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Technology Stocks : MicroStrategy Inc. (MSTR) -- Ignore unavailable to you. Want to Upgrade?

To: Jay Fisk who wrote (673)4/21/2001 4:40:04 AM
From: Jay Fisk  Respond to of 715

Big Plans Fizzle as Vision Blurs

It didn't escape Michael Saylor's notice back in June of 1998 that "MSTR," the stock ticker symbol for his newly public firm, MicroStrategy Inc., could just as easily be shorthand for something else: "Master."

"As in 'master of the universe,'" he told the aides and investment bankers with him on that day when the software company's stock first began trading. This was a consummate Saylor line, a snapshot of the ambition that made him the most celebrated technology entrepreneur in Washington. He vowed that his software would one day "purge ignorance from the planet," that it would render information as ubiquitous as water. He joked about running for president, compared himself to Mother Teresa, claimed to be doing God's work.

Last spring, when grandiosity - rational or not - had become a Wall Street gold standard, shares of MicroStrategy catapulted to $333. Saylor's net worth, on paper, reached $14.5 billion.

Now, with MicroStrategy's shares trading below the price of a Starbucks latte, Saylor's MicroStrategy holdings have "sunk" to $129.2 million. But the level of Saylor's fall far transcends the lost wealth, Securities and Exchange Commission investigation and shareholder lawsuits of the past year.

Tuesday, MicroStrategy held a symbolic funeral for Saylor's most grandiose dreams: The company sharply reduced its commitment to a subsidiary,, that was once considered the cornerstone of its effort to be a pervasive delivery service for information and commerce. And it said it wanted to sell its wireless communications service,

The company will retreat to making its "data-mining" software, tools that cull information from databases so businesses can analyze customers and trends. MicroStrategy also said it would lay off a third of its workforce, about 600 employees.

Certainly, there's plenty of pain to go around in high-tech these days. Another fallen local tech star, PSINet, announced today that it may file for bankruptcy. Last week, the Reston Web services firm Proxicom laid off nearly 20 percent of its workforce. Examples abound, and the new batch of laid-off MicroStrategy employees won't lack for company.

But MicroStrategy's miseries are more pronounced and dramatic than most, given the volume and scale of Saylor's pronouncements.

"Like Bill Clinton, MicroStrategy was brilliant, but there's a sad feeling that it has not lived up to its promise," said Mark Bisnow, Saylor's former chief of staff, who left the company earlier this year. Others who have watched Saylor are more blunt.

"Michael was able to live in a dream world for a long time," said Nigel Pendse, a software analyst for the England-based OLAP Report, who has followed MicroStrategy for the past five years. "Anything was possible, and people believed it. Now, it's obvious that it was all Michael's mad dream."

It was, for so many people, such a compelling dream. And no one sold it harder than Saylor. He proclaimed that he was out to build an electronic network that would capture a trillion dollars worth of transactions in areas as diverse as ticket bookings, stock purchases, and credit card refinancings.

Saylor, through a spokeswoman, declined to comment for this story.

Saylor saw the Internet and new wireless technologies putting much of America's commerce in play. By convincing consumers to trust MicroStrategy and its affiliated businesses with personal information, he aimed to bombard them with individually tailored sales pitches delivered to their cell phones, pagers, computers, telephones, and other communications devices.

Then he hoped to earn fees by allowing consumers to complete a transaction at the push of a button.

"I don't think about building a business that will last until I'm dead. I think about building a business that will last until people don't need a television anymore," Saylor said.

"A thousand years from now, if we're all floating upside down in a saline solution with IVs in our arms, and all we do is watch 3-D holographic videos while robots do all the work, then as long as we get to pick the video, there's going to be a need for" MicroStrategy's services, Saylor said., which distributes personalized weather, news, sports and traffic reports, figured prominently in his plan. But, conceived at a time when any business with a ".com" in its name seemed to have instant cachet, now faces the dot-com downdraft.

