September 18, 2014

Diversifying Away From Profits

David Poppe | 12/1/1995
If 1995 was a bad year for you, take heart. You could've been Paul G. Kahn. The chairman and chief executive of Jacksonville-based Ideon Group Inc. saw his company lose about $80 million on ill-fated new ventures. Angry investors shaved about $350 million off Ideon's stock market capitalization. And the company spent $6 million battling lawsuits filed by Kahn's predecessor, Peter Halmos, alleging mismanagement, stock manipulation and more.

When Kahn took over the business late in 1993, it had $180 million in cash and liquid securities, no debt and a long history of profitability. Two years later, more than half the cash horde is gone and Ideon will post its first ever annual loss.

Ideon - which was known as SafeCard Services until an April name change - sells a credit card protection service that enables customers to replace lost or stolen cards with one phone call. Kahn came to the company late in 1993, having just overseen the roll-out of AT&T's Universal Card. According to a Business Week article, the long-distance company issued 16 million credit cards in four years and won the U.S. Commerce Department's Malcolm Baldrige National Quality Award in the process.

Kahn joined a profitable but slow-growing company that had recently moved from Fort Lauderdale to Cheyenne, Wyoming. In the year before he signed on, SafeCard posted net income of $31.5 million, or $1.10 per share, on revenues of $156.6 million.

Despite the enviable 20% net margin, Wall Street hated the stock. Revenues were flat and earnings were boosted by aggressive - though legal - accounting.

Also, founder Halmos had been an inaccessible manager, holding stockholder meetings in places like Bismarck, N.D. The board had ousted Halmos in December 1992, with his brother and co-founder Steven quitting his position as CEO a few days later. "Peter regarded the company as his fiefdom," said director William T. Bacon, Jr., after Halmos' departure.

The Halmos legacy wasn't Kahn's only problem, however. Some 13 million people pay $15 a year to register their credit cards with SafeCard; because few people ever lose their cards, the business is extremely profitable. But it's also tough to keep customers: fully one-fourth fail to renew each year. Analysts have wondered how long the company could keep replacing more than three million customers a year.

Kahn had an answer. By using SafeCard's cash to diversify, he boasted he could grow revenues to $500 million by 1997 and lessen dependence on the credit card registry. To implement his plan, Kahn spared no expense. In 1993, SafeCard had 435 employees and 115,000 square feet of office space in Cheyenne. By early 1995, the work force was up to 1,400. Kahn, who had a home in Ponte Vedra Beach, didn't cotton to the high plains and moved executive offices to Jacksonville, leasing 110,000 square feet of space there.

To mark the dawn of a new era, the company was renamed Ideon Group. To ferry executives across the country, a $6.5 million corporate jet was acquired. To record his glories, Kahn hired a local journalist to write a company biography. He even pondered a bid to name the Jacksonville Jaguars' new stadium Ideon Field.

In May, Ideon agreed to pay $39 million for the 350,000-square-foot American Express Regional Operating Center as its new headquarters, putting down a nonrefundable $3.9 million deposit on the 35-acre property.

The Florida Times Union reported Kahn hired a coterie of five assistants and three secretaries to plan his busy days. Kahn bristles at that, saying there was a corporate support staff of seven to nine people, but adds, "They weren't all holding my hand."

At first, this free spending didn't attract much notice. Investors were pleased that Ideon adopted some new, conservative accounting methods. And they were thrilled when it bought two promising young companies.

Ideon paid $35.5 million for Wright Express, which operates a credit card network for commercial truck fleets. The card helps fleet owners track drivers' expenses and detect fraud. Wright Express earned $2.5 million on revenues of $12 million in 1994. Revenues could top $21 million this year, and stock analyst Les Nelkin of Furman Selz Inc. in New York believes they will surpass $30 million next year.

Ideon also bought an outfit called National Leisure Group for $15 million. National Leisure markets vacation packages to credit card companies, retailers and wholesale clubs. Nelkin sees its revenues growing from $17.6 million this year to $22 million for 1996.

But other moves proved less successful. Ideon spent heavily to start the Family Protection Network, a service that enabled parents to pay $50 per year to "register" their children so that if the kids were ever snatched, Ideon could help authorities find them.

When the company test-marketed the service, Kahn says it received "an unbelievable amount of response" from parents. But no one bought it. "What they [parents] said they would do and what they actually did when they had an offer in their homes were completely different," he says.

Ideon closed the business in July and has written off its $26.3 million investment. "It certainly has scarred me," Kahn says.

Another disaster was a $22 million project marketing a PGA Tour Partners credit card with SunTrust and the Professional Golfers Association. Kahn says research in 1994 suggested the card would be popular, but by early this year, "the credit card market had significantly changed in terms of an avalanche of competing offers." Ideon envisioned charging a fee for the PGA card, but annual credit card fees are now almost extinct. Worse, two competing golf-oriented cards came out at the same time, according to Kahn. Ideon shuttered the business in September.

