Company Problems Escaped Scrutiny in Media Coverage
By JOHN BRINSLEY
Contributing Reporter
Admittedly, it was a short interview. And there was a lot to discuss, including how the company’s stock had jumped to $33 a share from its initial public offering price of $11 in only a week.
Still, when CNBC strapped a microphone on Stamps.com Chief Executive John Payne in 1999, the two questioners failed to ask him something that in hindsight is pretty obvious:
Why should anyone invest in a company that does not have any profit or even any revenue?
It’s the kind of question that points to the media’s role in covering some of the high-flying businesses that sprung up in the late 1990s.
Santa Monica-based Stamps.com was one such story. The company, which provides mailing and shipping services over the Internet, went public in June 1999 despite not having any revenue at the time. By November 1999, the stock was trading as high as $90 with a market capitalization of nearly $4 billion. Today, the stock trades around $3.25. It has yet to make one penny in profit.
“The press got swept up in the Internet hype and pumped up a lot of marginal companies in a way that undoubtedly misled some investors,” said Howard Kurtz, who covers the media for The Washington Post, and is the author of “The Fortune Tellers: Inside Wall Street’s Game of Money, Media and Manipulation.”
Perhaps no Los Angeles company better exemplifies this than now-defunct eToys Inc. The brainchild of former Walt Disney Co. executive Toby Lenk and hatched at Bill Gross’ Idealab incubator, the online toy retailer was formed in 1997 and quickly became a media darling.
Top IPO
In May 1999, eToys launched the most successful IPO ever of any L.A. company. Its stock traded above $80 on its first day, giving it a market cap of $7.5 billion. The press reacted in kind. Lenk was part of a cover story in Fortune Magazine, “How to be a Great CEO,” and was later named to Fortune’s list of “40 Richest Under 40.”
Many stories did point out the obvious that eToys was losing money hand over fist. But the focus often was more on its stock and sales growth. When the company announced that it had lost almost $21 million in its first quarter as a public company while posting an almost 2,000 percent growth in sales, a Los Angeles Times story noted in the lead paragraph that analysts were impressed.
Times Business Editor Bill Sing defends his paper’s coverage of eToys, as well as other hot-flyers that ultimately crashed. But he concedes that the hype got out of hand.
“You have to distinguish the kinds of stories,” he said. “A lot of skeptical stories were written also. A lot of responsible newspapers, and I would like to include us in that, were writing (such stories) all along.”
A review of media coverage at the time finds that the print media, especially daily newspapers with heavy financial coverage, raised more questions than did the cable news channels.
But there is broad agreement that the press dropped the ball in certain areas especially in not examining the role of analysts who worked for investment brokerages that were underwriting or taking heavy positions in the stocks of companies the analysts were covering.
Last week The Wall Street Journal reported that former Merrill Lynch & Co. Internet analyst Henry Blodget, whose enthusiasm for eToys was repeatedly cited, is being investigated by the New York state attorney general’s office regarding possible conflict of interest in his stock recommendations.
“It’s a complete cop-out to say the press could not have seen the danger signs,” Kurtz said.
Also coming under fire is the amount of attention given to those making fortunes on the technology boom. There is no better local example than Gary Winnick, co-founder of Global Crossing Inc.
Initially, Wall Street reacted wildly to the idea of laying thousands of miles of fiber optic cable underwater for a worldwide telecommunications network. Global Crossing’s stock reached upwards of $60 in the spring of 1999, making the Beverly Hills resident worth $6.2 billion on paper.
Forbes wrote a cover story on Winnick and his company in April 1999, calling his “the fastest fortune ever,” and pronouncing Global Crossing’s prospects ambitious but not implausible.
In May 1999, the Business Journal put Winnick on its front page as that year’s “Wealthiest Angeleno,” and wrote a glowing portrait of the company’s rapid growth.
“We put him on the cover because he was the richest Angeleno at the time,” said Business Journal Editor Mark Lacter. “Where we failed, and where others failed, was not taking it many steps further and looking at the company’s prospects. In retrospect, it wouldn’t have changed our decision to put him on our list, but we should have sounded more warning signs that this wealth was transitory.”
That’s for sure. The company’s stock had started to fall even as Winnick’s profile was rising, and it would never recover, sunk by failed mergers and bad business deals. Last week, it was trading just above $1.
