The Danger of High Flying Startups

WeWork, once a darling of Wall Street, even before its planned IPO, has been in the news a lot…and not because its stock price is flying high after going public.

In fact, as those in the investment community well know, WeWork recently pulled its IPO amidst investor doubts about the company’s valuation and concerns about corporate governance, according to the Wall Street Journal.

A follow-up WSJ story covered the incredible downfall of the company and its CEO, who has since been relieved of his duties, removing him from the company he started in 2010. According to an editorial in The Washington Post, “This might be the most spectacular implosion of a business in U.S. history. Other failures were bigger, in mere dollars. But WeWork has to be the most literally incredible. Profanity seems somehow inadequate. It’s just . . . holy wow.”

This spectacular implosion points to WeWork’s former CEO, Adam Neumann, whom The Atlantic called the “Most Talented Grifter of Our Time.” That’s saying a lot, given the downfall of Theranos due to its founder, Elizabeth Holmes, and the billions stolen by Bernie Madoff, pyramid schemer extraordinaire.

Looking at some of Neumann’s actions, it seems like the writing was on the wall.

For example, during a courting process by Nasdaq and the New York Stock Exchange, Neumann was said to have asked if the exchanges would ban meat or single-use plastic products in their cafeterias. A noble thought for sure, but one has to wonder what kind of power Neumann thought he could wield. While working on the company’s S-1 in preparation for the IPO, Neumann’s wife, also WeWork’s chief brand officer, insisted it be printed on recycled paper, but rejected early printings as not being up to snuff. This set the process back by days, because the original printer refused to work with them anymore. Earlier in his history, Neumann is reported to have claimed that he wanted to become “leader of the world, amassing more than $1 trillion in wealth.” While a successful CEO needs to have a healthy ego, these vignettes point to someone whose ego passed healthy, all the way to downright irrational.

SoftBank Group eventually bailed WeWork out through a $10 billion+ takeover, which, according to Reuters, gave Neumann a $1.7 billion payoff. That’s a lot more than the company’s currently estimated $8 billion valuation, but not even close to the $47 billion valuation it supposedly held in January.

Can the WeWork story provide insight for future start-ups and for venture capitalists who fund them?

For one, the financials, operations and inner workings of a company matter. When a high-profile unicorn, with a tremendous pre-IPO valuation files an S-1, the details become public and scrutinized by a lot of very smart investors. If a company is not on solid ground, with a strategic plan that can be effectively implemented, it’s probably not ready to go public. Additionally, when a CEO of a high-profile unicorn, with a tremendous pre-IPO valuation has delusions of grandeur, it’s probably not a great idea to back him or her, unless they have proven their worth.

While there’s no cookie cutter mold for determining which companies and CEOs will ultimately be successful, quality should be the rule, among many other warning signs that should be heeded.

Laurie Berman, lberman@pondel.com

Taking America’s Pulse Online

The Pew Research Center recently announced it would be conducting the majority of its U.S. polling online, much like most other public opinion surveys these days.

Until recently, phone-based surveys were the de facto standard for opinion polls. According to Pew’s own research, the number of surveys conducted over the Internet “have increased dramatically in the last 10 years,” driven by available technology and lower costs.

What shifting to online polling means for our long-term phone survey trends | Pew Research Center

The paradox is that people respond to online and phone polls differently. Pew calls this the mode effect, when responses to some of the same questions are different depending on the interview format.

For Pew, switching to online polling after years of telephone surveys will have an impact on quantifying historical data. This also may influence how media report on the center’s year-over-year trends.

Online polling methodologies may be shaping a new generation of survey taking. The good news is that trusted pollsters are transparent about these approaches.

And when it comes to the pros and cons of online vs. telephone surveys, a simple Web search will yield myriad results, including observations from Pew, as well as in Forbes.

Most polling firms and universities use a combination of online and telephone survey methods. It’s essential, however, that online surveys produce statistically accurate data, especially when the results are used by media.   

To help ensure reporting accuracy, the National Council on Public Polls published a list of 20 questions a journalist should ask about poll results. The irony is that reporters don’t have time to review questions because of today’s ultra-competitive “real-time” news environment. 

