The Anchor In The Special Committee Report

From a first glace, it's apparent that the "Report of Investigation by the Special Committee of the Board of Directors of Hollinger International Inc," known for brevity's sake as the Breeden Report, has anchored itself as a lawyer's brief, not as a research report. To see this, I'll quote the second paragraph of the "Introduction and Executive Summary" in full, and then modify the perspective by translating it into a contemporaneous hypothetical research report done by a (thankfully hypothetical) equity analyst for Ravelston Corp.

First, the quote:

The Report chronicles events at Hollinger over the decade since it first became a U.S. public company in 1994. Hollinger is a publishing company, but the story of the last decade at Hollinger, which is the subject of this Report, is not about Hollinger’s valuable publishing assets or the quality of the staff at its many publications. Rather, this story is about how Hollinger was systematically manipulated and used by its controlling shareholders for their sole benefit, and in a manner that violated every concept of fiduciary duty. Not once or twice, but on dozens of occasions Hollinger was victimized by its controlling shareholders as they transferred to themselves and their affiliates more than $400 million in the last seven years. The aggregate cash taken by Hollinger’s former CEO Conrad M. Black and its former COO F. David Radler and their associates represented 95.2% of Hollinger’s entire adjusted net income during 1997-2003.

Now, the modification:

This report chronicles the coup executed by Ravelston Corp, over the last seven years. Ravelston is a management company that primarly provides executive services to Hollinger International. This story is not about the performance of Hollinger International. Rather, this story is about the negotiating excellence shown by Ravelston Corp, in a manner that shows how much money the company has garnered from its management contract with Hollinger Int'l. Through shrewd negotiation, Ravelston and its principal shareholders have acquired more than $400 million from Hollinger in the last seven years. The aggregate cash flowing in from Hollinger Int'l, to Ravelston and its principal shareholders represents 92.5% of Hollinger Int'l entire net income during 1997-2003!

When put in the second form, an experienced - real - securites analyst would be asking a few pertinent questions in his/her notebook:

1. Why would that writer have used a fudge phrase such as "aggregate cash" when he clearly means "revenue?" How much has Ravelston actually earned? What are its costs?
2. What relevance does the 92.5% metric have for the question of why Ravelston showed "negotiating excellence" in a purported "coup"? How does the revenue from Hollinger stack up against the revenue earned by comparable management-services companies? How about its profit margin?
3. Come to think of it, how does that part of Hollinger's Selling, General & Administrative expenses that's been "garnered" by Ravelston compare with all other companies in the same industry, not just the ones which this fellow would like us to see? If the adjusted S, G & A account of Hollinger Int'l. is comparatively low, then we'd better check to see who's stiffing whom.


The above technique is useful for ferreting out hype, or reverse hype. If your eye is caught by emotional language in a report, then changing the perspective (as I've done above) will help in discounting the believability of the original report.


NOTE: The Breeden report was ruled to be inadmissible as evidence by Judge St. Eve early on in the trial.

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Speaking of tendentiousness, there's another way in which it can be shown, by sketching together a hypothetical "Special Report" for Hollinger Int'l, that pushes similar buttons, for the time period in which Gordon Paris was the CEO:

From 2004 to 2006, Hollinger International was the victim of pervasive nest-feathering by now-ex-CEO, Gordon Paris, ousted as of November 15, 2006. While (note the metric that's being pulled out of the hat) Hollinger Int'l's operating income was negative $11.011 million during Paris' first year as CEO, he nevertheless snaffled $3.5 million in salary alone during that year. In three years, Paris extracted $7.5 million during a time when Hollinger Inc's aggregate operating losses were over $56 million, with the most egregious loss being in 2006, when he finally was maneuvered into accepting a salary cut. (I got this figure by adding together the operating losses at Hollinger Inc, now Sun-Times Media Group, from this annual financials data for the company. Note how I have sneakily not adjusted for non-recurring items, which I could sneakily explain away by writing, "This figure doesn't adjust for non-recurring losses or gains in operating income" in an attached footnote and breaking it down later in the report.)

Paris was well-compensated, indeed. But for what? His time as CEO saw the stock price halved, at a time when the S & P rose more than 25%. The dividend, stopped later, was meager compensation indeed for the stockholders, who suffered a capital loss of approximately 50% of their investment, and an opportunity loss of 60%, calculated conservatively (yes, the use of the word "conservatively" is an added bit of boilerplate)...

With regard to the second re-perspectivizing, here's a interesting question: had a full anti-Paris 'report', written in the same style as the snippet above, been: published straight, without calling any attention to any lawyer's tricks in it; circulated generally; and, treated with the respect that the Breeden Report itself has enjoyed, would Gordon Paris have grounds to sue the author(s) of it for defamation?