We noted on Monday the sort of god-like powers that short seller Carson Block, of the firm Muddy Waters, has on Chinese-based companies that are listed in North America: When he issued a “strong sell” on Focus Media Holdings Ltd., the stock plunged as much as 74 per cent during the day.
Tuesday provides more evidence: The shares did rebound 9.1 per cent after Focus Media issued a response to Mr. Block’s allegations, but the price is still 34 per cent below where it began on Monday – suggesting that Mr. Block is winning this tug-of-war so far.
Among Mr. Block’s allegations, he believes that Focus Media – a digital advertising company – has overstated the number of screens in its ad network and has been writing down investments that it never made.
The report was issued outside of normal business hours in China, but Focus Media has since responded in a news release, denying “the allegations entirely.” The company said that Mr. Block’s report fails to understand the business. More specifically, it said that the observation about the number of screens is unfounded, according to Bloomberg News, and it will hire an outside firm to examine the ad network, with results ready in two weeks.
“Allegations relating to historical acquisitions, impairment charges and writeoffs impugn the motives of management without foundation or basis,” the company’s release said.
Meanwhile, pity the poor analysts caught in the middle of this spat. They’ve been busy since Mr. Block issued his report though. JPMorgan Chase & Co. cut its recommendation on Focus Media to “neutral” from “overweight” and slashed its price target to $20 (U.S.) from $39. Credit Agricole Securities maintained a “buy” recommendation and $44 price target. And EVA Dimensions raised its recommendation to “hold” from “sell”, but did not issue a target price.