BRIAN KENNY: What happens when one of the world’s biggest luggage companies suddenly finds someone rummaging through its financial baggage? In 2018, Samsonite looked remarkably well-packed for the journey ahead. Sales and operating profits were climbing. Its shares had enjoyed a strong run and its $1.8 billion acquisition of Tumi had extended the company into the luxury market. Most analysts were optimistic, but a newly launched activist short seller, Blue Orca Capital, saw something very different. Its team began digging into questions that sit at the intersection of accounting, governance, and valuation, a complicated network of subsidiaries, significant related party transactions involving the CEO’s family, rising inventories, acquisition accounting that required substantial judgment, and evaluation that invited comparisons with luxury brands, even though much of Samsonite’s merchandise sold in decidedly less luxurious settings. The challenge is separating legitimate warning signs from the ordinary complexity of running a sprawling global company. So should investors be worried about what’s inside the suitcase or is the short seller simply over packing its case?
Today on Cold Call, we unpack, “Samsonite: Accounting Baggage?” with Professor Aiyesha Day.
Aiyesha Day studies corporate governance, behavioral finance and financial reporting and disclosures, all of which we’re going to touch on today. Aiyesha, welcome back to Cold Call.
AIYESHA DEY: Thank you for having me again.
BRIAN KENNY: It’s been a little while since you’ve been here, so we’re glad to have you back in the studio discussing a case about a company that pretty much everybody has heard of. Most of us probably have some Samsonite luggage in our closets. I know I do.
AIYESHA DEY: I should ask you, did you buy it at full price?
BRIAN KENNY: I think I probably bought it on Amazon, so probably not, right? I don’t think I paid a luxury price for it. And I don’t own any Tumi products to my knowledge, but my wife might. So I haven’t done inventory there. But people are so familiar with it and I think we’re going to get into some topics today that I think a lot of people don’t even think about when they go out to purchase something. What is the true value of what they’re purchasing? Is the company representing itself in an authentic way? So thanks for writing it and thanks for being here to talk about it. Why don’t we just start with a straight-up question about Samsonite. What made this a good topic for an HBS case from your perspective?
AIYESHA DEY: Sure. So one of the courses I teach with my colleague Jonah Seas is called The Anatomy of Fraud. So a goal there is to make our students very sophisticated at reading and analyzing both financial and non-financial information. That helps them not just as investors, as analysts, as potential board members, but also as management because they want to know is something going on with my company that I should pay close attention to. So we teach them about picking up red flags and indicators for financial malfeasance or even companies that are misvalued.
So we typically start with more classic frauds, which we already know were frauds like Enron, WorldCom, Wirecard, et cetera. But a good way to test what they’ve learned is to apply it to more controversial contemporary cases, which is not clear. Is it fraud? Do we believe the accusations some market participants have made or do we want to believe the company? So typically we’ll start with a vote. What do you think? Why? Do you want to short? Do you want to buy? So this is a good way to test and teach students skills to analyze a company and try to look at the merits of short sellers in this case versus the company’s argument. So I think it’s a very good fit for our fraud course.
BRIAN KENNY: And it’s good that we’re teaching our students about this. I should say that.
AIYESHA DEY: Yes, definitely.
BRIAN KENNY: So it’s important work that you’re doing. You mentioned short sellers and I teased about Blue Orca in the introduction. Just tell us a little bit about Blue Orca, who they are, and where they fit in this story.
AIYESHA DEY: Yeah. So Blue Orca was founded by Soren Aandahl. He’s actually also a guest. He has been very generous with his time and he comes to discuss this and other cases. So a short seller typically is a market investor who will find mismatches between how a company is presenting itself and the underlying numbers or governance, et cetera. So when it sees a gap, it tries to buy shares so it can sell later and make a profit on it. And it has to actually present a thesis to the market on why it’s making its accusations or why it’s shorting it, et cetera. So it’s investment thesis. So it serves as a good monitor, as a market-level governance monitor because you have firm-level monitors, you have regulators, but then at the market level, who are these investors, et cetera, who are watching out to make sure companies are misrepresenting themselves.
