Friday, August 10, 2007

Liquidity Collapse: The Shareholder Letter You Won't See

From Jeff Matthews:

The Shareholder Letter You Should, But Won’t, Be Reading Next Spring



Dear Shareholder:

Well, it seemed like a good idea at the time.

I am referring to your board’s decision to approve a massive share buyback and huge special dividend last summer, when the buzzwords going around Wall Street were “returning value to shareholders.”

Why we did it was this: a smart banker from Goldman Lehman Lynch & Sachs came in, all gussied up and looking sharp, and made a terrific PowerPoint presentation to the board with multi-colored slides that showed how paying a special $10 a share dividend, plus buying back a bunch of our stock at the 52-week high, would “return value to our shareholders.”

We should have thrown the fellow out the window, along with his PowerPoint slides, but what happened was, my fellow board members and I were so busy deleting emails from our Blackberries that we just didn’t notice the last slide showing (in very tiny numbers) the “Trump-style” debt we would be incurring to do so.

We also missed the footnote showing the fees that would go to Goldman Lehman Lynch & Sachs for the courtesy of their showing us how to wreck our balance sheet.

Those fees, I am embarrassed to say, amounted to more money than we made the quarter before we “returned value to shareholders.”

But the fact is, we’d been getting so much pressure over the last few years from the hedge fund fellows who own our stock for ten minutes tops, not to mention the so-called “analysts” on Wall Street (around here we call them "Barking Seals"), to do something with the cash...well, the truth is we just couldn’t stand answering our phones any more.

So, in order to finally start getting things done instead of spending all day explaining to these hedge fund fellows and the Barking Seals on Wall Street why we weren’t “returning value to shareholders,” we decided to do the big buyback and the big dividend.

And for a few weeks there, it was pretty nice.

The stock jumped, the phones stopped ringing, and the Barking Seals started congratulating us on the conference calls instead of asking us when we were going to get rid of our cash.

Unfortunately, not only did getting rid of our cash and taking on a huge debt load NOT “return value” to you, our shareholders, it actually crippled the company for years to come.

For starters, as you know, the aftermath of last summer’s sub-prime debt crisis is forcing perfectly fine companies to liquidate businesses at fire-sale prices…but we can’t take advantage of those prices, because we have no cash. And thanks to the debt we incurred “returning value to shareholders,” the banks won’t loan us another dime.

Secondly, as you also know, we’ve had to lay off hundreds of loyal, hard working employees to pay the interest expense and principal on all that debt, because unlike Donald Trump, we actually repay our debts.

Furthermore, as you probably don’t know, we’ve also scaled back some interesting research projects that had great long-term potential for the company, but were deemed too expensive to continue in light of the fact that we have no cash.

Now, I’d feel a heck of a lot worse about all this if we were the only company suckered into buying our stock at a record high price and paying a big fat dividend on top of it.

But I’m happy to report there were others who also did the same stupid thing.

For example, Cracker Barrel, the restaurant chain that depends on people having enough money for gas to get to its stores along Interstates across America, spent 46 bucks a share for 5.4 million shares of its stock early last year to “return value to shareholders.”

Cracker Barrel’s stock now trades at $39.

And Scott’s Miracle-Gro, whose business is so seasonal it loses money two quarters out of four, put over a billion dollars of debt on its books with the kind of special dividend and share buyback we did.

Health Management Associates—a healthcare chain that can’t collect money from about a quarter of the patients it handles—paid shareholders ten bucks a share in a special dividend to “return value to shareholders” and then missed its very next earnings report because of all those unpaid bills and all that new interest expense it was paying.

Oh, and Dean Foods, a commodity dairy processor with 2% profit margins, returned all sorts of value to shareholders early last year—almost $2 billion worth—just before its business went to hell in a hand basket when raw milk prices soared.


So, you see, everybody was doing it.

And boy, do I wish we hadn’t.

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