Wednesday, February 27, 2008

Auto parts industry

The continuing story of the wholesale reorganization of the US-based auto parts industry is worth another look this month.

GM is trying to get a divorce decree from its parts supplier, Delphi, but the alimony figures keep going up.

Indeed, the "ex" has started a familiar cry, "I'm melting, I'm melting!" The reorganization in the Manhattan bankruptcy court seems to be turning by decrees into a liquidation.

On December 31, Delphi reported to the court that it has discontinued its steering business, "Previously recognized impairment charges recorded with respect to these businesses are included in the loss from discontinued operations during 2007."

In January, the court approved Delphi's plan, which would have had the remainder of the company emerge from bankruptcy next month, but the credit crunch and some balking on the part of GM as to the role it would have to play in that emergence have held things up.

Accordingly on Monday, February 25, the court took another step in the ad hoc liquidation. It authorized Delphi to sell the assets of its recently discontinued steering business to an outfit called Platinum Equity.

Other auto parts companies have passed through the creaky revolving door of chapter 11 recently -- Federal-Mogul emerged in December, Tower Automotive last summer -- but Delphi likely isn't too lonely -- Dana Corp is there to keep it company for the nonce.

A lot might be said about all this. The usual take is that its all so much fall-out from labor/management disputes. If you're symapthetic to the unions, you say the managements have used the bankruptcy courts to reverse the hard fought gains of working folk, and so forth. If you're skeptical about the social value of unionism in its current form, though, you might prefer this account by blogger David Welch..

Don't expect resolution here. I'll see you all at Pragmatism Refreshed through the weekend.

Tuesday, February 26, 2008

AIG Guilty Verdict

A jury in Hartford, Conn. has found one of AIG's executives guilty in a scheme to manipulate that company's financial statements.

The man at the defense table was Christian Milton, formerly AIG's vice president of re-insurance. He was convicted along with four executives from the General Re Corp., whom I won't name here because my own interest is in the AIG side of the case.

Milton remains free on bond pending a sentencing hearing in May. His attorney, Frederick Hafetz, said he'll appeal. No doubt one of his contentions on appeal will be precisely that Milton shouldn't have been lumped in with the General Re crowd. Interestingly, each of the General Re defendants was higher-ranking in their organization than Milton was in his.

The other reason to focus on Milton rather than the General Re defendants is that the scheme is supposed to have been for his company's benefit, not theirs. The General Re folks were supposedly just trying to accomodate AIG, given its importance in the industry. The government charged that General Re agreed to assist AIG in accounting shenanigans that inflated its (AIG's) loss reserves figure. That, in turn, presumably calmed the nerves of investors and helped sustain AIG's stock price.

So why only a lowly vice-president in the dock from AIG? The prosecutor said he hopes to work "up the ladder," and presumably at the top of that ladder is the fellow who was CEO at the time, Hank Greenberg.

Getting up those rungs is by no means a foregone conclusion. Assuming just for the purpose of discussion (a) that Milton is guilty as charged, and (b) that he was committig crimes because his superiors told him to ... the inference would have to be that he has NOT ratted out those superiors yet, and that its unlikely the prosecution has more to offer him now in return for co-operation than whatever they were offering him in the pre-trial and pre-verdict negotiations.

Still, the whole thing might have a chilling effect on Greenberg's desire (one he tentatively expressed in November) to start playing an active role again at his old company.

Monday, February 25, 2008

Iridium Looking to an IPO

Tech Trader Daily, a blog under the Barron's umbrella, recently posted a story about Iridium, a satellite telephone company that hyped itself in the midst of the irrational exuberance of the 1990s as on a mission to change the world.

It didn't change the world. Indeed, its dreams collapsed ahead of the rest of the high-tech bubble of that time -- it petitioned for the protection of the bankruptcy court (Delaware) in 1999.

To summarize the TTD story: Iridium is a comeback success. It remained in bankruptcy for two years, until it emerged as the property of a private group of buyers led by Dan Colussy, who paid about $25 million for it to read TTD click here.

