Has Paul Kahn Lost His Midas Touch?Antonio N. Fins
Back in 1993, when Paul G. Kahn walked away from the top spot at AT&T's Universal Card Services unit, the credit-card maven could have had his pick of jobs. In less than four years, Kahn had hoisted AT&T into the big-time in the U.S. credit-card industry, creating a $1.4 billion business with 16 million cardholders. Along the way, Kahn also won a Baldrige Quality Award for AT&T--and a reputation as a rising star. When he quit, several industry giants tried to lure him, but Kahn wasn't tempted. "I wanted to be my own boss," he says.
Kahn chose tiny SafeCard Services Inc., a $175 million Jacksonville (Fla.) company with a controversial past and a future full of questions. SafeCard provides a credit-card registry service that notifies issuers when cards are lost or stolen. Since taking over as chairman in late 1993, Kahn has put it through a turbocharged change. He has spent heavily to beef up the core card-registry unit and has moved into a slew of new businesses. To win over shareholders, who had watched the stock stagnate around 10 for years, Kahn bought back 10% of SafeCard's shares while promising 30% compounded annual growth and $500 million in revenues by 1997. By February, shares in the company--since rechristened Ideon Group--soared to 21.
VENDETTA? But Kahn's new life as an entrepreneur has been far from smooth. Former Chairman and co-founder Peter Halmos resigned in 1990 in favor of his brother, co-founder Steven Halmos, after he was targeted in a criminal investigation by the Internal Revenue Service. The probe was later dropped, with Halmos cleared of wrongdoing. But Halmos has slapped the company with five lawsuits charging Ideon's board, and later Kahn, with everything from fraud and stock manipulation to stealing ideas for new businesses. Moreover, in a recent letter to the Securities & Exchange Commission--reprinted in a full-page Wall Street Journal ad--Halmos charges Kahn with lavishing company funds on new ventures that are producing only meager results, while hiding problems in the core card business from shareholders. "At least we made money," says Halmos.
Kahn calls the charges "ridiculous and baseless." So far, the lawsuits have not succeeded, and most analysts and investors view them as a vendetta by a man bitter over losing control of the company, a charge Halmos denies. But in one way, Halmos appears to be right: While Ideon's revenues grew 11%, to $173 million, in 1994, higher spending sent earnings down 40%, to $18 million. Kahn assured Wall Street in recent months that with strong sales of recently launched new products about to kick in, Ideon would meet analysts' earnings estimates of $17 million to $20 million this year, with a big leap in 1996.
But on May 25, Kahn announced that weak initial response to two of those new products would cut 1995 revenue growth--and that earnings would not hit the low end of analysts' projections. Kahn now refuses to comment on whether Ideon will even be profitable. Within 24 hours, Ideon's shares sank 34%, tumbling to around 9. "The long-term prospects aren't encouraging," says one disgruntled shareholder.
Kahn dismisses the problems as little more than a "hiccup" in a makeover that always promised to take several years. "Both are brand-new businesses," he says. "This is just a matter of revising them." Over the next three months, Ideon will rejigger its product offerings and marketing plans. In the meantime, with the stock cheap--and in hopes of demonstrating confidence to investors--Ideon announced plans on May 29 to buy back 2.5 million more shares, news that nudged the stock up to nearly 10.
It's a far cry from what Wall Street expected when Kahn took over in late 1993. Shareholders had long been dissatisfied with SafeCard's slow growth and languishing stock. But it wasn't until late 1992 that the board pushed Steven to resign and finally cut Peter Halmos' consulting contract with the company.
Kahn seemed the perfect choice to rev up SafeCard. The savvy marketer had transformed the stodgy card industry almost overnight with Universal, which slashed interest rates and promised those who signed up early no fee for life. Traditional bank-card issuers swore it wouldn't work. But when millions signed up, rivals were forced to bring their charges down as well, and a more marketing-driven era in the card industry was launched.
