Surprises Don’t Sell

One of the real truisms about investors is that they don’t like surprises. This is a truism that Daniel Borislow, CEO of long-distance provider Tel-Save, has spent the last four months ignoring, with predictable results.

Tel-Save has been one of the pioneers in what you might call the “cheap as cheap can be” long-distance market, offering calls for nine cents a minute. What national recognition the company has received is the result of its marketing deal with America Online. If you’re an AOL subscriber, then at various times in the past year Tel-Save ads have been the first thing on your screen when you sign on. Like most of the ads on AOL, Tel-Save’s were the definition of low-tech. They looked like something someone had designed on a PC, circa 1983.

Still, Tel-Save’s prices have proved alluring enough on their own, at least to AOL customers. In its most recent quarter, the company’s revenues rose 48% from a year ago, and AOL business made up more than a third of all sales. The problem is that Tel-Save shows no indication of being able to turn a profit on those revenues, particularly since the company is shelling out $190 million this year selling its services to those AOL customers. In other words, the company is spending almost half of its annual revenue on marketing. Put another way, Tel-Save is buying customers.

Giving away business–or selling it below cost–in order to build market share is an oft-cited characteristic of the Internet economy.’s most recent quarterly numbers, for instance, are not that different from Tel-Save’s. But it’s hard to see exactly where Tel-Save’s marketing plan will get the company, in the sense that it’s not clear that, marketing costs aside, it can make any money selling long-distance at nine cents a call. And Tel-Save will never be able to increase its prices, since its only competitive advantage is price. (And it’s not much of a competitive advantage, either, since most of the big long-distance carriers now offer 10-cents-a-call plans, albeit with monthly fees.)

Still, all of this would simply make Tel-Save another shot-in-the-dark company whose stock price was boosted by the mention of that magic word “Internet.” What’s most interesting about Tel-Save, and what has hurt the company’s stock most in the past few months, is its CEO’s baffling habit of setting and then breaking deadlines without any prompting from outside. In February, Borislow hired Salomon Smith Barney as an adviser in order to facilitate a sale of the company. That decision came after Borislow was outbid in two different attempts to acquire other long-distance companies.

Traditionally, when a company puts itself on the block, it says something like, “We hope to make a deal in the next few months” or “We’d like this process to reach a conclusion as quickly as possible.” Borislow, by contrast, decided to create a self-imposed deadline, announcing that he would sell the company by April 15. When Tax Day came and went without the appearance of a buyer, he pushed the deadline back, and when that deadline came and went, he did it again. As time passed and the horde of buyers Borislow apparently expected failed to materialize, Tel-Save’s stock price kept slipping downward and the CEO began to contemplate the possibility that maybe the company would be better off independent. Then, in early August, Borislow announced that he would have a final decision on whether the company would be sold by August 10, on which date he would also announce the company’s second-quarter earnings.

In what by that point no longer qualified as a surprise, Borislow did not have an announcement ready on the 10th, nor did he have the company’s earnings. But four days later, he did have news: the company was going to stay independent, it had lost $96 million in the last quarter (on sales of $111 million), and Tel-Save was going to proceed with a board-authorized $300 million stock buyback.

Now, Tel-Save’s stock has fallen from a high of 30 to just above 10. When the buyback plan was authorized, $300 million would have bought around 10 million shares. Today, though, you could buy 40% of all the outstanding shares with $300 million, no small feat when you consider that Borislow himself owns 39% of the company. So most of that money won’t be spent. But the buyback does sound impressive, and Borislow has built an entire business on well-positioned hype.

Of course, that’s what makes his decision to keep making public promises he couldn’t keep so confusing. No one was really pushing Borislow to set a definite date. And had he just kept periodically insisting that the company was close to a deal, investors would probably have gone along. Borislow may be one of those guys who thinks he only functions well under pressure. But what we’ve learned is that he’s just the opposite. If this were the 1950s, we’d say that Borislow was psychologically compelled to sabotage himself. Since it’s the 1990s, we’ll just say that Tel-Save is yet another late-boom Internet company, one of many castles made of sand.