Risk & Compliance

Bad News? I Know, Let’s Get the CFO to Tell ’em!

Increasingly, finance chiefs given swell job of delivering bad earnings reports. Also: Amid worker protests, Enron CEO lets go of $60 million parac...
Stephen TaubNovember 14, 2001

When the going gets tough, the CEO gets the CFO.

At least, that’s how it seems these days as more and more companies deliver bad news. Just look what happened on Tuesday.

In the morning, Wal-Mart delivered pretty good sales results for the third fiscal quarter, with the retailer’s management saying the company would meet fourth-quarter estimates. “The weaker economy has attracted additional customers in more frequency, and sales are running at pre-September 11 levels,” beamed Wal-Mart CEO Lee Scott in a recorded conference call. “When the economy improves, we will keep those customers.”

Sure, there was good news to deliver, so CEO Scott was the messenger.

Same with J.C. Penney chairman and chief executive Allen Questrom, who was also quoted in the press release accompanying the company’s strong earnings report: “…merchandise assortments, together with marketing efforts, are bringing the customer back to J.C. Penney.”

This wasn’t the message over at Oracle Corp. So, one day after company CEO Larry Ellison let it slip that Oracle didn’t have such a swell second quarter, CEO Larry Ellison decided to trot out his trusted CFO Jeffrey Henley to deliver the specifics. On Tuesday, Henley warned that fiscal second-quarter results will fall short of expectations. “We’re going to do worse than we thought going into the quarter,’ Henley said in Baltimore at an investor conference hosted by Deutsche Banc Alex. Brown, say published reports. “We’ve seen much more slippage, much less conversion of the pipeline we started the quarter with. I don’t think that will change until the economy strengthens.”

Over in Germany, it was Deutsche Telekom AG’s chief financial officer who delivered that company’s bad news. On Tuesday, CFO Karl-Gerhard Eick said the German telecom giant was likely to post a net loss for the full year. “The net result will probably not be positive,” Eick reportedly said at an event in Berlin.

The CFO at JDS Uniphase Corp. was also front and center on Tuesday. But, in this case he was needed to convince investors that the seemingly embattled company could cough up $1.75 billion in cash, cash equivalents and short-term investments to buy other companies. “We will spend part of our cash on acquisitions,” CFO Anthony Muller told investors at the Deutsche Banc Alex. Brown Technology Conference in Baltimore. “We think there are some very interesting acquisition opportunities out there.”

Wait, isn’t a major strategic plan like acquisitions at the core of the CEO’s job? Not when the chief executive must explain how a once-reeling company could afford to pay $1.75 billion to buy other businesses.

And then there’s Amazon.com. The poster child for the new economy, the company has still not lived up to many investor’s expectations. So, naturally it was CFO Warren Jenson who told attendees at the same Deutsche Banc Alex. Brown conference that he is upbeat about the fourth quarter.

“Having closed the books for October, we feel great about where we are for the quarter,” Jenson said in response to a question, according to wire service accounts.

You can bet that if Amazon ever reports a profit — a real net profit, not a pro forma profit — it will be CEO Jeff Bezos who will step up to a podium to announce the remarkable news to Wall Street and the press.

IPO News

This IPO market has gone wacky.

It’s not enough that suddenly three companies went public on Tuesday, which qualifies as a boom these days. What’s amazing is that, in each case, the share price of the newly public company actually finished the day around 27 percent higher than the launch price.

The share price of health care consultancy Advisory Board Co. closed at $24.25 in its first day of trading. Advisory Board raised $95 million by selling 5 million shares, or a 41 percent stake, at $19 apiece. The company, however, will not receive any of the proceeds — all of the shares were offered by David G. Bradley, the company’s biggest stockholder.

Meantime, shares of AMN Healthcare Services Inc., a temporary healthcare staffing company, closed at $21.66.

And the American Depositary Shares (ADS) of Fisher & Paykel closed at $22.95. The New Zealand-based maker of consumer appliances and respiratory care products was the first foreign company to sell and list its shares in the United States since July.

