Cramer Looks Back: Hayes Turns to Mush

In the fourth segment of a five-part series, the trader recounts how a small-cap remote-access play deteriorated.
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(Editor's Note: James J. Cramer, co-founder of, is getting some rest and relaxation with his family this week. But in order to give you your daily Cramer fix, we've got a special five-part series from the trader. In this series he will focus on what went wrong during 1998. Today he focuses on how a small-cap win turns into a crushing defeat.)


Access Beyond

merged with Hayes -- a company in bankruptcy -- I didn't like the look of the deal. The combined company came public, lost the Access Beyond moniker and became Hayes. The stock, which had been trading between $4 and $5, immediately bolted skyward. People liked the combination.

The new v.34 modem cycle was ahead of them. I averaged down on a huge chunk of stock. The price-to-revenue ratio seemed way out of whack. That's when I should have been selling. I knew I didn't like the deal, but the stock acted so well, I thought that there might be more to it. Maybe I was too skeptical; the stock seemed to be saying hold on, it is worth it. See what's around the bend.

When companies are in bankruptcy they have to write a plan detailing how they will operate when they come out of bankruptcy. In it are a series of projections. The projections seemed easily obtainable. Management was quite confident it could meet the numbers. The managers exuded confidence.

They missed the first quarter by a mile. They missed it by so much that they needed to raise more money. We turned them down. Instead they arranged financing with a group of sharp money managers who insisted on a structure that, the moment I saw it, I knew could knock the company for a loop. I called management and explained to them that the terms of the convertible financing would create a risk-free short-selling situation by the people lending the money. I said that the lenders would be encouraged to bet against the company. Management had no idea what I was talking about.

As soon as the deal was closed, short-sellers started swarming all over the company. I know I sound like those people who hound

Herb Greenberg

when he raises questions about a company, but indeed, the short-sellers, aggressive to the point of beleaguering any potential buyer, systematically knocked down the company's stock.

I repeatedly complained to management about this. Management repeatedly denied it was happening. Finally, in a heated meeting, one at which I totally lost my temper, I demanded that management call up the convert holders and ask them if they were behind the short-selling.

Management did; I was right. The convert holders had shorted a huge amount of stock, creating a situation where the company looked like it was in dire straits, even if it wasn't. But it was too late, the damage was done and the stock had been knocked down to 1 3/4, a huge, huge loss for someone who was playing with the house's money until he averaged down. At this point the question became, do I bother to try to sell the shares, now numbering 2 million, and if I do, what will I get for them. I made the judgment that I had weathered things this far, I might as well hold out to the bitter end.


Another quarter came and went and the company fell further behind plan. It changed managers. It sued the convertible holders to try to get them to stop shorting. They wouldn't check off on it, though. It tried to sell plants, move headquarters, lay off people, change CFOs. Nothing, nothing worked.

So what did the company do? What do you do when your stock is trading at $2 and looking like it is going to zero? Why, you reverse-split the stock!

Sure enough, next thing I know I have 700,000 shares of a $6 stock.

But within a matter of weeks the stock is back to 3. If you take away one concept from this piece, remember that when public companies do reverse stock splits, it is a sure sign that things are coming unglued faster than even management thinks.

Now I had something on my hands that was worth more dead than alive to my portfolio. Around this time, to compound my embarrassment,


did a piece that questioned how someone as allegedly savvy as I am would get trapped in a Hayes. I declined to answer any questions. I had no desire at the time to explain the rank incompetence on the part of management and how I had been unable to stop both the Hayes merger and the convert financing. I also had no desire to indicate how unhappy I was because at this point I would have loved to sell any amount of shares to salvage something.

There were no buyers anyway. And there would never again be buyers after the



With the next quarter came a statement about a liquidity crisis at the company. The stock immediately fell below a dollar.

Now it truly was worth more dead than alive. I sold my whole position at a hideous loss right at the time that it filed for bankruptcy.

It subsequently closed and was delisted. I lost millions of dollars. And I didn't even have the satisfaction of telling off management. I just drifted away.

Friday: A Final Blow From an Old Friend, the S&Ls

James J. Cramer is manager of a hedge fund and co-founder of Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending an email to