After the shares dropped 40% Monday on claims by a short seller that the company is a fraud, analysts from
have come out to defend Focus Media.
Carson Block, director of research at Muddy Waters Research
In the 80-page research note on the company released Monday, Muddy Waters calls Focus Media "the
of China," a reference to the Japanese camera maker that was recently found to have concealed losses for two decades with takeover fees and accounting tricks. Muddy Waters, in calling Focus Media a "strong sell," benefits from any decline in share price as it has a short position.
Focus Media is significantly and deliberately overpaying for acquisitions, writing down $1.1 billion out of $1.6 billion in acquisitions since 2005," Muddy Waters researchers wrote in their report. They allege that Focus Media's overpayments include fraudulently booking at least six mobile handset advertising acquisitions that the company never made, and that Focus Media has written at least 21 acquisitions down to zero before disposing of them for no consideration.
Additionally, Muddy Waters claims that Focus Media says it has acquired, written down and disposed of companies it never actually purchased. Muddy Waters also alleges that Focus Media has been fraudulently overstating the number of LCD screens in its network by 50%.
Focus Media responded to Muddy Waters' allegations Tuesday, denying the allegations entirely. "The allegations in the report amount to no more than a questioning and second guessing of the motives and business judgment of the Focus Media management," the company said in a statement.
But even before Focus Media came out with a statement, Morgan Stanley analyst Richard Ji stood up and said the drop in Focus Media shares on the Muddy Waters allegation "creates a buying opportunity."
Ji argues that it's well-known that Focus Media overpaid for a number of acquisitions before writing them down completely, essentially calling it old news.
"As a result, we do not understand the market reaction to the research report -- which would look to have created a buying opportunity," Ji writes in his research note Tuesday, reiterating his "overweight" rating on the stock and $46.50 price target.
While Goldman Sachs analyst Catherine Leung doesn't stick her neck out like Morgan Stanley's Ji, she also notes that Focus Media's investment track record for material acquisitions has been disclosed under
Securities and Exchange Commission
"Since 2008, FMCN has not made any significant acquisitions that have been subsequently written off, which in our view suggests that the core business is generating positive cash flow and is not reliant on continuous acquisitions," Leung writes. However, she has placed her "buy" rating under review until hearing a detailed response from the company.
Not every sell-side analyst who thought highly of Focus Media before Monday is sticking with the company.
analyst Dick Wei downgraded the stock to "neutral" with a price target of $20. That's less than an "overweight" rating and $39 price target.
-- Written by Robert Holmes in Boston
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