Colussy's group has since repositioned it. It no longer wants to change anything fundamental about the way people communicate, but it has found a few profitable niche markets -- as a back-up service for truck fleets, for example.

Anyway, Iridium plans an initial public offering for some time in 2009. Projects wuld be a better word there than "plans," since the projection seems vague. Still, here are two cheers for them. Hooray! Hooray! They formerly offered evidence that even when space launches are under discussion, grandiosity is a hindrance to profitability. Now they offer evidence, instead, that scaled-down practicality is the solution.

Let's hope we get more of such a less.

Sunday, February 24, 2008


The hedge fund TCI contends that the railroad company CSX (which I backgrounded for you in the previous entry of this blog) should: separate the roles of chairman of the board and chief executive; refresh the Board with new independent directors; allow shareholders to call special shareholder meetings; align management compensation with shareholder interests; justify its capital spending plan to shareholders; and provide to shareholders a plan to improve operations.

Much of the heat of this still-developing proxy fight was generated in single remark in the context of a teleconference last October (the 17th) called to discussed third-quarter earnings with the stock analysts.

One of the analysts on the line, Christian Wetherbee of Merrill Lynch, noted that CSX was measuring its return-on-investment figures against book value. He asked:
"Where do you think you stand on a replacement cost basis? I'm sure you guys have done the analysis. I'm kind of curious. Is it half that level? Is it, you know, somewhere in between? higher or lower?"

Book value: how much the RR paid for its locomotives and other assets, minus depreciation for their age.

Replacement value: how much it would have to pay for equivalent assets today.

Michael Ward, the chairman and CEO of CSX, replied: "Chris, what industry looks at their ROIC on a replacement cost basis? I don't know of any industry that does that."

TCI considers that remark fatuous: just short of a declaration that Mr. Ward is running a non-profit. They've got a point. It seems intuitively obvious that replacement cost is the more sensible market-driven measure, that book value allows more scope for slushy numbers. And surely somebody at CSX is keeping track of replacement value, even if that somebody isn't Mr. Wald!

Stock price? From the summer of last year until the start of this month, CSX stock was zig-zagging about in a range between $40 and $46. In recent weeks it has broken out of that price on the upside, going above $50. I won't try to give reasons for that move here.

One of the contentions of TCI is the classic corporate goo-goo point that the roles of CEO and chairman of the board ought to be separated, that the coach and the quarerback ought to be different folk. What's behind that contention in this case is chiefly that Mr. Ward is both of those things, and TCI doesn't trust him to do either job, but would rather have him stay on in just one of them than in both.

Wednesday, February 20, 2008

Working on the railroad

CSX Corp., a railroad headquartered in Richmond, Va., is in an increasingly bitter dispute with TCI, a British hedge fund, over what the hedge fund sees as CSX' incompetent management, and what the railroad sees as the hedge fund's potentially ruinous effirt to produce a perpetual running recall election.

CSX this month has amended its bylaws to provide that a special meeting would be called only after the company received a written request from shareholders representing at least 15 percent of its voting power.

I'll wait until next week to detail this fight somewhat for you. For now, here is a little history. Its corporate ancestors include The Baltimore and Ohio Rail Road Company, one of the four railroads known to every enthusiast of Monopoly, the famous board game.

The B&O, America's first common carrier, was chartered in 1827. Its first rails were useful only for the purpose of assisting the horses, making the carriage-pulling work a bit easier. Steam replaced horses three years later.

The B&O was acquired by the Chesapeake & Ohio -- which had been a canal company in the old days, when proponents of canals and rail debated over who represented the future -- the acquisition didn't happen until the early 1960s, and the present name, CSX, was originally suggested by the phrase, "Chesapeake, Seaboard, and many things more."

Last year, CSX spent $3.2 million on Washington lobbyists. At least some of that money went into the company's support for legislation that would require hedge funds to register with the SEC -- oops, we've wandered back into the TCI/CSX controversy again, haven't we?

Til we meet again.

