Stock Turmoil at Rowecom Raises Doubts for NewsEdge Takeover
By Michael Brick
TheStreet.com/NYTimes.com Staff Reporter
1/5/00 7:01 PM ET
Accounting disputes can often take years to sort out.
But as Rowecom (ROWE:Nasdaq - news) and its acquisition target NewsEdge (NEWZ:Nasdaq - news) learned in a dramatic fashion Wednesday, they can sometimes clobber a stock price and rebuild it, all in the same day.
And regardless of which view of Rowecom's accounting eventually prevails, the company now has a bigger mess on its hands after the day's stock turmoil. Regan Fund Management, a New York hedge fund that owns more than 25% of NewsEdge, issued a hastily assembled news release after the markets closed saying it will now vote against the acquisition by Rowecom because of the decline in its stock price.
Shares of both companies took a pounding early Wednesday after Michael Hughes, an analyst at J.C. Bradford, widened his estimate of Rowecom's loss for the first quarter ended Dec. 31.
By 11 a.m., Rowecom shares had fallen to 26 13/16, down more than 31% from their 39 15/16 opening. Meanwhile NewsEdge fell as low as 7, more than 27% down from its 10 1/8 opening.
Rowecom helps businesses create online stores from which their employees can order magazines and journals; NewsEdge supplies business news to individuals and corporations.
The stocks recovered considerably from their intraday lows but were still down sharply by the market's close, as the company explained what it called Hughes's error to analysts and investors, and as other Wall Street analysts doublechecked their math. Rowecom shares closed down 8 11/16, or 20%, to 35, while NewsEdge's shares ended down 1 13/16, or 17%, to 8 7/8.
But the sequence of events provides an object lesson in just how quickly the perception of news -- whether it is accurate or inaccurate, new or old, accepted or disputed -- can wreak havoc on a stock's value and alter investors' fortunes.
"We're driven by price," said Basil Regan, general partner of Regan Fund Management. "We don't like to wake up in the morning and find out we got a 30% haircut. We're not happy campers."
After the stock market closed, Regan made clear how unhappy his firm was, as it announced its opposition to Rowecom's takeover of NewEdge.
"We didn't think the valuation of NewsEdge is reflected in the current terms," said Peter Woodward, research analyst for Regan. Rowecom has offered 0.26 of its shares for each NewsEdge share. That would have valued each NewsEdge at $11.375 on Tuesday, but only at $9.10 at the market close on Wednesday.
Richard Rowe, Rowecom president and CEO, addressed Regan's decision to vote against the acquisition: "It's clearly a regrettable but predictable response to the reaction to the market based on one analyst's comments today. We're as confident as we ever have been with the targets we've given analysts. We're quite confident that this is a good deal for Newsedge shareholders as well as for Rowecom." Bradford analyst Hughes still has a strong buy and $50 near-term price target, Rowe noted.
A Dispute Unfolds
In an internal memo to J.C. Bradford's sales staff this morning, Hughes wrote that he had found a mistake in the company's 8-K/A filing with the Securities and Exchange Commission. Expenses were understated by $21 million, he wrote, underscoring the company's need for a permanent chief financial officer. He added that Rowecom attributed the error to auditors.
"Regardless, we find it disconcerting that such a mistake would make it into the public marketplace, especially given the company's accounting team had an ample opportunity to vet the Dawson numbers before the 8-K/A was filed," Hughes wrote.
At 10:35 a.m., with the stock trading down about 10 points around 30, the news service Dow Jones sent its first headline onto the wires--"Rowecom Off 30% After J.C. Bradford Widens 4Q Loss View," according to a copy of the news report provided by Regan.
The stock began a further plunge, but Hughes had slightly altered his tone in his public comments.
"I don't think there are any operational issues at the company," he was quoted by Dow Jones as saying.
By then, Rowecom executives were feeling the pressure.
"We were fielding a lot of calls from our analysts, and as we spent a lot of time on the phone with them, it became clear," said Jeffrey Sands, Rowecom's interim chief financial officer.
Hughes did not return calls for comment.
According to Sands, Hughes had failed to factor in around $2 million in income taxes the company would pay in the fourth quarter. The European taxes result from the company's acquisition of Dawson Information Group, consummated in October, which brought $250 million in revenues, Sands and analysts said.
The company's controller was poring over analysts' reports around two weeks ago and noticed the error, according to Sands. Company officials informed Hughes at least a week ago, Sands said.
Hughes had not filed his report with First Call, which distributes analysts' reports, as of 3:20 p.m. A First Call researcher confirmed that J.C. Bradford distributes its reports through First Call, although, like many brokerages, they sometimes disseminate information to their best customers first.
"The analyst at J.C. Bradford made a mistake," said Pawan Malhotra, analyst for CIBC World Markets, who rates Rowecom a strong buy. "People thought it was new news. It was old news."
Malhotra's firm was a secondary underwriter on the company's initial public offering, which means it stands to gain significantly if the stock performs well.
He maintained his estimate of a quarterly loss of 24 cents a share, while Hughes reportedly had altered his estimate from 16 cents a share to 30 cents a share. |
