A Hot Stock Hits Static : Wall Street: Shares in Culver City-based IDB Communications tumble on questions over accounting methods. Firm insists revenue and profit figures are sound.
The cover of IDB Communications Group’s latest annual report reads “The Sky’s the Limit,” and until this week there was little reason to doubt it.
Founded 11 years ago with a $15,000 loan, the Culver City-based company grew into a $311-million global communications firm by 1993--boasting a cutting-edge satellite network that transmitted everything from slugger Barry Bonds’ home runs to news of killer Jeffrey Dahmer’s trial to private corporate phone calls.
All the while, IDB’s 38-year-old founder and chief executive, Jeffrey P. Sudikoff, grew rich and respected enough for Fortune magazine to list him in March among a select group of “America’s smart young entrepreneurs.”
A personal capstone for Sudikoff came last month when he and a partner bought a 72% stake in the Los Angeles Kings from financially troubled sports mogul Bruce McNall for $60 million. Now Sudikoff wants to build a $150-million state-of-the-art sports arena.
But on Wednesday, IDB’s stock price went into a free fall, losing half its value as investors bailed out on news that the firm’s independent auditors, Deloitte & Touche, had resigned in an apparent dispute over IDB’s accounting.
The stock plummeted $7.375 to $7.125 on Nasdaq in what was by far the most active trading in any stock. As for Sudikoff, IDB’s largest individual shareholder, he lost a staggering $35 million on paper between breakfast and lunch.
The plunge in IDB stock is not expected to affect the Kings. Sudikoff’s partner, Joseph Cohen, said the team’s fortunes “don’t rise and fall with IDB stock.”
But Sudikoff faces an angry mob on Wall Street. The big question dogging IDB now, and the one that caused the stock meltdown, is whether the company may have overstated revenue or earnings in prior years to keep its stock flying high and thus provide the “currency” needed to fund a dramatic acquisition binge that started two years ago.
IDB President Edward R. Cheramy, a former accountant and Sudikoff’s No. 2 man for 8 1/2 years, denied Wednesday that IDB has misrepresented its growth. He said that while Deloitte had questioned some of IDB’s accounting in 1992, the two parties ironed out their differences and Deloitte issued unqualified opinions on IDB’s finances for ’92 and ’93.
Cheramy admitted, however, that IDB’s relationship with Deloitte has been troubled for years, but he said he had no warning Deloitte would resign.
Analysts said Wednesday that the specific accounting disputes appear fairly minor. One involved how to record a gain of $5 million on the sale of a satellite transponder. IDB chose to book the gain in the first quarter, offset by certain charges. Deloitte apparently argued to book the gain in the current quarter.
Another issue involved IDB’s decision to make an accounting adjustment in the first quarter on one of its long-distance phone contracts. Cheramy said Deloitte initially objected to the adjustment but ultimately agreed to it “when one of their people from New York came out here” to discuss it.
So far Deloitte has refused to comment. It is expected to explain its resignation to securities regulators soon.
If IDB had agreed to follow Deloitte’s counsel on the two accounting issues, Cheramy estimates, reported first-quarter earnings of $8.8 million would have been revised downward by “a couple million dollars.”
That would have left earnings well above the $4.1 million reported in the 1993 first quarter, but the decline in earnings growth might have unnerved investors.
Indeed, asked why IDB would choose to argue accounting points rather than go along with its auditor, Cheramy said that restating first-quarter earnings would have created “a credibility problem with our investors.”
But for money managers such as Gary Pilgrim, whose firm Pilgrim Baxter had owned 4 million of IDB’s 71 million shares as of Tuesday, IDB appears to have created a far bigger credibility problem by allowing Deloitte to resign. Pilgrim was among the IDB holders who bailed out Wednesday.
“The items themselves aren’t the issue--it’s the company’s inability to reconcile differences with an independent third party,” Pilgrim said. “My guess is they tried to scream (Deloitte) down and failed.”
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Pilgrim said Wall Street doesn’t doubt that IDB’s business is real, only what it now is truly worth. “Nobody’s questioned their ability to grow their top line (sales),” Pilgrim said. “But certainly you can (now) question their profitability.”
From a few million dollars in revenue in 1985, IDB grew into an $86-million business by 1990, providing satellite transmission for customers as diverse as Major League Baseball, the Playboy Channel and the White House. IDB’s forte was providing satellite links from remote locations.
But along the way, Sudikoff and Cheramy took on heavy debt to fund their expansion. In mid-1990, as the recession hit and many TV and radio programmers began to scale back special-event broadcasts that were IDB’s lifeblood, the company’s growth stalled.
IDB’s need to find a steady source of sales and earnings led to its concerted push into international long-distance telecommunications in 1992. Sudikoff had laid the groundwork for the move by cementing ties with many foreign governments, including Russia, China and Israel.
In 1992, IDB bought a large but unprofitable global long-distance provider called WorldCom from Swiss giant TeleColumbus. Rather than use cash for the deal, IDB convinced TeleColumbus to take 13 million IDB shares as payment.
In 1993, Sudikoff and Cheramy engineered another major long-distance telecom acquisition, agreeing to buy the unprofitable TRT Communications from Oregon-based Pacific Telecom. Again, the payment was mostly in stock, this time 10 million IDB shares.
The acquisitions produced dramatic overnight growth for IDB. Sales mushroomed from $104 million in 1991 to $155 million in 1992, then to $311 million last year.
More important to Wall Street, IDB’s earnings also rocketed--from $1.55 million in 1991 to the $10.96 million reported for ’93.
With its rapid growth--the firm touted itself as the fourth-largest U.S. carrier of international long-distance phone calls, behind AT&T;, MCI and Sprint--IDB became a Wall Street darling. It stock tripled in 1993 alone, from $6 to nearly $19, then hit a peak of $20.50 early this year.
Yet some of the company’s doubters questioned how IDB could take two money-losing long-distance companies and quickly turn them into earnings successes.
Charles Biderman, an independent stock analyst in Santa Rosa, Calif., suggested to his clients last fall that they “short” the stock, betting on a decline. After studying IDB’s financial reports, Biderman said he failed to understand how the WorldCom and TRT acquisitions had become “wildly profitable companies overnight.”
Biderman suspected accounting tricks, but in poring over IDB’s reports, he conceded, “I couldn’t give you a smoking gun. But I’ve been in this business long enough. . . . You almost had to short it based on your gut.”
Cheramy insists that the profits IDB has wrung from its acquisitions are real, noting that IDB slashed employment at WorldCom and TRT by two-thirds as it integrated their networks into its own.
Moreover, Cheramy says IDB’s long-distance business is capable of 20% to 25% annual earnings growth. “We’ll show you what the numbers are,” he said, directing his comments to the company’s instant legion of doubters on Wall Street.
Asked if he thought IDB’s financials might have to be restated when the company hires a new auditing firm, Cheramy said, “I don’t think that will happen.”
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Times staff writer Lisa Dillman contributed to this report.
IDB Communications Group At a Glance
Business: Global transmission of telephone services, television programs and radio programs. The company claims to be the fourth-largest U.S. carrier of international long-distance telephone calls and the largest U.S.-based provider of international digital private line telephone services.
Headquarters: Culver City
1993 Revenue: $310.7 million, double IDB’s 1992 revenue.
1993 Net Income: $10.96 million
Employees: about 900
Chairman and Chief Executive: Jeffrey P. Sudikoff, 38. Sudikoff’s personal holdings include 72% of the Los Angeles Kings hockey team bought last month with IDB director Joseph Cohen for $60 million.
