Muddy Waters Initiating Coverage on FMCN – Strong Sell

Muddy Waters rates Focus Media Holding Ltd. (NASDAQ: FMCN) shares a Strong Sell because of significant overstatement of the number of screens in its LCD network and its Olympus-style acquisition overpayments. The $1.1 billion in write-downs from its acquisitions exceed one-third of FMCN’s enterprise value, making FMCN’s acquisitive behavior more destructive than Olympus’s to shareholder value. FMCN insiders have sold at least $1.7 billion worth of stock (two-thirds of FMCN’s enterprise value) since FMCN’s IPO. At the same time, the insiders and their business associates further enrich themselves by trading in FMCN assets, while costing FMCN shareholders substantial sums of money.

• FMCN has been fraudulently overstating the number of screens in its LCD network by approximately 50%. This is similar to China MediaExpress Holdings, Inc. (OTC: CCME), which we reported is a fraud on February 3, 2011. We therefore question whether FMCN’s core LCD business is viable.
• Like Olympus, FMCN is significantly and deliberately overpaying for acquisitions, writing down $1.1 billion out of $1.6 billion in acquisitions since 2005. These write-downs are equivalent to one-third of FMCN’s present enterprise value.
• Our research shows that FMCN has claimed to acquire, write down, and dispose of companies that it never actually purchased. Investors should be concerned about to where cash actually moved in these transactions, and about the integrity of reported results.
• FMCN has written at least 21 acquisitions down to zero and then given them away for no consideration. We show that many of these write-downs are not justified. There are several possible nefarious reasons FMCN gives acquisitions away, including doing so may put FMCN’s problems beyond the reach of auditors.
• Insiders have used FMCN as their counterparty in trading in and out of FMCN subsidiary Allyes, with several individuals earning a total of at least $70.1 million, while shareholders lost $159.6 million.
• Sales of FMCN shares by insiders have netted them at least $1.7 billion since FMCN went public in 2005.

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