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Tavia Grant

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Crossing muddy waters

Tavia Grant

TORONTO (GlobeinvestorGOLD) — En-wrong. WorldCon. LieCo. As the list of corporate accounting scandals and swindles grows by the day, it's no surprise investors - and the public at large - have stopped believing anything corporations, analysts, or the media for that matter, have to say.

Certainly, they can't trust CEOs, who have sophisticated public relations firms to help spin any message whichever way they want. Enron's CEO, for example, reassured investors right to the bitter end that the company's business was sound and prospects bright.

Nor can the public always trust the media, which often receives advertising dollars from the very sources it's supposed to be covering.

So what's a retail investor to do? Just as smart investing often means spreading risk, the savvy investor should never rely on information from a single source. The more variety of business publications you read, the better able you are to make up your own mind.

That includes going to the source of the news itself. This means — gulp — listening to conference calls, tuning in to Webcasts and examining the gobbledygook in companies' press releases. A tip about these documents: read the whole thing, including the fine print. Big news often gets buried at the bottom — in size six font.

The following, dear reader, are a few terms to watch for. Most originate from press releases, but many have also reared their ugly heads in newspaper pages. In a tribute to Mad magazine, we'll call this list "What Companies Say — and What They Really Mean."

Downsizing/cost-cutting:
Companies never fire people, at least not in press releases. That wouldn't look nice. Instead employees are downsized, rightsized, made redundant, realigned, rationalized, reduced through natural attrition, or the headcount is reduced. No one is ever simply fired.
Restructuring:
A catch-all phrase that could mean anything. It may refer to firing people (see Downsizing), a management shuffle, one-time charges, heading towards bankruptcy or changing how business units are organized. Popular synonyms include resize, reconfigure, reorganize, rationalize and reposition (notice how all this jargon seems to start with the letter R?).
Guidance:
Ever heard a CEO say, "we're sorry, but we goofed: we're not going to make nearly as much money as we thought." No? Well that's what they're saying when they "adjust earnings guidance." Companies don't "guide" lower or higher. They either make more or less money than they, or investors, expected. Adjusting guidance usually means a profit warning, plain and simple.
Cautiously optimistic:
CEOs love to say this, when they have no idea of where their business is headed. A favourite among telecom chiefs in the past year.
Convergence:
A buzzword among media moguls. It means linking a bunch of different businesses through "co-branding" and "cross-marketing." It means you can advertise your Web site in your newspaper and advertise your newspaper on your TV station and then use one reporter to make TV, radio and print appearances. The jury's still out on whether this will work.
Mergers versus acquisitions:

The higlighted area shows the companies stock price when the "merger" was announced.
The warm, cozy announcement of the union of two companies is seldom a merger of equals. Companies love to announce a "merger" and the media often follows their lead (mining company Kinross Gold's "combination" with Echo Bay Mines and TVX Gold in June is a case in point — Kinross took over its smaller rivals). An acquiring company often sees its share price decline when a takeover is announced because it is usually spending a considerable amount of money — whether it's in the form of cash, shares, warrants or other instruments — and these transactions always involve some risk. Examine the terms of the deal carefully: know who is buying who and what your stake will be when the deal is completed. And speaking of mergers, remember the following word?
Synergies:
Not quite as popular as in the heyday of mega-merger mania, perhaps because they're rarely realized. Synergies refer to all the cost savings companies hope to achieve after a merger or acquisition.
Non-performing assets:
That'd be when a bank makes a bad loan, but doesn't want to say so.
New economy:
A vague term for an era that was supposed to re-write the rules of classic economics. It didn't. As Jeffrey Madrick, editor of the economic affairs journal Challenge has noted, "a single phrase ruled financial journalism, but what the phrase really represented was a poorly-defined idea that could be anything an editor wanted it to be."
E-commerce:
see above. Fuzzy term often used instead of outlining any real business plan. Ditto for companies that focus on "B2B" solutions.
In discussions with creditors:
Companies rarely say, flat-out, that they might fold. When UAL warned of bankruptcy in August, Screen shot of UAL press release the headline on its press release read: "UAL Corp. Intensifies Recovery Effort." In the release, the company said it was "changing its business plan," boosting cost savings and "retooling operations." By the way — in the third-last paragraph — the company is also "preparing for the potential of a Chapter 11 bankruptcy filing this fall, due to fourth-quarter debt payments." Hmm. Other phrases that should raise a red flag are "in danger of failing to meet loan covenants," "liquidity crunch," and, of course, "restructuring."
EBITDA, cash flow, revenue, margins:
Companies often like to focus on these, in an attempt to distract the reader from net income. These numbers are important, but never forget: the bottom line is the bottom line. Always look at net income. Read Fabrice Taylor's column on understanding earnings.
Adjectives, subjective statements:
A few years ago, a Canadian mining company put out a press release saying it was sitting on potentially the biggest deposit of silver in the history of the world. This was post-Bre-X, mind you, when mining companies were discouraged from exaggerating their findings. Companies still exaggerate, so mentally delete the adjectives from any press release. "State-of-the-art," "one-of-a-kind" and "best-in-the-world" might be true, but you don't depend on the company's opinion.

Regulators — and companies — are trying to clean up their acts. The Securities Exchange Commission now offers companies a handbook on Plain English. And public relations schools are "trying to help [PR] students understand how markets can be manipulated and material misrepresented," says Ed Wright, program coordinator for the PR program at Toronto's Humber College.

With all the accounting scandals of late, it's no wonder investors are confused and mistrustful about their sources of information. Nor do they think the worse is over. In a July GlobeinvestorGOLD poll, more than half said they expect a large Canadian corporation to announce an accounting scandal in the months to come.

Even without any more dire announcements, the era of unquestioning belief in financial markets may be over, and that's not a bad thing. After all, as Albert Einstein once said, the evolution of man lies not in blind faith, but in striving after rational knowledge.

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