My uphill battle, in promoting my new book, The 5 Minute Investor, is against the popular conception that the reasons behind everyone's stock market losses have to do primarily with (a) fraud, and (b) the difficult nature of understanding big companies. The "proof," I am frequently told, is that even the biggest investors -- billionaires, pension funds, money managers, mutual funds -- lost billions overvaluing Cisco and Yahoo, and getting fooled by Lucent and Enron.
By and large, it isn't the deviousness or complexity that fooled "the smart money." No one wants to believe it, but the culprits were ignorance, laziness, and inattentiveness. Individual investors simply do not fathom how careless the insiders and professionals can be, even with billions of dollars, generations of experience, and armies of advisers.
What else could explain how Edgar Bronfman, Jr., until recently vice chairman of Vivendi Universal, lost $3.5 billion of his family's fortune in just two years?
Two generations of Bronfmans built Seagram into as close to a fool-proof business as is humanly possible. People drink liquor. Is that a simple enough business plan? In addition, Edgar Sr., in the early eighties, parlayed an unsuccessful takeover run at an oil company into 20% ownership of DuPont, which was to chemicals what Seagram was to scotch. DuPont's stock reliably rose and also paid a dividend that brought nearly $300 million a year into Seagram's coffers.
On the premise that people weren't drinking like they used to, Edgar Jr., as soon as he got his mitts on the company, sold the DuPont stock and used the money to buy MCA from Matsushita, which had choked on Lew Wasserman's hodgepodge of media assets a couple years earlier. Junior also spent $10 billion for Polygram, a music company.
For some rich guys, it takes their luck almost as long to run out as their money. Edgar actually found a Greater Fool in Jean-Marie Messier, CEO of a French company he renamed Vivendi. Messier wanted to turn a 150-year-old water utility and waste hauler into a 21st century media conglomerate. He poured the utility's profits into media partnerships: British pay television, French pay television, French cell phones, and a variety of other European deals. Messier had Vivendi buy Seagram for $30 billion in Vivendi stock. The Bronfman family's stake in Seagram was worth $6.5 billion.
So what do you do when you find someone dumber than you? You give him everything you own and make him your boss. I don't know how someone could spend as much time with Barry Diller as Edgar Bronfman, Jr., and apparently know so little. The Bronfman family rolled its Seagram ownership into 8% of the new company, to be run by Messier.
The rest of the story is pretty predictable. First, Messier declared war on Disney, Viacom, Sony, and AOL Time Warner. Vivendi Universal was almost completely unarmed in this war. Though its liquor and utility businesses were solid earners, and Polygram gave it a big music presence, the movie studio was second-rate, and the distribution outlets enjoyed by competitors were way better than Messier's idea of using European pay TV and French cell phones to deliver entertainment. Second, Messier sold everything that actually made a profit (the liquor and the utility). Third, he went on a buying spree, spending over $20 billion on USA Networks, a Moroccan telephone company, an educational publisher, a satellite company, and a huge buyback of Vivendi stock. Fourth, Messier got booted out last June with the company on the brink of bankruptcy. Its stock has fallen 80% this year and the reason the Bronfmans didn't lose more than $3.5 billion is they sold a bunch of stock as soon as the post-merger lock-up period expired. Messier and the company are now being investigated by regulators and prosecutors in the U.S. and France for hiding the company's dire financial condition.
Junior likes to portray himself as a victim of Messier. He told CNBC recently, "Anybody who either worked for the company or invested in the company should feel betrayed." I'm sure a nut like Messier wasn't completely honest with investors or the board, but I don't think he was some kind of undetectable super-criminal. Messier bought 500,000 shares with his own money while this was going on.
Messier's simply ran the company in the ground by spending a lot more money than Vivendi had. What, other than foolishness, could account for Bronfman not figuring this out? He was vice chairman of the company, with the power to approve all these expenditures and the preparation of this financial information. With a dynastic fortune at stake and a leadership role in the company, he knew everything that was happening, or chose to remain ignorant.
Even with $6.5 billion at stake, some people will choose to remain ignorant. Bronfman knew that Vivendi's finance department had only ten employees. (Its PR department had over 100.) It wasn't until just a few months before Messier's ouster, after Messier made over $20 billion in deals, that Bronfman decided to inquire further. This occurred only because someone approached him. Salomon Smith Barney had been retained to work on a bond deal that never worked out. A department head asked Edgar, Did you know what kind of awful financial condition the company is in?
Edgar convinced the board to hire Goldman Sachs to perform a financial evaluation. After Goldman presented it in June, Messier managed to rally the French directors around him and keep his job. He quit several days later only because Vivendi's leading banks refused to continue lending money if he stayed.
You know how you felt about putting $6,000 into Cisco when it was trading for 250 times earnings, and then lost 80% of its value? How, you wondered, could you do such a thing without thinking?
Edgar Bronfman, Jr., feels the same way, just multiplied by a million.