General consensus says polls serve a greater good helping define public opinion on everything from brands to policy. Media love surveys too. So much so that The Hill launched “What America’s Thinking,” a Web TV show that focuses on the latest news about public opinion.

As storytellers, we rely on accurate trends to help shape different narratives on behalf of our clients, whether that data is derived from the Web or via telephone.

— George Medici, gmedici@pondel.com

The Best Donut in Los Angeles

WARNING:  You have to read this entire blog post to know where to find the best donut in Los Angeles.

With third-quarter earnings season nearing its sunset, the year is practically over.  OK, OK, let’s not get too far ahead of ourselves.  But seriously, what does 2019 hold for capital markets?  Um, uh, well, that’s hard to say.  A few preliminary ideas from the IR observation deck:  Investors will care even more about diversity at the board level, cash preservation or lack thereof will weigh heavily on investors’ minds, and public companies will feel more pressure to perform on a quarterly basis to justify high stock valuations.

Indeed, these variables have already surfaced in 2018, particularly in California.  A California law passed in September that requires all publicly held companies based in the state to have at least one female board member by the end of 2019.  The law goes further by also requiring companies with at least five directors to have two or three female directors by 2021.

At the same time, continued volatility in the market and rising interest rates are influencing companies and investors alike to carry more cash on their balance sheet.  This trend will likely persist as the Fed partakes in gradual interest-rate increases in 2019.  That being said, investors don’t necessarily have the patience to watch a lot of cash sit idle on a balance sheet, so use it wisely.

Speaking of patience, high U.S. stock valuations will require companies to prove their pudding is still the best pudding around, and the onus will be on IR professionals to ensure that stellar financial performance is communicated effectively.

There are a number of other IR-related topics to consider for 2019, such as the continued effects of MiFID II, how artificial intelligence will influence IR, and the best place to eat a donut in Los Angeles when you’re on an NDR.  But for now, let’s just get through earnings season.

— Evan Pondel, epondel@pondel.com

Class Action Litigation on the Rise: How Safe are Safe Harbor Statements?

History has a way of repeating itself. With 2017 statistics of all kinds starting to be compiled, one offered by the Stanford Securities Class Action Clearinghouse should make public company management teams and their boards take notice: the number of securities class-action lawsuits is on the rise … in a startling way.

 

The clearinghouse reported that the number of annoying and costly public company securities class action lawsuits increased to 413 in 2017, up from 213 in 2016, and up from an average of 190 in the years 2002 through 2015.                        

                                            

classaction_law

Law firm Wilson Sonsini Goodrich & Rosati recently issued a paper highlighting the trend, which can impact companies of all sizes, from micro- to mega-cap. The three biggest reasons for the suits are material misstatements or omissions in registration statements and prospectuses for IPOs; challenges to merger and acquisition transactions, many if not most of which defense lawyers say are boilerplate in nature and meritless; and greater scrutiny by the SEC to disclosures being made by private companies.

 

Disclosures, or lack thereof, in press releases, which are totally in management’s control, often play a role in such lawsuits. While most companies are careful about including safe harbor statements in their press releases, which offer some legal protection, many companies do not use those statements properly. Often, they fail to customize those paragraphs to include the actual forward-looking statements mentioned in the press release. Worse yet, sometimes the safe harbor paragraphs are being included as boilerplate, even when there are no forward-looking statements at all.

 

Remember the term, “You’ve been Lerached?” A couple of decades ago, class action securities lawsuits were rampant, with a San Diego-based law firm, long since shuttered its doors, leading the pack in filing them. The firm’s principal ultimately went to jail for fabricating many such suits, looking for plaintiffs to buy a few shares of a given company, allegedly based on a CEO’s statement about future performance, then at the first sign of non-performance, voila, the company was “Lerached,” with the term affectionately named after lawyer Bill Lerach. Copycats followed.

 

Many of those lawsuits were legit, and they ultimately gave birth to the Private Securities Litigation Reform Act of 1995 and the safe harbor statements in press releases, followed by Reg FD in 2002. But despite the safe harbor protection, a case involving guidance issued in a press release by Quality Systems last July may signal a frightening change: The U.S. Court of Appeals for the Ninth Circuit, which governs California, reversed the district court’s dismissal of a securities fraud suit, saying various aspects of the safe harbor were “hostile in tone and application, when compared to many prior forecasting decisions.”  