Tuesday, February 19, 2008

Non-core acquisitions

Sometimes the management of a company will come under fire from its shareholders for a policy of "non-core acquisitions."

The idea is that a company should "stick to its knitting," should do what it does best. If a company has been successful in the past in the "core" area, then it has an edge there -- not just the initial success itself, but the institutional know-how built up over time, and the fact that suppliers and customers in that field have both presumably grown accustomed to its face.

There is another thought behind the complaint about "non-core acquisitions." This is the idea that "we, the stockholders don't pay you, the managers, to diversify our portfolios for us. We'll do that for ourselves."

Let's get back to the point at which we left the matter yesterday. Presumably, if I've just bought stock in Comcast, it is because I wanted some exposure in my portfolio to the risk-reward profile found historically in the type of business I know Comcast to be in. If I also want something safe (or something more risky but promising) in there, I'll also buy that. It impedes my ability to get the balance I want if the managers of the particular stocks involved are shifting their own profile.

Now we can move forward a step. I can't say I have much sympathy with this sort of complaint. After all, managers are also often criticized for failing to diversify. Suppose Blockbusters had stuck doggedly to its brick-and-mortar stores (its "core assets") and ignored the fact that the technology for movie-purchase was changing on them. They'd be defunct. But they did anticipate the change and diversify in time, doing "non-core" things in the process, which is why they're a tenable company today. Of course, along the way they made a few false steps, such as a deal with Enron but ... hey ... that's show biz.

My point then is simply that the core/non-core distinction is not itself very useful, and that when we find it being invoked, we should try to look more closely at what is really at stake.

Monday, February 18, 2008

Comcast update

I last wrote about Comcast on January 23. It's time for an update on that situation.

Last week Comcast, the cable operator, announced a revision in its compensation package for the company founder, Ralph Roberts. He was paid $1.85 million in 2007. His salary for 2008 will be a little bit less. $1,849,999 dollars less.

The company will also eliminate a benefit that was to have continued payments to Mr. Roberts' estate for five years after his death.

These moves are widely attributed to the influence of Chieftain Capital Management, which owns about 2% of the company's equity.

Executive compensation issues are, generally, eyewash. In a more substantive move, though, Comcast said that it will buy back $6.9 billion of its stock over two years and pay its first dividend in almost a decade, sending the shares up the most since 2002.

A Bloomberg reporter, Todd Shields, interviewed Glenn Greenberg (Chieftain's managing director) last week. Greenberg told Shields: "They certainly hit on all the important points, which we and others had been discussing with them. Now it's up to them to create value, which they have not done in the past 10 years."

Another issue that has arisen in the Comcast context recently is that of "core" versus "non-core" acquisitions as growth strategy. I'll have a few words to say on that theme tomorrow. Until then, enjoy President's Day.

Sunday, February 17, 2008

Subprime mortgages

Now that the world of finance has decided that "subprime mortgages" and the fall of the great superstructures of paper and abstraction built thereon are yesterday's news, a stale old crisis, everybody's attention has moved on to a newer, fresher, crisis. Bond insurance.

That's fine with me. Every news cycle has its own pace.

But before we consign it all to the memory hole, let us pause for a laugh, appreciating this stick figure account of what happened.

(Keep pressing the arrow on the bottom left hand side of your screen to go from one slide to the next.)

Wednesday, February 13, 2008

Shuffling about on NYT board

The grey lady, the New York Times, is shuffling her own board membership around, in anticipation of a proxy fight at the annual meeting scheduled for April.

They presumably want to offer the strongest slate they can, and it appears that Brenda Barnes and James Kilts don't count as among the strongest in their eyes.

Of course, press releases never put things that way. The good news is that this time we're also being spared the usual pap about how Mr. Kilts and Ms Barnes have simultaneously decided they need to spend more time with their respective families. We're told simply that they won't stand for re-election.

Instead, Dawn Lepore and Robert Denham will join the incumbents on the slate. In a statement, the chairman, Mr. Sulzberger, said: "The skills, expertise and leadership qualities of these two nominees will greatly benefit our company during this time of tremendous change in the media world."