The first turning point for Saylor and MicroStrategy came a year ago, when the company stunned Wall Street by announcing that it had overstated revenue and earnings for two years, and that what investors trusted was a profitable company was actually losing money. Weeks later, MicroStrategy disclosed that it had overstated its results for three years and was losing money when it first sold stock to the public.

After the initial March 20 disclosure, the stock plunged, spiraling through the year along with Saylor's fortunes. In December, the SEC accused Saylor and two other executives of fraud. In a civil complaint, the SEC painted a picture of Saylor and others discussing "the financial results they would like to report" at the close of a fiscal quarter and timing the booking of recent deals accordingly. The SEC also alleged that MicroStrategy booked revenue before transactions were completed.

Without admitting or denying wrongdoing, Saylor settled by agreeing to pay a $350,000 fine and give up $8.3 million of alleged ill-gotten gains from selling MicroStrategy stock when the numbers were inflated.

Tuesday came the second turning point. The company announced that's budget and workforce were being trimmed and it was seeking strategic partners. The move was not surprising, given its recent struggles. But in light of Saylor's heady vows of yore, and his recent success at attracting big-name Washington technology executives to's board, it was striking.

A year ago, Saylor pledged that he would "never hedge the company." The latest annual report says "substantially all of our assets" are pledged as collateral for a $10 million loan and a credit line, not yet finalized, that would allow MicroStrategy to borrow up to $20 million.

He also vowed his unflagging loyalty to his workers. "This I assure you," he said at the company recruitment fair last year. "If you join our firm, there is no way - no way - you're going to see us ever back down, give up, slow down or sell you out...We would never abandon our mission," Saylor said.

"What you need is you need someone...that won't give up, won't pull the rug out from under you. We are that someone," he said.

To: Jay Fisk who wrote (673)4/23/2001 5:57:55 AM
From: zax  Read Replies (1) | Respond to of 715
Agreed. Unfortunately its difficult to find shares to short. Neither MSDW nor Datek had any on Friday. Its pretty clear this puppy is headed toward the pink sheets, or worse.

Here's one more article of relevance:

MicroStrategy trips over its own miscues
By Larry Barrett
Special to CNET
April 20, 2001, 11:55 a.m. PT
E-business software provider MicroStrategy has declared war on short sellers, investors who profit by betting a stock will fall, but the company might be its own worst enemy.

In a letter to shareholders Thursday, the company asked its investors to help protect the company from excessive short selling, which executives claimed played a significant role in the stock's unfettered collapse in the past year. While acknowledging the downturn in technology stocks, "management believes that the current stock price is also attributable in part to heavy selling pressure from short selling," said MicroStrategy CEO Michael Saylor in the letter.

The letter apparently worked. Shares soared 76 percent Thursday and tacked on another 12 percent Friday to trade just below $6. Analysts weren't impressed. They said the true irony of MicroStrategy's letter to shareholders was that the company's own miscues left the door open for short sellers.
Investors who "short" stocks are the bane of many companies because they profit from a company's misfortune and plunging market capitalization. Shorting a stock means borrowing shares to sell, then "covering" the loan by buying the company's stock on the open market.

Here's an example: A short seller, banking on a sharp decline in a particular stock, might borrow 100 shares of the stock from a brokerage firm at $20 a share and immediately sell the shares for $2,000. If the stock were to fall to $16 a share, the short seller could then buy 100 shares to return to the broker for $1,600 and pocket the difference less a small commission fee.

If they guess wrong and the stock appreciates, short sellers must buy back the shares at a higher price and, in theory, there's no limit to how much the short seller could lose if the stock continues to gain ground. Shorts have made a small fortune as the Nasdaq Stock Market has plunged from its all-time high set in March 2000.

In his letter, Saylor urged shareholders to take possession of MicroStrategy shares by pulling them into their accounts. Shares registered in a broker's name or held in a margin account are loaned to short sellers. Shares registered in an individual shareholder's name that haven't been purchased on margin cannot be "loaned" out to short sellers.

