If You See Something, Say Something–Fuzzy Numbers Edition

In the New York City subway there are signs plastered all over the subway cars saying, “If you see something, say something.”  I think they are referring to terrorist activity, but for the moment, let’s assume we should also apply this to fuzzy financial numbers.

An alternate title to this post would be: Why I don’t like acquisitive companies.

Companies acquire other companies for a variety of reasons and I find most of these reasons highly dubious.  The cynic in me says a lot of companies do this because they can obscure the true nature of their underlying business when they combine the two companies.  I can just picture the following conversation in the executive office:

CFO, “Well, our numbers are going to be significantly down next year based on my calculations.”

CEO, “Any chance we could go out and acquire some new revenue.”

CFO, “I guess, if we issued more stock and took on more debt.”

CEO, “Great, I think we should do it because the press release headlines on next year results will show the results of the combined entities which will easily be higher than our current projections because we are buying a whole new company.  Remember, let’s make it a big company, so we can show double-digit growth numbers.”

CFO, “But, won’t people ask for growth numbers to be broken out between organic and acquisitive growth?”

CEO, “Wow, you must be new to this public company gig….They won’t and if they do, we will just say it is too hard to compare.  Trust me, 15%-20% stock price increase as soon as we submit the press release.”

This made sound absurd until I further describe how this exact situation played out today (excluding of course the executive room meeting, which happened before the acquisition).

Gentiva is a home health care and hospice company.  I was previously in this business, so I understand it and stay current on the 6 public companies.  It is within my circle of competence, but no great values at this time.

Last fall, Gentiva made a big acquisition.  They acquired Harden Healthcare, which also does home health, hospice and community health.  Gentiva reported first quarter results today and announced, wait for it, double-digit revenue increases.  Additionally, they disclosed at bottom of the press release that these results do not break out how much of that growth is due to the acquisition of Harden because, and I quote, “Net revenues specific to Harden for the first quarter of 2014 are not available as, subsequent to the acquisition date, the Company has undertaken significant consolidations and closures of Harden branches in overlapping and smaller markets for which reporting of separate results is no longer available.”  

If I close a branch in the first quarter of 2014 this should in no way affect the data I have for the operations of that branch in the first quarter of 2013 (unless of course Enron is in charge of preserving the data–read, shredding).  I would presume Gentiva had this branch-level data when it did its diligence on the acquisition, but unfortunately, 6 months after that acquisition that data is no longer available?

The real reason, I presume, for the data misplacement is that although the revenues have grown 17% since last year, let’s throw out a number and estimate that the acquisition added 20% growth and the underlying business therefore declined 3%.  I can’t be sure on these exact numbers.  However, I know someone who does have the data and they are not willing to share it.  True to form, Gentiva’s share price is up 15-20% this morning.

To illustrate that I am not a completely one-sided cynic, a different home health company reported results yesterday, Almost Family.  Coincidently, they also did a major acquisition at the end of last year and here is their statement regarding the breakout of organic and acquisitive growth, “VN segment Medicare admissions decreased organically by 5.8%…Our PC segment hours of service and revenues grew by 5.3% organically and 8.0% through acquisition.”  

When people ask about how you can judge management, since it is such a squishy factor (or the more high-brow phrase, qualitative), I present to you Exhibit A: Clear and honest reporting of results.

It is interesting to note that when CMS investigated both of these companies in the past for Medicare fraud, only one of them had to pay a fine.  I will give you three guesses and the first two don’t count.

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