Post of the Day
August 16, 2000
Lernout & Hauspie
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Thank you, TMFOtter
I must admit, I really like The Motley Fool. Their emphasis on doing your own homework, on making up your own mind, on not simply taking for gospel anything you see in writing, all that really strikes a cord with me.
Of course, one of the things I like most about the Fool is their mission - Learning Together. This is an important concept, for without learning there is no knowledge and without knowledge we distinguish ourselves from our primate cousins only by being a little less hairy. And from what I've seen on these boards, most of us here want to be a lot more than hairless apes, which is where the learning together part comes in. So let's see what we can learn from TMFOtter's recent words of wisdom on Lernout & Hauspie and maybe in the process we can help TMFOtter learn a little something, too.
To begin with, I could point out that the first thing TMFOtter might want to learn is how to correctly spell the name of the CEO of the company he so liberally blasts. But that would - probably correctly - be considered petty and since I don't want to appear petty, I won't suggest that. We'll just leave it to TMFOtter's innate desire to be a little more accurate in his future writing.
But back to the relevant stuff, we're here to learn together, to analyze objectively the pros and cons of all the news reported about a given company and then to make up our own minds about where to put our money. In that context we must admit that once you are long a stock, the temptation to be less than objective exists. Therefore, it is always good to get an opposing view point. At worst it offers a challenge that makes us reevaluate our position, while at best it can actually offer valuable information. That doesn't mean we'll like hearing it, most often we won't.
So let's have a look at how valuable, informative and objective TMFOtter's assessment of L&H is. Excerpts from his comments will be in italics below.
"In particular, the company's aggressive acquisitions, high percentage of affiliate sales, and relative lack of reporting have made it difficult to make an accurate assessment of the true performance of the company. (Until this year, Lernout & Hauspie had filed only the minimum required by the SEC for foreign companies listed in the U.S., and not in electronic form.)"
The myth of Lernout & Hauspie's reporting is perpetuated. As an investor looking to gauge where LHSP might go in the future, why would I be interested in what detail L&H did or did not report in the past, if they are practising full disclosure now for all current and past information? And wouldn't it be helpful if TMFOtter could have backed up the alleged "high percentage of affiliate sales" with some actual numbers?
Aggressive acquisitions make it difficult to assess the true performance of the company? Yes, true, but so what? That's just as true for Cisco and JDS Uniphase and I'm sure they've heard their share of criticism over the years. But the only alternative seems to be to forego growth via acquisitions, which would be silly.
"Korea has traditionally been an extremely difficult market for foreign companies to operate in, most companies achieving success only after many years of relationship building, if at all."
I guess that what TMFOtter is implying here is that if L&Hs reported revenues for Korea are correct then there must be something fishy about them or, worse, those revenues don't really exist. Does he offer any facts support these implications? None, zero, but then you don't need any facts to support something that you only implied but didn't say, do you?
"But skeptical observers have questioned the veracity of Lernout & Hauspie's Korean sales after the company's chief executive, Gaston Bastaens, volunteered names and approximate sales numbers for 30 Korean customers."
Correct me if I'm wrong, but I thought the sequence of events was the other way around.
"The company insists the sales numbers in its last quarterly report are accurate. This insistence has done nothing to stem the flood of class action filings on behalf of shareholders. While some law offices seem to file such suits if a CEO has a bad hair day, should Lernout & Hauspie's numbers turn out to be incorrect, these suits may have some merit and a longer-term impact."
Very misleading and without merit. What constitutes a flood? A handful of law suits? A dozen? Two dozen? Or just two?
If Lernout & Hauspie's numbers turn out to be incorrect, the law suits and their cost are the last thing we'll have to worry about. The share price will tank faster than we could yell 'sell!'.
"The company's CEO is not intimately aware of the details of the company's largest customers in the only market where it is growing?"
Huh? Where did this one come from? Without evidence it's purely speculative and it's a huge leap from the fact that L&H as engaged KPMG to audit the situation to the speculation that this implies that the CEO, Gaston Bastiaens, has brought in the auditors to tell him the facts. If he really didn't know (quite unlikely), wouldn't it be much simpler for him to simply ask his own people in Korea?
"Even after the acquisition of Dragon, its largest competitor, we find that sales everywhere else are decreasing?"
