How to Kill a Great Stock
By Nick Kapur
February 1, 2010
Financial publisher Value Line (Nasdaq: VALU) used to be a proud, successful business. But lately, the company is more like a punch line to a sad joke.
You see, Value Line ranks near the very top of modern corporate disasters. Though the losses involved have been comparatively small, Value Line's story is nevertheless heartbreaking.
It's time for us all to learn how one misguided leader can slowly and steadily destroy a great business.
The sad story
Value Line was founded in the throes of the Great Depression by an enterprising businessman named Arnold Bernhard. For decades, the company made money and served its customers well, delivering highly valued investment research tools, newsletters, databases, and even a branded line of mutual funds.
Over the past 20 years, however, business has simply languished. Value Line was not decimated by the slow demise of the print industry. It didn't lose analytical credibility, a reality that will forever stain credit raters like Moody's (NYSE: MCO). One can't even really blame upstart competitors like Morningstar (Nasdaq: MORN).
No, what happened to Value Line was former CEO Jean Bernhard Buttner.
The power of a terrible leader
In 1983, Arnold Bernhard took his company public and soon named his daughter Jean president of the publishing empire. His death just a few years later paved the way for her to take complete control.
To put the situation in perspective, since 1984 the S&P 500 has returned about 550% to investors. Value Line, meanwhile, has lost roughly 30%. Total revenues at Value Line for fiscal year 2009 were identical to revenues in 1987. Its premium subscription base is less than half of what it was in the mid-1980s. And the company recently posted its first net loss in nearly two decades.
Clearly, something went wrong under the eye of Ms. Buttner.
Now, in fairness, businesses decay and implode all the time -- look no further than AIG (NYSE: AIG) and General Electric (NYSE: GE) as evidence. But in this case, Value Line's shoddy long-term performance really boils down to four problems, all of which land at the doorstep of Jean Bernhard Buttner.
1. Wretchedness and inexperience
According to an article published in Crain's, Buttner's business experience before taking charge at Value Line amounted to "working at an interior design business with her husband." As if the complete lack of relevant business experience weren't enough, apparently there were some personality issues.
Numerous former and existing employees accused Buttner of being tyrannical, abusive, and intolerant. According to Bloomberg, employees faced pay cuts if they arrived to work late or were caught eating at their desks. Those who complained in public forums were summarily sued.
We know that being an intolerable personality is not necessarily detrimental to a company's bottom line (from what I understand, Apple's Steve Jobs is not exactly a peach), but we do know that the ritualistic driving off of talent is.
According to the same Crain's article, "Value Line was (under Arnold Bernhard) a training ground for scores of top Wall Streeters."
Under Buttner, however, analysts faced excessively frugal compensation schemes (capped at half of the typical Wall Street rate) and what must have been a tough working environment.
2. A failure to acknowledge reality
Historian David McCullough once noted of Gen. George Washington that, "seeing things as they were, and not as he would wish them to be, was one of [Washington's] salient strengths." Buttner apparently had no such skill.
Like Rick Wagoner at General Motors, Dick Parsons at Time Warner (NYSE: TWX), Dick Fuld at Bear Sterns, and numerous other CEOs of failed (or failing) businesses, Buttner just never quite saw the reality of her situation.
Times were changing fast for all businesses at the end of the 20th century, and yet she stubbornly clung to the antiquated publishing model of her father's generation. When the financial research industry began to move in a completely different direction, Value Line was essentially left behind.
3. Lack of accountability
Buttner had absolutely no one to answer to but herself, thanks to a nearly 90% stake in the company. The system of checks and balances normally in place to help management make effective and responsible decisions was largely absent.
Her board of directors was filled with her children, relatives, and various acquaintances, and her management team was allegedly composed of cowering yes-men. Who was there to say "no"?
Like Bob Nardelli at Home Depot (NYSE: HD) and Anthony Mozillo at Countrywide Mortgage, Buttner's most noteworthy legacy is one of self-interest. Her declaration of a special dividend in 2005 worth $175 million substantially reduced the company's coffers -- and $150 million of it ended up in her very own pockets.
Perhaps more damning, however, is a 2009 SEC lawsuit claiming that since 1986, Value Line's mutual funds had been ripping off their clients and illegally raking in fees worth tens of millions of dollars.
Buttner settled the lawsuit for $45 million, but acknowledged no guilt. Fortunately, the SEC also forced her to resign her position and end her control of the company.
The real tragedy
The combination of these qualities is, of course, deadly. Sadly for Value Line, the damage is already done; the business is long past relevant. Nevertheless, there are two important things to say here that go well beyond Value Line:
1.Value Line, and companies like it, is the reason The Motley Fool cares so much about management. The CEO giveth and the CEO taketh away.
2.There are plenty more Value Lines out there.
Buttner is just the tip of the iceberg. The tale is extreme, but certainly not unusual -- and that's why evaluating management is such an important part of investing.
The Foolish bottom line
Legendary investor Peter Lynch once said that investors should, "Go for a business that any idiot can run -- because sooner or later, any idiot probably is going to run it."
But as Value Line illustrates, even a great company can be brought down by bad management.
First a few clarifications:
I believe the idiot quote is attributable to Warren Buffet, isn't it.
Also, Dick Fuld was the CEO of Lehman Brothers not Bear Stearns (not Sterns).
And some thoughts:
Although Value Line's prospects seem dim, the company maintains a strong financial position and is debt free. Cash and investments of about $105 million (more than $10 per share) handily exceeds the amount of unearned subscription revenue carried on the balance sheet as a liability (typical of accounting in the publishing industry). What's more, Annual Cash from Operations ranged from $14.3 million (FY April 09) on the low end to $25.2 million (FY April 07) over the past four full fiscal years, and totaled an outsized $36.6 million five years ago (FY April 2005). By comparison, the company spends almost nothing on capital spending, leaving virtually all of CFO as FCF available for investment in product development or for payment as dividends.
As the writer mentioned, the Value Line BRAND is not destroyed. Certainly it has been considerably diminished by the recent revelations, but it has not been destroyed. Certainly it has been diminished by the reign of the real Queen of Mean (not Leona Helmsley). Finally, a considerable portion of the subscription base probably consists of libraries that are unlikely to cancel their subscriptions over the short term so there is potential for the business to remain viable for quite some time.
Certainly, Morningstar has eaten Value Line's lunch, but the company's name has value and good management may be capable of turning the company around through reinvestment in the business, improvement of existing products (the electronic version of the survey appears to be a disaster), development of new products, and the general application of good business practices.
Practitioners of Porter Analysis would readily classify the company as a "cash cow" not as a "dog." Value could even be created through the classic Porter strategy of using the cash flow of the existing business to invest in completely new businesses through diversification. Heck, you could buy quite a few car washes per year with $15 million. Even Lenny Dykstra was able to do that, and he didn't even have $15 million a year to invest in them.
The big questions remain: How will JBB dispose of her ownership interest? Who will be the buyer of that ownership interest? How quickly will they sweep the C-suite clean of people like the current CEO who is a long-time crony of JBB.
Inquiring minds want to know.