Truth in Media Global Watch Bulletins

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TiM GW Bulletin 99/8-5

Aug. 20, 1999

Perot Systems' Latest Results: Profits Soar; Stock Stinks

A "Flash-in-a-Pan" Perot

Another Example of Disconnect Between Stockmarket and Business; But Perot Stock May Be Also Suffering from Low Float, Indifference


PHOENIX, Aug. 20 - Ross Perot was a "flash in a pan" would-be U.S. President. Perot Systems, is a "flash in a pan" U.S. IPO stock. Like father, like son; like founder, like his corporate baby…

After the ignominious performance which followed the once soaring Perot Systems stock in the early days following its Feb. 1 IPO (Initial Public Offering), parallels between Ross Perot the Politician, and Ross Perot the Reincarnated Businessman, are unavoidable.

Back in the early summer of 1992, an independent presidential candidate, Ross Perot, led in the national polls both the Republican incumbent president George Bush, and the leading Democratic challenger, Bill Clinton. Suddenly, in late July 1992, Perot announced he was dropping out of the presidential contest, conceding the race to the two establishment "studs," both racing for the same stable owners.

Why? No one knows for sure. Ross sure wasn't talking. But various versions of the "Godfather" movie's "offer he cannot refuse" kept popping up.

Then, just as surprisingly as he had dropped out as the front runner, Perot "miraculously" reentered the presidential race in October 1992. As a "designated loser," of course, who helped elect Clinton as President by splitting the Republican vote. And he repeated the same "feat" in 1996, this time as a Reform Party candidate, a party Perot and his 1992 supporters had founded.

Why are we bringing this up in a business report? Take a look at the Perot Systems stock trading chart, immediately following the Feb. 1 launch of this new public stock by the lead underwriters, such as Morgan Stanley and Merrill Lynch. And then take a look how the Perot Systems' stock ended up in mid-August, dropping from the dizzying high of $85.75 per share on Feb. 4, to a mere $19.19 on Aug 12 - the low for the year. The same "flash-in-a-pan" syndrome is evident. A high-flyer turns into an also ran.

Why such a riches-to-rags journey in a stockmarket jiffy? (six months). For answers, don't look at the company's fundamentals. Because its business results have been nothing short of stellar.

Stellar Business Results

Perot Systems' pre-IPO 1998 financial performance was great. Its first half 1999 track record is better. Much better.

The second quarter earnings were up 50% over the same period last year. Revenues increased by 18%. Perot Systems' pretax margin was 10% - well above the top IT services leaders' 1998 average of 6.5%. Its net margin was 6% - 50% higher than the leaders' average of 4% (see the "IT Hexathlon," Annex Bulletin 99-16, 5/25/99). All these income statement figures represented all-time highs for Perot Systems.

The company's balance sheet was even stronger. Cash surged by 204% since the second quarter of 1998. Even excluding the receipts from the IPO proceeds, it was up by 41%. The company's debt is practically non-existent (only $1 million, which is simply a capitalized lease obligation). Its equity surged by 166%, from $115 million to $307 million; the free cashflow was $19 million, an increase of 82%.

In short, the discrepancy between Perot Systems' business results and its stock performance is yet another example of a disconnect between reality and perceptions which rule the cashflow-driven Wall Street casino.

So is there a logical explanation for the fact that Perot Systems' stock stinks while its business soars?

Low Float, Indifference Hurt

Perhaps. In fact, two things come to mind. Low float and Wall Street's and Perot staffers' own relative indifference.

But first, let us try to correct a misconception implied in the above rhetorical question. The Perot stock stinks only relative to the $85.75 peak it achieved three days after going public. But it is still well ABOVE the initial offering price of $16 per share (it closed at $22 today, Aug. 20).

As a matter of fact, right after the IPO launch on Feb. 1, the lead underwriters - Morgan Stanley, Merrill Lynch, Warburg Dillon Read, Bear Stearns and Hambrecht and Quist - all took initially a lot of flak for allegedly underpricing the stock. In the end, these investment bankers' judgment was proven correct.

One reason the highflying Perot stock came down to relative proximity of the earth's surface is its low float. Only 7.8% of the shares were offered to the public - 6.2% in the U.S., and 1.6% internationally. Which still left the insiders with control of the company, something which tends to lead to Wall Street's relative indifference to such stocks.