Meanwhile Harbinger and Firebrand between them now own 10% of the company's equity. Representatives of those two funds apparently met with Sulzberger Friday, but the subsequent manuveuring would certainly seem to indicate that nothing was resolved.

Tuesday, February 12, 2008

"Gimme the sports section, cellmate"

According to a front-page story in today's Wall Street Journal, William Lerach is hoping that newspaper subscriptions will put him in a good bargaining position in prison.

Yesterday, Lerach, formerly a prominent class-action plaintiffs' attorney, who has pleaded guilty to rent-a-plaintiff accusations, received his sentence. He'll do two years in federal prison, pay $8 million, and accept disbarment.

Fortunately, he has been in the habit of reading up to six newspapers a day. He figures that'll help him get along. "A sports section is supposed to win you a lot of favors." Good luck with that.

It is amusing to me that the government stumbled into the case against Lerach and his former colleagues at Milberg Weiss in the course of pursuing a bit of insurance fraud involving two extremely valuable paintings -- a Monet and a Picasso, no less.

The works were: Monet's "The Customs Officer's Cabin at Pourville," from 1882, and Picasso's "Nude Before a Mirror," painted in 1932. They were both purchased by a fellow named Stephen Cooperman, then insured in 1991 for a total of $12.5 million. The following year he reported them stolen and made his insurance claim. This was suspicious from the get-go. The Cooperman home had a burglar alarm, which had not been set off by the alleged thief. There was no sign of break-in at all, other than the reportedly missing paintings. But the insurance company, after contesting the matter initially, settled in time. (I don't know off hand whether the amount of the settlement has ever been made public.)

Anyway, the paintings were found undamaged in a storage locker in a Cleveland suburb on Feb. 2, 1997. For the story of how that recovery came about, go here. The short version ... a Clevelander apparently had stored the paintings in the locker as a favor to his buddy, Cooperman. The insurance company took title to the paintings when they were found, and Cooperman now faced fraud charges.

Cooperman cut a deal for a lighter sentence by telling authorities that he had some (unrelated) dirt on Milberg Weiss. He had been a lead plaintiff of theirs in class-actions against corporations. They'd have him buy stock in a company that might be vulnerable to such a lawsuit. This is where the business sections of six daily newspapers might be helpful. Then, if the the stock price fell dramatically, Cooperman would serve as the lead plaintiff, allowing Milberg Weiss to win a "race to the courthouse" against other attorneys and their clients, and allowing it to be first in line for as lead counsel for the class. Cooperman would receive payment for his part in this, and that payment would in turn be very hush-hush, because the courts are rather vigilant about intra-class conflicts of interest.

So that's the want-of-a-horseshoe-nail type story that led to the fall of King Lerach.

Seek edification elsewhere.

Monday, February 11, 2008

More About That Furniture Company

As I indicated yesterday, Costa Brava, the hedge fund managed by Roark, Rearden, & Hamot, wants to take over the board of a Virginia based furniture company.

It is a challenging business in these days of disintermediation, and Bassett has been shrinking. Of course, they prefer words like "consolidating" and "cost-cutting." But they're shrinking.

In the words of their latest annual report, "Over the last seven years, we have reduced our number of facilities from 13 to 3 and reduced our headcount from approximately 4,200 to 1,450. During 2007, we closed a large wood manufacturing facility in Bassett, Va. This resulted in headcount reductions of approximately 280 employees and leaves us with one small wood assembly plant in Martinsville, Va., one fiberboard supply facility in Bassett, Va., and one upholstery facility in Newton, N.C."

They also seem nowadays to receive a lot of their income not from the furniture business at all, but from running their own portfolio. They have $51.8 million invested in The Bassett Industries Alternative Asset Fund LP.

Hmmm. So is Costa Brava actually trying to obtain control over the furniture company -- that wood assembly plant, the fiberboard supply facility, the upholstery facility -- or is this a matter of one hedge fund trying to merge with another. Except that the merger target still has some of the trappings of a furniture company around it?