In other IPO news, Centene Corp., which provides managed-care programs to Medicaid recipients, said it will offer 3.5 million shares for $13 to $15 apiece when it goes public. The company could fetch as much as $49 million from the IPO. Centene management plans to use the proceeds to repay $4 million in subordinated notes, as well as for general corporate purposes, including working capital and potential acquisitions.

And Alliance Medical Corp., reprocessor of disposable medical devices that are used in a variety of medical procedures, set its launch price at $14 to $16 and its number of shares at 4 million.

Debt Funding News

  • FleetBoston Financial Corp. is expected to issue $1 billion of 5-year global notes, led by Fleet and Credit Suisse First Boston, according to published reports. Last week Moody’s Investors Service raised FleetBoston’s long-term senior debt ratings to A1 from A2.
  • Wisconsin Energy Corp. issued $300 million in 7-year notes, led by Banc of America Securities and Bear, Stearns & Co. It was priced to yield 5.558 percent, or 140 basis points over comparable Treasurys, and was rated A2 by Moody’s and A-minus by S&P.
  • Sierra Pacific Resources issued $300 million of Corporate Premium Income Equity Securities (PIES) in the private placement market. Each of the Corporate PIES consists of a unit of a stock purchase contract issued by Sierra Pacific and a senior unsecured note issued by the company with a face amount of $50. The Corporate PIES are mandatorily convertible into the company’s common stock after four years. They have a coupon of 7.93 percent and was priced at a premium of 20 percent above Monday’s $13.85 closing price of the company’s. Lehman Brothers was the sole lead manager.
  • Allied Waste Industries Inc. said it plans to issue $500 million in 7-year senior notes. Proceeds will be used to repay portions of term loans under its senior secured credit facility.

Bank Financing Drying Up

While the capital markets are still very hospitable to investment-grade borrowers, banks are not as friendly these days.

A Federal Reserve survey found that 51 percent of 57 large U.S.-owned banks are tightening their criteria for approving commercial and industrial loans to large and midsize banks because of concerns about companies’ ability to pay their debts, according to The Wall Street Journal.

This is up from 40 percent during the last quarterly survey in August.

Foreign banks are even tougher on borrowers. Of 22 foreign banks with lending operations in the United States, 63 percent tightened their standards in November, up from 50 percent in August.

“All survey respondents pointed to a less-favorable or more-uncertain economic outlook as at least a somewhat-important reason for changing their commercial-lending policies,” the survey said, according to the paper. “Moreover, that reason was said to be very important for 63 percent of domestic banks, up significantly from 37 percent in the August survey.”

In addition, nearly 30 percent of the domestic banks and 40 percent of foreign banks said they had written down the value of some loans, especially to airlines and other travel companies.

Lay-Away Plan

So, no Enron news today? Hardly.

In today’s installment of The Not-So-Secret Storm, we learned that Enron chairman and chief executive Ken Lay was in line to receive more than $60 million once he severed all ties to the troubled energy company. But when news of Lay’s go-away money reached employees later in the day, it touched off a full-scale worker protest.

Rather than risk another PR disaster, Lay quickly agreed to waive the severance package. He also said he would decline a modified package if approved by the board.

“He has told the employees that he has given a lot of thought to this over the last few days and in light of the circumstances surrounding the company and after listening to the employees he has decided the best thing to do is waive his right to the payment,” Enron spokesman Vance Meyer told the Associated Press.

Under the terms of his employment contract, Lay was to receive $20.2 million per year through 2005 for each full calendar year following the close of the sale to Dynegy or any material change in control of Enron.

If the Dynegy acquisition closes this year, he would receive four of those payments starting in 2002. If the deal closes next year, he would receive three of the payments, starting in 2003.

The company was even going to pay his taxes if the annual payments were deemed to be an “excess parachute payment” for income tax purposes, according to his contract.

Lay reassumed the posts of president and chief executive in August following the resignation of Jeffrey Skilling.

In other Enron news, the company named Raymond Bowen treasurer and vice-president of finance. He previously served as both chief operating officer of Enron Industrial Markets and treasurer of Enron Capital & Trade Resources.