San Diego San Diego's Titan Corp. -- left at the altar by giant Lockheed Martin -- must rebuild its management and reputation. In a conference call with the investment community today (July 8), it is spelling out its strategy. But Titan must also convince savvy investors that its main focus will be running a business, not running up its stock.
One reason Titan stock has taken a beating since Lockheed aborted a proposed $1.66 billion buyout late last month is some people's fear that the San Diego information technology defense contractor may resemble the artist Titian more than the warrior Titan. What's beneath those brushstrokes?
When it was founded in 1981, the company concentrated almost entirely on defense. Then, with the Pentagon cutbacks of the early 1990s, it pursued nondefense acquisitions and commercialization of its defense technologies -- taking accounting liberties and overtouting its stock along the way, according to critics. A decade later, after tech stocks crashed in 2000 and defense heated up again, Titan took a $218.1 million writeoff in 2002 and began concentrating almost totally on defense again.
Amid all this churning, the stock's price and earning have been highly volatile, and last year, the company agreed to be sold. In September 2003, Lockheed offered $1.8 billion, or $22 a share, for Titan. Then the roof collapsed. In January of 2004, SureBeam, a Titan offspring, plunged into Chapter 7 liquidation bankruptcy, and it's still not clear how much the misadventure will cost Titan, which has remaining financial ties to the company it nurtured.
More trouble came the following month, in February. Lockheed and Titan revealed that the Department of Justice and the Securities and Exchange Commission were investigating possible under-the-table payments Titan may have made in emerging nations. In April, Lockheed lowered the price it would pay to $1.66 billion, or $20 a share. But Lockheed said that Titan would have to resolve the criminal investigation by June 25.
In the spring came more adversity: Titan's role in alleged abuses in Iraq. The company has more than 4000 linguists under contract around the world, including Iraq. An Army investigation of Abu Ghraib prison has implicated two Titan translators.
After Titan could not work things out with the Justice Department by June 25, Lockheed dropped its offer. Titan's stock had been hovering around $20 while the deal was on the table, but quickly plummeted to below $13, despite management's claims of impressive growth through internal innovation.
"In 2003, we had internal growth of 26 percent. In the first quarter of 2004, organic growth was 21 percent," says spokesperson Wil Williams.
However, Titan lost money in 2000, 2001, and 2002 before making a mere 39 cents a share last year. In the first quarter of this year, revenues increased, but Titan earned 3 cents a share, down from 9 cents in the same quarter a year earlier. Standard & Poor's, the debt-rating agency, put Titan on its negative credit watch.
And the company will probably be tied up in court for some time. After the SureBeam debacle, Titan's founder and chief executive, Gene W. Ray, along with boardmember and former San Diego mayor Susan Golding, were named in lawsuits alleging that information disseminated for the SureBeam offering was untruthful. Additionally, the company faces civil lawsuits for not revealing its role in the alleged overseas bribes. Another suit charges that Titan engaged in racketeering in its Iraq activity.
"The task at hand is turning Titan back into a public company," says Bud Leedom of San Diego's Comstock Advisors. "A lot of cleanup has to be done; there has to be basic refocusing," especially as the government investigations and civil suits proceed.
These factors create uncertainty -- any stock's bugaboo. But much of the uncertainty about Titan is self-created by its switching of corporate strategy and allegedly questionable accounting and self-promotion.
During the period of the early 1990s to early 2000s, when Titan was on an acquisition binge and called itself a technology incubator, the stock soared, but skepticism mounted. The market value of Titan stock zoomed almost 1000 percent in 1999, when telecom was hot. Titan stock shot above $60 in early 2000, as the company boasted of its wireless and satellite communications contracts in emerging nations, particularly the African nation of Benin. But in mid-2002, Titan said it was getting out of the overseas business that had excited Wall Street and helped to run up the stock.
That period in which it purported to be a technology incubator has some people edgy now. In 2002, Chicago's Spin-Off Advisors issued a report on Titan that has proved to be prescient. For example, it declared, 18 months before the bankruptcy, that "SureBeam's equity is effectively worthless." The company used an aggressive method of accounting that could be overstating revenues, said Spin-Off. Eventually, the reluctance of a SureBeam accounting firm to go along with this method ignited a chain of events leading to the liquidation early this year.
The 2002 report said that Titan had grown entirely by acquisition from the early 1990s through 2001, while it piled up debt for the purchases. The defense business had had almost no internal growth since the mid-1990s. Titan "pandered to investors," with "media banter or hype" driving up the stock, said the report. "Titan uses their expensive stock to acquire other companies." But the strategy backfired. Management "destroyed several hundred millions of value," said Spin-Off.
Titan's Williams won't comment on internal growth during the 1990s. But, he says, "The company is interested in running its businesses," rather than running up its stock.
Titan hurt itself in 2000 when it aggressively sued short-sellers allegedly spreading false information about its stock. Short-sellers, or bears, make money when stocks go down, while bulls want to drive stocks up. Titan sued a San Francisco hedge fund over information it shared with a few other money managers. There was a settlement.
But Titan forgot that bulls and bears, while in mortal combat all day, have a symbiotic relationship. Both have a stake in the other surviving. If every stock went up 25 percent a year, brokerage houses would shut down. They maximize their commissions on volatility -- stocks going both up and down. Bears get rich when bulls run stocks too high, and bulls get rich when bears overdo it on the downside. A company attacking short-sellers is attacking the very essence of capital markets, and also raising stock analysts' eyebrows. They wonder if a company is only focused on its stock.
"They went after the shorts," says Leedom. "I've never seen a company so sensitive. It destroyed their credibility. Wall Street said 'forget it' and turned its back."
Says David Allen of Palomar Equity Research, "When a company aggressively goes after short-sellers, it becomes something of an analytical issue." That's particularly true, say both Leedom and Allen, because in this instance, the short-sellers were right.
There was further fallout from the attack on shorts. The San Francisco hedge fund hired a fraud examiner, who stated that Titan was including questionable items in revenue, deferring costs for inordinately long periods, and misclassifying certain costs, thus boosting revenues and earnings artificially. Neither the hedge fund nor Titan would discuss the matter.
Last year, the Reader got an anonymous letter saying that Titan's telecom operation had distributed bribes in the African nation of Benin. In February, Williams denied that Benin was an issue in the corrupt payments investigation. Nonetheless, the Reader printed the letter and my commentary. Later, it came out that possible Benin payments were indeed under investigation.
Last month, the Reader got a letter with the same typeface and writing style. It reiterated the charge of alleged overseas payments. It also said that from 1998 to 2002, Titan "established minority positions in startup companies and then transferred obsolete inventory to avoid costly write off charges."
Williams says that's "untrue." The company's independent auditors would have caught such activity, he claims. Maybe so. But as Allen points out, "There have been analyst issues about the accounting at Titan and SureBeam."
As it struggles to regain its footing, Titan must examine its past, not just tout its future.