For full disclosure, my firm, Reed Conner & Birdwell, owns a boatload of Comdisco (CDO) and we've owned it for years.
So when we see an article like Alex Berenson's
today on the company, you can imagine our interest. Let me say this in as objective manner as possible:
and its readers deserve better. To address the issues:
- The article starts right off with "Comdisco, a fast-growing computer leasing company ... which has come under fire in the past for allegedly using aggressive accounting tactics." There is no excuse for quoting four-year-old articles inother publications (in this case,
Forbes) and leaving the allegations hanging outthere uncontested. This is unfair and Alex makes noattempt to elaborate on the accounting issues.
This is no different than the "junk science" reporting on topics asvaried as Alar,Audi brakes, etc., in which news publications quote one another ad infinitum and in the end no one has any idea ofwhat actually happened.
So when did you stop beating yourspouse?If you are going to use terms like "fast growing" and "aggressiveaccounting" in regard to leasing companies, you have a responsiblity to knowwhat you're talking about, since the statements are akin to yelling fire ina crowded movie theater.
It took our firm the better part of 20 hours on thephone with Comdisco, plus other leasing companies and a few accountants andtextbooks, to fully understand the complexities of accounting for leases andwhy Comdisco reports what it does. And then we watched the company for years beforebuying.
This is a very, very tricky area that is very easy to misunderstand,and one of the reasons Comdisco has sold at very attractive prices from timeto time: People are too lazy to do the work.
As far as the "quality" ofits accounting, the company has not taken a material writedown for leaseresiduals in the 10 years we have looked at it (the company says not in20, but we have only dug for 10), which is not a bad record considering thevolatility of technology and leases and a number of notable disasters. The$20 million payment to Comdisco when the founder died was fully disclosed, offset withexpenses and reported exactly as required under generally accepted accounting principles. The guy diedand Comdisco received the money: So what? Life insurance proceeds are
not anextraordinary item per GAAP.
While the majority of Comdisco's business is with the
Fortune 1,000, ithas for decades had a "venture" lease business where it does small leases tostart-up companies at highly favorable rates, for short periods with100% payout at the end of the lease (i.e., no residual risk) and often withwarrants or stock in the deal.
It has done hundreds of deals like
Crescent and the net effect has been minimal to astounding, as someholdings have blossomed into valuable public companies. So asking why Comdiscois in this business is a question asked by someone who has not bothered toread the annual report.
There is $11 million of equipment out of a lease portfolio of $9 billion. Noteven a footnote on Comdisco.
The reported "refusal to comment" from Comdisco insinuates thecompany is trying to hide something. On a story like this, I can understand exactly why Comdisco's legaldepartment is wary of letting execs talk to reporters. What leasing companyin its right mind discusses specific deals with the press? Comdisco can kissits entire business goodbye the moment it divulges customer information toany outsider who calls.
"In addition to serving as the middleman, Comdisco had stakes in both thebuyer and seller of the equipment." First off, it's irrelevant, which seemsobvious in the article, since Alex left the paragraph hanging without anyadditional comment. Second, leasing companies write leases. They are notthe sales arm of
IBM (IBM) - Get Report,
Cisco (CSCO) - Get Report,
Hewlett-Packard (HWP) ,
Newbridge (NN) et al. Comdiscois not in the business of buying equipment, taking the risk and then tryingto find someone to lease it to. It was approached by Coyote andintroduced to Crescent and did the venture deal. Modest risk well-discountedwith a potentially attractive reward.
Andwhile I certainly am interested in why Comdisco might be doing business with whatclearly seems to be a flighty company, I also admit to having little stomachfor venture capital and have been completely useless when readingstart-up VC business plans, because they all look like silly crap to me.That's why you have a seasoned pro do it.
Yes, we own it and yes, we get heated when we see what is an obvious stretchhere to extend the "news cycle" on an otherwise great story.