Maytag's Spin Cycle
If you weren't paying attention last week--and even if you
were--you might have missed the dramatic fall in the stock of washing-machine
maker Maytag, which began on Wednesday and continued through Friday. Although
Maytag has gained a lot of attention recently for its fantastic high-end
Neptune washer and its high-powered CEO, it's not exactly the kind of company
that makes your ears perk up. But the story of what happened to Maytag, or more
precisely the story of how Wall Street reacted to what happened to Maytag, is
such a clear illustration of the Street's conviction that there's nothing wrong
with inside information as to be almost a parody.
Maytag's stock was driven down because the company is
going to fall far short of earnings estimates in the next two quarters.
Unfortunately, Maytag investors didn't find that out until the company
announced the shortfall Friday morning, after two full days of massive selling
on no news at all. Well, no public news, that is. Clearly lots of
people knew something.
Now, Maytag insists that it didn't even know things were
going to be so bad until its sales numbers came in, and that it didn't tell any
of its big shareholders to get out before the bad news broke. Perhaps. But
trading volume on Wednesday was three times normal, and trading volume on
Thursday was six times normal. A lot of that, of course, was just momentum
selling, as people leapt out of the way of what quickly became a falling knife.
But the size of the trades was such that the whole situation looks decidedly
sketchy.
Here's the quirk in the whole story, though. Among the
people raising the possibility that large shareholders were informed in advance
are analysts at some of Wall Street's biggest investment banks and brokerage
houses. And among the people most annoyed by the company's late announcement
are those same analysts. Why? Because when they talked to Maytag Thursday
night, the company reassured them that nothing was wrong, and that there would
be no change in their earnings forecasts.
Let's get this straight. The analysts are annoyed because
Maytag didn't tell them that something was wrong before it told the
public that something was wrong. In other words, Maytag didn't give the
analysts the chance to tell their clients to sell before other investors
realized something was wrong.
Of course, this reaction was accepted as par for the
course on the Street, even though if Maytag had told analysts anything, it
would have been as blatant a case of selective disclosure as you can imagine.
And I'd say this was astonishing, except for the fact that selective disclosure
remains a painfully common practice. Non-institutional investors are excluded
from company conference calls and snubbed by investor-relations people.
Companies continue to disclose material information to analysts before issuing
press releases. And they spend far more time talking to large shareholders than
they do talking to the public.
The ironic thing, then, is that Maytag did the right thing
Thursday night, even if it looks as if someone at Maytag might have done the
wrong thing a couple of days before. When analysts call, looking for
information that will help their clients and only their clients, companies
should just say, "Buzz off. If we have something important to say, you'll find
out when everyone else does." Oh, I how long to be a fly on the wall for that
conversation. (Well, actually, I don't want to be a fly, since they have short
and miserable lives. But you get the point.)
