Overstock.com Inc. (OSTK, Financial) has been trying to reinvent itself. Its legacy online retailing business has suffered badly in recent years, resulting in a strategic shift toward other pursuits. Chief among these has been a push, through wholly-owned subsidiary Medici Ventures, into the arena of blockchain technology and crypto.
We discussed Overstock’s big strategic shift in a previous research note, in which we concluded that, while there might be unappreciated value in this new pursuit (as well as unlockable value through the sale of the legacy online retail business), the unknowns and uncertainties make us nervous about taking the plunge. We can now add another area of doubt to our list of fears: puzzling behavior and statements from the CEO. Specifically, CEO Patrick Byrne’s decision to sell 10% of his holdings and then write a lengthy letter to shareholders in order to justify his move.
Let’s discuss this latest development, and how it impacts our view of the company.
A study in self-justification
Byrne, who is also the founder of Overstock,Ă‚ sent a message to shareholders dealing with his decision to sell 10% of his shares in the company:
Dear Owners,
In March I disclosed that this year I would be selling stock to fund sidecar investments with the company. As was disclosed in SEC filings today, I have sold roughly 10% of my Overstock.com stock holdings. You should not be alarmed, for six reasons:
1) Within a matter of days, I will reinvest most of this money into two co-investments with Overstock and Medici Ventures (thus I am eating a double dose of my own cooking, as months ago I promised you I would).2) You will soon see me honor several professors from my distant past who should be asked to wait any longer.
3) I have to pay Uncle Same his cut. Remember, I didn’t buy this. Washington built this.
4) I feel very encouraged by the speed of improvements in our retail business (which also makes me comfortable taking this moment to sell). I also think the Medici Ventures business model is playing out beautifully, and we are getting to park your capital in some of the most exciting blockchain innovations in the world, coupled with the tech and corporate support that is making Medici Ventures a sought-after capital partner.
5) As was mentioned six months ago, I needed to sell stock during this quarter to meet such obligations. I am disappointed that I when the deadline arrived for my sales this quarter, the stock had dropped (I sadly note that over the last 180 days the correlation between OSTK’s and Bitcoin’s daily moves has been 85.5%, and again warn people: we don’t have significant holdings of Bitcoin).
6) In the 18 years I’ve worked here, I have only ever sold a tiny sliver of my stock before (and that was 10 years ago, in the middle of my Mitzvah with Wall Street, when I wanted to test the system). Most of these 18 years I did not draw a salaey (and for the last several, have drawn $100,000 so as to avoid being one of those schmucks who does not draw a salary).
I’ve cashed in 1/10 of my chips (most of it, to reinvest next to you). Don’t worry; I’m still in the game, and we’re going to bring this House to its knees.
I look forward to our next meeting. Until then, I remain,
Your humble servant,
Patrick
More questions than answers
Unpacking Byrne’s stock sales and justification letter is no simple task. The first of his six points is the only one that might inspire some confidence in his shareholders, if indeed he follows through and plows most of the proceeds from his stock sales, which resulted in about $20 million in proceeds to the CEO. That is about 10% of his personal stake in the company.
Of course, any time a CEO sells shares of his own company, it is usually taken as not a great sign. It is a worse sign when the CEO makes the sales at what a bullish investor ought to consider an unjustifiably low stock price. But if the lion’s share of the money is genuinely being redeployed as co-investments, thus giving Byrne a a double-dose of his own cooking, as he says, then it may not be so bad.
But he does not end his efforts at self-justification there. He goes on to talk about using the money to “honor” professors from his past and to pay tax obligations. His emphasis on the need to “pay Uncle Sam his cut” is particularly perplexing. It is definitely jarring to see the CEO of a public company air his grievances toward the American tax system via shareholder letter. Likewise, the boasting about not taking a salary sounded more like posturing and excuse-making than the serious comments of a CEO.
Byrne’s point that he felt justified in selling now due to improvements in the legacy online retail business is also strange. The share price has been deteriorating along with the retail segment of late. Some improvements seem to be in the works, and the potential for offloading it to another buyer allow his point to stand somewhat, but not entirely. If indeed things were turning around at last, one would expect Byrne to wait a little while longer for those improvements to be reflected at least a bit more in the share price.
A question of leadership
All of Byrne’s comments, which seek to bolster shareholder support, may end up biting back at him. Some show potential, such as the promised co-investments, but those have to be seen before they can be believed.
As for the other justifications, they seem rather tone-deaf and strange. That gives us some pause about the competence of Byrne as CEO, who appears to be feeling increasingly under siege. Such mentalities at the top of companies can prove dangerous for their operations – and their shareholders.
Byrne has a great deal to prove. His focus should not be on justifying selling his shares at what ought to be unacceptably low prices. Instead, he should be laser-focused on execution. But we see more excuse-making than action-taking at this point.
Verdict
We see and appreciate the bull turnaround case for Overstock, but there are still so many question marks. And an erratic, or at least disconcertingly eccentric, CEO adds to those concerns.
A turnaround demands discipline and focus. Byrne has been with Overstock for 18 years, but that does not mean he has the skills to lead it into the next phase. We are certainly skeptical of his capacity at this point.
Disclosure: I/We own no stocks discussed in this article.
