Good on Audit Integrity for fighting back against the blatant bullying being perpetrated on it by Hertz.
A brief history is in order: on September 16, Audit Integrity released a report, based on new and proprietary analysis, listing 20 large public companies with the highest probability of declaring bankruptcy in the next twelve months. One of those companies was Hertz, which, in its latest 10-K, has a 23 pages of risk factors, including these:
We have substantial debt and may incur substantial additional debt, which could adversely affect our financial condition, our ability to obtain financing in the future and our ability to react to changes in our business…
Despite our current indebtedness levels, we and our subsidiaries may be able to incur substantially more debt…
Our reliance on asset-backed financing to purchase cars subjects us to a number of risks, many of which are beyond our control…
We may not be able to generate sufficient cash to service all of our debt or refinance our obligations and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful…
A significant portion of our outstanding indebtedness is secured by substantially all of our consolidated assets. As a result of these security interests, such assets would only be available to satisfy claims of our general creditors or to holders of our equity securities if we were to become insolvent to the extent the value of such assets exceeded the amount of our indebtedness and other obligations.
Hertz wasn’t happy with the Audit Integrity report, and sent the company a rather silly letter on September 22, which included lines like this:
Several analysts follow Hertz and its competitors closely, and all of them have significantly increased their estimates of the per-share price of Hertz’s common stock from where their price targets were 6 months ago. In addition, had your staff taken the time to review what the analyst community is saying about the rental car industry in general and Hertz in particular, you would have learned the favorable macro economic factors working in favor of the industry into the foreseeable future.
Heaven forfend that an independent research house should do something other than just “review what the analyst community is saying” and look at “macro economic factors”!
The really nasty bit of the letter, however, was where Hertz’s general counsel not only threatened to sue Audit Integrity over the report, but also copied the general counsels of all the other companies on Audit Integrity’s list, encouraging them to do likewise.
The lawsuit arrived on September 25. It’s pretty weak stuff, but Hertz is clearly hoping that it can embroil Audit Integrity in a large number of annoying and expensive lawsuits, brought not only by itself but by any other company that Audit Integrity singles out as being at risk.
So Audit Integrity’s chairman, James Kaplan, has decided to take this to the SEC:
Hertz is entitled to protest Audit Integrity’s findings. It also has the right – in fact, we believe the obligation — to address the areas of risk which we identified, and take steps to correct them. Such actions would benefit Hertz’s shareholders and would show that fact-based research was being used to improve the transparency and financial health of the company. Instead, the company has chosen to defame our methods – which are published on our website, but which the company’s management apparently has not read – and to invite unrelated companies to file action against us.
Frivolous attempts to crush independent research do not benefit investors. Publicly dismissing our model as “misinformation and untruths” also is a materially misleading statement about Hertz’s current financial condition…
As you have stated that you plan to step up the SEC’s enforcement efforts and better protect investors, it is my hope you will investigate this matter. It is possible Hertz will yet prove to be one of America’s great corporate success stories, but there is a disturbing trend of financially precarious companies aggressively trying to silence or tarnish their critics in the months immediately prior to their demise (Enron, Tyco, and Lehman immediately come to mind). If Hertz is allowed to mask serious financial risk by attempting to discredit quantitative research, Hertz’s shareholders may follow in the footsteps of others who suffered from a lack of warning.
It would be great if the SEC took this letter very seriously. Not all independent research is accurate, but the way for companies to deal with inaccurate research is to engage it on the merits and the substance, rather than to launch bullying lawsuits which have the aim of shutting down the research house in question. I haven’t spent any time looking in detail at the Audit Integrity report, but I do know that Hertz’s response is extremely worrying, and in and of itself raises serious questions about the company’s commitment to transparency and openness.