Chasing deals earned William P. Foley II a fortune, and last year the Santa Barbara investor was at the top of his game.
Foley’s fast-growing Fidelity National Financial Inc.--which he built into one of the nation’s largest title insurers--hit record profits. The Wall Street Journal put Foley on its front page, profiling his burgeoning fast-food empire, which includes Carl’s Jr. and Hardee’s. Ever on the lookout for new deals, the hard-charging entrepreneur bought a stake in the Orange County investment banker Cruttenden Roth Inc.
But as Foley is learning, the warmth of Wall Street’s approval can turn chilly awfully fast.
In just one year, most of Foley’s best-known investments--ranging from title insurance to restaurants to information technology--have turned sour. Stock prices of seven Foley-run companies have lost, on average, half their value since July 1998. By comparison, the Standard & Poor’s 500 index has risen 20% over the same period, while the Russell 2,000 index of smaller stocks is up 0.5%.
Irvine-based Fidelity National is down 47%. Anaheim-based CKE Restaurants, parent of Carl’s Jr., lost 62%. Micro General Corp., a Tustin-based information technology firm controlled by Foley, fell from $6 a share last year to $3.25 as of Friday.
Analysts say Foley shouldn’t take the declines personally, but the negative trends have nevertheless bruised his hard-earned reputation as a builder of companies and a corporate turnaround specialist.
“When your stocks go up, you’re a genius,” said Allan Hickok, an analyst at U.S. Bancorp Piper Jaffray in Minneapolis. “When they go down, you’re an idiot. I’d say the chorus from investors who are skeptical about Bill Foley’s collection of companies is definitely getting louder.”
Some question whether the energetic, 54-year-old Foley is spreading himself too thin or chasing too many deals, causing investors to lose faith.
There’s more than just Foley’s reputation at stake. The value of his personal stock holdings in several of those companies is down nearly $75 million over the last year, primarily because of the declines in Fidelity National and CKE, according to company financial statements. Based on Thursday’s market close, Foley’s stakes in the seven companies was worth more than $130 million, documents show. Foley was traveling last week in Russia and did not make himself available for comment.
His supporters and colleagues say the stock drops are no reflection on Foley. Rather, they say, the declines represent an unfortunate convergence of unrelated market forces that have hurt his portfolio.
“Fundamentally, his companies are running strong,” said Andrew Puzder, Foley’s attorney and co-investor in several of the stocks. “We just need the market to catch up and acknowledge that.”
Fidelity National, he said, is suffering from the same cyclical declines as other title insurance companies, caused primarily by rising interest rates and a concern among investors that the refinancing boom is over. Fidelity National stock fell from an all-time high of $39.69 a share last July to $19.75 on Friday. Fidelity National’s cross-town rival, Santa Ana-based First American Financial Inc., experienced a nearly identical 50% stock drop over the same period, Puzder noted.
Separately, investors in CKE Restaurants have grown frustrated by the company’s slow progress in digesting its 1997 acquisition of Hardee’s, where sales continue to fall. After missing its first-quarter earnings expectations, the company watched its stock fall to $14.63 as of Friday, down from $40 last July.
The stock slumps at Foley’s other companies, including Santa Barbara Restaurant Group, Micro General, American National Financial Inc. and money-losing restaurant chains Checkers Drive-In and Rally’s Hamburgers, are largely attributable to the stock market’s current preference for large companies and Internet stocks, according to Byron Roth, chairman of Cruttenden Roth, the Irvine stock-underwriting firm that is 18%-owned by Foley’s Fidelity National. That has hurt the kind of small-company and value stocks that Foley tends to buy.
“Small-company stocks are out of favor right now,” Roth said. “But it’s a marathon. Bill is making investments for the long run.”
Puzder also notes that despite the recent downturns, many of Foley’s companies have outperformed the market during the 1990s. An investor who bought $100 of Fidelity National stock on Jan. 1, 1990, would have nearly $1,050 today, or almost triple the gains of the S&P; 500. Even CKE stock is up 135% during the same period, despite the recent decline.
Still, some say Foley’s self-described “addiction” to deal-making may play a role in his stock troubles. A West Point graduate who has applied his military training to running companies, Foley may be making deals faster and more aggressively than investors like to see.
Foley’s restaurant operations are a case in point: To cobble together the nation’s fourth-largest fast-food chain, Foley has bought, sold, merged and renamed so many small restaurants in recent years that it’s hard for investors to keep track of his strategy.
