This is why we rarely see analysts downgrade to how they really think a company is doing (The guy in the following article lost his job for giving a bad write-up on Coke!) They get canned for anything less than 'hold'!!!
Cracking the Books: Accounting Sleuth Is
Paying the Price
By Suzanne Kapner
Staff Reporter
9/22/98 11:17 AM ET
Publish and perish.
Since airing a stinging critique of
Coca-Cola's (KO:NYSE) accounting
methods this summer, accounting
professor-turned-analyst Albert Meyer's life
has fizzled. In July, he lost his job at an
Indiana money management firm. This month he sold his
four-bedroom house in Elkhart, Ind., where he's lived for two
years with his wife and three teenage sons. He's preparing to
move, but to where? He's not sure.
"It's someone paying a price for his ideas," says Dwight Owsen,
a doctoral student at the University of Portsmouth in Britain,
who, with Meyer, submitted two articles on Coca-Cola's
accounting to Accounting Today magazine, summaries of which
will run in the Sept. 28 issue. Owsen says he's escaped similar
censure. "The life of an academic is very insulated. I can say
what I want."
What started as an analysis into Coca-Cola's earnings as a
prelude to an investment has since spiraled out of control. On
Wall Street, analysts fear being frozen out or denied access to
information if they criticize companies too vociferously, a sharp
contrast to the academic freedom afforded to professors. But
even by the standards of Wall Street, the personal difficulty
Meyer is facing as he publishes his views is unusually harsh.
"I used to drink a lot of Coke, now I drink Pepsi," Meyer says,
trying to make light of the situation he's found himself in.
In February, Meyer, 47, was working as an analyst for Martin
Capital Management in Elkhart, which manages $325 million
for high-net-worth clients. He was asked to analyze Coca-Cola,
as the firm was considering investing in the world's largest
soda company. Meyer examined the relationship between
Coca-Cola and its bottler, Coca-Cola Enterprises (CCE:NYSE),
which was spun off in the late '80s. Since Coca-Cola has only a
minority stake in CCE -- it now owns 43.7%, down from 49% at
the time of the spinoff -- it considers the bottler a separate
company. But Meyer came to reason that the fortunes of the two
companies are so closely linked that they should be treated as
one entity.
This consolidation would cut millions from Coca-Cola's
earnings, he argued in two academic articles, and would force
the company to reclaim billions worth of debt that now rests on
CCE's books.
Consolidation
threatens a primary
component of Coke's
earnings: the sale of
bottling franchises --
and the valuable
franchise rights that go
with them -- to both
Coca-Cola Enterprises
and other shareholders
in stock offerings.
These sales, by Coke's
own estimates, added
12 cents to earnings in
1996 (or 8.7% of fully
diluted net income) and
21 cents to earnings in
1997 (12.8% of the
total). If Coca-Cola and
Coca-Cola Enterprises
were consolidated, they
would not be able to tap
all of this additional
revenue stream, which
has enabled Coke to
deliver on its ambitious
earnings targets.
Meyer and Owsen take
issue with the notion
that CCE is an
independent company,
since seven of the 13
members of CCE's
board have close ties
with Coca-Cola, either
as former employees or
through current
business or investment
relationships.
That creates the possibility that transactions between the two
companies -- including $1.6 billion that CCE paid to buy three
bottlers from Coca-Cola last year -- aren't conducted at fair
value. "How can I know that all the transactions between Coke
and CCE are the result of spontaneous activity between a willing
buyer and a willing seller, each wanting the best deal for him or
herself?" Meyer wrote in an email.
Meyer points to a dismal return on CCE's assets, 1.2% in 1997,
compared with the 36.6% return Coca-Cola showed on assets
that year, as evidence that CCE shareholders may be getting the
short end of the stick. Not to mention the fact that since January
1990, Coke shares have soared a cumulative 606%, while CCE
shares have advanced far less -- only 474%.
Coca-Cola says the company is in accordance with all laws and
regulations. But the Financial Accounting Standards Board,
which sets the country's accounting rules, is considering a
proposal that would require companies with very close ties to
consolidate -- even when one owns a minority interest in the
other. Robert Baskin, a Coca-Cola spokesman, says if the rules
change, the company will change to comply with them.
