Thursday, May 20, 2010

CEO Gets A Stoning

Usually, company conference call participants are fairly polite in their questions and comments for company management. When a company has lost a lot of money, however, shareholders can turn nasty!

Belzberg Technologies (BLZ) is one such company. It recently reported a $2.5 million loss in its first quarter, which follows losses of $11 million, $2.5 million, $1.5 million, $2 million and $0.5 million in the previous five quarters! As such, shareholders have sold this company with a vengeance, so much so that the company trades for well below its cash balance, and thus became a potential value investment.

Illustrating the frustration of many shareholders with this company was Sam Stone, a private investor who gave it to the CEO on the latest company conference call. Here are some of his statements to management, who eventually had to cut him off:

Sam Stone: You had a year and a half to do something about turning around the company, but you've had one disastrous quarter after another and the cash keeps dwindling. Other than paying your salary, what reason is there to keep this company open?

CEO Judith Robertson: Well we have a plan to turn the company around, and we're executing on that plan, and we believe that the future value of the company is not reflective in the current operating performance.

Stone: At the current rate of burn, you're going to run out of money in the first quarter [of next year]. Other than hoping that someone will buy you while you're losing money, what viable options do you have?

Robertson: We have an operating plan that we're executing that is a combination of continued cost right-sizing for the size of our organization and changes in our industry, as well as pushing forward on targeted revenue initiatives...

Stone: ...If you have no substantial revenue generating sales in the pipeline, why don't you shut down the company now? Or is this just to maintain your salary and Chris Jackson's? Whose benefit are you running this company for, yours or the shareholders?

Robertson: I am running the company for the benefit of the shareholders, as is the Board.

Stone: Your results don't seem to match that. The previous company you ran went into bankruptcy; it seems that Belzberg is heading in the same direction. Why don't you close the company now and give what's left to shareholders. If you wait for the first quarter when you run out of cash, there'll be nothing left.

Robertson: The Board and I believe that the value of the company going forward is more than shutting it down. So we think that's the right decision.

Stone: Well, if you stay in business, how long are you going to be open for business until you run out of cash? How much cash do you have in the bank to weather the storm? How many quarters? As a shareholder, I'm appalled that the decision to shut down the company is not actively discussed in this call in a meaningful way...How is the way you're running this company different than how you ran your last company into bankruptcy?

While Sam Stone's approach is a tad aggressive, his frustration is likely echoed by many shareholders. Since the stock price of this company trades well below the company's cash balance, it makes sense to shareholders like Stone that the company should wind-up its operations and pay shareholders what they can.

Management, however, has decided to attempt to return to profitability. But they have not provided shareholders with any guidance on revenue/cost targets, resulting in much uncertainty. Until this changes, shareholders are in the dark as to what to expect.

Disclosure: Author has a long position in shares of BLZ


Wide Moat said...

Yeah, heard that one. I sympathize with Stone, and commend his courage.

If you think of capital as 'claim checks' on others' good (or less good) labors, then we likely should get fired up when incompetent stewards burn it in uneconomic uses, or solely for personal enrichment.

I do appreciate that some restructuring plans do fail despite adequate care, attention, and foresight, but stewards of capital have an (moral?) obligation to speak candidly about those plans to owners.

Personally I wouldn't call out his past failures in public, but the rest seems on the mark.

Unknown said...

need more shareholders like that. Corporate America needs a little flaming for their f-ups rather than collecting millions at shareholders expense.

Anonymous said...

long the equity?
i think the debt would be the safer option

Ankit Gupta said...

I commend that caller/shareholder on having the leadership to make such bold statements.

I have to ask though - what's more effective:
1) Calling the CEO out
2) Doing it in a nicer manner - "You've done a great job running a business with ### employees and managing everything with it, and my hope is that you do the same with the business as an investment. If it's unprofitable, we're making a situation where shareholders, employees, and even management loses because we can't lose money forever like this. I will send a letter to the board suggesting shutting down the business and giving management a severance package so that they can make a decision independent of their own personal impact."

I think there are lots of situations where companies should be shut down, because there is no real hope of turning a profit and management doesn't seem to really care for anything other than their salary.

Question for Saj - this is a situation where the stock trades below liquidation value. What about when a stock price is well above liquidation value (20-30x it), but those involved know that there is really no hope of a turnaround? Shutting down the company would send the stock price down 90%, and so the markets seem to say that they're better staying around and losing money than closing up shop.

With such little cash in a situation like that, they will have to raise money soon, and the dilution will lower the stock price, eventually bringing it down further and further. How can a manager justify shutting down a business when people want to invest in something losing money? If they're focused on intrinsic value, you should shut it down. If you're focused on the stock price, you should keep running it.

Saj Karsan said...

Hi Ankit,

Yeah that is a tough situation. That might be what we saw with Jones Soda here.

Management's best play at that point might be to try to sell it to those shareholders who are bidding up the price (i.e. those with capital who see a brighter future in the company than they do).