Ross Perot and his son, Ross Perot, Jr., a successful Dallas businessman in his own right, each held 37.9% of the company after the IPO. The older Perot's stake is actually held by HWGA, Ltd., a partnership he set up after leaving EDS. Its acronym stands for "Here We Go Again," revealing some of Perot's rarely seen levity. Morton Meyerson, the former CEO, had 9.6%, with the remainder of the shares (less than 7%) spread between other officers or directors.

The insiders pocketed the proceeds from the IPO, and then mostly sat on their hands, as professional traders and their clients fell over each other in an effort to acquire the few Perot shares which were floating around the market.

The high volumes in the first four days of trading attest to such "flash-in-a-pan" frenzy. The volumes went from 10,867,900 shares traded on Feb. 2, to 7,121,200 the following day, and to 6,600,200 and 4,178,500 shares respectively in the next two trading days.

Once the Perot Systems stockmarket pan cooled off, the volumes dropped off to an average of 215,000 shares per day, as can be expected for a company with such a low float (see the charts at our Web site).

Today (Aug. 20), for example, only 122,900 Perot Systems shares were traded.

Big Client Concentration

Another thing which sets Perot Systems apart from its larger competitors, the global IT services leaders - IBM, EDS, Andersen Consulting CSC, Cap Gemini… - is a relatively high concentration of business which the company gets from its largest clients. In 1998, for example, the top 10 clients accounted for nearly two-thirds (65.7%) of Perot Systems' revenues.

Of the top Perot customer relationships, none is probably more important than that with UBS AG (United Bank of Switzerland), into which Perot entered in January 1996. Revenues from the UBS long-term "level of effort"-type contract accounted for 24%, 22% and 23% of the company's business in the last three fiscal years.

In addition, the Perot Systems earned 3.3%, 5.5% and 5.3% of its 1998, 1997 and 1996 revenues from the various special projects performed for UBS.

Furthermore, UBS is a Perot Systems shareholder. It owns 934,320 of the Class B (non-voting shares). But a part of the original agreement gives UBS the right to acquire an additional 6,400,000 Class B shares upon the exercise of options, at an exercise price of $3.65 per share.

Each share of the Class B stock can be converted into one share of the Class A common stock (i.e., with full voting rights), for purposes of a sale or distribution to a third party purchaser who is not an affiliate of UBS.

Which means that UBS is looking at about a $135 million capital gain if it were to dispose of its holdings, even at the currently deflated Perot Systems price of $22 per share. Just how chummy UBS and Perot Systems are, can also been seen from the fact that Warburg Dillon Read, the No. 3 underwriter in the Perot IPO, is an investment banking division of UBS. And that Perot Systems has provided project management and implementation for two new Warburg Dillon Read trading floors (in London, England and Stamford, Connecticut). And has been centrally engineering and integrating Warburg Dillon Read's workstations globally.

In short, Perot Systems is not only still quite closely held by a small group of insiders; it is extremely tightly coupled with its biggest client - UBS. That may be music to the ears of a private company shareholders. But situations like that usually sound an alarm for publicly traded stocks.

Of course, in a world ruled by Greed, facts like that, even if clearly spelled out in the IPO Prospectus, have obviously fallen on deaf ears of "investors" who bid up the stock value in the early days of trading. So the Greedsters who bought the $22 Perot-stock for $85.75 on Feb. 4, deserve every cent of their subsequent losses. They paid a diamond's price for real gold in a "fools' gold" market.

Perot Systems is a good company. It is a very profitable enterprise, positioned smack in the middle of a booming IT services market. It is also a well run outfit, growing in double digits.

But it is a terrible investment "opportunity," especially in today's perverted market, fueled by Greed and driven by cashflows. And given Perot Systems' low float (no reflection on its CEO's naval standing - Ross Perot is an honored graduate of the Annapolis Academy).

So no wonder the stock has been a vintage Perot "flash-in-a-pan" phenomenon.

Is there a good news about the Perot stock?

Yes. For Perot. Even at $16 per share, this IPO helped raise over $100 million in public funds (less the investment banking fees, of course).

And also, because it hasn't helped bring to power in Washington another criminal, as its chairman has done in the political arena. Twice.

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