BRIAN KENNY: And they come to this with a point of view.
AIYESHA DEY: Yes.
BRIAN KENNY: And so to some extent, part of their role is to call attention to what they see as inconsistencies.
AIYESHA DEY: 100%. And one can say, “Well, they have incentives, they want to make a profit,” But you know what? So does the company. So do long investors. And the thing is they have to present you a thesis with arguments. So yes, they have incentives, but doesn’t mean they’re wrong. So you have to be savvy enough to analyze and look at what they’re saying and try to make your own judgment call about it.
BRIAN KENNY: So by all accounts and the accounts being provided by Samsonite themselves, things looked pretty good. They had kind of a rosy outlook as I mentioned in the introduction. What should an investor or a board member have been paying attention to even before Blue Orca came along?
AIYESHA DEY: Right. So one of the things where there should be an immediate red flag at first is when the margins and what the company is doesn’t really match. For example, here we have massive gross margins, right? It rose from 52% to about 56%. But the core brand, like you yourself said, is heavily sold at a discount and all as mass. So it’s selling at a multiple for luxury brands, but it’s really a very mass middle tier brand. It’s certainly not like a Louis Vuitton, but it’s selling at that multiple. So the first question is, okay, what’s going on here? It’s selling at this huge price, but here I just bought it at Macy’s at 50% off. So that’s one, right? The other thing that is, again, a red flag, so it’s not definitive, is when companies such as Samsonite that fuel their growth with a lot of debt. Now, is that a bad strategy? Not necessarily, but one question then to ask is this sustainable? They’re growing, they’re buying growth and profit margins essentially with a lot of debt. And is that a sustainable strategy in the long run? Then you can look at individual accounting numbers. Now, one thing that acquisitions help to do is when you’re acquiring another company, you get to use a lot of judgment and discretion in combining accounts, stepping them up to fair value, which you get to a certain… So there’s a lot of discretion, a lot of judgment that management can exercise. So again, it’s another place to, not necessarily a bad thing, but somewhere you want to look a little closer. And of course when there’s a lot of governance red flags, like for example, a bunch of auditor changes. Well, why are so many auditors resigning? So those little things are, I think boards, investors can take up as, okay, that’s a point I need to follow up on.
BRIAN KENNY: And how many, this is a question that probably doesn’t have a direct answer, but how often do boards or investors really delve into the details in that way? Or do they just kind of accept it on the surface?
AIYESHA DEY: Sadly, not as often. This is why short sellers have such a, I think, potentially important role is you listen to a story, a hype, you look at prices going up and up and up and you want to be part of the group making all the money in some sense. And one problem happens is when there’s a lot of big names involved, like if you take Enron or you take Sino-Forest or these other companies, there were massive investors piling in, investing in the company. The board had high profile names. You have Big Four auditors. So everyone assumes someone else has done the due diligence.
BRIAN KENNY: Yeah. Why would everybody be investing in this?
AIYESHA DEY: Exactly. These are big people, big names. They know what they’re doing. So I’m just going to not worry about it. So just a quick point there is a big name investor is not a substitute for due diligence. So I mean, long story short to your point, sadly, I don’t think boards even are digging in that often.
BRIAN KENNY: In the way that they should, right?
AIYESHA DEY: Exactly.
BRIAN KENNY: And valuation has a lot to do with what’s happening at Samsonite here. They’re telling their own story, which is what organizations do, right? They want to paint the rosiest picture that they possibly can. How much does the story that a company tells about itself influence valuation that the market’s willing to give it? Are people able to see through what’s considered to be kind of a rosy picture?