 

What does all this mean?  Maybe nothing, but today more than ever, it pays to listen carefully to your SEC lawyer and to your investor relations advisor on all corporate communications matters. It also may be a good idea to place close attention to those safe harbor statements, and be sure to stay tuned as to whether those statements turn out to be not so safe as hoped.

— Roger Pondel, rpondel@pondel.com

 

 

 

Read Any Good Books Lately?

I really enjoyed McKinsey & Company’s piece on what CEOs are reading in 2017, which is a continuation of an annual list going back several years.  Not only did it provide interesting recommendations about what to add to my Kindle library, but seeing what’s in the minds of leaders makes them a bit more relatable.  Not surprisingly, the list is overwhelmingly non-fiction, however, I’d recommend more fiction for a bit of escapism, which is likely needed given CEOs daily demands, and because there are some lessons to be learned from non-fiction storytelling.

Some of this year’s titles include:

  • Serial Innovators: Firms That Change the World by Claudio Feser
  • Sun Tzu: The Art of War for Managers: 50 Strategic Rules Updated for Today’s Business by Gerald A. Michaelson and Steven W. Michaelson
  • Good to Great: Why Some Companies Make the Leap . . . and Others Don’t by Jim Collins.  CEOs surveyed by Fortune named this book “the best business or management book they had ever read.”
  • Zen and the Art of Motorcycle Maintenance: An Inquiry into Values by Robert M. Pirsig

I suppose I’m not alone in my interest in lists like these, as several media outlets have reported on CEO reading over the years.  Business Insider noted books like The Remains of the Day by Kazuo Ishiguro as being a favorite of Jeff Bezos who once said that he “learns more from fiction than non-fiction” (I’d note here that I pointed that out earlier in this post before I even saw that Jeff Bezos said it).

Tim Cook took the non-fiction path with Competing Against Time: How Time-Based Competition is Reshaping Global Markets by George Stalk, Jr., and Thomas M. Hout, which he is said to distribute to new Apple employees and colleagues.  The Road to Character byDavid Brooks was cited by Pepsi’s CEO, Indra Nooyi, as providing an understanding that “building inner character is just as important as building a career.”

Rounding out the recommendations, Forbes recently listed Shoe Dog, by Phil Knight, Competing Against Luck: The Story of Innovation and Customer Choice by Clayton M. Christensen, and Who Says Elephants Can’t Dance? by Louis Gerstner, Jr. as popular CEO choices.

Have you read any of these books?  Others you’d like to recommend?  Let us know in the comments section below.

— Laurie Berman, lberman@pondel.com

Frothy Market Prompts Old Tactic with a Twist

wolfThe market was hot, and virtually all participants were making money.

Around the time that the movie, “The Wolf of Wolf Street” was out, folks in the IR industry were rolling their eyes a lot. The hyper, cold-calling brokerage salespeople depicted in the movie—but taken from real life—did almost anything to establish new accounts and sell penny-stocks to unsuspecting clients.

Their tactics usually began by offering shares in a well-established company, as a safe, relatively risk-free investment, helping to establish credibility. Then weeks, sometimes days later, they would call again, touting a sure-bet penny-stock that no one ever heard of, but that they knew was about to go through the roof. The purchase, of course, had to be made on the spot, prior to the stock rising, since it certainly was going to happen very soon. The brokers usually were paid by the issuer or by a stock promoter, in addition to garnering a commission from the unsuspecting mom-or-pop investor.

Another penny-stock, promoter-driven tactic during that era was the use of fancy, glossy-printed fliers, occasionally stuffed into the plastic bags of newspapers that were delivered to thousands of homes.

That was then. What about now?

The market is hot, and virtually all participants are making money.

A few months ago, I wrote about some Wolf-like cold calls I was beginning to receive, on my cell phone, no less. And just last week, stuffed into the plastic package with my still home-delivered Los Angeles Times (OK, I get the New York Times digitally), was a glossy stuffer promotion for a recent IPO, “Now Nasdaq Listed: BHF,” read the heading. Only this was not for a penny-stock.

