking place in broad daylight for the whole world to see, yet the cops aren?t even looking in the right direction.
Instead, the regulators remain preoccupied with catching the Wall Street equivalent of petty thieves and hooligans, while men and women with seven- and eight-digit annual incomes have been rushing into and out of Wall Street?s money vaults day and night, bags of booty dangling from their hands.
While this has been going on, here?s what the Securities & Exchange Commission has been doing. On Wednesday, for example, the SEC announced the filing of fraud charges against one Yun Soo Oh Park (aka ?Tokyo Joe?), the operator of a popular investment advice Web site, for scheming to sell his own personal positions in stocks even as he was recommending the stocks as ?buys? on his Web site. The action marked the SEC?s second such move in recent weeks ? part of a welcome and much overdue drive to crack down on the outrageous market manipulation that has been taking place in NASDAQ stocks on the Internet.
But all the thievery that has ever taken place on the Internet ? and probably ever will ? is nothing compared with the wholesale looting of the market that has been going on in the name of free-market capitalism by underwriters in the IPO game. My friends at Securities Data Corp., which tracks this sort of thing, tell me that in 1999, Wall Street underwriters pocketed an almost unbelievable $1.1 billion in fees from internet IPOs alone ? a more than ten-fold increase over 1998. Leader of the pack? Goldman, Sachs & Co., which alone bagged $212 million. Second place? Credit Suisse First Boston Co., which hauled off $184 million.
In return for those fees, the underwriters have been playing the most cynical, conniving game imaginable. In the name of the free market ? and while hiding Pontius Pilate-like behind the ?Risks & Uncertainties? sections in their IPO registration statements ? they?ve been bringing public some of the most godawful garbage that the IPO market has ever seen: unseasoned, untested, worthless companies, with no track records, no earnings, no cash flow, no credible management teams ? and most recently, not even any revenues. This is dreck that five years ago wouldn?t even have gotten the nod as a ?development stage? offering. Now the junk is packaged and fobbed off as shares in real companies.
The underwriters have been getting away with this because inexperienced, na‹ve Internet investors ? many of whom call themselves day traders but are actually just buy-and-hold trend chasers ? have been making it possible. They?ve been foolishly bidding these offerings into outer space before the shares even get to the aftermarket. And that, in turn, has given the institutional clients of the underwriters the confidence to buy the junk at $15 or $20 per share, when in reality it often isn?t worth even a tenth of that. The confidence comes because they know they can then turn right around and resell it into the grasping, outstretched hands of retail investors in the aftermarket, for colossal profits? tripling and even quadrupling their money in barely an hour?s time.
WHO?S KIDDING WHOM?
Who gets stuck holding the bag? Joe and Mary Six-pack, who else! ? which is where the ultimate cynicism in the whole hustle takes place. Once the shares are placed in the aftermarket, the underwriters begin bombarding the public with ?buy? recommendations to stave off collapse for as long as possible.
The recommendations are cynical ? as well as transparently phony ? because they are at odds with the underwriters? own actual behavior. The buy recommendations attempt to make the case that stocks that have been driven to absurd and indefensible heights in their very first hours and days in the aftermarket are nonetheless somehow still cheap and should be bought.
But wait, folks. Don?t forget that it was only days earlier when these very same underwriters were telling their IPO clients (the companies actually issuing the shares) that $15 or $20 per share was all the stock was worth. Three weeks later, and they then turn around and tell the general public that the shares are cheap at two and even three times that price? Who?s kidding whom!
If this had happened only once or twice, well, we could say it was an isolated incident and just forget it. But these are not isolated incidents any longer. They have become central elements in the marketing of IPOs, and in my personal ? constitutionally protected ? opinion, they amount to nothing less than fraud on the market. The same underwriters that say a stock is fully valued in an IPO at $15 per share cannot turn around three weeks later and say the same stock is underpriced at $50 or $60. That is one circle that even the greatest sophists on Wall Street cannot square. Either the issuing companies are being ripped off, or the general public is being misled. Both positions cannot be simultaneously right. Maybe Wall Street is a little behind on certain things, but speaking with a forked tongue went out with swindling the Indians.
