Thursday, December 17, 2009

Major Conflict of Interest at Dover Motorsports

In November, I wrote about Dover Motorsports and described it as an interesting investment opportunity despite the poor performance of the Company's management. If you did not have a chance to read it, you can access it by going to the following link:

When I posted this report on the Internet, I had no idea it would create so much interest from the shareholders of Dover Motorsports. The next day, I received numerous e-mails and phone calls from angry investors who were fed up with the management. The amount of money that these shareholders lost is significant. At first, I wasn't going to do anything because I bought the stock of Dover Motorsports at less than $2 per share, which means I will probably make money no matter what the management does. I just don't think they can destroy this company any further.

Then I saw a press release announcing that the University of Iowa is going to award Henry Tippie, chairman of Dover Motorsports, an honorary doctorate during the commencement ceremonies on Saturday, December 19, 2009. Tippie lost hundreds of millions of dollars for Dover Motorsports' shareholders, and now, he is getting an honorary doctorate. This is an insult to the shareholders of Dover Motorsports, and the University of Iowa should be embarrassed to be giving him an honorary doctorate. Does this mean that our universities only care about donations? What is the price that one has to pay to receive an honorary doctorate? Are we teaching our students that donations can buy us anything? The press release stated:

"Henry Tippie is a man of humble demeanor but extraordinary achievement, and he is a role model for University of Iowa students. He has built his businesses the right way, with hard work and ethical considerations always foremost."


Maybe Tippie built his businesses the right way, with hard work and ethical considerations, but he is not currently running Dover Motorsports the right way and with ethical considerations. He ignores shareholders and destroys the shareholders' value. Refer to my analysis on Dover Motorsport for these details. I don't believe that he is an appropriate role model for University of Iowa students.

Tippie is also involved with other public companies such as Rollins, Inc. (ROL), RPC, Inc. (RES), Marine Products (MPX), and Dover Downs Entertainment (DDE). Based on the earnings per share growth and the return on equity, these companies are not run as poorly as Dover Motorsports. But if I were a shareholder of any of these companies, I don't think I would want to own a piece of these businesses knowing that Tippie has any involvement. The only reason why I own Dover Motorsports is because I don't think the management can perform any worse than they already have. This is the only company I am aware of that even if it went bankrupt, shareholders would still double or triple their money from today's prices because the assets could be auctioned off for a high enough price to pay off the lenders and reward shareholders handsomely with whatever remains.

So how can Tippie get away with this? It took me some time to investigate the answer to this question. There is a serious conflict of interest at Dover Motorsports. Tippie is one of the trustees of RMT Trust, the largest shareholder of Dover Motorsports. The other two trustees are R. Randall Rollins and Michele M. Rollins. Because Randall and Michele granted all of the voting power to Tippie, he has full control over shares held by the RMT Trust. As a trustee, he has a fiduciary responsibility to the beneficiaries of the trust; in this case, Michele is not only one of the trustees but is also the beneficiary. As a responsible trustee, Tippie should care about the performance of Dover Motorsports because RMT Trust is its largest shareholder. If the company does not act in the best interest of the shareholders, he should either sell the stock or apply pressure to the management and the board of directors to improve their performance and start realizing that they work for the shareholders. However, because Tippie also serves as the chairman of Dover Motorsports' board of directors, this does not happen. He controls over 50 percent of the voting power in the company. Of course he is not going to pressure himself to change his own performance. Instead, he keeps running Dover Motorsports into the ground by making bad acquisitions, keeping unprofitable racetracks that drain the company's financial resources, and refusing to sell the company to one of its competitors who would pay premium prices for its assets.

Under normal circumstances, it would be logical to assume that Randall and Michele would stand up to Tippie and confront his poor performance. According to the will that made Michele the beneficiary of the RMT Trust, she has the power to require the trustee to convert any non-income producing property into income producing property. Because Dover Motorsports does not pay dividends anymore, it is considered a non-income producing property. It could be converted into an income producing property if it was sold. However, standing up to Tippie is not that simple. By reading the book, Hanging the Moon: The Rollins Rise to Riches, by Drury L. Pifer, it is evident that the Rollins would probably not be where they are today had it not been for Tippie. The Rollins brothers, John and Wayne, created a fortune for the family. Michele is John's third wife and Randall is Wayne's son. The brothers were involved in many different businesses, and they were very successful, but their problem was that they kept poor accounting records. This is not unusual among entrepreneurs. They had no idea how much money was coming in and how much was going out, which was a recipe for disaster. To solve their accounting deficiencies, they hired Tippie. Pifer said,

"Now the three men began to function as three forces, each one driving as well as balancing the other two. … Wayne might be viewed as the genius of business, Henry as the civilizing force of government, and John as the creative power that brings the dead to life. In any case, they operated as a system of checks and balances. The success of their collective creation depended on that."

In 1971, Tippie moved his family to Austin, Texas. By 1974, the Rollins brothers, without the third leg of the stool, nearly went bankrupt. Once again, they reached out to Tippie to rescue them. Before Tippie agreed to help them, he spelled out his terms. He asked for full control and power to make whatever decisions he felt were necessary. Pifer quoted him saying, "I was not going to get involved if I'd be second guessed." He eliminated the directors that he felt were not useful and cut costs left and right by firing executives and other employees he considered to be "fat." In the end, he turned those businesses around.

After the death of the two brothers, the Rollins family inherited their wealth while Tippie remained in control. Randall and Michele are so indebted to him that they must risk allowing him to destroy Dover Motorsports. The question is how far does Tippie need to go before they say anything? Does he have to destroy Rollins, Inc. (ROL), RPC, Inc. (RES), Marine Products (MPX), and Dover Downs Entertainment (DDE) before they stand up to him? I am not sure. This is something that only they can answer. With the exception of Rollins Inc., the stock prices of these companies, which are the ultimate measure of long-term success, do not look favorable.

I just cannot believe that Tippie was able to fix all of these problems and is now destroying Dover Motorsports. However, I think there is more to this picture. One time, Warren Buffett said that newspapers, such as the New York Times, are valued more than just on cash flow. Aside from financial rewards, these owners benefit from an enhanced status in society. The same concept applies to professional sports teams and this is no different with NASCAR. Because Dover Motorsports hosts two Sprint Cup races, this allows Tippie to go to two races a year where he can feel important shaking hands of the movers and shakers of major corporations who are involved in various sponsorship programs.

Angry shareholders of Dover Motorsports are asking for the company to sell itself to one of its competitors. I am not sure if Tippie will do what is right for shareholders or what is right for his ego. Time will tell.

Disclosure: Long DVD. No position in ROL, RES, MPX, and DDE.

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