RHD Suit Settled for $25 Million – Yellow Pages Obsolescence Claimed

by Chris Silver Smith

A class-action lawsuit brought by stockholders against the former R.H. Donnelley Yellow Pages company and some of its executives was settled earlier this month for $25 Million.

The stockholders in the suit (“Local 731 I.B. of T. Excavators and Pavers Pension Trust Fund et al. v. Swanson et al“) had said that executives had made false claims during the period, stating that print Yellow Pages were not becoming obsolete, among other things, and that they had made false assurances about the financial condition of the business.

RHD had filed for Chapter 11 reorganization in 2009, and later emerged from bankruptcy under the new name, Dex One Corporation, in 2010.

Aside from the claims around the company’s finances, the issue of whether print Yellow Pages are becoming obsolete or not has been a controversial one in the past. The industry as a whole had been financially strong and growing for nearly a hundred years up until the advent of the internet. However, there were indicators that the industry was beginning to be impacted by significant changes in consumer behavior by at least 2007, if not prior (see “Google Trends: Yellow Pages Will Be Toast In Four Years“).

During the period cited by the class action suit, the RHD CEO, David Swanson, made a number of bullish statements regarding the print YP business such as this one quoted by Barron’s in 2008:

“Wall Street has it completely wrong, and that’s completely understandable,” says David Swanson, R.H. Donnelley’s chief executive. “They think we sell a product that’s falling off a cliff. That assumption is wrong.”

Stock analysts are “the worst demographic for yellow-pages usage,” Swanson adds. “Just because they don’t use it, they assume nobody is. If you go to Cedar Rapids, Iowa, the print yellow pages is a much more stable” business than it may be in Manhattan.

He had represented that references to print YP directories were growing:

However, it had also been clear that some of the cited YP statistics had been skewed, overestimating usage.

Fast-forward to here in 2012, and the question doesn’t seem so controversial — larger print YP companies have definitely seen erosion of advertisers, some of which was due to usage erosion (particularly in larger metro markets).

Since the suit was settled, it’s hard to find anything definitive about the contention over the claims around Yellow Pages viability versus obsolescence. In such cases there are a score of reasons why defendants might choose to settle, so it’s not necessarily an acknowledgement that the executives knowingly made false claims about the long term prospects of print YP (whether the industry might see a “cyclical” versus “secular” downturn as mentioned in the above video). However, there had been clear warnings sounded by many industry analysts leading up to the period, so it likely wasn’t a good idea to insist that yellow pages phonebooks were not facing risk of a secular decline.

Print YP is not altogether dead, I should note. I continue to see smaller directories in rural markets that are likely performing well, along with certain kinds of specialized business directories in large urban markets (based on the apparent numbers of ads in the directories). For instance, various ethnic directories in print seem to be very strong in the Dallas – Fort Worth area, like books for Indian-owned and Korean-owned businesses.

However, the environment for print YP has changed in a very massive way, and continues to evolve (or devolve, I might say). All of print media has faced the disruption of internet and search engines, and those mediums probably can’t expect to reverse the macro-level trends, even if there are some exceptions to be found in the micro-level.

The main takeaway from the R.H. Donnelley investors settlement could be a warning for AT&T, as they contemplate divesting themselves of the Yellow Pages: Wall Street and the S.E.C. may be very skeptical if they place too high of a valuation on their directories company.

Read more about the settlement at: R.H. Donnellley Reaches $25M Deal In Shareholder Suit.


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