That Lehman Brothers convertible-bond analyst Ravi Suria came out with a scorchingly negative “avoid” research note on Amazon’s bonds on Feb. 5 should not have come as a surprise. Last June, the then-little-known Mr. Suria sounded the first warning that Amazon could well run out of cash in the coming quarters. The stock was then trading in the mid-40’s, and has been in free fall ever since to today’s 13 and change, as investors’ concern over Amazon’s liquidity has grown.
What’s more, Amazon’s instantaneous and almost personal rebuttal to Mr. Suria’s report–”It’s a silly report that’s chock full of errors,” Amazon spokesman Bill Curry responded immediately–also should have surprised no one. Amazon chief executive Jeff Bezos labeled Mr. Suria’s first report “pure, unadulterated hogwash,” and the company has never been shy about lashing out at analysts who won’t toe the company line.
But what is unusual is that Mr. Suria’s report was held up for 10 days, apparently in response to concerns–some of which were valid–raised by Amazon officials and board members. One who apparently made a warning phone call to Mr. Suria’s bosses was Amazon board member John Doerr, the powerful senior partner of Silicon Valley’s top venture-capital firm, Kleiner Perkins Caufield & Byers, according to sources close to the matter.
Evidence of the delay is in the report itself. While it is dated Feb. 5, a careful reading of the note shows that the price of the bond was dated on Jan. 25–meaning that the report was due to hit the wires on Jan. 26.
Chief financial officers and even chief executives have certainly been known to call up investment banks to complain about unfavorable research. But for an investor of Mr. Doerr’s stature to get involved is far less common. And it means one of two things: Either he is certain that the research is fundamentally flawed, and thus worthy of being pulled, or he is certain that the conclusions are indeed true, or close to being true.
That Lehman ultimately issued the report is also unusual for Wall Street, but not for Lehman, which has been known for issuing tough research independent of its corporate finance activities.
The report, however, was not issued without some angst–and not without some changes. After being presented with some new figures by Amazon executives, Mr. Suria apparently toned down his report, said the sources.
Why the pressure? Because what Amazon had seen in the report, it did not like. Lehman Brothers had sent a copy, as a courtesy, to Amazon’s financial department on Jan. 26. When Amazon executives learned of the report’s harsh nature–that the specter of bankruptcy was being raised–they leaped to the phones, sources close to the matter said.
Mr. Doerr, for one, phoned Lehman Brothers chief executive Richard Fuld, raising concerns about the logic driving the report, and warning that it would have a harmful effect upon the company, said the sources, who had secondhand knowledge of the phone call.
Neither Amazon’s Mr. Curry nor Lehman Brothers director of U.S. research Steve Hash would confirm or deny that such a call was made.
Mr. Doerr did not return any calls for this story.
At the same time, Amazon officials sent a three-page note to the Lehman Brothers research department, pointing out a series of what they thought were errors, both numerical and contextual. They also pointed out that more information concerning the company’s cash position would become public when Amazon announced its year-end results on Jan. 30.
And, indeed, the company’s balance sheet did show some improvement. As a result, Mr. Suria was persuaded by Lehman Brothers research officials to tone down the report a bit, to reflect the new information.
The initial version of Mr. Suria’s report had made a strong point: that auditors would soon start to analyze Amazon on a “going concern” basis–meaning that Amazon’s finances had reached such a state that its viability as a company was in doubt. But Amazon’s auditors, in fact, issued no such warning in the year-end results. Thus, the publicly issued version of the report de-emphasizes the “going concern” thrust.
Instead, the final report focuses on Amazon’s deteriorating liquidity, concluding that it should remain a cause for concern with investors.
The toned-down report notwithstanding, Mr. Suria’s aggressive stance on Amazon is another example of Lehman Brothers going against the investment-banking grain.
In contrast to the likes of Morgan Stanley & Company, Goldman Sachs & Company and Credit Suisse First Boston, Lehman has a minimal investment- banking presence in tech-related businesses and, as a result, has been free to take harder-hitting stands in its tech research. Besides Mr. Suria, equity analysts Holly Becker and Tim Luke have garnered renown of late for their early and negative views on the likes of Yahoo (for Ms. Becker) and Cisco Systems (for Mr. Luke).
Still, taking on the likes of Amazon is a sensitive business. And when Mr. Doerr, the V.C. giant, gets involved, you know things are getting serious. Mr. Doerr, through Kleiner Perkins, was among the first private investors in Amazon back in 1996. Not only did his investment explode by many multiples when Amazon went public that year, his glowing reputation as a tech seer was to a large extent jump-started by his Amazon stake.
Mr. Doerr’s clout in Silicon Valley is immeasurable. The fact that Mr. Fuld stood up for his analyst is probably less surprising than the meddling of Mr. Doerr. However, it seems that Mr. Doerr felt the research was fundamentally flawed. And Mr. Suria’s initial conclusion–that Amazon’s financial health would be questioned by its own auditors–was indeed off-base.
But Mr. Suria’s broader conclusion, that the company’s cash position was deteriorating, remains a true and perhaps bitter pill for Amazon and its investors to digest.
For the plucky Mr. Suria, 29, all of this is heady territory. A native of Madras, India, Mr. Suria had been toiling away in relative obscurity (although he has been third-ranked by Institutional Investor since 1998) as the head of Lehman Brothers’ convertible-research department until last June, when he quickly became known as the Amazon killer. The February report is his third on Amazon, and in each his reasoning has been cold and relentless: Forget about Amazon ever turning a profit, this company is on the verge of running out of cash.
“By the third quarter of 2001, Amazon’s current assets will be less than its current liabilities,” Mr. Suria told The Observer . “The only reason it has any cash at all now is because it hasn’t paid its bills.”
Mr. Suria’s point is simple: Amazon may well have a billion or so in cash on its books, but with its short-term liabilities at $975 million, that cash number is in effect meaningless.
Amazon’s Mr. Curry is quick to respond: “There are basic errors in his report. And his assumptions–that we will burn through $490 million in cash–have no basis in fact.”
So is Amazon running scared? Mr. Suria certainly thinks so.
“Look at what they are doing,” said Mr. Suria, who can barely contain his ire after months of having his credibility questioned by Amazon. “Six months ago, they were expanding like crazy. Now they are laying off 1,300 people, they are closing a Georgia distribution facility that they opened two years ago, and they have repriced their options for the second time in six months, giving them a much lower strike price and a shorter term.”