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BEHIND THE NEWS: Smulyan latest exec to see vast paper profits evaporate

February 4, 2008

Back in late 1999, Emmis Communications Corp. CEO Jeff Smulyan was sitting on company stock worth more than $300 million. Today, he's still sitting on the stock but it's worth a mere $14 million.

Ouch. But forget about throwing a pity party for Smulyan, 60, who founded the company 28 years ago, building it into one of the nation's leading radio companies.

"This company is what I love. I love Emmis," he said. "I have no regrets."

Why did he hold tight through the years, beyond unloading a modest block of shares a few years ago? And why is he still holding tight, even as he's watched the shares slide from the 1999 peak of $62 to $2.75?

"The big reason is, we believe the stock is very, very much undervalued. I realize short term this is where the industry is," he said, referring to the ad slump hitting all the companies in his sector. "But I have a lot of faith it is going to come back."

He has another incentive to keep a tight grip on shares: Because most of Smulyan's stock has extra voting power, his stake gives him control over the fate of the company at a time some shareholders are howling for a sale.

And he apparently isn't an all-his-eggsin-one-basket guy. "I have made some [other] investments," he said. And he did raise more than $5 million in early 2004 by selling a sliver of his Emmis holdings. The company's decision last year to award a $4-a-share cash dividend earned him another $20 million.

Yet his devotion to his company's stock stands in stark contrast to the approach employed by the top brass of Finish Line Inc., another Indianapolis company whose shares have taken a plunge.

Finish Line founders through the years have sold lots of stock-a move that has softened the blow as the share price fell from $23 to $2.25. From 2003 to 2005, CEO Alan Cohen and senior executive vice presidents David Klapper and Larry Sablosky combined to unload shares for more than $65 million.

A Finish Line spokeswoman said the company had no comment on insider sales. In late 2003, Finish Line Chief Operating Officer Steve Schneider told IBJ the trio all were in their mid-50s and were selling for diversification and estate planning.

"They are still very much committed to the company," Schneider said, noting they continued to have substantial holdings.

That's still true today, though the value of those holdings has withered. Just since June, when Finish Line negotiated the $1.5 billion purchase of a larger retailer, Tennessee-based Genesco Inc., the company's shares have lost 80 percent of their value. Cohen's remaining 2.2 million shares are worth only about $5 million.

"We are very concerned about what is happening to our stakeholders, shareholders and employees," Cohen said during a Jan. 4 conference call with analysts. "This is not what we had in mind; this is not what we had planned."

Smulyan and Cohen are far from the first local executives to see big paper profits disappear. Conseco Inc. cofounder Stephen Hilbert found his huge stash of company shares worthless after the company slid into bankruptcy in 2002. At the company's 1998 peak, he owned shares worth nearly $400 million.

It was a similar story for George Mikelsons, the founder of ATA Holdings Corp. In 1998, he filed plans with regulators to sell 2 million of his shares for $40 million but backed off after airline stocks dipped.

He surely would like a do-over. When ATA landed in bankruptcy court in 2004, he still owned 70 percent of the company-a stake wiped out when the company reorganized.

At any company, insider selling is sensitive stuff. Analysts and investors tend to read sales as a bearish sign. Their thinking: If executives think the stock's headed higher, why would they be selling? But it's not that simple, said Robert Laikin, CEO of Plainfieldbased wireless phone wholesaler Brightpoint Inc.

Executives could have a range of reasons for selling, he noted. And even strong performance is no guarantee a stock price will be heading higher. Laikin recalled a quarter when Brightpoint reported great earnings and a great outlook, but the stock fell on concerns about the overall wireless industry.

"I do know a lot of CEOs of other public companies that try to suggest strongly or guilt employees into not selling stock ever," Laikin said. "I personally think that's ridiculous. Some people have different situations. Some people have hospital bills. Some people have kids in college. Some people want to diversify their net worth."

Laikin makes no apologies for selling shares through the years. In the latest transaction, last October, he cashed in stock for $1.35 million.

Brightpoint stock sometimes has risen after Laikin's sales, but that's the way it goes in investing. As the experiences of Smulyan, Hilbert and Mikelsons show, there's a lot to recommend locking in profit.
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