What's New in Cybertalk?

By Jean Gora
December 2001

CyberTalk is a column that appears monthly in LOMA's Resource, the magazine for insurance and financial services management. To see more contents of the magazine and to see how to subscribe, click on RESOURCE MAGAZINE.

Airing Dirty Laundry

Until the advent of the Internet, executives managing a merger of two U.S. insurers had a reasonable chance of controlling published information regarding the integration of the two companies following the merger. No more. The Internet now allows employees, agents, and other insiders to tell the world what is going on within the company after a merger—and they are doing so.

Yahoo Finance Message Boards
Pick the Yahoo Finance message board (accessed through http://finance.yahoo.com) for any large recently merged insurance company, and read the comments. The authors of the comments include current and potential investors in the company’s stock and present and past company employees and agents. These individuals may not always tell the truth. Their real identities are unknown. However, the volume of these comments and the informed nature of many of them lend them a degree of credibility.

It is not beyond the realm of possibility that these postings affect the company’s stock price. Although the interest of investors and employees/agents may diverge in some respects—i.e., investors may welcome staff reductions that employees fear—in other respects, they converge. Neither investors nor employees benefit if the company’s management makes grave mistakes. Thus, for the first time company employees and agents have a relatively easy way to bring the errors of management to the attention of the investors and the public in general. Executives who are responsible for integrating two companies following mergers should take this possibility into account.

A Recent Example
This CyberTalk column examines the comments on the Yahoo Finance message board about one recent insurance merger. For purposes of this discussion, the merged company is called XYZ, which was formed through a union of companies named YYY and ZZZ. The merger, which was called a merger of equals, was announced at the end of 1998 and became effective in mid-1999. The CEO of YYY became the executive chairman and CEO of the new company. The CEO of ZZZ became president and COO.

Shortly after the merger closed, a class action lawsuit was filed on behalf of XYZ investors alleging that the managements of the two companies had issued false and misleading financial statements designed to inflate the price of the companies’ stocks in conjunction with the merger. These statements showed outstanding growth in operating earnings that were, according to the complaint, backed by inadequate reserves. At around the same time, policyholders filed a class action lawsuit challenging the company’s claim payment practices. As of mid-October 2001, the Yahoo Finance message board had logged more than 21,000 comments regarding this merger.

This discussion concerns only information that can legally be disclosed to the public, and not illegal information disclosures prior to the public announcement of the merger. The U.S. securities laws place significant restrictions on pre-merger information disclosure. Legal post-merger-announcement information disclosures include proxy statements and quarterly and annual reports required by securities regulators, company press releases and speeches. There are no significant legal barriers against unauthorized disclosures by company employees and agents. Companies can fire individuals who make unauthorized disclosures, but unless these individuals use insider information to profit in their securities trading activities, companies can impose no legal sanctions on them.

What the Messages Say
Here is a sample of recent comments regarding the XYZ merger:

"From the inside, I can tell you this is anything but a merger of equals. You are right...that the shots are being called by ZZZ’s CEO. I have noticed a lot of highly regarding YYY people leaving the company or not ending up on the positions that many thought they would." Message 488.

"The merger and related problems will take a long time to work out. Some examples: one subsidiary has never met its growth plans although they keep trying. Another sub is on the block and may cause a loss on sale or continued weak performance. Hints at more reserve hits in the future may be related to all the claim issues. Have use seen the Web sites of disgruntled claimants and their suits against YYY? There has been a loss of a tremendous amount of knowledge of business lines with the retirement or exodus of the most experienced people just to get the expenses down. There is also the difficulty of merging multiple business systems without continuing impact on customer service." Message 550.

"As an ex-employee, I know YYY made some pretty bad decisions in the last 3-5 years, like acquisitions that never met their potential for growth, constant organization changes in the home office especially in customer service areas, old systems that were never replaced satisfactorily and ran up huge cost over-runs." Message 556.

"You can’t replace top sales people with someone new and expect the same results. Why? Because group insurance sales through insurance brokers rely on the relationship of the salesperson to the broker. These relationships sometimes take years to build. That’s why in this industry, group insurers are offering huge comp guarantees to other carriers’ experienced reps, provided the reps will stay in the same territories. The last time YYY drastically cut their reps’ compensation, most of them left and went to competitors." Message 596.

"Here are the goods: XYZ took a hit to bring YYY’s books in line with ZZZ’s. Then the ZZZ crew found that YYY had actually undersold their products for longer and at a bigger loss than they thought. After recalculating, they took the most recent hit to a account for the perceived shortfall generated by YYY’s use of doctored actuarial tables to artificially inflate sales at the cost of long term profitability. It isn’t ZZZ’s management that is causing the problem. It is the fact that YYY hid its losses from everyone so that it could continue to inflate sales numbers by selling at a loss." Message 665.

"We get the feeling that current management simply wants to sweep out as many of us as possible, consequences be damned, as if we were nothing more than so many dust bunnies under the sofa. And the best employees are leaving not so much because of what the company has taken away but because the don’t like the kind of employee they have had to become." Message 1422.

"As a potential investor, I would like this board to have more comments on new products, initiatives, growth plans, acquisitions, sales forecasts, mergers, etc…. Yahoo boards vary in quality. I am not criticizing anyone about current content. The lack of this type of information [on this message board] indicates this information is held close to upper management, or real growth plans do not exist. Combined with [the high level of] employee dissatisfaction, [this situation] definitely makes it difficult to put money in this stock." Message 1441.

"I have been reading this board for months. What is happening to this stock today coincides precisely with what all the postings on this board have said. I don’t care how low this stock goes. I would never buy it again." Message 2035.

"I must say this board has been a very valuable resource to investors. Although some perceive it to be a lot of…nonsense, many of the posts over the past several months pointed either indirectly or directly to the trouble that the company is in now. Meanwhile, the more credible sources, i.e., [securities] brokerages, were upgrading the stock to strong buy. But there is no way an analyst can have a better feel for the company’s outlook than an employee (albeit disgruntled) who has witnessed the workings of the policy from the inside." Message 2069.

Hitting Where it Hurts
The Yahoo Finance message board on XYZ stock includes hundreds of messages like those quoted above. Although the message board is targeted at individual investors, securities analysts employed by institutional investors probably access it as well. As institutional investors are typically the major investors in a company’s stock, their behavior has the greatest impact on its price. The analysts employed by these institutions may give greater weight to other sources of information, but they would be foolish to ignore the issues raised by these messages. Thus, these messages can have an effect on the company’s stock price.

Because the compensation of CEOs is often linked to the company’s stock price, these messages can also affect CEO compensation. Thus, when the CEOs of merging insurers reduce staff and agent forces, these individuals now have the opportunity to harm the CEOs in return. However, they will probably succeed in doing so only when the company’s post-merger financial performance is also poor.

See previous issues of CyberTalk in the CyberTalk Archives.