Rumor: Microsoft is about to issue a colossal profits warning. It’s looking at worldwide quarterly revenues of just $100,000. And have you heard what happened to Bill Gates? He flipped out over three years ago. He has been impersonated by a computer-generated actor ever since. The whole enterprise is fast going down the gurgler. Mark my words – sell.
Okay, I’m a liar. And you should pay no notice to any of the above. I’ve just made this up for the benefit of an internet bulletin board. Why? Because I can. And I’m not alone. The explosion of retail share trading has been accompanied by a huge increase in investors using chat rooms or message boards to swap news, views and tips. Tens of thousands of message boards are dotted across the internet, with the most popular such as Raging Bull, Silicon Investor, Motley Fool and Yahoo attracting vast numbers of messages. And, with individuals spouting chat with almost total anonymity, companies have to be wary of cranks, con artists and the downright naive.
Ignore the fact that, in deliberately creating a misleading impression about an investment, I have just committed a criminal offense (please), and consider this: online rumor is rife and it can hurt.
‘The popularity of bulletin boards has increased dramatically and the rumors are certainly impacting share price,’ says Andy Yates, CEO of DigitalLook.com, a UK-based equity research and news alert service. The company runs The Bulletin Board Watcher, an alert service for companies that scours the boards for scandalous scuttlebutt. ‘People have made a lot of money from bulletin boards, and some of them are quite unscrupulous.’
In the UK, where the three biggest chat rooms – run by Motley Fool, Hemscott and Interactive Investor International – are thought to have 2 mn registered users between them, the Financial Services Authority has issued a warning to investors, counseling that following such tips blindly can ‘seriously damage your wealth’. The Consumers Association of Ireland has echoed the alert. But often it’s the companies rather than the consumers that really have to watch out.
‘It’s certainly the ultimate form of democracy,’ says Jeff Baum, IRO at Lucent Technologies, the New Jersey-based provider of communications and networking systems. ‘But that’s the real danger. It’s available to anyone and, of course, it’s anonymous.’ And there’s the rub: while the bulk of online chit-chat is harmless, the medium can easily be exploited. Popular tactics include pumping and dumping (spreading untruths that will ramp up a share price before selling and making a fast buck) and trashing and cashing (spreading lies to drop a share price before buying the shares cheaply). Bulletin boards are also the haunt of revenge-seekers and environmental campaigners – all of whom can spread harmful fabrication.
And chatters don’t always stick to predictable patter: rumors about future acquisitions or financial problems are obviously common, but harmful canards can also include reports that the chairman is a paedophile, has been arrested or has checked into hospital.
‘People are so desperate for information, they’re making it up,’ says Richard Lackmann, of Hugin, a European IR consultancy with a focus on new media. ‘The market is looking less and less at historical data.’
But bulletin boards aren’t just a stomping ground for liars and attention-seekers. ‘Most of the time it is people spreading bona fide news or analysis,’ Yates considers. ‘People dissect even the smallest part of a press release. If used properly, bulletin boards can be very useful. More and more deals are being broken on bulletin boards. They broke the Norwich Union-CGU merger over a week before it hit the press.’
But the FSA is more circumspect, pointing out that discussion in chat rooms is like exchanging views in a bar. And while chat rooms feature the equivalent of the bar’s madman that grunts incoherently and swears at his beer, there are also punters who actually talk sense. ‘There is a small minority of cranks,’ concedes Yates. ‘But increasingly City professionals are posting messages. So there’s a lot of accurate information.’ Nevertheless, Lackmann feels that, ‘Day traders are the ones that use rumor. For long-term investors, the bump and grind will even itself out.’
In that case, is it true that online rumors affect your stock? The idea that share prices can be altered by the ramblings of techno nerds – who frequent chat rooms in between playing Tomb Raider and downloading pornography – has got to be an urban myth. Hasn’t it?
Well, tell that to the companies that have suffered. Tell it to food giant HJ Heinz, which felt the pinch when rumors insisted that its ketchup was made from cows’ blood. Tell it to Mrs Field’s Cookies which was accused over the internet of underwriting a party for the jurors in the OJ Simpson case.
Some instances are more mundane. Last year, the Dialog Corporation, a UK internet services company, saw its share price tumble 7 percent. The fall was traced to a message posted on the Hemmington Scott bulletin board, which – at the time – falsely claimed that the company’s debt restructuring was in trouble.
‘We get our fair share of bulletin board rumor,’ says Kristian Talvitie, head of IR at the rumor-ridden company. ‘Some of the stuff I read is so far off-base that I hope people aren’t investing in our company because of that.’
Lucent Technologies has had to put up with rumors too. It was the subject of claims that the company was about to issue a profits warning. That said, the company wasn’t too impaired. ‘We’re the most widely held stock in the US,’ says Baum. ‘There are thousands of postings on us every day. Smaller companies are probably a little more volatile.’