Where, I wonder, did we find this? We can only find these sort of gems of "reliable" reporting if we take the writings of others sight unseen and don't bother to check the facts ourselves. Sales are down in Singapore and Belgium, but up in Europe, the U.S. and, of course, Korea. If you take out the $31 million impact from Dragon and Dictaphone, essentially flat in the U.S. but still up quite a bit in Europe (over 40%).
Three Months Ended June 30,
United States............ $18,691 $ 48,909
Belgium.................. 10,750 8,562
Europe, other............ 18,578 27,342
Singapore................ 25,436 890
Korea.................... 1,124 68,059
Far East, other.......... 1,436 1,144
In summary, TMFOtter has accurately regurgitated most of the bad press L&H has been getting of late. If that is his job, fine. However, if his job is to actually add some objectivity and analysis to the discussion, then I suggest that he came rather short of the goal, not because he did not exonerate L&H (nobody but L&H management can do that), but because he provided no fresh insights and no objectivity. He had nothing to offer in support of allegations already made elsewhere, but nonetheless proceeded to condemn the company and find them guilty without even analyzing the scant evidence and hearsay that had been proffered by the sources of the original allegations. Nonetheless, I want to thank TMFOtter for adding a little more fuel to an already stimulating discussion.
Whatever happened to innocent until proven guilty? The WSJ makes an accusation, ignores additional information from L&H the company WSJ has accused, then simply says it "stands by its story". It is now left to L&H, the accused, to prove, their innocence, i.e. the accuracy of their reporting. Curious state of affairs, isn't it?
As individual investors it behooves us to do our own research and make up our own minds. It also behooves us to be wary of whatever 'information' is provided by analysts and journalist if it is not substantiated by facts and analyses that we can confirm independently. No matter what its source, an unsubstantiated allegation carries no more truth, no more substance. Keep in mind that whether the allegation comes from Herb Greenberg, the WSJ or somebody at The Motley Fool, without facts and substance to back it up, it is only an allegation.
Thank you, TMFOtter for illustrating this very important aspect of "Learning together".
Having said all that, the simple fact is that we still don't know whether the WSJ report is true or whether L&H has been accurate in its reporting of client names, or do we? If L&H had been lying, then why bother to invite an independent auditor to come in and review the situation? If they are the lying, cheating bastards that some would have us believe, then the only possible answer is that they are planning to buy a report from KPMG that gives L&H a clean bill of health. Let's play with that one for a minute, assume that it is LHSP's intention to pay KPMG to put out a fake report (their only choice if they have been lying). Assume even that KPMG could be bought (my apologies to LHSP and KPMG for the insinuation, remember this is for illustration purposes only). Ignore, for the time being, the question of KPMG's own desire to be truthful, assume the worst, but remember that last year Cisco decided to invest $1 billion in a strategic alliance with KPMG. Can we really believe that KPMG would risk its entire reputation for the few bucks they would get from L&H for this audit?
So assume the worst, imagine LHSP management as deceitful and misleading, KPMG as an auditor for hire who will write whatever report the paymaster dictates. Then take it a few steps further. If L&H were as deceitful as recent press reports would have you believe, then what would make KPMG believe that they could get away with a fake report? If things at LHSP are as bad as they have been made out to be in some quarters, then KPMG would have to assume that the truth would come out sooner rather than later. Knowing that, would they risk their reputation and risk seeing lucrative opportunities like the $1billion alliance with Cisco disappear faster than you can say fraud? Not in this life. If we can figure this one out, don't you think that L&H management - scheming and manipulative as they allegedly are - would have to come to the same conclusion? And if they have to inevitably come to this conclusion, why bother hiring KPMG in the first place? All it could possibly buy them is a few days or weeks at best.
That allows only one conclusion, L&H management is confident in the accuracy of their statements and is intent on proving it beyond a doubt.
At times like these staying invested in a company like this does take some faith, because as has so ably been demonstrated, most recently by TMFOtter, it is easy to construe a very negative picture without much in the way of facts at all. Only time will tell, what the real facts are. But based on how I've seen this company execute and based on where this industry is going and L&Hs dominant position, I'm confident that in a few years we'll look back at the summer of 2000 as just another hickup on the way to excellent returns. But take that for what it is, just my opinion.
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