Wall Street can be a ruthless taskmaster. Public companies hold earnings calls each quarter to discuss and explain the company’s revenues, profits and the extenuating circumstance-effected results. Analysts and reporters are on the call to ask questions and probe into sensitive areas. Before the earnings have been made public, analysts using their own sources and analytics to predict the operating results for each company and woe to the ones that fail to measure up. It is not an easy process for the CEOs who present the results. Many become frustrated and get quite grumpy, even hostile during earnings calls. Recently, the most noted unhappy CEO is Elon Musk. Musk is tired of being questioned on Tesla’s failure to produce the earnings analysts had predicted, and for failing to meet the production expectations that he had set himself. He wants to take his ball and go home. Musk says he is going to Saudi Arabia for the money to buy Tesla back from the public market. At the $420 per share price Musk suggested, he will need $72 billion to do the deal. In the case of a successful buyout, Tesla would become a very highly leveraged firm. Leveraged buyouts can be risky as Toys “R” Us and Caesars can testify. Both ended up in bankruptcy court; Caesars survived, Toys “R” Us did not. Being too highly leveraged is not a good position and if Musk thinks the public market is difficult, wait until he faces his debtors demanding higher returns
Gaming companies also face the challenges of public financing and the relentless earnings calls. In 2000, Steve Wynn sold Mirage Resorts to MGM for $4.4 billion in cash. He told one of his major investors that he wanted to “quit and start over.” Wynn said he was glad to be out of the public market and the public eye and free of those pesky earnings calls. Wynn disliked having to justify his ideas, the company’s financial performance and anything else associated with his company. Wynn always wanted to build what he envisioned and spend enough to fulfill that vision. He resented having to pass his dreams through committees, investors or critics. But in 2002, when he was ready to build Le Reve, the name was later changed to Wynn Las Vegas, he went back to the public market. Until early 2018 when he resigned and sold his shares in Wynn Resorts, Steve resented the scrutiny that goes along with public money. Still, Steve was one of the best during an earnings call. He was always charming and filled with new ideas and concepts to dazzle the listeners.
Other CEOs struggle to give a performance equal to Wynn’s; but most of them at one time or another have shared Steve’s frustrations. Who wouldn’t? The analysts do their calculations and then tell the investment community what to expect. If the company fails to meet those expectations, the company, not the analyst, is punished. In a recent earnings call, Jim Murren, CEO of MGM voiced his frustrations: “I don’t like calls like this. We drive revenue everywhere, not just in the hotel business. Our market share on the Strip is up in every metric. And we expect that to grow into next year. When we meet or exceed RevPAR, it’s no big deal,” Murren said. “When we miss, it’s a big disaster.” MGM’s second quarter results were not as good as Murren had hoped, but given a series of extenuating circumstances that affected revenue and profit, it was not all that bad in his mind. The other public companies with casinos in Las Vegas also failed to meet analysts’ expectations. One might think that if the analysts got it wrong on all the casinos in Las Vegas that possibly their thinking was flawed, not the casinos’ performance.
In expressing his frustration publicly, Murren went a little further than most CEOs allow themselves to go when he said he did not like the earnings calls. However, in private most of his contemporaries would probably say the same thing. If they are the founders and driving force of the company like Musk or Wynn, they might even consider selling out, or buying the company back after one of those calls. For the others CEOs, enduring the calls is probably the only practical solution. The stock market is a powerful force in our economy. It can be the only place some companies can raise enough money to fulfill their dreams. The market can also be very enriching. If the market likes a company, the key executives and major investors stand to make lots of money. And while it can be a source of wealth, it is also a source of pain and frustration. Public companies report earnings quarterly and investors expect improvement each quarter year-over-year. That relentless pressure can lead to some very short term thinking. It is difficult for people to plan four or five years into the future when they have to please the market every quarter. It can be a vicious cycle and lead some, like Elon Musk to seek an exit and find a different way to conduct business. However, even Musk will find that he cannot finance ventures to Mars or tunnels under Los Angeles without the public’s money. And once you accept that public money, you have to dance the public’s dance. It is a tango without an end.