"Our stock wouldn't be where it is right now if the short sellers hadn't piled on us," Saylor said during an interview Thursday. "I think (Thursday's) stock price reflects the sentiment that our shareholders want to do what they can to support this company."

Several analysts disagreed with Saylor's conclusion, suggesting that while a handful of loyal shareholders may have followed the company's directive, a more plausible explanation for the 76 percent surge was that short sellers immediately began to cover their positions by buying shares before any buy-and-hold investors took action.

"Frankly, (the shareholder letter) is a little hard to figure out," said Jim Pickrel, an analyst at J.P. Morgan Chase. "It's hard to gauge how much of this is related to the letter and how much of it is short covering. The stock's going to be a bit tougher to short for a little while, but I don't think this will have much of an impact in the long run."

A brief history
MicroStrategy's letter to shareholders is just the latest development for a company that has seen its stock top $300 in March 2000 before tumbling to a low of $1.75 earlier this month.

Analysts said MicroStrategy's "business intelligence" software is technically sound, but a series of management blunders that hurt the company's credibility on Wall Street, a slowdown in information technology spending and intense competition has sent the company reeling. Analysts said MicroStrategy's business performance coupled by a restatement of sales and earnings and the Securities and Exchange Commission probe that followed practically invited short sellers, who target distressed companies.

MicroStrategy's software lets companies comb their databases for sales trends, customer behavior and other hidden patterns useful for marketing plans. It competes with Cognos and Business Objects.

Things turned sour for MicroStrategy on March 20, 2000 when the company announced it would have to restate its sales and earnings for 1997, 1998 and 1999--which had helped to propel the stock to such a high level--to reflect the fact that the company had lost money rather than turned a modest profit in 1999 and earned only half as much as it as it had previously reported in 1998.

These were no minor adjustments.

For example, sales for 1999 came in at $151 million, down from the original report of $205.3 million. Instead of earning 15 cents a share for the year, it actually posted a loss of $33.7 million. The aberrations between what MicroStrategy reported for sales and earnings in 1997 and 1998 were also off by a considerable margin, sparking 25 class action lawsuits and the SEC probe. The SEC investigation culminated with Saylor and two other executives paying out more than $11 million in fines without admitting or denying wrongdoing.

One analyst at a major brokerage firm who picked up coverage of MicroStrategy from a colleague said it didn't take much time to for him to figure out the company had serious issues.

"Let's just say that after meeting with (Saylor) for the first time, we agreed to disagree," the analyst said. "He wanted to talk about technology. I wanted to talk about the business. I mean, this was a guy who actually argued that there were 35 days in some months.

"The company has never turned a profit, continues to burn through cash and derived about 90 percent of its sales last quarter from its installed base," he said. "There's no growth. Throw in the slowdown in technology spending for even the best companies and you get a good idea of just how much trouble these guys are in."

On April 3, MicroStrategy warned analysts that it would miss estimates yet again, predicting sales of between $47 million and $51 million in the quarter and loss of between 31 cents and 37 cents a share.

It also said it would cut one-third of its work force in a cost-cutting move as part of its effort to "refocus on our core business-intelligence business" and predicted it would achieve profitability by the end of this year.

The "toxic" loan
MicroStrategy's biggest mistake could have been raising $125 million in a convertible loan last summer from Promethean Asset Management, a New York-based hedge fund that has provided similar loans to a number of companies including eToys, Entrade and Ariad Pharmaceuticals.

In investment circles, these convertible loans are known as "death spiral" or "toxic" loans because companies' stocks have a nasty habit of falling below $1 after they are taken out.

And those are the fortunate companies. Many others end up in bankruptcy court. This, according to analysts and executives at companies who have dealt with these hedge funds, is no coincidence.

Terms of the loans typically call for the lenders to be repaid in stock and the farther the stock falls, the more shares the borrower must pay. If the borrowing company can't meet the repayment terms, the hedge fund effectively takes control of a significant minority interest in the company.

If the company can pay, the hedge fund takes the interest--usually in the range of 6 percent to 9 percent--as well as the principal and moves on to the next client.