QUICK ACTION. When SafeCard called, Kahn liked what he saw: Its dominance of the lucrative card-registry market left it sitting on $180 million in cash. Says Kahn: "This was a very poorly positioned company" badly needing marketing polish. If he succeeded, Kahn stood to profit handsomely on options to buy up to 1 million shares at $13.
Kahn wasted no time. He replaced most of SafeCard's old executives with top aides from Universal, American Express, and MasterCard. He computerized SafeCard's reams of microfilmed customer data. He figured that by combining sophisticated database management with the direct-mail techniques he perfected at AT&T, he could cut SafeCard's sky-high turnover rate and sell more services to customers. That appears to be working: Ideon's core card revenues grew 11% in 1994, up from the 7% annual rate they had averaged.
At the same time, Kahn moved into new ventures. Last fall he spent $35 million for Wright Express. Wright, which analyst Ned Davis of Oppenheimer & Co. estimates will have 1995 revenues of $21 million, supplies gasoline credit cards to transportation companies to monitor drivers' expenses. In February, Ideon paid $15 million for travel agency National Leisure Corp.
In April, Kahn launched a credit card linked to the Professional Golf Assn. tour--the first of up to a dozen cards he plans. For a $15 to $45 annual fee, cardholders gain special access to golf events such as Pro-Am tournaments and clinics with professionals. Ideon is also spending $18 million to launch Family Protection Network, a registry that allows parents to store their children's pictures, fingerprints, and other data. For fees ranging from $50 to $250, Ideon will notify police and work with private investigators to locate missing kids. In March, Kahn also began test-marketing direct-mail sales of reproductions of Vatican artworks.
Kahn argues these diverse businesses all share one thing: sophisticated computerized marketing techniques. They are linked not by what they sell, but how: "We're a family of service companies that are information technology-based," he says. "We all use database marketing either to sell or deliver our customer service."
MIDAS TOUCH. Kahn argues that by sharing databases and knowhow, all the companies under Ideon will benefit. Alone, Wright Express never had the money or the skills to analyze the data generated by its cards. Now it is using Ideon's computers to develop new financial services for its transportation-company clients. And Kahn argues that Family Protection Network will also benefit from SafeCard's ability to register vast amounts of consumer data, then rapidly notify authorities countrywide of problems.
So far, however, the Midas marketing touch Kahn displayed at AT&T seems to be missing. Although Kahn projected the PGA-linked card would have 500,000 to 1 million subscribers by yearend, it has gotten off to a poor start. "It could be that our offer was just too complex and we need to simplify it," Kahn says.
Nor has Family Protection Network worked. Kahn blames poor marketing. But it has also run into opposition from police forces and nonprofit agencies that work with families of missing children, who say the business simply exploits fears without providing real security.
Meanwhile, costs have soared. With hundreds of additional personnel soon to fill Ideon's new $39 million Jacksonville headquarters, coupled with sharply higher marketing and research-and-development spending, overhead rocketed 47%, to $43.3 million last year. And shareholders complain that they have received scant explanation for why Ideon has gotten so little for its money on the new products. "[Ideon] has offered no defense of their marketing research or of how they went into the new products," says one. "They've essentially said, `Trust me, it's going to work."' Analysts say they no longer have a clue what yearend results will look like--and that's why the stock has fallen so far, so fast. Right now, the verdict on this first-time entrepreneur is not good.
IDEON INVESTS HEAVILY TO DIVERSIFY
-- Family Protection Network: A database registry to help parents locate missing kids. Cost: $18 million
-- National Leisure Group: Bought in Feb. 1995, National Leisure offers packaged vacation tours. Cost: $15 million
-- Vatican Art Collections: Now in test marketing, Ideon wants to sell Vatican art reproductions through direct mail and magazine campaigns. Cost: $1.75 million
-- PGA Partners card: The first of Ideon's planned moves into co-branded credit cards, the Partners card lures golfers with Pro-Am clinics and tournaments. Cost: $25 million
-- Wright Express: Acquired in Sept. 1994, Wright provides gasoline credit cards that help trucking fleets control drivers' expenditures. Cost: $35 million