Magnum Power, an electronics group from Linlithgow in Scotland, would attest to that. Shares in the group soared by more than 60 percent after chat room postings – predominantly by one user, Philip Belch – claimed it was poised to announce ‘exceptional’ profits and a tie-up with Microsoft.
‘We didn’t see everything that appeared,’ says Sandy Morrison, Magnum’s CEO. ‘But the share price moved in a way we hadn’t expected. The first we knew was when it had built up a head of steam.’
A hopeless task?
At first glance, the problem looks insurmountable. With 73 mn users surfing the internet, how can you hope to avoid the rumors?
Rule number one, it seems, is to keep your eyes peeled. ‘First of all, companies should check to see if there’s a board on them,’ says Nancy Sells, VP of eWatch. ‘I’d say nearly every company checks to see what’s being said about them. We collect the data and send it out to our customers, then they can nip internet rumors in the bud. Many use eWatch as a form of insurance.’ Yates, as a CEO, agrees: ‘Companies have to know what is being said about them to know how to respond.’
So what is the best course of action? Inaction is a fairly popular choice. Most companies choose to ignore tittle-tattle rather than risk fanning the rumor’s flames or affording it credence simply by acknowledging it. ‘Best practice is not to respond,’ remarks Lackman. Talvitie certainly follows this line. ‘Our general policy is to not comment on rumor,’ he says. ‘There is obviously a potential to respond. But if you respond to one, do you have to respond to them all? Because then if you don’t respond on one occasion, isn’t that a response in itself?’
And responding can give rise to obscure problems too. ‘If a company posts a response as itself, it isn’t worth it,’ says Yates. ‘The whole thing is anonymous anyway and CEOs are often impersonated.’
Keeping mum isn’t the same thing as corporate apathy, mind you. Companies receive stern advice from some quarters to say nothing. ‘Lawyers always tell you not to say anything,’ comments Talvitie. ‘But then again, if you were thinking of going for a walk, your lawyer will tell you not to in case you tripped and hurt yourself.’
Like many elements of IR, it often boils down to discretion. A mouth-shut line can sound sensible until your share price discernibly plummets. What then? Well, approaching the bulletin boards or chat room operators themselves can sometimes be fruitful. Dialog did just that during its rumor strife. ‘Someone had stated something as fact, like second quarter revenues will be blah blah blah. We had Hemmington Scott remove the posting and issue a note of apology.’
‘If you consistently get someone spreading rumors, you can get the people that run the bulletin boards to remove the user,’ says Yates. ‘But to a large extent, the boards are self-policing. If people see obvious ramping going on, they’ll alert the message boards themselves.’
Moreover, under some jurisdictions, users’ anonymity dissolves when what is being said is illegal. Last year, under court order, Yahoo had to provide all the personal identification information it had on 21 employees of Raytheon, a California-based aerospace company, who had allegedly disclosed ‘proprietary and confidential information’ via anonymous postings on the Yahoo message board.
Legal action is an extreme measure that is not open to most companies, even when the share price is being hit. But there are other avenues of recourse. Issuing a press release – deliberately distinct from the internet – is often the chosen method. ‘If necessary, we’d put out a press release in response to an internet rumor, rather than responding online,’ says Baum.
‘If there is gross misinformation, then it’s a good idea to issue a press release,’ echoes Sells. ‘That way you can deal with the issue before consumers get a chance to run with it.’
Wag the dog
Sly use of the media can be a good bet, too. ‘I remember when Provalis were the subject of rumors in the US,’ recalls Yates. ‘This had pushed the price up over there and there was a lot of UK interest. So the company spoke to Reuters and told people that nothing had been announced yet, and that they’d make an announcement on this date. Unfortunately, smaller companies don’t easily get this sort of press coverage.’
True. And they know it, to the extent that Magnum’s Morrison has voiced concern over the online balance of power. Rumors blighted his company at the worst possible time. ‘It was very difficult,’ he says, ‘because it all happened during a closed period. So we actually had to make an announcement to the stock exchange on the Monday before the results were published – in a period when we normally wouldn’t. We feel that the stock exchange should have more control, especially now that the net has become a viable form of trading.’
So far, Morrison’s campaign hasn’t taken off and best practice remains a topic of debate. Sells suggests a written policy. ‘A company might choose to say nothing online, or send out press releases. The point is to show consistency and know what to do.’
But again, it’s a policy that focuses on limiting damage, not avoiding it. Lackmann, however, suggests a more proactive approach. ‘The whole internet rumor argument can be split in two,’ he says. ‘Clearly if you can avoid it in the first place, that’s better. So you should be proactive rather than reactive. Make sure that you’re providing a solid information flow. That means ensuring that you own your own web site and that it’s up-to-date, so people will be less likely to go to bulletin boards for information. People will still make things up, though. In that case, don’t do a BMW – don’t say No, we’re not going to do it and then turn around and do it. Don’t respond to it directly, just hammer home your proactive strategic message.’
I only hope Microsoft has done its groundwork – apparently its programmers are fed on cow’s blood. It’s true…
