|From this week's Barron's:|
On March 5 of last year, Michael Saylor, a 35-year-old multi-billionaire, disclosed his plan to spend $100 million for an online university that would offer "free education for everyone on earth, forever."
Saylor, the chief executive of a highflying software firm called MicroStrategy, was then worth (on paper, anyway) about $12 billion. His "data-mining" firm had been extolled in the press for doing everything from allowing GE Capital to better manage its fleet of leased cars to helping Victoria Secret discover the alluring fact that New York City stores sell the largest number of black bras.
From a 1998 offering price of $6, the stock had soared as high as $333 just days before Saylor's announcement, giving the company a market cap of a whopping $27 billion.
But then, on March 20 the company disclosed that reported earnings had been an accounting fiction. Boom! The stock plunged $140 in a day.
When the financials were subsequently restated-for '97, '98 and '99-profits turned to losses.
But that wasn't the end of it. The SEC charged that MicroStrategy's accounting fiction was outright accounting fraud. In December, Saylor and two other execs, without admitting or denying the charges, agreed to pay over $1 million in fines.
Just last week, MicroStrategy's accountants, PricewaterhouseCoppers, agreed to pay $51 million to settle a shareholder suit stemming from the collapse.
Even though early last month MicroStrategy' stock traded as low as $1.75 a share, Michael Saylor insists that by focusing on its core business and dramatically slashing costs, the company will break into the black this year. On April 19, in a stirring letter to stockholders, he urged them to "combat short selling" by immediately transferring their stock out of street name to stop brokers from "loaning" the shares to short sellers.
That day the stock shot up 76% to $5.23. It closed Friday at $4.76.
So what are the odds of a turnaround.
Here's the dope from the guy at Merrill Lynch, MicroStrategy's lead underwriter: "We believe the deterioration of MSTR's business is accelerating. Employee attrition, cash constraints, internal restructing and a macroeconomic slowdown augur poorly for the company's prospects." In May, the analyst noted, "risks are increasing."
In early February, Saylor announced that he would sell 15,000 shares a day for the next two years, no matter what the price of the stock. The proceeds on the first day, February 12, were $156,000; on the second, $166,650; on the third, $158,400-well you get the idea.
It got us thinking that Saylor's advice to shareholders is absolutely right. Under no circumstances should they be "loaning" out their shares. Instead, like Saylor, they should be selling them.