Drawing the Line at Value Line
An interesting situation has been developing in connection with one of Wall Street's better known stock-picking services: the so-called Value Line (VALU).
Admittedly, we are no great fans of Value Line. It's not that the investment services offered by the company are no longer what they once were. The more fundamental problem is that the company that owns and manages the various Value Line offerings is publicly held and traded, yet nonetheless appears, on all available evidence, to be run like the personal and private plaything of its chairman, chief executive and majority stockholder, Jean (The Mean Machine) Bernhard Buttner.
We'll get more deeply into that subject in a minute, for nothing much seems to have changed since we last advanced some thoughts on the state of business at Value Line in December of 1996. Basically, the company looks to be a dead-in-the-water operation that has been becalmed for so long now that life in the Digital Age seems to be passing it by.
But before getting into the particulars, let's share some thoughts on an instructive situation that seems to be occupying a good deal of Buttner's attention at the moment -- a period when her stockholders would be better served if she were focused instead on running her company.The situation arises as a result of a 1998 Federal appeals court ruling that exempts Internet Web site operators from defamation liability under the Communications Decency Act of 1996. That ruling in turn has uncorked a continuing smear campaign against Buttner on an Internet bulletin board run by Yahoo! (YHOO), the search engine company. It's a smear campaign that Yahoo! has been permitting every step of the way. But thanks to the aforementioned court ruling, the company has been exempted from any liability for its involvement in it. All this has developed as a result of the bleating protestations of Internet site providers that fact-checking or even minimally vetting what they permit to be published on their Web sites would discourage free speech and be ruinously expensive. Yielding to that reasoning, a Federal appeals court in Virginia held one year ago in reviewing a libel action against America Online (AOL) that Congress gave Internet service providers a blanket and categorical protection, under the 1996 act, from libel suits. This blanket protection has since uncorked a torrent of defamation and slander on the Internet, as Internet companies like America Online, Yahoo! and many others -- recognizing they can't be held legally liable for what gets posted on their sites -- have permitted an ever-swelling army of Web surfers, all disguised protectively with aliases, to say any damned thing under the sun about anything or anyone, no matter how scurrilous or untrue. One favorite pastime: Rings of stock manipulators, both promoters and short-sellers, gang up to take secret pre-emptive positions in various stocks, then use pseudonyms and aliases to post unfounded -- and often false -- market-moving statements about companies on Web sites. The practice is now provoking all sorts of retaliatory litigation by the target companies -- litigation that the Web site operators are safely exempted from even though they themselves are providing the forums for the libels and false information to be spread. That's where Buttner comes in, because for the last year she has been subjected to an unending campaign of vilification and abuse on a Yahoo! bulletin board. Now she's fighting back with a $52 million libel action -- not against Yahoo!, which continues to allow the campaign to unfold on its Web site to this hour, but against the people using Yahoo! to attack her. They seem mainly to be her own employees. Over the years, we have not said very flattering things about Buttner, to be sure. We've called her an autocrat, a corner office dominatrix and Wall Street's answer to Nurse Diesel -- referring to the Cloris Leachman character in Mel Brooks' twisted comedy, High Anxiety. But at least we have provided evidence to support our assertions. And more importantly, we have signed our name to everything we've written about Buttner and her company. And that in turn has informed not just the world at large, but Buttner in particular, as to who we are and where to find us should she decide to answer back. But that is something her Yahoo! attackers haven't done. Hiding behind the veils of aliases, they have called her mentally unbalanced, incompetent, a dodo, an idiot, not qualified to run a pay toilet and a nitwit. The libel suit also noted a bizarre posting that claimed she tried to have her deceased father, Arnold Bernhard, exhumed from a cemetery and buried in the backyard of the family estate in Connecticut, in order to -- get this -- ruin the property values of abutting homeowners. Most First Amendment lawyers would quickly -- and rightly -- retort that such comments are not libelous at all. In his marvelously readable book, The Practical Guide to Libel Law, New York First Amendment lawyer Neil Rosini lists 20 different disparagements that courts have held to be vigorous expressions of protected opinion. They include "idiot," "fanatic," "raving maniac," "gutless bastard," "crackpot," "Commie," "asshole of the month," "pus-bloated," "wacko" and more. Many might also say that the whole campaign is just a cyberspace version of graffiti scribblings on factory walls, and that in Buttner's case it simply shows how thoroughly detested she is at her own company. Instead of getting upset over underlings who have been making faces behind her back for years, maybe she ought to take a course in how to get along with other people and devote herself in the future to breathing some life back into her company. But she's rich enough -- and apparently thin-skinned enough -- that she's decided to fight back and has now subpoenaed Yahoo! to divulge the real names of the individuals hiding behind the aliases on its Web site. I, for one, hope she succeeds in ferreting them out, too. One clever wit has been signing his postings "Matt Drudge," implying that a number of the rants have been authored by the well-known, if not widely admired, Internet gossipmonger. Mr. Drudge himself has denied having had anything to do with the matter. But I also think none of this would be happening if Internet operators were subject even to a few of the publishing standards that the rest of the media must live with every day. It is one thing to say that the phone company can't be held liable for defamation just because someone makes a slanderous