AIYESHA DEY: Not always, right? Which is why it’s like when you see particularly very high EV to EBITDA margins, so basically the markets are paying or wanting to buy a story more than the numbers and it’s not earnings per se, it’s what they believe about earnings and the story. So they’re buying into the story, which is why let’s say Samsonite was selling for a luxury brand multiple, even though it was mid-tier. So the story becomes pretty important.
BRIAN KENNY: Yeah. So in comes Blue Orca. They have their own financial incentive in what they’re doing here. So we should sort of acknowledge that too. It benefits them to have people see all the flaws that they’re pointing out. What was Blue Orca insinuating in its report and how should investors evaluate that kind of evidence? Should they look at it with a jaundiced eye or should they sort of take it at face value?
AIYESHA DEY: So one of the things I think Blue Orca, when it first looked at Samsonite, it had the same question that, oh wow, they’re selling at a massive multiple and this is Samsonite. It’s not Louis Vuitton. So what is going on? Let’s dig a little bit deeper. So that got them interested. When your performance is too good to be true, that always gets a short seller or any savvy investor a little bit more interested. I mean, even in a good way, how are they doing this? I want to know. And so I think then they started digging into a little bit more the numbers and they found some of the accounting that didn’t quite add up or at least raised questions. Then they saw all of these related party transactions in India. A CEO who said he was a doctor, but he wasn’t. So a ton of these little things started piling up enough for them to say, “All right, the numbers and the story don’t quite add up.”
BRIAN KENNY: Yeah. Talk a little bit about the related party transactions and the CEO of Samsonite. What’s the context there that people should be aware of?
AIYESHA DEY: Samsonite India was dealing with a lot. So there were two, there was AbhiShri, I think that was like a retailer, which was owned and controlled by the CEO’s company. And then there was Bagzone. Sorry, AbhiShri was the distributor and Bagzone was the retailer. Both were companies that Samsonite was dealing with and both were also controlled by the CEO. So these are related party transactions, and when it is, it’s not an arm’s length, that means the CEO can influence both sides. So it is not clear what the conflicts of, are they inflating profits? Are they reducing costs? Are they giving more generous terms to these other companies? So it creates a big conflict of interest that sets at least a questionable item. And because it’s questionable, that’s when the credibility point becomes even more important. So the thing is a lot of the story is a story and you have to trust the person telling the story, and the person responsible for the story is the leader, the captain of the ship, the CEO of the company.
BRIAN KENNY: So were they calling his credibility into question?
AIYESHA DEY: Yes. And that was the thing. It seems like a very minor thing that, oh, he said he was a doctor, he flouted he had a PhD, but he didn’t. So some of us may say, “Okay, what’s the-”
BRIAN KENNY: That seems like a big thing to me.
AIYESHA DEY: Right? But to the extent there are some people who may say, okay, it’s not a big deal. He enrolled for one, he didn’t get one. What’s the big deal? But actually, it is a big deal. We have done a ton of research, which actually shows that even minor indiscretions point to core character personality issues in leaders that can lead to massive reporting risk, including fraud. So I think that the credibility of the person leading the company shouldn’t be dismissed easily. It is something that all investors, boards should definitely pay attention to.
BRIAN KENNY: I would think so.
AIYESHA DEY: Because at the end of the day, you have to trust the people telling you the story about the company.
BRIAN KENNY: Right, right. You mentioned earlier that they had acquired a lot of firms and that creates the opportunity maybe to kind of blur the accounting numbers a little bit. For somebody who’s not steeped in knowledge, like I’ll name myself here about how this works, can you give us a couple of examples of how acquisition accounting can create opportunities to maybe paint a rosier picture than you might otherwise have?
AIYESHA DEY: I can give you one example. So when you acquire another company, the rules require you to redo the value of all of your assets and liabilities to whatever is the fair value at that point in time. So you’re raising the value of your assets to fair value. Let’s say you have land and you bought it for $50,000. So someone else acquires you and the land is now worth a hundred. So they get to write the land as a hundred in their books. So you have to represent the fair value of that. Same goes for liabilities. Now, one of the things that Tumi had on their books was 39 million of accounts payable. So that’s all fine. But what Samsonite did after they acquired it is that they stepped it up to about 139 million.