I was mildly shocked that any stock was being promoted this way, and even further surprised to learn that the company, Brighthouse Financial, is not some sleaze-ball publicly-traded shell with no revenue or earnings, but a real company, an annuity and insurance seller, with $223 billion in assets.

Perhaps this sort of tactic again will become a trend. And in this scenario, because the company is real and not even close to penny-stock status, maybe the tactic will work.

But wait. On the first day of trading, August 7, the shares fell 4%, closing at $60.72. And digging a little further, it is interesting to note that while MetLife still owns 20% of Brighthouse, a filing said it plans to sell all of its holdings “as soon as practicable.” I wonder what they know that the rest of the investors do not. Same ole promotion resurfacing with a twist…at least the issuer has assets.

Roger Pondel, rpondel@pondel.com

Not Your Average Covfefe

Whether investor relations or strategic public relations, or even in politics, we all know that words matter.

Every once in a while, I get stumped, sometimes amused, by simple-sounding, strange words that I have never seen before. Some only have four letters. I jotted down ten real words I read over the past couple of months that I am happy to share with PW Insight readers.

Test yourself and see how many you know. And please send me a quick email if you get even half of them right. Call me immediately if you know them all.

  1. flense
  2. tankles
  3. nish
  4. fob
  5. wheedle
  6. lanx
  7. puce
  8. yeta
  9. peen
  10. pelf

The answers:

  1. to strip blubber or skin from a whale or a fish
  2. a sound louder than a tinkle
  3. nothing
  4. chain attached to a watch
  5. to coax by flattery
  6. a platter for serving meat
  7. a dark red or purple/brown color
  8. awesome
  9. end of a hammer head opposite the face
  10. money gained in a dishonorable way

Roger Pondel, rpondel@pondel.com

Beware of Lurking Wolves

Sometimes, I pick up my own phone at the office. Last week, a friendly caller caught me off guard. The conversation went something like this:

Caller: Hello, Roger, how are you?

Roger: Fine, thanks, how ‘bout yourself?

Caller: I am also fine, thank you for asking. I am calling to let you know that our analysts have started recommending the stocks of several conservative, dividend-paying, major oil companies They are very safe investments, and I would like to start a relationship with you.

Roger: Pardon me?

Caller:  I also want you to know that from time to time we come across the stocks of some smaller companies that our analysts research thoroughly. And within the next week or so, there is one that we will be formally recommending, because of some announcements we believe the company will we making in the next two months.

Roger: Who is this?

Caller: I will give you my full contact information in a minute, but please let me finish.

Roger: May I have your name and the name of your company?

Caller: Now Roger, no one can predict what will happen to the price when those announcements start to flow, but I would like to call you at the right time, so that as a client, you may take advantage of our knowledge. Buying a few shares of a major oil company can establish the account, then we can move quickly on the smaller companies at the right time.

I never got the fellow’s name, since I hung up on him. But his pitch was familiar. It was reminiscent of cold calls that came in prior to the 2013 release of The Wolf of Wall Street.

Almost comedic, but perhaps disturbing, the call was the second one I received—with precisely the same script—in the past couple of weeks. Could the wolves be coming back? Have their prison terms ended? Perhaps it’s the perceived frothy Dow. Or maybe the fake news mantra. Or the newswire upstarts that make it ridiculously inexpensive, and often without traditional controls, to transmit press releases from virtually any source.

Most readers of this blog know better and would not fall for such scam calls. But beware, nevertheless. Hopefully, history is not repeating itself.

Roger Pondel, rpondel@pondel.com

Trump’s Effect on IR

There has been a heap of stories written about President-elect Donald J. Trump’s effect on trade relations and health care, but nary a peep about how his presidency is going to affect our world, meaning investor relations.

Granted, it would be unusual for media to report on how our country’s new chief executive officer will influence investor relations because, um, IR isn’t necessarily something bandied about in the Oval Office.