There's 11.8 million shares of Bassett outstanding. The stock price is in the neighborhood of $12. Simply multiplying them gives us a market cap of about $140 million. So the "alternative asset fund" is more than one-third of that, raising the prospect (in my simple mind anyway) that the fund is the prize, not the fibreboard.

Sunday, February 10, 2008

An Objectivist Furniture Company?

Costa Brava Partnership III, a Boston based hedge fund, has nominated seven people for the nine-member board of a Bassett, Va.-based furniture company, Bassett Furniture Industries.

Costa Brava owns 5.1% of Bassett's equity, so it can't win a proxy fight without a lot of help. More interesting to me at the moment, Costa Brava is managed by a company called Roark, Rearden & Hamot Capital Management LLC.

That corporate name sounds like a list of three founders. But only one of the three (Seth W. Hamot) is non-fictitious. The rest of the name appears to refer to two characters in Ayn Rand's novels: architect Howard Roark of The Fountainhead, and metallurgist Hank Rearden of Atlas Shrugged.

The novels were very poorly written efforts to illustrate a philosophy that Rand called Objectivism, which itself was just a very poorly thought-through mishmash of what she picked up from secondary and tertiary sources about some of the thoughts of real philosophers.

None of which is to say that the Costa Brava nominees won't know how to run a furniture company. I just hope nobody ends up dynamiting Bassett stores in emulation of a plot devise in The Fountainhead.

Wednesday, February 6, 2008

Bank merger and personal drama

Mr. Hill is still alive, but this is happening over his metaphorically "dead body."

Shareholders of Commerce Bancorp Inc. will meet later today to approve the sale of that New Jersey bank to a Canadian company, TD Bank Financial Group.

Regulatory approvals are still pending, but if everything goes as expected the result will be one of the largest banks on the North American continent.

The deal is based on a share swap as well as cash payments. Commerce shareholders will receive 0.4142 shares of a TD common share and $10.50 in cash in exchange for each common share of Commerce Bancorp Inc. That was calculated on the basis of a valuation of US$42 per share for Commerce.

The drama here is the fall of Commerce founder, Vernon W. Hill II, who staunchly opposed selling his bank. his baby. The board of directors had to squeeze him out in order to put it up for sale.

The office of the Comptroller of the Currency helped them do so. It made noises about investigating Hill, and stopped approving new bank branches until he retired.

Here's a link for those of you who may want to read some more about Hill and that particular squeeze.

Tuesday, February 5, 2008

Back to the US

As everyone who hasn't been living in a cave for the last few days by now knows, Microsoft wants to buy Yahoo!

What is a bit newsier is that Yahoo's management doesn't really want to let that happen.

They don't have the final say in the matter. Of course, Yahoo isn't "their" company beyond whatever psychological identification they may feel with it. Yahoo belongs to its owners, the shareholders, and MS can go over the heads of management to bring this merger about.

Here's an analysis from the San Jose (Calif.) Mercury
Yahoo faces few options.

I'm interested especially in what the Mercury calls the "Disney ending." To what white knight might Yahoo possibly appeal? Hmmmm. Any ideas out there?

Monday, February 4, 2008

A sentence in Korea

On Friday, February 8, a court in Seoul, Korea sentenced Paul Yoo to five years in jail on a charge of stock price manipulation. This was only half of what prosecutors had requested, but it still surely seems like a long time to Mr. Yoo.

I doubt that Mr. Yoo did anything to merit the sentence. Nonetheless, I won't go into a tirade about the tyranny of it all, etc. I understand the prosecutors' reaction to events fairly well at a human level.

It is what I remarked upon briefly yesterday, a natural reflexive oposition to the increasing prominence of the impersonal equity markets -- at the expense of the more personal 'Confucian' type of business dealings some in east Asia consider more of a cultural/regional strength.

