Tyco's CFO Mark Swartz used the opening statement for his company's eighth consecutive weekly investor teleconference as a victory lap. Three months earlier, Tyco had caught Wall Street's worst case of Enronitis - the market disease in which investors believe a company may be hiding Enron-like accounting problems. The nature of Tyco's business model - an acquisitive conglomerate with several diverse businesses - made it especially vulnerable to the condition. But now the company's reputation was on the mend and Swartz's weekly investor teleconferences seemed at least partly responsible.Whereas the first few conference calls began with Swartz on the defensive, this time around he was able to gloat about a rare communications victory for his oft-maligned company. Swartz started by ticking off a laundry list of allegations and rumors that he had blunted in recent weeks. He recounted how on the seven previous calls he had answered scores of questions about every arcane aspect of Tyco's balance sheet. He also revealed how Tyco calculated organic growth, accounted for swap transactions and goodwill, handled purchase accounting, and pooled accounting, to name just a few of the many complex financial transactions through which he had walked investors.
Fielding everyone's questions
"We have taken these questions from institutional shareholders, sell-side analysts, individual investors and several of Tyco's toughest and most savvy critics within the short-seller community,
declared Swartz on the call. "Beyond the issues I have mentioned, there are probably a dozen others that I've answered, but probably forgotten over the past couple of months. We are unaware of any other management team that has been willing to subject itself to as open a discussion of its accounting or disclosure practices as Tyco has."
Few people could argue with that declaration. And as of that moment, Tyco's crisis IR strategy had to be considered at least a short-term success.
The company's shares had rallied about 15% off their February lows, when a Wall Street Journal report, which alleged the firm did not disclose many of its acquisitions, sent shares reeling. A week after that report, Tyco began its conference calls.
"What Tyco did could be viewed as a case study in good shareholder communications,
says Jeff Corbin, managing partner at KCSA Worldwide. "It shows how effective a well thought-out IR strategy can be."
At its core, the strategy was simple. Wall Street was overflowing with rumors that Tyco had something to hide, so the company set out to address every issue and rumor in a public forum that occurred on the company's terms. Swartz would take questions about Tyco's balance sheet from all-comers.
In the end, perhaps the very fact that Swartz was answering all questions was as powerful a statement as any of the answers he gave about Tyco's accounting practices. Indeed, the calls ceased last week because Tyco had seemingly exhausted the rumor mill and restored confidence in it financial reporting.
In an ironic twist, the same investment community that had been banging down Tyco's door looking for answers weeks earlier was now moaning, "Enough is enough."
"During the Q&A, people have even come out and told us that these calls were becoming boring,
said Swartz on the call.
"We, however, interpret this as good, a sign that investor confidence in our accounting is high."
Another company that has seemingly cured its bout of Enronitis is Cendant, a travel services and residential real estate firm. Cendant, which reeled from one of the most infamous accounting scandals of the '90s, was another easy mark for the rumor mill.
In late January, it was revealed that Cendant had seven off-balance-sheet entities. That revelation led investors to draw comparisons to Enron's notorious collection of off-balance-sheet partnerships. Cendant shares fell nearly 10% during one trading session on such concern.
The firm confronted the issue head-on by posting a detailed account of all its off-balance sheet entities on its website. The posting seemed to allay Wall Street's fears as shares retraced some earlier losses and Cendant has not been bedeviled by any such rumors since its disclosure.
Silence still golden to some
But while the success of Tyco's "disclose-until-they-beg-you-to-stop" strategy and Cendant's quick response would seem to invite imitators, some companies seem content to keep their investors guessing.
Most recently, Adelphia Communications, the nation's sixth largest cable company, decided to keep mostly mum after announcing that it had guaranteed $2.3 billion in previously undisclosed loans to the family that controls the company. Adelphia shares have lost more than half their value since the firm made the announcement on March 27. Since then, Adelphia's IR strategy has been to address Wall Street through a series of terse press releases posted on its website. The statement by the management in the initial press release now seems to almost mock shareholders.
"We recognize that in the current financial environment, shareholders are looking for greater clarity and transparency from the companies in which they choose to invest,
read the statement by John Rigas, Adelphia's chairman and CEO. "We at Adelphia recognize and respect that desire for greater clarity and transparency, and are committed to providing it in a timely manner."
In an April 4 Reuters story, which reported that the company was the subject of an SEC inquiry, an analyst vented his frustration at Adelphia's reticence. "There's still a number of questions that need to be answered,
Kevin Kuzio, analyst with high yield research firm KDP Investment Advisors, told Reuters. "The SEC investigation is no surprise. But what the market is looking for is some kind of clarity regarding the final amount of these loans and what assets are backing them."
A more recent Reuters story claimed that shareholders could be on the verge of a revolt with some being asked to join a consortium designed to displace management.
"The appearance of irregularities has destroyed the value of this company,
Ajay Mehra, portfolio manager with Columbia Management Company, told Reuters. "The asset value is clearly there. If I were asked to join such a consortium, I would consider it. The lack of transparency and credibility is making the whole market queasy."
Nevertheless, increased disclosure doesn't always equal better disclosure.
Experts say that better disclosure often means making the complex easier to understand.
"I've heard of instances recently where people remark that Company X's annual report is 33% larger than it was last year,
says Lou Thompson, president and CEO of the National Investors Relations Institute. "I'd argue that more doesn't always equate to better. It's often a matter of disclosing things in way that more understandable. This type of disclosure is especially helpful to individual investors."
The Enron debacle has made secrecy a mortal sin on Wall Street, as investors now question companies about all aspects of their financial reporting.
This includes items that were taken for granted just months ago.
"Investors aren't just questioning a company's numbers, they now have specific questions on how these numbers were vetted,
says Richard Torrenzano, founder and CEO of the Torrenzano Group, a corporate and financial PR firm. "At annual meetings in the past, management would point to two guys in blue suits and say, 'These are our auditors,' and rarely would anyone think twice about them. Now people have serious questions for these guys in blue suits. It's an absolute sea change."