Oracle of Omaha Trumps Wizard of EBITDA
By James J. Cramer
TheStreet.com
06/28/2002 11:06 AM EDT
Wait a second. Why did we get in this EBITDA fix to begin with? Who started all of this garbage? Who put us on this path?
I can only talk about personal introduction to the term, but it came from TCI (TCOMA) and the "genius" that was John Malone, its CEO.
A long time ago, in the 1980s, John Malone said that he wasn't going to allow his company to pay taxes if it didn't have to, and he didn't want his company's prospects to be dragged down by depreciation. So he would talk about EBITDA and how it was a "truer" depiction of the company.
I was an earnings per share guy in the '80s, so I stood around and watched as people piled into TCOMA without me. I was stuck with EPS.
Then I would go to these hedge fund bull sessions with people a lot smarter than I was and they would tell me that I was stuck with the wrong matrix, that Malone, who was a genius, told them EPS was stodgy and silly.
Sure enough, people began to believe Malone and his stock levitated. Then the mutual funds bought it and it levitated some more. Then his company was bought at a huge premium to where it was selling to Bell Atlantic, and when that deal fell through and I felt temporarily vindicated (I still avoided it cause of EBITDA), a bunch of other "reputable" companies came back and bid much higher -- and home runs were hit with EBITDA. Grand slams!
Now it is totally discredited. But at least you have to understand that the whole movement started because a man everyone revered, John Malone, seemed smarter than all the rest of us. Right now I hear people yammering in the background about the genius of Warren Buffett for avoiding EBITDA, but I am, in my mind, playing the tape of the genius of Malone embracing EBITDA.
They can't both be geniuses.
I am taking Buffett in this one. |