These hedge funds are Wall Street's answer to the Las Vegas pawn shop, the places companies desperate for financing turn to when the capital markets and traditional lending sources will have nothing to do with them.

As Dale Schmidt, a manager at the Potomac Internet Short Fund, put it: "Companies have to find the money to keep the doors open. But the potential price could be the losing control of your company."

MicroStrategy "was going to do this huge secondary offering but the wheels fell off after the SEC probe," said one analyst who spoke on condition of anonymity. "They needed money so they went to the financing of last resort. The irony here is MicroStrategy took out a loan that encouraged the people they were borrowing from to short its stock. And while the hedge fund won't admit it, that's what's been going on."

The house always wins
In MicroStrategy's case, this convertible loan was due this June and the company didn't have the cash to pay it off. Faced with the prospects of having to either pay the loan or fork over the shares and sustain the enormous dilution to the value of its common stock, Saylor worked out a refinancing deal--announced with the company's April 3 profit warning--to buy his company some more time.

"If converted in the original manner at current levels, MicroStrategy would have had to issue over 50 million shares to convertible preferred shareholders, inflicting serious dilution on common shareholders," First Albany analyst Mark Murphy wrote in a research note. "The deal was restructured so that some of the convertible preferred shares are redeemed for cash in the near-term ($25 million), while other convertible preferred shares are exchanged for Series B, C and D preferred shares with conversion prices of $5, $12.50 and $17.50 per share."

Promethean and other hedge funds have been tagged by a series of lawsuits from borrowing companies in recent years, accusing them of short selling shares in the respective companies to drive down the share price and garner a larger percentage of the company's common stock when the borrower failed to meet the repayment date.

Repeated attempts to contact Promethean founder and CEO James O'Brien were unsuccessful Thursday, but he did tell Bloomberg earlier this year "every one of our investments becomes more valuable as the issuer's stock price increases, and conversely, every one of our investments becomes less valuable if the issuer's stock price declines."

However, Promethean could short sell the stock of a company it holds a note on all the way to basement, then usurp the shares to cover their positions when the company fails to meet the terms of the loan.

In either scenario, the hedge fund wins. If the company continues to flounder, the stock plummets. If the stock falls, it pockets the proceeds from shorting the stock. Eventually, the company runs out of money and the hedge fund swoops in and takes a huge block of common stock to cover its position.

If the company recovers, the hedge fund gets back the original loan plus interest and moves on to the next desperate company.

A chief financial officer at one technology company said his firm managed to repay its convertible loan to Promethean before the stock market collapsed last spring. He said the amount of short selling of his company's stock increased dramatically shortly after the loan was signed.

"Whether the shorting was done by Promethean or by people who closely watch what they do, I don't know," he said. "You could never prove it either way. But I can tell you that we would never do that deal again. Not in a million years."

Shorts a scapegoat?
When pressed, Saylor acknowledges that his stock's poor performance "brought a lot of shorts into the stock" in the past year.

As of March 9, 5.8 million shares, or roughly 20 percent, of MicroStrategy's shares on the open market were being shorted. By comparison, Cisco Systems and Sun Microsystems had only 0.9 percent and 0.6 percent, respectively, of its available shares in this same position. hovered at a remarkable 58 percent.

"I sent out the letter to tell our shareholders that it was not in their best interests to let these shares sit in a margin account and be available to short sellers," Saylor said. "This short selling has put a lot of pressure on our stock. We had to do something."

Saylor said a combination of his letter and MicroStrategy's recent restructuring will put the company back on track and fend off short sellers, but analysts have their doubts.

David Hilal, an analyst with Friedman Billings Ramsay, estimates MicroStrategy has about $105 million in cash, but $40 million earmarked for, MicroStrategy's messaging subsidiary. Factor in a $25 million cash payment to Promethean for the convertible loan refinancing, and MicroStrategy has $60 million in the bank.

If the company breaks even in the fourth quarter as it has promised, MicroStrategy will be OK, but it will " require solid execution without much leeway," Hilal said.