BRIAN KENNY: Wow.
AIYESHA DEY: So I mean, that raises a couple of-
BRIAN KENNY: It’s a huge increase.
AIYESHA DEY: A huge increase. So the question is, well, one is it’s a payable. So the fair value of a payable, that’s just the invoice number. That’s what you pay back. So how can you just step it up, right? So the question is, are they adding more things to it? That is potentially possible that they’re not talking about. They could have added, but 100 million again, as you said, is a lot. The reason it’s risky is because sometimes what companies will do when they want to hike up these liabilities is they write it up and they balance the rest out in something called goodwill, which is sort of the net between what the purchase price is and your net assets are. And what they do is it sits in their books and in the future when they have certain expenses, it said that they spend cash and they don’t report expenses anymore and they lower the liability down. So it’s almost like think about it creating a reserve that they can dip out of in bad times so they don’t have to record an expense so their earnings don’t look bad.
BRIAN KENNY: It sounds like it creates a lot of opportunities though for being deceitful, right? Is there no governing authority who says that this is what you have to make your fair market value? Are there no sort of accounting rules that govern this?
AIYESHA DEY: I mean, the accounting rule is it has to be fair value, but this is where a lot of judgment and discretion comes in. This is why acquisition accounting is a place where there’s room for that. And so a particular case where investors and boards should look deeper into because who knows? And I think as Samsonite later says, “Well, we added other things in that account, which is why it is that big.” So I mean, again, this could be, if that is true, it could be justified later, but how come you didn’t explain it before? Because it creates already a red flag right there. How did payables jump a hundred million?
BRIAN KENNY: Again, with the credibility issues.
AIYESHA DEY: Exactly. Right.
BRIAN KENNY: Okay. So Blue Orca, we talked about before that they have a motivation in doing all of this. How did the market respond to it? Were they buying Blue Orca’s story or were they buying Samsonite’s story?
AIYESHA DEY: Well, right after the report was published by Blue Orca, the stock market fell sharply. So clearly they attached a lot of credibility to the report. So I think on May 23rd, the Blue Orca report had said that the target was about, it should be about Hong Kong $17 or so, but the stock was, it fell, but it was maybe at $34. And then it starts falling after that, quite a bit. But I do have to note that on May 31, 2018, Tainwala, the CEO at that time with all the related party transactions, he resigned. And the CFO at that time, Gendreau, became the CEO, and the stock rose on the CEO’s departure, not so much on the accounting rebuttals by the company. So what it tells you, investors responded mostly to a credibility and trust fix. And anyway, five years down the line and more, the stock never really regained its old premium. Now, fraud was never proven, but the luxury multiple didn’t come back either.
BRIAN KENNY: Okay. Okay. So in some ways, Blue Orca got the result that they wanted and the CEO is no longer in the picture. How did Samsonite sort of talk about those developments as they were unfolding? What was the Samsonite response to all of this?
AIYESHA DEY: In their rebuttal, they tried to get back about all of the accounting problems that Blue Orca raised. I mean, their first response was to kill the messenger a little bit. Oh, this is Blue Orca. They have their own interest to undermine shareholder confidence, et cetera, et cetera. But then it actually took each of Blue Orca’s points one by one and tried to rebut. So it said, “Why are payables so high?” So according to them, they had put a bunch of other things in it. Inventory, distributor inventory was another issue that Blue Orca had flagged. So that’s something also they responded to and said why that was in the report, but not quite true because Blue Orca hadn’t taken the global distributor inventory into account.