comment during a telephone call. But it is a totally different matter to say that a Web site operator that spends millions annually to maintain electronic bulletin boards, where people can sound off to the whole world at once, shouldn't be responsible when the company knowingly permits its sites to be co-opted and used by slanderers, stock manipulators and who knows who else. As for Buttner, both she and her company would clearly be better off if she spent more time trying to bring Value Line into the Digital Age instead of fretting over how the digisphere is ruining her reputation. But one senses the boss lady doesn't even realize that time is passing her by. The heart of the company's business is the Value Line Investment Survey, which is basically a database of financial information about close to 5,800 public companies. The Survey, which features weekly updates on more than 200 categories of data, has been around for donkey's years and has a following of subscribers who pay close to $1,000 annually for the product in its most digitally advanced form, which comes on a CD-ROM. But the CD-ROM is hard to use, with crash-prone programming. Worse, the technical support people on the company's 800 support line are snotty and impatient, and many of Wall Street's hottest companies aren't even in the database at all. That is particularly obvious in the Internet sector, which contains a mere 41 companies. In comparison, the investor Web site run by Microsoft (MSFT) now counts more than 130 in the sector. Missing names in Value Line include broadcast.com (BCST) (market value: $4.5 billion), Barnesandnoble.com (BNBN) ($2.7 billion), CMGI (CMGI) ($11.5 billion), Go2Net (GNET) ($2.3 billion) and many more like that. In their place are basket-case operations like Prosoft Training.com (POSO), which has declining sales of less than $9 million annually, a $2.69 stock price, a $38 million market value and almost no daily trading volume at all. When grotesqueries such as that appear in the heart of the company's flagship product, it is the job of the CEO to reach down into the ranks of lower management, find the guilty party and crack his head wide open. But no one seems to care, and the embarrassments just continue uncorrected. It's shameful. To be top dog at a stock-picking service that tracks less than a third of the stocks in one of the hottest sectors in the history of Wall Street, while instead covering ridiculous stocks like Quarterdeck, which sold for 50 cents a share until it was acquired by Symantec (SYMC) and isn't really part of the Internet at all, is simply and utterly a disgrace. It would be no different if Ford (F) were to dump the Lincoln Navigator and replace it with a 40-year-old Schwinn three-speeder pulling a Radio Flyer wagon -- and the company's chief executive, Jacques Nasser, were to flog it to Matt and Katie on the Today show, saying, "This is it, kids, just what the market has been clamoring for. Want to take her for a spin?" Generally speaking, the company's finances seem sound enough. But who can get excited over a business in which two-thirds of the revenues come from a technology-driven publishing effort in which virtually every competitor in the market has migrated to the Internet while Value Line remains mired in an out-of-date CD-ROM product and, it seems, according to the company's own financials, isn't spending even a single reported dime on a research and development effort to improve anything? What's been the biggest single expenditure at the company in recent years? Would you believe a special dividend of nearly $150 million so that Buttner could buy out her much despised (and vice versa) twin brother, Van, and thereby gain 100% control of the holding company that owns 80% of Value Line's stock? No kidding -- that really happened! Not a penny for R&D, but $149.7 million so that Jean could make Van go away. Since then, the company has been basically dead in the water, with revenues that have stagnated at around $90 million a year, with costs that have shot up at a brisk 10% annual clip in the last year and with securities-related income that lately seems to have tanked. Normally, public companies issue press releases detailing their fourth-quarter financial results prior to the issuance of year-end statements, but Value Line arrogantly doesn't bother, so investors will have to wait until July 19 to see if there's any glimmer of improvement in the offing. My guess is that, based on the company's performance to date, it will just be more same old, same old. But don't think Mean Machine Jean will be hurting. The stock itself has gone nowhere since we last visited the company. It was selling for $44 at the end of 1996, and it's selling for $40 today. But during that time Mean Jean has paid herself more than $3 million in salary and bonuses -- which is to say, an astounding 7% of the total salary and benefits she paid everyone else in the entire company. In addition, thanks to that $149.7 million special dividend, she now holds 80.6% of the company all for herself -- which is a tidy little nest egg worth more than $300 million at the company's current price. Meanwhile, as we've seen, she's become obsessed with finding out who among her underlings has the temerity to stand up behind a false nose and mustache on the Internet and call her, in the adolescent ranting of a cyberspace graffiti artiste, a nitwit and a nut. Yahoo! deserves more than it's getting for letting that happen on its Web site, but Value Line's investors deserve more than they're getting from the company's boss for caring about it at all. Bottom line: Value Line is a solid company with reliable pretax operating income in the $35 million range (which doesn't include income from securities transactions, which hovered between $20 million and $35 million over the last three years). The company has an extraordinarily strong balance sheet, with no debt, virtually no other liabilities and approximately $220 million in cash and marketable securities. That's a balance-sheet equivalent of $22 per share for a company that is, for all practical purposes, effectively a mutual fund. If we were to capitalize the annual pretax income of $35 million at 10%, we would have an acquisition value of just under $60 per share. With only 2 million shares in the public's hands, for roughly $100 million, Buttner could easily take the company private, and then everyone would live happily ever after. You can reach me by e-mail at email@example.com.
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