THE VALUE AMERICA CATASTROPHE
So let us now turn to Value America Inc. to see how all this has played out in one of the biggest IPO catastrophes of the last year. Value America, as you may or may not know, is distinguished among other things by the fact that at the time the company went public, it had all of 18 months of actual retail experience under its belt. But e-commerce was hot, and the company?s founder, Craig Winn, 44 ? whose most recent previous experience at running a public company, a $90-million-a-year (revenues) lighting fixtures maker, had led to its Chapter 11 bankruptcy in 1993 ? talked a good game.
Craig Winn, former chairman of ValueAmerica.
So good a salesman was Winn, in fact, that, to get Value America off the ground, he secured more than $30 million in startup capital from backers such as Paul Allen, co-founder of Microsoft Corp., and Frederick Smith, the chairman of Federal Express. (Microsoft is a partner in MSNBC.)
Winn?s beguiling pitch was simple: Retailing on the Web may be a narrow-margin business, but you could nonetheless make a lot of money at it if your volume were big enough and you didn?t stock any inventory on your own. When a customer ordered something from your site, you?d simply pass the order along to the manufacturer, and that company would ship it.
On that premise, and not much else, Value America went public in April of 1999 with a 5 million-share offering at $23 per share, putting a total market value of more than $900 million on the business. Within minutes, Wall Street was revaluing the company upward to more than $2.5 billion.
Paul Allen, left, founder of Microsoft, and Fred Smith, chairman of Federal Express, provided part of the $30 million start up capital for Value America. Smith now heads a committee looking for "strategic alternatives" for the direct marketer.
But the euphoria didn?t last long, for it soon became clear that the company couldn?t grow except by losing money ? and the more it grew, the deeper into the red the business sank. In the nine months for which it has so far reported financial results, sales have roughly doubled, to $57.6 million in the three months ended Sept. 30. But that is only because, in an effort to generate revenue growth, the company has discounted the price of its merchandise so fiercely that its gross margins have all but vanished, collapsing from just under 50 percent in the March 1999 quarter, to barely 9 percent in the September quarter.
And remember, so-called gross margin ? defined as sales minus the cost of goods sold ? is what you?re left with before you take out any other cost of running the business, from the cost of your employees, to your operating expenses, your headquarters administration, and so on. Throw all that into the mix, and Value America?s financials are a fright, with sales only doubling since March while operating losses have nearly quadrupled.
BANCBOSTON STAYS UPBEAT
Though these trends have been in evidence from almost the first day the company went public, you?d never have known it from BancBoston?s cheery ?buy? recommendations on the stock. The first one, issued May 4, said, ?We believe Value America has the right formula for value shopping; initiating coverage with a Buy.? The report said it expected the company would maintain gross margins of 12 percent and an operating margin of 5 percent, would report full-year losses of $2.71 per share and turn profitable in 2002.
The following week, on May 10, the company reported a 33 percent operating loss instead of the predicted 5 percent operating profit. This was followed, in August, with a report from the company that revenues had grown to $35.8 million in the second quarter. But this happened only because super-aggressive discounting had slashed the company?s gross margin for the quarter to half the size of the previous quarter, causing the operating loss to soar to 58 percent of revenues.
So how did BancBoston respond? It issued a report expressing ?encouragement? at the revenue growth while ignoring the catastrophically widening operating loss. Moreover, with the stock by now having sunk all the way to $11 per share, or less than half its IPO offering price, the firm actually reiterated its ?Buy? recommendation on the shares.
Then came the third quarter, with sales surging to $57.6 million, but only because the most aggressive discounting yet had driven the gross margin down to 9 percent of sales, while the operating loss narrowed only fractionally, to 54 percent of sales.
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Want to guess how the underwriter reacted? It issued a report describing the sales growth as ?better than expected? and with the stock still stuck in the $11 to $12 range, reiterated its ?buy? recommendation ? this in the face of the fact that strife in the management ranks had already begun to spill into public view with the company?s announcement ? the day before the underwriter released its report ? that Value America?s chief financial officer had abruptly quit the company. Incredibly, the report showed no awareness that the departure of the top finance man at the company was reason for concern, and actually recommended that any resulting weakness in the stock be seen as a buying opportunity to ?create or add to current positions.?