To pay for these and other failures, Ideon took a second quarter charge of $73.3 million. That was followed by a $10.8 million charge in the third quarter. Some 400 people lost their jobs.

In this light, Kahn's spending attracted new notice. Even minus the huge second quarter charge, Ideon's operating expenses rose from $36.1 million for the second quarter of 1994 to $57.5 million in the second quarter of 1995, a 59% increase. Revenues, meanwhile, had grown by just 17%.

After peaking at $21.38 in February, the stock collapsed in May and wallowed at about $9 in early November, near the 52-week low. With 28 million shares outstanding, Ideon's tumble represented a loss of about $350 million in market value from its high and a return to the same level as late 1992, when the Halmos brothers left.

Investors were left to sell or seethe.

"Given how much they spent on products that were clearly, in hindsight, pathetically researched, what they did wasn't professional," says Clive Munro, an independent stock analyst based in St. John, U.S. Virgin Islands.

Munro chides Ideon for rolling out untested businesses on such a large scale. "The mistake that Paul Kahn made was not that he tried it; it was that instead of spending $2 million to $3 million to start a new business, he spent $30 million," he says.

Kahn seems to agree. In a recent venture, Ideon paid $1.75 million for the right to market reproductions of Vatican Museum art works and collectibles. Ideon mailed a catalogue this fall. This time, its downside is limited to the rights fee because it subcontracted the catalogue work. "It's given me some new insight into how I should launch products," Kahn says.

Kahn says he will spend 1996 paring expenses. His retinue of assistants is down to two. The jet is for sale. The biographer is gone. And Ideon wrote off the $3.9 million deposit on the American Express building.

"Clearly, we're in a more conservative mode now with the need to deliver earnings to our shareholders," Kahn says. For 1995, analyst Nelkin expects Ideon to lose $78.6 million, pretax, on revenues of about $235 million.

Despite its overall woes, however, Ideon's credit card registry continues to be a cash cow. An optimistic Nelkin believes that if management tightens its belt, Ideon could recover quickly and post 1996 revenues of $261 million, with pretax operating earnings of $34 million.

But some think the man who fattened up Ideon should not be trusted to implement the diet regimen. Munro describes Kahn as "a marketer, a builder and a liberal spender. He's not the guy who shareholders need to fix this thing. He created the problem and he's not the guy to fix it."

People in Peter Halmos' camp are harsher. "The real story of the last year has been the ability of current management to piss away somewhere between $100 million and $200 million of cash," says Bart Sacher, a Miami lawyer representing Halmos. "These guys have taken a company that had a 20-year track record of making nothing but cash and basically ruined it."

Sacher says Halmos has no desire to regain control of Ideon, but simply wants to collect severance and other damages he believes he's owed.

However, Halmos clearly wants Kahn out. In litigation, he charges Kahn with using accounting changes to conceal deterioration of the credit card registry business, tipping favored stock analysts to Ideon's earnings news and failing to disclose troubles with Family Protection Network and PGA Tour Partners in a timely fashion. Sacher calls Kahn "a bad guy."

"Eventually, the courts will settle the matters with Peter," Kahn responds. "And frankly, he's not making any headway with all his suits and allegations."

Halmos isn't the only critic who gripes that Ideon's management is packed with Kahn's cronies. Vice-chairman Francis J. Marino formerly was Kahn's personal lawyer at the firm Mahoney, Adams & Criser. Kahn's brother-in-law has a management job.

Meanwhile, John R. Birk, the former chief executive of Wright Express, was dismissed as Ideon's chief operating officer in September. "John Birk's departure was a very sad day for investors and most of us think the wrong guy was thrown out," says Munro. Birk wouldn't comment.

Not surprisingly, Kahn disagrees. "I think we've got a good management team," he says flatly.

Another problem chafing some holders is fat compensation lavished on the board of directors. All Ideon directors receive a retainer of $50,000 annually, plus $2,000 for attendance at each board meeting. In comparison, Miami newspaper giant Knight-Ridder Inc., which had $2.6 billion in 1994 revenues, pays directors $26,000 per year, plus $1,000 for each board meeting.

Aside from Kahn, Ideon's eight-member board includes former gubernatorial candidate Jeb Bush; University of North Florida president Adam Herbert; Jacksonville Jaguars minority owner Thomas F. Petway III and former Hill & Knowlton chief executive Robert Dilenschneider.

Most of the directors declined comment or didn't return telephone calls. But Bacon, a Chicago Corp. investment banker whose 17-year tenure is the board's longest, didn't sound complacent in a brief interview. Asked if the board is satisfied with management, he responds: "That's a hard question to answer. Obviously nobody is satisfied and that's reflected in the stock price." But he says Kahn's team would have an opportunity to turn things around. "I believe the company is a very good company and can be made very successful," he says.

Kahn says directors understood and approved of his strategies, knowing they could backfire.

But, he concedes, that doesn't make the mistakes easy to swallow.

"This has been a tough summer for me," Kahn says. "It's damned hard to try to build something up and have to turn around and shut it down."

Tags: Florida Small Business, Politics & Law, Business Florida

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