It did say that something Blue Orca picked up on, on the value of inventory was due to a misleading footnote. Now, they fixed the footnote. They said that doesn’t affect profitability at all, but one thing investors should note is that why was it wrong in the first place? These disclosures run through your internal audit, your audit committee, your auditors. Nobody picked it up.
So that says, is something wrong with your internal controls? So it is something to worry about because internal controls are there to catch problems like this and auditors themselves depend on internal controls because they audit on a sample basis. They can’t audit everything. So if a company has weak internal controls, that itself is a big red flag. Why aren’t the auditors flagging that too?
BRIAN KENNY: Sounds like they had some reasonable responses, but really at the end of the day, it feels like this was much more about the credibility of the leader of the firm. And the footnote is also, that’s going to shake people’s confidence a little bit as well. But it looks like both Blue Orca and Samsonite had some reasonable things that they were pointing out, right? And I’m wondering, in your experience, when both sides have plausible explanation for the same facts, how do you decide whether a red flag has actually been resolved rather than simply explained away? Were there really issues here that Samsonite was trying to cover up?
AIYESHA DEY: So I think one thing to check is if something is resolved, it doesn’t remain a concern anymore. So if it was something related with numbers, that’s verifiable. You can go in, ask for detailed disclosures and make sure the numbers add up. But if it’s something that just keeps it unclear and there’s, oh, here’s an innocent explanation, but that can’t be verified, that’s not as satisfactory. So this internal controls issue, tell me why was this not picked up by the series of bodies that went through it? Let’s dig deeper. So I think verifiability, can an independent party come and verify this issue and make me feel comfortable about this? Look at the trends going forward. For example, the company saying payables were not anything like a cookie jar that Blue Orca is claiming. There’s just other stuff in it. Look at the payables over time because one of the points about a cookie jar is the company slowly lowers the liability over time and doesn’t really create an expense. So they’re using up the reserve to mask the fact that there are expenses. So how does the liability behave over time? So look at the trends and things like that can help with the verifiability as well.
BRIAN KENNY: What do you think this case tells our listeners about the power of short sellers and the role that they play in the scheme of things? Are they really here to help with governance or are they really here to help themselves achieve whatever financial goals they have?
AIYESHA DEY: I mean, at least from a theoretical point of view, they form a pretty important corporate governance, market level corporate governance mechanism. Do they have incentives? Of course, but so does the company and so do other investors to profit. And short sellers, the thing with them is they have to present a thesis. They can’t just say, “Oh, this is a bad company.” They have to present a thesis, present their arguments. They’ll give you a reason by reason why they believe what they believe. And one thing is they actually do a lot of field work. They do a lot of forensic investigations. They go on foot. If they really believe something is off, they’ll go to the site, they’ll check the inventory, they’ll check what’s going on. They’ll talk to people. They do a lot of due diligence before they actually… They’re also investing, you have to remember, a lot of their money.
So they want to make sure that it’s correct. But like you said, they also have incentives, as does everybody else. Doesn’t mean they’re wrong, but doesn’t mean you blindly follow them either. So you have to, I feel, have enough knowledge to at least know when to ask more questions, reach out to management and say, “I don’t understand. Can you explain this?”
BRIAN KENNY: Yeah. No, that’s great. That’s great insight. We’re almost at the end of our time, Aiyesha. So I will ask you to end just by telling our listeners, if there’s one thing you want them to remember about the Samsonite case, what would it be?
AIYESHA DEY: So I’m speaking from management side. Suppose you were leading a company like Samsonite. Just remember, the best defense against a short report is a company that would have nothing new to learn from reading one.
BRIAN KENNY: Aiyesha, thanks for joining me.
AIYESHA DEY: Thank you for having me.
BRIAN KENNY: If you enjoy Cold Call, you might like our other podcasts: Climate Rising, The Founder Mindset, IdeaCast, Managing the Future of Work, Skydeck, and Think Big, Buy Small. Find them wherever you get your podcasts and check out our video episodes on the Harvard Business School YouTube Channel.
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