Chicken coming home to roost

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1a34430vAs a general rule, I do not allow myself to be possessed by the common market maker conspiracy theory, the rampant paranoid notion that market makers manipulate stocks for their own gains.

Likewise, I don’t allow myself to be carried away in the pump and dump hysteria, where any momentum in a stock is followed by amateur speculators, traders, and investors yelling foul.

However, I do believe that there are equities that are extremely susceptible to manipulation, such as MTSL, the equity of MER Telemanagement Solutions, which I have written extensively about in this blog (refer to the XREFs section for more information about MER Telemanagement Solutions.)

The epicenter for such manipulation is frequently SeekingAlpha, because, as I wrote in a recent posting about a particularly unfortunate SeekingAlpha article that appears to have had a pumping effect on MTSL (here,):

…to achieve a run-up, we need information dissemination on a vast scale. Simply put, we need a channel — preferably one that provides indiscriminate and rapid access to mainstream online media.

SeekingAlpha, through its direct feed into other news streams, is such a channel. For instance, articles written on SeekingAlpha gets replicated in the Headlines section on the associated equity page on Yahoo Finance, providing not only near-instantaneous distribution, but also an air of credibility that alternative channels, such as investor and trader newsletters, cannot achieve.

The bumpy road for Mr. Sujan Lahiri

My posting was not written in a vacuum. I had been commenting on the SeekingAlpha article, which had been written by some hapless fellow named Sujan Lahiri, pointing out that the article was factually wrong on a number of counts. Mr. Lahiri, in turn, had initially attempted to respond in a calm and objective manner, but eventually got exasperated and started accusing me of being a bear.

Here is Mr. Lahiri’s last response to my probing comments:

You seem to be very bearish about MTSL. Instead of me writing a new posting, why don’t you write your own article and get it published on this website? If done well, SA might pay you $150, and shares MTSL could drop. Let the market decide.

This comment is extremely interesting — not just because of its infantile nature, which collides head-on with Mr. Lahiri’s attempt to come across as a mature value investor, performing in depth analysis, but also because it reveals that Mr. Lahiri is focused on writing for money, apparently banking on receiving the $150 per article that SeekingAlpha guarantees plus whatever reader-count based commission he can get.

In my posting about Mr. Lahiri’s article, I had shown him the courtesy of not assuming that his intent in writing the article was less than honorable (as I have written about in the past, as a matter of universal truth, when you see people doing or expressing something that is obviously wrong, then the only question is one of whether you are dealing with a crime or stupidity,) but, frankly, his comment about the $150 coupled with an earlier observation in his article, stating that he had taken a position in MTSL before publishing his SeekingAlpha article, makes me feel not so sure as to what side of the criminal/stupid seesaw he belongs to.

As I showed in my posting it is relatively easy to demonstrate that Mr. Lahiri’s SeekingAlpha article is less than a master-piece, and in my comments on SeekingAlpha I had pointed out four things that, right of the bat, were factually incorrect in the article:

  • MTSL is not the leader in the space of companies that serve MVNOs. Far from it i, in fact. Ask ourself who services Traq, or, for instance the large Italian MVNOs. MTSL is a bit player in the MVNO/BSS space.
  • The price did not slide from +$5 because of the tax issue, but, rather, because of the loss of the ONLY MVNO contract it had, and, also, the one contract that provided substantially 25% of the revenues and ALL of the margin.
  • Addition of more MVNO/managed services contracts will not swing the company to some incredible EPS immediately, even if these contracts are withe large MVNOs. In fact, it will take years for the contracts to provide material contributions and, in the short to medium term, they will actually hurt the margin — perhaps even considerably.
  • The marque customers quoted are on the TEM side, a business segment that, at best, is static, and, in fact, according to the company is declining. Moreover, to mention these companies is like Dunkin Donuts announcing that it has sold one donut to an employee in GE.

