A week or so ago, Rob Powell posted Cogent, Self Promotion, and the Mirror Image. In the post, Rob asks (me paraphrasing):
What happens when executives talk their company down, and then buy the stock or debt at a substantial discount on the open market?
The situation that led to Rob asking this question is Cogent. Since May, Cogent has been communicating that business is not so good. Growth in traffic has slowed. Price competition is fierce. And Cogent has no choice but to aggressively lower their price. Not surprisingly, their stock fell sharply–it is 75% lower than its 2007 price–and their convertible debt has been trading at an enormous 50% discount.
In the meantime, Cogent has been using its excess cash to buy stock and debt. Evidently, they believe their company is worth a lot more than the public markets. In addition, Cogent’s CEO is personally purchasing debt at this steep discount.
Rob Powell contrasts this situation to its mirror image. He opines that CEOs often pump up their stock price, thereby enabling them to raise money at higher prices or sell their shares at inflated prices. Rob asks “are the ethics different when we look at a mirror image?”.
I will provide my perspective to this question tomorrow.
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