NEW YORK, NY / ACCESSWIRE / June 30, 2020 / Labaton Sucharow LLP, a leading investor rights law firm, announces it is developing a proprietary investigation concerning potential securities claims on behalf of shareholders of J2 Global (JCOM) resulting from allegations that J2 may have issued materially misleading business information to the investing public.
J2 Global, Inc., together with its subsidiaries, purports to be a leading provider of internet services. J2 provides cloud services to consumers and businesses and licenses its intellectual property ("IP") to third parties. In addition, the Cloud Service business includes fax, voice, backup, security and email marketing products. J2's Digital Media business specializes in the technology, gaming, broadband, business to business, healthcare, and international markets, offering content, tools and services to consumers and businesses.
On June 30, 2020, Hindenburg Research issued a negative report on J2 noting:
- J2 is a digital media roll-up that has acquired 186 businesses since its inception. Its CEO describes the company's "acquisition system" as its "single great competitive advantage."
- We suggest the contrary and believe J2's opaque acquisition approach has opened the door to egregious insider self-enrichment, which we approximate totals $117 million to $172 million based on publicly available information.
- For example, we uncovered that J2 acquired a newly formed entity based out of its own VP of Corporate Development's personal residence for an estimated $20 million. The entity had undefined "intellectual property" and no employees or apparent assets. No conflict was disclosed.
- The VP of Corporate Development who was on the receiving end of the payday handled 135 of J2's acquisitions, representing ~73% of the company's acquisitions to date.
- It appears to be a pattern. J2's Chairman formerly controlled a different publicly traded company alongside the noted VP, stacked with various J2 board members and insiders. Its European subsidiary racked up ~€14 million in losses despite having virtually no assets. The entity was based out of the same personal residence and was also acquired in part through a related party transaction with the Chairman. The stock of the parent company is down ~99%.
- J2 recently committed $200 million of shareholder cash to a newly-formed investment vehicle run by its Chairman, who has a track record of venture investment failures. The investment vehicle's leadership includes other J2 execs and insiders. J2 expects to commit another $100 million to the vehicle.
- That investment vehicle, in turn, made its first investment of an estimated $12 million into a newly-formed home video business established by the Chairman's nephew. That business is already dormant, according to a former employee. Once again, no conflict was disclosed.
- Despite J2's proxy describing all but one of its board members as "independent", we found decades of intertwined financial interests between board members and executives, calling that independence into question.
- Concurrently, a slowing stream of acquisitions has helped to unearth a decline in J2's key business metrics: digital traffic is down (despite support from recent acquisitions), and cloud cancel rates are ticking up with ARPU falling.
- The underperformance has been masked by tricky accounting. The company has never taken a goodwill impairment, yet subsidiary filings report multiple material goodwill impairments that don't appear to coincide with parent financials. We estimate at least $155 million in impairments based on visibility into $700 million in acquisitions.
- J2's European business (13% of revenue in 2016), which was overseen by the aforementioned VP of Corporate Development, has seen its revenue decline 27% in the subsequent 3 years with operating income swinging from $5.5 million to negative $13 million.
- We believe the company's audit committee simply cannot be relied upon, as a majority of the committee has worked together for years prior to serving on the board of J2 in roles that reveal conflicts of interest.
- The "independent" board approved the cancellation of J2's dividend to "create greater shareholder returns over the near, medium and long term". This apparently includes massive loss-making capital commitments and management fees to related parties.
- J2's young, newly minted CEO was compensated over $45 million during his first year in the role, more than the CEOs of Microsoft and JP Morgan, despite J2 being a fraction of the size. We can't help but wonder whether the board and executive team could be simply trading favors, in a manner consistent with J2's actions for decades.
- COVID-19 has now officially halted the company's acquisition model. We feel this is a crucial opportunity for the company's auditors to examine all of the transactions we lay out in this report (including all acquisitions made under the former VP of Corporate Development) and take necessary measures to prevent what we believe to be additional misuse of shareholder capital going forward.
On this news, on June 30, 2020 pre-market, J2's stock is down approximately 10%.
If you are a shareholder or option holder that suffered losses in J2, and wish to participate, learn more, or discuss the issues surrounding the investigation, please contact David J. Schwartz using the toll free number (800) 321-0476 or via email at firstname.lastname@example.org or email@example.com.
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SOURCE: Labaton Sucharow LLP
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