With the rise of equity markets comes the thorough globalization of finance, and the demise of traditional ideas of sovereignty. With the rise of equity markets come mergers and acquisitions, proxy contests, and a general stirring of the pot. The stirring can be very productive, but if you're one of the vegetables inside, it can be scary too.

Lone Star Funds is an investment company headquartered in Dallas Texas. Five years ago it bought a controlling stake in the Korean Exchange Bank. At that time, Mr. Yoo worked for Lone Star, with the job of scouting out promising acquisition targets and reporting to Steven Lee, who was the highest-ranking Lone Star honcho in Korea.

The gist of the ostensible case against Yoo is that he made false public statements about KEB, and especially about its credit-card unit, KEB Credit Services, in order to make their financial distress seem greater than it was, drive down the share price, and ease the way for their acquisition by Lone Star.

You can find more on the subject in this Bloomberg story.

Saturday, February 2, 2008

Importance of stock markets

I received a review copy recently of a new book by Frank B. Cross and Robert A. Prentice, LAW AND CORPORATE FINANCE.

I'm not going to review it here, but I would like to quote one passage from the first chapter that piqued my interest and that relates to the issues I discuss on this blog.

"The value of stock market financing was disputed for some time, when East Asian countries' success was fueled by bank lending and cross-ownership arrangements for investment, without much in the way of freely traded national equity markets. Some even suggested that the developed equity markets of countries such as the United States could be counter-productive, by creating demands for short-term performance at the expense of long-run economic success. Time has not been supportive of these theories, though, and empirical research generally bears out the importance of developed and free equity markets, although the incentive for short-term focus by American companies remains a concern."

He gives no citation for the ideas he's referencing there. As I understand it, though, he's referencing the 1980s and the first half of the 1990s, when the term "the four tigers" [sometimes, confusingly, the four dragons instead] became popular for South Korea, Taiwan, Hong Kong, and Singapore. There are also in a further confusion of the metaphor, "aspiring Tigers" in Malaysia and Indonesia.

It was in 1994 that Foreign Affairs posted an interview of the long-time prime minister of Singapore (then in retirement) Lee Kuan Yew which has been much-quoted in this line.

Eastern societies are different from Western ones, he said, because easterners believe "the individual exists in the context of his family. He is not pristine and separate. The family is part of the extended family, and then friends and the wider society."

Tu Wei-Ming, a philosophy professor at Harvard University, is one of the scholars who has helped promulgate similar arguments about the connection between "Confucian values" and the dynamism of certain societies such as Singapore.

While it's too easy to bloviate in these areas, it may be safe to say there was a dispersion after 1949. The entrepreneurial segment of China's population left ahead of the communist takeover. The sizeable Chinese minorities in several adjacent countries have become relatively prosperous and politically influential there. This in turn has left them open to periodic bouts of race-baiting, but it has proved beneficial in terms of the growth of the host societies.

Two of the dragons, of course, ARE Chinese. Hong Kong and Taiwan. The other two, Singapore and South Korea, have benefitted from this dispersion, as have the aspirants.

The post-1949-dispersion model appeals better to my own intuitive sense of how the world works than does the sort of Kiplingesque East/West dichotomies of former prime minister Lee.

At any rate, it does seem likely that amidst the dispersants and their descendants there would develop interpersonal connections that would be more important than the impersonal market operations one experiences through a stock exchange. When a company borrows money from a bank, one person speaks directly to another, they discuss the terms, they fill out the forms together. In issuing stock to raise money, abstraction of a different order is at work. So we're bank to the passage in the Cross and Prentice book with which we began -- a preference for bank lending over stock market financing might have become a feature of the development of some nations, and might even have been praised as an element in their success.

The crisis of 1997-98 would naturally have put the kibosh on such talk. Can we infer, then, that stock exchanges have become more important in the countries I've named over the last ten-eleven years?

Yes, we can. We can also see as a matter of fact that some of the phenomena that come with public markets for equity, including proxy fights, have become more prominent in east Asia recently. I'll say something about South Korea in particular tomorrow.