'Rattling Cages'
Meyer says he decided to leave the firm in July after his firm
suggested he drop his work on Coca-Cola. "The guys at the
office didn't accept my research with great enthusiasm," he
says, making sure to add that there's no malice between him
and Frank Martin, who founded the firm in 1987. "It's not in Martin
Capital's best interest to get the reputation as a firm that rocks
boats."
Martin, who calls Meyer a "peach of a guy," says he asked the
accountant to stop his research, because it was of no value to
his clients as his firm doesn't short stocks. But Meyer refused to
stop. "He metamorphosed
from a quiet, introspective
accountant to a crusader
who's rattling cages," Martin
says.
Martin also worried about
retribution from Coca-Cola. "If Albert could've proved to me that
there was no risk to us, I'd say go right to the front page of The
Wall Street Journal," Martin says. "But he wasn't able to assure
me that Coke wasn't going to get tough with this little pipsqueak
of a business in Indiana.
"I don't fear any mortal or organization," continues Martin, who is
56 and whose battle with multiple sclerosis has confined him to
a wheelchair. "I only fear meeting my maker. But most of my net
worth is tied up in this firm and I'd like it to end up in charity," and
not in legal fees. Coke's Baskin says the company was
unaware of Meyer's employer and never had any contact with
Martin or his firm.
Martin Capital wasn't the only organization reluctant to associate
itself with Meyer's work. Meyer and Owsen sent their findings to
the Institute of Management Accountants in Montvale, N.J., a
trade association. After allowing Coca-Cola to review the
documents, the group decided not to publish it in its magazine.
"It was rather inflammatory," says Rick Swanson, the group's
executive director.
Grant's Interest Rate Observer, a newsletter, eventually quoted
from Meyer and Owsen's work in June and The New York Times
ran an in-depth story on the front page of its business section in
August. "Meyer has a point of view and anyone who wants to
write about it is entitled to publish it, although we may disagree
with it," Baskin says.
A Nose for Controversy
It's not as if Martin didn't know what he was getting with Meyer. In
fact, the Coke imbroglio isn't the first time Meyer has stirred up
controversy over humdrum accounting issues. In 1991, the
native of South Africa accepted a teaching position at Spring
Arbor College in Michigan after four years with Deloitte &
Touche in Cape Town.
There, Meyer began looking into the Foundation for New Era
Philanthropy, a Philadelphia-based charity to which the college
was a major donor. When he suggested to the college's
trustees that the organization resembled a Ponzi scheme, the
school's president wrote a letter to the faculty criticizing Meyer's
work as "crusading zeal." Even when the scandal became
public and stories of how New Era defrauded some of the
country's brightest individuals peppered newspapers, Spring
Arbor's administrators asked Meyer to refrain from talking to the
media.
"I felt it was my duty to talk to the press," Meyer says, adding that
his decision strained relations between himself and the
trustees. New Era founder John Bennett was sentenced to 12
years in a federal prison for defrauding charities, churches,
colleges and philanthropists.
Martin recruited Meyer after reading
a story about the New Era scandal in
The Wall Street Journal. "I
appreciated Albert's tenacity in
uncovering that fraud," Martin says. "I
said, 'That's the kind of guy I want in
my firm.'" Yet now with Meyer's zeal placing Martin's firm in what
he perceives as a precarious situation, Martin's enthusiasm has
ebbed. "Albert should've said, 'This is the firm that puts bread on
my table and has given me an opportunity, let me say nothing,'"
Martin says. "Albert was not a team player."
Meyer says he places his desire to serve the public above his
desire to serve the firm. "I used to stress in the classroom to my
students: 'You are certified to serve the public above all else.'
That's why they call you a Certified Public Accountant.'"
So Meyer is packing up and preparing to vacate his house by the
end of the month. He's considering jobs in publishing,
consulting and accounting, although he has yet to secure a
position. "It's been an upheaval," he admits and says moving
now is difficult, because it will disrupt his sons' schooling. Why
not stay put and get another job in Elkhart? "I don't want to be
competing against Mr. Martin," Meyer says.
Martin and his family (he has five brothers) hold a prominent
position in this town of 50,000 people that's about three hours
from any major city. Martin's father was a broker in Elkhart for
nearly 40 years, and Martin Capital is one of the more prominent
financial institutions in the area.
"It didn't work out for me in this town, so it's time to find greener
pastures," Meyer says. "No one should feel sorry for me. That's
life. I say, 'Publish and be damned.'"
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