These factual problems where never addressed by Mr. Lahiri in his comment section, and, in fact, in his comments he addressed precisely zero of the deficiencies that were identified by readers of his article.

What he did do was pull a Halo Effect out of his hat, claiming that the — highly speculative — market’s reaction to his posting was prima facie evidence that his article was accurate:

I guess the market agrees with me, shares are up 25% since publication of this article.

This is, of course, abject nonsense, mostly similar to a pyromaniac setting a house ablaze by pouring 20 gallons of gas on the structure and lighting a match and then claiming that the resulting wholesale destruction of the house demonstrates that it was a fire-hazard. Just plain idiotic.

The article’s aggressive pumping (clearly visible even in the article name which included the terms “Low Downside, Multi-Bagger Upside”) did indeed result in a significant jump in the per share price. However, as it is always the case when the market reacts to shaky information, the chickens did eventually come home to roost, and as of 11:30 a.m., EST, today, Januar 27th, 2014, the per share price of MTSL is, in fact a full 10% lower than it was on November 19th, 2013, the day that Mr. Lahiri posted his ill-intended or ill-thought-out article.

So, with some glee towards Mr. Lahiri (but no prejudice or malice towards MER Telemangement Solutions, MTSL, or investors in MER Telemanagement Solution,) I allow myself to stoop to an infantile level and say: I guess the market agrees with me, shares are down 10% since publication of Mr. Lahiri’s article.

Back to MER Telemanagement Solutions

The drop in per share price accelerated when MER Telemangement Solutions recently announced that a three-year commitment contract from third quarter of 2013 had been terminated (read more about this in a recent posting, here.)

This event, the taking-on of a service contract that, apparently, was highly risky should give the company’s board of directors pause. For, as I wrote in the posting in which I dissected Mr. Lahiri’s article:

And it gets worse… For one has to ask why it was not possible for the company to sell additional MVNO/managed services contracts or, for that matter, MVNO/cloud or mobile banking solutions over the last three to four years, and, then, suddenly, when the Simple Mobile contract is in the wind, deals starts pouring in. One possible answer, and it is a nasty one, is that the company has become less picky and more willing to, on a deal-by-deal basis, run risks related to the three dimensions that we spoke about above: 1) revenue profile, 2) costs, and 3) risk.

Customer acquisition is a difficult discipline, but it gets somewhat easier if you abandon all risk management. However, as any operating executive will tell you, once you abandon risk management in order to increase the pace of bookings, you are set up for a serious beating.

For MER Telemangement Solutions, the first round of the beating is already being doled out, but there may be more beatings to come.

First, it is not yet clear if the termination of the three-year contract constitutes a clean break with each party owing the other party nothing, and, second, it is not clear whether MER Telemanagement Solutions has to make adjustments to its results to account for the terminated contract.

The first question is at its roots probably a question of contract law and who did what to whom and who was hurt by whom… Hopefully, it will be an amicable dissolution. If it is not, the two companies can end up in some nasty litigation.

The second question is on of how the deal was treated in the results for third quarter, I think, since (and I am going from memory here) the deal was struck in September of 2013 and announced in October… Hopefully, the deal was treated in a straightforward manner and the accounting impact will be minimal.

These two questions unfortunately goes to the heart of two other matters. The first matter is how much unrecoverable expenses MER Telemanagement Solutions took on to win and service the deal. The second matter is whether or not the securities class action lawyers will begin circling around the company once the fourth quarter results are announced.

One thing is for sure. The company has to be more careful about who it signs up for its managed service offering — particularly given the fragile state it will be in after having lost the Simple Mobile contract, potentially affecting perhaps 25% of its revenues and more or less all of its gross margin and net income.

And now for something completely different…

The above is pretty heavy stuff, so, while we are on the subject of chickens, I invite you to visit an earlier posting in which I discussed chicken crossing the road à la Hemmingway, Niccolò Machiavelli, and Jacques Derrida (here.)

Participate, please….

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