Mere days later, the company?s CEO, Thomas Morgan, 44, quit as well ? this time apparently as a result of clashing with the chairman, Winn, over who was going to run the company. The whole fracas seems to have resulted in a pre-Thanksgiving meeting of the company?s board of directors, which accepted Morgan?s resignation while shoving Winn aside to the do-nothing job of chairman of the executive committee. This was followed by the board?s elevation of the company?s No. 3 executive, Glenda Dorchak, also 44, to Morgan?s job as CEO.
During all these chaotic events, the folks at BancBoston seem to have said nothing publicly at all. In fact, it appears that somewhere along the line, the very name Value America vanished down the BancBoston Robertson Stephens & Co. memory hole.
Thus, although the Investext research service in Boston contains archive entries for at least four separate press release ?buy? recommendation from the firm on Value America, and similar listings can be found on Yahoo! and elsewhere, not a single one appears on the BancBoston Robertson Stephens Web site, though the site carries an archived listing of investment recommendations dating back as far as last September.
Be that as it may, on Dec. 29, Value America itself informed the world of the turmoil that had been taking place behind its corporate curtains. On that date, and with the stock selling for a mere $6 per share, the company issued a press release announcing that it was laying off 47 percent of Value America?s workforce and that FedEx chairman Frederick Smith, who had sat on Value America?s board through the events of previous weeks, would head a committee of other board members to explore ?strategic opportunities? for the company ? a euphemism for trying to find a buyer. Oh, yes, said the announcement in an almost by-the-way fashion, Craig Winn would be leaving the company ? no reason given.
Finally, with all that having transpired, with the stock having collapsed, the chairman and CEO having quit, and with the company drowning in red ink, now ? and only now ? it was time for the underwriter to bite the bullet. It did so with a release of its own Dec. 29, timidly downgrading the stock a notch, from ?buy? to ?attractive.?
WHAT NEXT?
So, what?s next for the company? When I asked a Value America spokesman how his company could possibly turn itself around in such circumstances, he answered that the company was now ?restructuring? itself, as per the Dec. 29 press release, to get rid of 95 percent of the marginal and ancillary products for sale on its site, and to concentrate on the 5 percent of the merchandise ? office equipment, computers, electronic gadgets and whatnot ? that accounts for 95 percent of sales.
It seems, explained the spokesman, that the company has overlooked a key detail in its rush to sign up thousands of vendor partners: If Value America didn?t move a lot of their merchandise, the merchants would be in no hurry to process the occasional order when it did come in, creating armies of furious customers who?d blame Value America for shipments that never arrived ? when the real delays were being caused by the merchants instead.
So, is it a good idea to try to solve this problem by simply getting rid of thousands of troublesome merchants and concentrating instead on a handful of suppliers that can deliver the goods from a limited menu of personal electronics and computer equipment? Here?s what the IPO from back in April had to say about that type of approach to building a Web retailing business. From the ?Risks and Uncertainties? section of the registration statement comes the following:
?The success of our business model depends upon our ability to offer customers a complete selection of brand-name products in a wide variety of product categories. If we do not broaden our product selection, customers may not choose to shop in our stores.?
In other words ? and to sum up ? one of the very dangers listed in the IPO for why it might prove risky to buy Value America?s shares at $23, has now become ? with the shares selling for a pathetic $5.87 ? the route the company has chosen in desperation to turn the business around before the stock sinks all the way to zero.
Does this sound to you like a company that knows where it?s going? It sure doesn?t to me. But I don?t blame the folks at Value America. Hey, if someone turned up in my life and started pushing the proceeds of a $126.5 million IPO in my direction, I doubt I?d say no thanks. No, I blame the underwriters for foisting this abomination on the investing public in the first place. They should be ashamed of themselves, and maybe they actually are ? but not ashamed enough, I?ll bet, to give back their fees and commission on the deal. On Wall Street, that never happens, ever.
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