But consider this: The American people are like investors, and how you treat them in good times and bad will affect the valuation of the country. And depending on how Trump executes his policies, many publicly traded companies and their investors will have to adapt to changing market conditions.

Following is a prognosticator of sorts on how Trump will affect the world of investor relations from an industry perspective. The analysis is based on discussions with the Street and analyst notes.

  • Consumer – Investor relations executives in this sector may experience an increase in inbound calls based on exposure to manufacturing overseas, particularly in China. Trade issues may thwart valuations and likely raise a lot of questions if a company has manufacturing exposure in foreign countries.
  • Construction – Generally, investors should have optimism regarding this sector’s near-term future.  At the same time, more dollars flowing to infrastructure could prompt greater scrutiny of infrastructure companies that aren’t performing.
  • Renewables – This sector has received bipartisan support in recent years, and there is no reason to expect otherwise during the next presidential term. The biggest conundrum for IROs in this space is selling the value proposition of renewable technologies and how soon they can be realized under the incoming administration.
  • Healthcare – With a lot of questions surrounding the future of the Affordable Care Act, many investors and investor relations professionals are likely unsure of where certain business models will stand under the new administration.
  • Technology/media – Hard to say what challenges may surface in this sector. Social media companies may come under fire for alleged fake news practices, as well as influencing the presidential outcome, which could certainly keep IR pros on their toes.
  • Banking – Investors are expecting interest rates to rise, which could bode well for the bottom line in this sector. Loosening up on regulations could also help move more financial services stocks into the black. IR executives will likely have to speak to how banks will enhance their net interest margins once the new administration is in full swing.
  • Aerospace/Defense – With a lot of suppliers in foreign countries, there could be a backlash with respect to manufacturing costs. Even though a Republican administration generally bodes well for this sector, optimism may soon fade if trade relations continue to slide.

— Evan Pondel, epondel@pondel.com

Girl Power

Sequoia Capital made news this week when they hired the firm’s first female investment partner in the United States.  This appears to be a 360 degree turn from last year, when, according to The New York Times, Sequoia’s Chairman said the firm did not have female investors in the United States because it did not want to lower its standards.

Women are rare in the highly competitive and cutthroat field of venture capital. According to The Times, research from Babson College showed the percentage of female venture capitalists at 6 percent, down four percentage points from 1999, at the height of the dot-com craze.  The CrunchBase Women in Venture report found that of 100 venture firms studied, 7 percent of the partners at those firms were women, and that 38 percent of the top 100 firms have at least one female partner.  In February, Bloomberg columnist Barry Ritholtz sought to answer the question: Why aren’t there more women in finance?  A possible answer is that “it may be a legacy of what has not only been a male dominated society, but it probably also reflects an industry that is particularly resistant to change,” or that “there are simply not a lot of women in senior positions in all of business, and finance to a great extent mirrors that reality.”

One would think then that there is a perception that women are not as accomplished as men. According to Ritholtz, several studies (Fordham University and the CFA Institute) have found that women in the actively-managed fund industry tend to outperform their male peers.  If true, why are the numbers still so lopsided?

Perhaps the tide is turning for women in business, however. The Los Angeles Times noted that among the largest U.S. companies, women now fill 20 percent of board seats, up from 15 percent in 2005.  In fact, women have made strides recently in other male-dominated professions.  There are now female referees and coaches in the NFL, female play-by-play announcers for major league baseball and female heads of state.  Great news, for sure, but how is that playing out in corporate America?

A 2012 case against Kleiner Perkins Caufield & Byers showed that women and men don’t always play nicely in the sandbox. That case saw a female partner, Ellen Pao, sue the firm for gender discrimination.  She lost the suit in 2015, but during a press conference Pao was quoted as saying, “If I’ve helped to level the playing field for women and minorities in venture capital, then the battle was worth it.”  Pao recently launched Project Include to assist startups and HR departments with recruiting, hiring and retaining a diverse workforce according to Wired.  Project Include also works with venture capital firms whose business is to help startups develop.

There is a lot of work to be done, but it’s my opinion that embracing diversity in the boardroom, on Wall Street and in business can only help improve the variety of opinions, talents and expertise necessary for us to thrive.

— Laurie Berman, lberman@pondel.com