The market was right on Friday to mainly reverse Thursday's negative response to the revelation that Mr Bill McCabe, chairman, and founder, of e-Learning group, SmartForce, is planning to resign in six months time, following a board restructuring. It did this by pushing the share price up 9.9 per cent to $47, partly reversing the previous day's 19 per cent fall.
But some misapprehension is understandable for three reasons. First, there may be still some bitter memories of the sharp fall in the share price, and the subsequent threats of class actions, following his previous resignation. Second, when he resigns this time, will he set up another educational software company, and subsequently back it into SmartForce, as he did with Knowledge Well? And third, it is surprising that a formal statement does not appear to have been made about last week's revelations.
Taking the third point first; no formal statement appeared on the important Yahoo finance site. Yet this was the site (on the message boards) that prompted all the discussion of the revelations and undoubtedly caused the collapse in the share price. The plan filed with the SEC, but not published, said the company is to strengthen and restructure the board "as part of this process, we plan to add one or two outside directors to our board who have substantial experience and knowledge in the technology and Internet industries".
SmartForce said it has already identified "several potential candidates. . . and have begun discussions with them". However, it could be "the end of the year, or later" before there is any appointment. Part of the plan involves the appointment of Mr David Drummond, executive vice president and chief financial officer to the board, and the stepping down of Mr Jack Hayes from the board but he will remain vice president of international finance.
But more importantly, and a point that appears to have been missed by Thursday's investors, is that Mr Greg Priest, the current president and CEO, will take over from Mr McCabe who would then become a special advisor. While Mr McCabe has overseen the move into the Internet, Mr Priest has been to the forefront in implementing the policies. Indeed, he has been the spokesman for some time. Mr McCabe, who will continue as a special advisor after the restructuring, sold around $40 million worth of CBT (it was transformed into SmartForce last year) in 1997. That was before the share price collapsed as a result of poorer than expected results. Subsequently, two senior executive left the company, and there were threats of class actions by shareholders against the company and some of the directors. Mr McCabe returned (together with Mr Priest) in a confidence building measure.
At first, the market did not react positively - the shares fell from about $10 to a low of $6.72, well below their highest point of $63.87. After that they crept up to $27.25 but that took a year.
The next plunge arose last year in the aftermath of a one-hour conference call to analysts in the US when it outlined its new Internet strategy which involved treating revenue differently. The shares promptly fell to $16.62. But the market had misread, or could not understand, the implication of the new strategy which was, in fact, better for the group. It finally dawned on the US investors and the share increase to over $50 before last week's slump
One fear is that Mr McCabe will leave to set up another educational software company and back it into SmartForce, following the pattern of Knowledge Well. That company, founded by Mr McCabe, was sold to CBT for up to $85 million. Both companies were in similar businesses, a view hotly denied by CBT which said it provides software to train people in information technology while Knowledge Well provides management and university training software.
But there is no evidence of similar action and it should be noted that Mr McCabe is not severing all his links with SmartForce. He also has no immediate intention to sell his shares which, with options, are valued at $216 million. Indeed, Mr McCabe has displayed great energy, and foresight, in getting the company back on track, and into a potentially faster earnings lane.
So how is the group performing and what about its future? The latest results, for the second quarter, showing revenue of $36.4 million and loss per share before goodwill amortisation of 15 cents, were ahead of brokers' expectations. The future also looks bright, with an average contract of $125,000. Importantly, the backlog at the end of June was $256 million, bringing it close to its year end target backlog of $350 million. Also, the company appears on target to go into e.p.s. breakeven position in the first quarter of next year.
Goldman Sachs last month added SmartForce to its US recommended list and its top pick for investors looking for exposure to e-Learning. It said the company "offers the most complete e-Learning solution in the explosive corporate e-Learning industry".
It conceded that risks such as the transformation to an Internet operation, valuation of options granted to employees, corporate structure (that was before the announced changes), the evolving nature of corporate e-Learning and shareholder lawsuits remain. However, these, it reckons should decrease over time.
Merrill Lynch, in a paper released after the revelations, said the weakness in the share price was "unfounded". It also argued that the company should continue to operate at, or above expectations, and put a target share price at $70. But that is not much above its previous peak of $63.87 when it was the old CBT group.
