J2 Global is a Nasdaq-listed digital media company based in Los Angeles. Founded in the early days of the dotcom boom, the company initially made its money by selling digital fax services to those who still communicated like it was 1982.
Realising that e-fax was a fading, but cash-generative, business, the company has spent the past 15 or so years pivoting to the digital media and cloud-software space via a spate of acquisitions. Today, J2’s portfolio includes popular gaming website IGN, internet speed test Ookla and a suite of VPN tools.
This shopping spree has come at some cost. Since 2010, J2 has spent just under $3bn of cash flow on acquisitions, according to S&P Capital data, the same as its current market capitalisation.
Acquisitive companies often attract sceptical investors wary of the checkered history of businesses buying growth, and J2 has proven no different.
In 2016, Andrew Left’s Citron Research seemingly took the first swing, alleging in his colourful style the company was masking negative organic growth through acquisitions:
Forensic accounting shop Glasshouse Research entered the ring a few years later, publishing a document with fewer emojis and more focus on what it believed was J2’s questionable acquisition accounting. They weren’t the only one concerned about the numbers. The SEC also sent J2 a letter in 2016 about its presentation of various non-GAAP metrics.
Yet the stock has left short-sellers punch drunk. In January, it hit an all-time high of $103.47. At time of writing on Wednesday morning it trades at $60.50, some 40 per cent below the its early 2020 highs:
A history of shrugging off scepticism didn’t put off short-seller Hindenberg Research, however. On June 30 it released a detailed analysis of the business which alleged conflicts of interest, odd impairment accounting and self-dealing. The company fired back June 31 with a series of rebuttals, which pointed out some flaws with the short report.
One point of contention for J2 was Hindenberg’s characterisation of its relationship with former vice-president of corporate development Jeroen van der Weijden who joined the company in 2015 before departing three years later.
Hindenberg had framed the company’s acquisition of van der Weijden’s consulting business in 2015 as an “obvious example” of “insider self-dealing” — that is enriching insiders at the expense of shareholders. Although J2 had disclosed the transaction, it had not mentioned to investors that this was, in Hindenberg’s eyes at least, a related-party transaction.
Here is J2’s response:
Hindenburg claims that Jeroen van der Weijden received $20 million for the acquisition of his business, which is patently false. J2 paid approximately $900,000 for Mr. van der Weijden’s consulting business in 2015 at which point he became a full time employee of J2 until his departure from J2 in 2018. Clearly, the transaction was immaterial to J2. Hindenburg also reports that the legal entity purchased from Mr. van der Weijden was dissolved shortly after his departure in 2018 as if to suggest dissolving excess legal entities is somehow nefarious. As anyone familiar with large corporations would know, it is common to dissolve legal entities after acquisition and integration of the assets — to do otherwise would be wasteful. It is also important to note that Mr. van der Weijden was not a related party at the time of the $900,000 acquisition (contrary to Hindenburg’s assertion), as he was not an employee, director or significant shareholder. He was a consultant for J2 from 2004 until 2015. Moreover, Mr. van der Weijden was never an executive officer of J2 so the reporting of this immaterial transaction was never required.
Hindenberg clearly missed the target on the acquisition price —$900,000 versus $20m is quite a gulf. But the question over whether van der Weijden’s was a “related party” does not seem, on first glance, as clear cut.
For instance log on to LinkedIn, type in van der Weijden’s name, and you’ll find an account which contains this:
(His entire profile is saved here as a screenshot.)
That profile states he was working for the company full time since at least 2009. An assertion backed up by his claims he played a role in over 135 M&A transactions, leading due-diligence efforts and co-ordination between various departments within J2 itself. That appears to contradict J2’s statement, which indicates that van der Weijden only became a full time employee after it purchased his consultancy for $900,000 in 2015 and, at that time, “he was not an employee, director or significant shareholder”.
In all honesty, it doesn’t sound much like the role of an unrelated party to FT Alphaville. However, we do know LinkedIn can be a place where people like to, let’s just say, big themselves up. So perhaps there’s a little of that going on here.
However, van der Weijden’s name also pops in rather more official J2 documents before 2015.
J2 Global UK is one of J2’s 70 subsidiaries, and according to its latest annual report and FT Alphaville’s calculations, accounted for 27 per cent of J2’s profits in 2018. In May 2014, van der Weijden was appointed a director of the company, where he held a position for nearly 2 years until early 2016:
Recall, this was before his Amsterdam-based consultancy was purchased in 2015.
Not only that, but van der Weijden signed off on the 2013 accounts “on behalf of the board”:
All of this adds up to someone who, by the looks of it, was very much a related party to J2 when it splurged $900k on his business.
It’s not FT Alphaville’s opinion that matters, however. Rather it’s the definition of a related party as defined under the SEC’s relevant disclosure rules. Cornell University helpful provide a guide to the rule — Item 404(a) — here.
The question boils down to this: can van der Weijden as a director of J2 Global UK, a subsidiary, be considered a related party of J2 Global, the holding company?
We presented the above to James Ryans, an assistant professor of accounting at the London Business School. He told us:
The reason why we have related party disclosures is to protect minority shareholders from shady dealings by controlling shareholders. The company rewarding a mid-level employee, or consultant, is not really the target of these rules. If the company wanted to reward him, they could write him a cheque and it wouldn’t raise an eyebrow. It doesn’t strike me as particularly egregious.
We also spoke to Ann Lipton, an associate professor in business law and entrepreneurship at Tulane University, who told us:
According to the SEC rules, and the interpretative guidance, if you’re just an officer or director of the subsidiary, and not at the registrant — the holding company — you are technically not a related party. However in a fiduciary sense, he would be an insider. Technically, however, he is not a related party.
J2 Global chose not to comment on the record for this article, but a person familiar with the matter repeated Lipton’s point, and also added that the amount paid was relatively immaterial, and that it was commonplace for a company to buy out a consultant so as to retain his services when they need them.
So if it wasn’t a big deal, why did J2 chose to address it first in its response to Hindenberg?
In all honestly, having craned our necks into this rabbit hole, it makes us now want to grab a flashlight, and see what else is going on here . . .