For example, Foley tried to merge Checkers and Rally’s in 1997, then scrapped the idea, then revived it again last fall.
In 1996, CKE moved into buffet-style restaurants, then abruptly spun off the operation two years later.
When Foley bought Hardee’s, he planned to convert the stores into Carl’s Jrs., but he dropped the idea in favor of reviving the old Hardee’s brand instead.
In addition, Foley has forged numerous joint ventures among his restaurant chains, and several of his companies own stock in one another.
A recent example: In January, Santa Barbara Restaurant Group gave about 2.5 million shares of its stock to Fidelity National in exchange for 2.2 million shares of Rally’s stock and 274,000 shares of CKE stock. At the same time, CKE holds an 8.4% stake in Santa Barbara Restaurant and a 37% stake in Rally’s, according to recent financial statements.
“It’s sort of a Byzantine labyrinth of corporate entities,” Hickok said. “It confuses investors. . . . But Foley is a deal guy. Some deals work out and others he spins off. He’s like a bridge player. He gets some cards that don’t work out, so he shuffles them off to the left or the right.”
Foley’s deal-making strategies at Fidelity National also have been controversial. To diversify Fidelity away from interest-rate-sensitive businesses, Foley has said he wants to branch out into new directions. But some of the diversification has come in the form of stock investments into other Foley-run companies, making Fidelity National look more like an investment firm than a real estate information company.
In addition to the 18% stake in Cruttenden Roth, Fidelity National owns 78% of Micro General, 29% of American National Financial and almost 37% of Santa Barbara Restaurant. Fidelity also holds stakes or warrants for stock in CKE Restaurants, Rally’s and Checkers.
“That’s not really diversification, that’s running an investment portfolio,” said Todd Pitsinger, an analyst at Friedman, Billings, Ramsey Group in Arlington, Va. “Investors don’t want to pay Bill Foley to run their investment portfolio. They can do that themselves. They want him to run his business. They like clean [investment] stories.”
Mark Stewart, chairman of Irvine-based OCstocks.com, which tracks Orange County companies, said the recent stock declines in Foley’s companies may be a friendly reminder from shareholders that he should finish implementing his existing deals before embarking on new ones.
“Sometimes deal makers get ahead of themselves,” Stewart said. “It may be a good idea to digest what he’s done.”
Stewart said Foley also may be a victim of his own past successes. Foley’s track record for building Fidelity National from scratch and turning around Carl’s Jr. may have led investors to hold unrealistically high expectations for what he can do and how quickly he can do it.
Foley, however, shows no signs of slowing. Chairman of six of his companies and chief executive of the two largest, he recently told a colleague that he views the latest stock declines as an opportunity for more deals.
“He doesn’t have the personality to move slow,” Roth said. “I don’t think he has two speeds.”
Times staff writer Edmund Sanders can be reached at firstname.lastname@example.org.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Losing His Touch?
Some of William Foley’s biggest investment bets--ranging from title insurance to hamburgers to technology--came up short over the past year. Stock prices at seven Foley-run companies have lost, on average, half their value.
Company: American National Financial
Foley’s stake: 5.0%
Value as of 7/15/99: $1,634,559
Stock performance 7/16/98 thru 7/15/99: -24%*
Company: Checkers Drive-In
Foley’s stake: 1.9%
Value as of 7/15/99: $476,051
Stock performance 7/16/98 thru 7/15/99: -71%
Company: CKE Restaurants
Foley’s stake: 2.7%**
Value as of 7/15/99: $21,867,798
Stock performance 7/16/98 thru 7/15/99: -62%
Company: Fidelity National Financial
Foley’s stake: 15.7%
Value as of 7/15/99: $101,437,362
Stock performance 7/16/98 thru 7/15/99: -47%
Company: Micro General
Foley’s stake: 5.1%
Value as of 7/15/99: $1,343,332
Stock performance 7/16/98 thru 7/15/99: -41%
Company: Rally’s Hamburgers
Foley’s stake: 2.5%
Value as of 7/15/99: $389,207
Stock performance 7/16/98 thru 7/15/99: -72%
Company: Santa Barbara Restaurant
Foley’s stake: 7.2%
Value as of 7/15/99: $3,475,536
Stock performance 7/16/98 thru 7/15/99: -68%
Company: Average loss
Value as of 7/15/99: $130,623,809
*Stock performance for American Financial measured from first trading day, 2/12/99 to 7/1/99.
**Not including a 7.5% stake held to Cannae Ltd. Partnership, in which Foley is a partner.
Source: Securities and Exchange filings