Martha Stewart and her Insider Trading - Essay Example

[Supervisor's Martha Stewart and Her Insider Trading Martha Stewart Living Omnimedia is a foremost supplier of unique 'how to' substance and products for the home. The 'Martha Stewart' brand is leveraged across four business sections - Publishing, Television, Merchandising, and Internet/Direct Commerce. Martha Stewart Living Omnimedia has eight core content regions - Home, Cooking and Entertaining, Gardening, Crafts, Holiday, Keeping, Weddings, and Baby and Kids - in that creative experts are constantly seeking and developing new ideas to maintain the high quality and value associated with the brand. (Byron, 58-59) The professionals at Martha Stewart Living Omnimedia generate a broad compilation of 'how to' articles, books, television programs, newspaper columns, radio sections and products relating to the eight core content areas all through the four business section. Publishing is Martha Stewart Living Omnimedia's largest business section that accounted for US $182.6 million of total revenues for 2002. It includes magazines such as Martha Stewart Living and Martha Stewart Weddings, nearly 40 Martha Stewart books, the ask Martha newspaper column and radio show, and a music library of compilation CDs. The Television section accounted for US $ 26.7 million of total revenues for 2002, where it now offers around 30 opportunities every week for viewers to watch Martha Stewart programming. Kmart plays a huge role in Martha Stewart Living Omnimedia's merchandising section. In 1987, Martha Stewart Living Omnimedia and Kmart created a partnership that has been extremely beneficial for both companies. Sales of Martha Stewart merchandise in Kmart stores have reportedly been in excess of US $5 billion since the beginning of the partnership. (Louria, 2) In 2001, Kmart sold US $1.5 billion worth of Martha Stewart Everyday house wares, and those licensing fees accounted for almost 25% of Martha Stewart Living Omnimedia's profits. But since Kmart filed for bankruptcy on January 22, 2001, Martha Stewart Living Omnimedia finds its fastest growing section - merchandising - in jeopardy. Kmart has increasingly lost ground to competitors such as Wal-Mart and Target due to ill-advised price-cutting strategies and a mismanaged supply chain. It has already closed the doors of 250 to 350 of 2,100 stores and Martha Stewart Living Omnimedia has taken quite a hit. In many ways, the IPO for Martha Stewart Living Omnimedia, Inc. has thus far been the high watermark for both the organization and its principal stockholder, Martha Stewart. It was Martha's singular good fate-as well as bad fate-to go public with her stock offering at nearly the top of the greatest bull market in American history. This timing meant that while she immediately became a billionaire on paper, the stock would likely drift down with the rest of the market, so that, financially speaking at least, she had no where to go but down as well. Not only has she so far been unable to hold on to the initial phenomenal gains from the IPO itself, but also there have come to be other-and more troublesome-questions clouding the organization's future. One question had been hovering over the organization from the day it went public: What would happen to the shares if Martha herself-who held more of them than anyone else-were to meet an untimely end It was the same question that some investors had tossed out regularly during the IPO road show. (Louria, 3) Now that the stock was trading publicly, it was no longer a matter of mere theoretical concern: More than a billion dollars of stock market wealth hung on the ability of the organization's chairman to bolt from bed each morning and begin pursuing one of the most demanding schedules of any public figure on earth. And there was another problem that abruptly moved from the realm of the theoretical to the real: Would Martha's organization be able to survive looming problems besetting its most lucrative business partner, Kmart Corp. The entire matter became real, immediate, and suddenly urgent in January of 2002 when Kmart, having lost the confidence of investors and lenders in the wake of a disastrous holiday retailing season, filed for bankruptcy protection from its creditors. This refocused Wall Street's attention on Kmart's most high profile business partner-Martha Stewart-from an angle that neither she nor her organization had been viewed before: Just how dependent was Martha on Kmart really (and Kmart on Martha, for that matter) The unexpected and unsettling answer turned out to be 'very' in both cases, and it sent the shares of Martha Stewart Living Omnimedia, Inc., that had been falling for more than a year, drifting lower still. It seemed pretty obvious that Kmart would need Martha, but who would have thought that Martha was so dependent on Kmart (Caillavet, 19) Both of these concerns-Martha's mortality and Kmart's ongoing viability-had begun to manifest themselves slowly, but relentlessly, in the organization's stock price, almost from the moment of the IPO. Though the price had touched US $49.50 per share on its first day as a public organization, the shares quickly began to weaken-as was the case with nearly all IPOs at around that time-and thereafter traded irregularly downward for the following two years until they reached barely US $16 per share by the end of 2001, that is where things stood in February of 2002. The decline that accompanied the plunge in the stock market itself, and the collapse of advertising through the entire media sector, made the organization worth less in the after-market than it had been valued at to insider investors even at the time it went public- what is known on Wall Street as a 'busted IPO.' This in turn meant that all the organization's original backers, had they stayed with the stock from the time of the IPO onward, or at least through February 2002, would have wound up losing money on their investments; it was not Martha's fault, it was simply the reality of the market and the economy. (Byron, 134-135) Because of her indictment, Martha's image is suffering and so is Martha Stewart Living Omnimedia. Is it for publicity purposes because Martha Stewart is a celebrity Is it because she is a woman who has successfully competed in a man's business world Or is it because the Department of Justice is attempting to distract the public's attention from its failure to charge the politically connected managers of Enron and WorldCom who may have swindled the public out of billions of dollars No matter what the reason, Martha Stewart is going on trial for one of America's biggest insider trading scandals. Aspects that participate a function in these scandals are greediness and the actions in which top executive are being remunerated. Executive compensation is meant to be a governance mechanism that seeks to align the interests of managers and owners through salaries, bonuses, and long-term incentive compensation such as stock options. The reason for compensating executives in stock options is so that they have an incentive to keep stock prices high and align manager interest with shareholder interest. The outcome from these options is that top executives are fabricating accounting statements to inflate stock prices on Wall Street so the value of their options increases. Top executives also get compensated with loans that have little or zero interest, from the organization in order to buy organization stock. While some stock option-based compensation plans are well designed with option strike prices substantially higher than current stock prices, too many have been designed simply to give executives more wealth that will not immediately show up on the balance sheet. Martha's scandal does not have anything to do with her organization, but Martha Stewart Living Omnimedia is still being affected by the choices she made. Governance mechanisms are designed to ensure that the top executives make strategic decisions that best serve the interest of the entire group of stakeholders. (Caillavet, 13-14) It's obvious that Martha was not thinking about how her decision to sell her shares in ImClone would affect Martha Stewart Living Omnimedia. Since the news of her indictment went public, Martha Stewart Living Omnimedia's stock price has dropped dramatically. Even though Martha was making a personal decision, she was still the CEO of Martha Stewart Living Omnimedia, and personal decisions can, in spite of everything, have an affect on the organization. Works Cited Byron M. Christopher, Martha Inc: The Incredible Story of Martha Stewart Living Omnimedia. Publisher: Wiley. Place of Publication: New York. 2002. Caillavet A. Cynthia, From Nike V. Kasky to Martha Stewart: First Amendment Protection for Corporate Speakers' Denials of Public Criminal Allegations, Journal of Criminal Law and Criminology, Vol. 94. 2004. Louria A. Hahn, Martha Stewart's IPO: Is There Life Without Martha. IPO Reporter, Vol. 23 Issue 41, 10/18/99. Read More