Goldman 8, Public Zero…The Teachable Moment of Bare Escentuals

We’ve been radio silent here at NotMakingThisUp the last week or so, for what we hope will prove good reasons.

The first reason is that for the past week your editor has been in conference meetings at Ground Zero of Healthcare Reform.



Now, Ground Zero of Healthcare Reform is, in our view, not Washington DC, where the legislation itself is being worked out. (And by “worked out” we mean “bribed, weaseled and compromised by ignorant Congresspersons”).

Ground Zero of Healthcare Reform, at least for the last few days, has actually been San Francisco, California. More specifically, it has been the JP Morgan Healthcare Conference—an annual confab of pretty much every CEO, CFO, VC or scientist who ever started up, ran, founded or otherwise had something to do with a company that performs the actual hard work of keeping healthy a nation of 300 million uniquely diverse (at least among the ranks of “developed nations” with which our healthcare quality gets blithely compared) human beings.

The second reason for the radio silence is that we’re gearing up to participate in Bloomberg Television’s coverage of the mini-Berkshire Hathaway shareholder meeting next week, at which Berkshire shareholders will be voting to do something Warren Buffett swore would never happen under his watch: the splitting of Berkshire’s stock.

No matter, this morning’s headlines brought a good reason to break that silence: the acquisition of Bare Escentuals, a publically-traded cosmetics company (ticker BARE) based right here in San Francisco, by Shiseido, a large Japanese counterpart, for $18.20 a share in cold, hard, US dollars.

Now, as far as deals go, this really shouldn’t be an attention grabber, but stay with us while we get to the “teachable moment.”

The winners in the deal are, of course, existing Bare Escentuals shareholders, who happen to include the company founder, a private equity firm, and the many institutions and individuals who bothered buying the stock on their own free will.

The losers would mainly be short-sellers, who according to our Bloomberg are stuck with 5.3 million such shares they must now buy back (“He who sells what isn’t his’n,” as the old Jessie Livermore phrase goes, “must buy it back or go to prison”).

Another class of losers, however, would be pretty much anybody who took Goldman Sachs’ advice to sell their BARE stock just six weeks ago. Indeed, more than 5 million shares changed hands in the two days following Goldman’s early December move from the always-meaningless “Neutral” rating to the rare “Sell” rating, and the stock traded down $2, wiping out $200 million of the company’s valuation.

Now, there was good reason investors took Goldman Sachs’ advice to sell their BARE stock.



After all, it was Goldman Sachs who led the Bare Escentuals public offering back in November 2006, pricing 16 million shares at $22.00 a share.

And it was Goldman Sachs who successfully led a 12 million share secondary at $34.50 in early 2007, which Goldman’s crack Equity Research Team quickly followed by slapping a “Buy” rating on BARE stock, with a target price of $44.00 a share.

“But wait, there’s more!”



Three months later, it was Goldman Sachs who, once again, plugged the Street with more stock, this time selling 8 million shares of BARE at $36.50.

Finally, the Street had had enough of Bare Escentuals: the stock sold off ten points that summer and never really recovered.

But this did not deter Goldman’s Equity Research Team, for in the manner of equity research teams everywhere, Goldman’s Finest changed their “Buy” rating to a “Neutral” only after all the deals were done.



And Goldman’s Finest stuck with that “Neutral”rating even while the stock performed in a decidedly non-Neutral fashion: it cratered all the way down to $2.45 a share in March 2009.



Now, you might think such a ridiculous price would have merited an upgrade: that $2.45 per-share valuation amounted to only 3-times EBITDA, a steel-company multiple for a non-steel-company-like 70% gross margin, 28% operating margin business.



Besides, if you liked it a $36.50, shouldn’t you love it at $2.45?

You might think that, but you’d be wrong. In fact, Goldman kept its “Neutral” rating and thus missed a 425% rally in shares of BARE until the stock hit $13.00 a share—where Goldman’s Finest deemed the shares an outright “Sell” just over a month ago.

By our count, that’s three overpriced stock offerings and four bad research calls, for a score of Goldman 7, Public 0.

And it is here now that we get to our Teachable Moment.



You might think this sort of performance would hurt Goldman Sachs—i.e. that there might be some sort of loss of credibility in the matter of Bare Escentuals which would have a negative financial implication down the road for Goldman Sachs, Inc.

And you would already be wrong.

Because the financial advisor to Bare Escentuals in its acquisition by Shiseido is none other than…

Yes, you got it.

Goldman 8, Public 0.

Jeff Matthews

I Am Not Making This Up



© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog e at NotMakingThisUp, and for what we hope will prove good reasons.

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