How IDB Went From Buyer to Seller
With its stock price cut in half and its accounting practices under fire, Culver City-based IDB Communications Group agreed Monday to be acquired by a rival.
But far from closing the book on its tumultuous recent history, the satellite communications company’s decision to sell out stirred new controversy on Wall Street.
Many of the firm’s largest shareholders are desperately trying to affix blame for what they regard as the premature end to IDB’s once-stellar story.
Some view IDB’s 38-year-old founder and chairman, Jeffrey P. Sudikoff, as tired of the Wall Street game and anxious to move on to other pursuits--mainly his majority ownership of the Los Angeles Kings. It’s a charge that rankles Sudikoff, who insists that his decision to sell the 10-year-old firm is solely based on a new assessment of IDB’s future in the evolving telecommunications industry.
Until a few months ago, IDB as a stand-alone entity had been one of Wall Street’s classic growth-stock stories. The company’s sales and earnings were rocketing, its global satellite communications network was the envy of competitors, and a small army of analysts pounded the table about the firm’s dazzling long-term potential.
At its most basic, the saga of IDB’s fast fall comes down to numbers--and expectations versus reality.
While Sudikoff crossed the globe cementing IDB’s valuable telecommunications contracts with foreign clients earlier this year, his No. 2 man was in a battle royal with the company’s accounting firm of Deloitte & Touche.
IDB’s No. 2, President Edward Cheramy, insisted that the company’s rapid first-quarter earnings growth rate, after major acquisitions in 1992 and 1993, was real. But the auditors’ doubts were so severe that, in a stunning decision, they quit in May--fueling a collapse of IDB’s stock.
Monday, Deloitte & Touche was vindicated at least in part: IDB, now advised by audit firm Arthur Andersen, agreed to restate its first-quarter earnings, slashing reported results by 33%. Even more significant, IDB indicated it is reviewing its use of a controversial accounting practice that, in effect, allowed the company to book long-distance revenue before it actually came in.
But in perhaps the biggest surprise, Sudikoff and his board agreed Monday to sell IDB to long-distance telecommunications firm LDDS Communications for a price that many of IDB’s big shareholders regard as too cheap.
Indeed, IDB stock tumbled 62.5 cents to $8.875 on Tuesday, reacting to the merger terms: Each of IDB’s 74 million shares would be exchanged for approximately one-half an LDDS share.
At LDDS’ closing price of $19.44 on Tuesday, the deal is worth about $9.30 a share to IDB holders. Earlier this year, before the accounting dispute surfaced, IDB shares traded as high as $20.50.
Sudikoff insists that Wall Street is being short-sighted in criticizing the deal’s terms. Noting that the marriage will take months to close, he expressed optimism that LDDS’ stock will climb over that period--lifting IDB shares as well--as investors look closely at the combined firm’s potential. “You have to look at where we expect LDDS to be in six months,” Sudikoff said.
But his words so far are falling on many deaf ears. “This deal pisses me off,” said Michael Mahoney, manager of the GT Global Telecommunications stock fund in San Francisco. As holder of 3.5 million IDB shares, he believes Sudikoff should have negotiated a higher price, given the value of IDB’s extensive international long-distance telecom agreements with foreign countries.
Those agreements, or “gateways,” represent a key asset that LDDS Chairman Bernard Ebbers needed to take his fast-growing domestic long-distance business to the international level.
Yet until last spring, the assumption among investors was that Sudikoff’s IDB was as firmly in position to be a buyer of other telecom networks as Ebbers’ LDDS. In fact, IDB’s dramatic growth in recent years--from $86 million in revenue in 1990 to $311 million last year--occurred as a result of huge acquisitions that brought IDB a horde of new long-distance clients.
To grow by acquisition, however, IDB needed a high stock price. As long as its earnings continued to expand at a brisk pace--33% in 1993--investors were willing to afford IDB a lofty share value.
But when IDB’s accountants resigned over the first-quarter earnings report, Wall Street had to consider its worst nightmare: that IDB’s growth may have been inflated by its accounting practices.
IDB’s announcement Monday that it is reconsidering a key element of its accounting practices has only added to Wall Street’s fear that it was somehow duped with regard to the company’s past growth.
Sudikoff insists that IDB engaged in nothing more than “aggressive” legal accounting. And he notes, correctly, that while Deloitte & Touche had problems with some of the company’s first-quarter earnings calculations, the accountants had all along blessed IDB’s revenue-accrual methodology.
The bigger question for many IDB shareholders, then, is why Sudikoff is suddenly selling IDB and why at no premium to the market price.
To hear LDDS’ Ebbers describe it, the buyout price isn’t low. Ebbers says IDB, as a stand-alone firm, would earn about 35 cents a share in 1995. A $9.30-a-share purchase of IDB “as a multiple of 35 cents is a very high price,” he argues.
As recently as three months ago, however, IDB was content with analysts’ estimate of 75 cents a share in earnings in 1995. Why, now, is IDB capable of only half that?
Sudikoff says the issue isn’t accounting changes, but the rapidly changing global telecommunications business. He came to realize this year, he says, that “we were short of the solutions needed to build the company on a stand-alone basis.”
IDB needed a bigger partner, Sudikoff said, and LDDS is a natural fit. As for how the market had valued--and is valuing--IDB stock, Sudikoff said: “I wasn’t as smart or as clever as they (investors) thought I was when the stock was at $20, and I’m not as dumb or as conniving as they think I am with the stock down here.”
Some investors questioned whether Sudikoff has been distracted from IDB by his L.A. Kings investment. Sudikoff scoffs at that. His 4.8 million IDB shares represent the bulk of his wealth, and thus would be extremely foolish for him to ignore, he says. “IDB gets all my attention.”
Moreover, he says that despite the accounting storm that was aggravated by personality disputes between Cheramy and Deloitte, “Ed didn’t make the problem all by himself. IDB management fell short of the mark in realizing what had to be accomplished” to keep earnings on track.
Yet Cheramy, 50, will have no role in the new IDB-LDDS. Sudikoff said Cheramy had previously expressed a desire to retire and has already moved to Jackson, Wyo. In the process, Cheramy was a heavy seller of his IDB shares in spring, before the accounting dispute surfaced.
Sudikoff, meanwhile, will have no official position at LDDS other than director. He will remain in L.A. While he says he would be quick to consider any rival bid for IDB, if none surfaces he is adamant that he negotiated the best possible deal. “My equity is more important to me than my job,” he says. In deciding to sell IDB to LDDS, he says, “I’m protecting the value of my equity and theirs (other shareholders’).”
IDB’s Fast Rise--and Fall Shares of IDB Communications Group languished in the company’s early years, until the firm mushroomed in size via acquisitions in 1992 and 1993. But questions about IDB’s accounting practices cut the stock in half this year. IDB’s high price each quarter on Nasdaq, except latest:
Note: Prices adjusted for stock splits.