The Woodbridge Group has sent its fellow shareholders in Office Depot (NYSE: ODP) a letter giving their reasons for dissatisfaction with that company's current board of directors and management.
Certainly the one-year stock price chart for ODP helps them make their case. Last April, the price was flirting with $37 a share. That flirtation didn't go well. She kicked him to the curb.
A steady decline began in June, and led to what seemed in September to be a floor of $19. The stock moved up from that floor as far as $22, then fell back again, crashing into the basement. It's now move $11 a share.
This, though, doesn't make a case by itself. These are difficult times. Lots of companies arehaving trouble. So (the Woodbridge Group suggests) let's look at the competition: Staples (NYSE: SPLS).
Back when ODP was flirting with $37, SPLS's dalliance was with the more modest-sounding figure of $26.50.
While ODP has lost more than two-thirds of its value in the meantime, SPLS, which is also down, has lost only 16% of its value, since it is now at $22.40.
This comparison may be unfair. It is always possible in such cases that the stock that underperforms if we're looking at price is also the one that's been spitting out dividends. I haven't checked into that possibility here.
Still, the Woodbridge Group complains that on basic operational metrics, Staples outdoes Office Depot. Same store sales data, for example. Again, as with stock price, both company's have fallen, But the fall is much more dramatic in the one case than in the other. Same stock sales are down for Staples by 5%. They're down for Office Depot by 24%.
The annual meeting is scheduled for April 23, at the Boca Raton Marriot.
I'll look into this particular dispute somewhat further tomorrow.
Monday, March 31, 2008
Sunday, March 30, 2008
KPMG Out As Bear Liquidator
There's a Cayman Islands subplot to the ongoing drama of Bear Stearns.
The Grand Court there recently replaced KPMG Inc. as the liquidator of two now-infamous Bear Stearns hedge funds with lots of nasty subprime exposure.
The two funds have not-so-snappy names. One is the Bear Stearns High-Grade Structured Credit (Overseas) Ltd. The other is the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage (Overseas) Ltd.
Mother Bear in New York last summer opted for the voluntary liquidation of these two funds in the Caymans, under whose laws the funds were organized.
Last month, a high muckedy-muck there ordered new liquidators: Geoffrey Varga and William Cleghorn of Kinetic Partners LLP, an international auditing and compliance consultancy founded in the spring of 2005. An auditing-world greybeard is out, a spring chicken is in.
According to an announcement from Kinetic Partners, a majority of investors sought the replacement of the KPMG liquidators.
"Investors also wanted a full and detailed investigation into the causes of the Feeder Funds' downfall to be undertaken, anticipating that the results would likely lead to the prosecution of claims for recovery against any of the Feeder Funds' direct and/or indirect control parties or service providers who appear to have any degree of responsibility for the Funds' losses," according to a statement from Kinetic Partners.
What's this all about? The judge seemed to go out of his way to et KPMG itself off any hypothetical 'hook.' He said (I'm quoting from a newsletter published by KYC News): "No suggestion whatsoever of impropriety or incompetence on the part of the Joint Voluntary Liquidators is intended. On the contrary, all parties have been keen to acknowledge the high reputation of KPMG...."
So KPMG presumably isn't one of those "control parties or service providers" against whom, the investors believe, liability might be found? It appears not.
The judge also seemed to think, though, that some of the lawyers associated with these funds had acted in a suspicious manner, and presumably bringing Kinetic into the picture will jumpstart an investigation of their behavior.
There are a million stories in this dying Bear.
The Grand Court there recently replaced KPMG Inc. as the liquidator of two now-infamous Bear Stearns hedge funds with lots of nasty subprime exposure.
The two funds have not-so-snappy names. One is the Bear Stearns High-Grade Structured Credit (Overseas) Ltd. The other is the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage (Overseas) Ltd.
Mother Bear in New York last summer opted for the voluntary liquidation of these two funds in the Caymans, under whose laws the funds were organized.
Last month, a high muckedy-muck there ordered new liquidators: Geoffrey Varga and William Cleghorn of Kinetic Partners LLP, an international auditing and compliance consultancy founded in the spring of 2005. An auditing-world greybeard is out, a spring chicken is in.
According to an announcement from Kinetic Partners, a majority of investors sought the replacement of the KPMG liquidators.
"Investors also wanted a full and detailed investigation into the causes of the Feeder Funds' downfall to be undertaken, anticipating that the results would likely lead to the prosecution of claims for recovery against any of the Feeder Funds' direct and/or indirect control parties or service providers who appear to have any degree of responsibility for the Funds' losses," according to a statement from Kinetic Partners.
What's this all about? The judge seemed to go out of his way to et KPMG itself off any hypothetical 'hook.' He said (I'm quoting from a newsletter published by KYC News): "No suggestion whatsoever of impropriety or incompetence on the part of the Joint Voluntary Liquidators is intended. On the contrary, all parties have been keen to acknowledge the high reputation of KPMG...."
So KPMG presumably isn't one of those "control parties or service providers" against whom, the investors believe, liability might be found? It appears not.
The judge also seemed to think, though, that some of the lawyers associated with these funds had acted in a suspicious manner, and presumably bringing Kinetic into the picture will jumpstart an investigation of their behavior.
There are a million stories in this dying Bear.
Wednesday, March 26, 2008
Springfield and MetroPCS
David Wighton writes "Wall Street Dispatch" for the wonderful peach-colored Financial Times.
His column today carries a fine discussion of the American "addiction" to litigation, as it affects Wall Street right now. In the process, he draws a connection I hadn't thought of before.
"In February," he writes, "Merrill Lynch repaid the City of Springfield, Massachusetts about $13.9 million for collateralized debt obligations it had sold to the municipality with the permission of city officials."
That's true, of course, and I've made a couple of references to that dispute in my other blog, Pragmatism Refreshed.
What I hadn't realized is that the old rule about the need to punish every good deed applies here. Wighton points out that after Merrill Lynch repaid the disputed amount, the Mass secy of state "promptly launched a fraud case against Merrill."
I also wouldn't have thought to make a connection between that fraud case and a civil action brought this week against Merrill Lynch in connection with auction-rate securities. Wighton tells me that cell phone operator MetroPCS has filed a lawsuit claiming that Merrill didn't properly explain the risks, selling auction-rate securities to MetroPCS as "low-risk and highly liquid," in compliance with that company's investment policy.
Why was a cell phone company interested in auction-rate securities at any rate? Wighton doesn't spell it out, but if I understand him accurately this was a way of saving money for its employees' pension plan. I'll have to look into that a bit.
Wighton's over-riding point is that companies (and municipalities) "across the US are considering taking an unusual step to counter disappointing returns from their corporate treasuries: legal action."
We've lost the ability to suck it up and move forward. We always have to sue somebody. We ought to learn the stereotypical stiff-upper lip from Mr. Wighton's fellow countrymen.
He's got a point.
His column today carries a fine discussion of the American "addiction" to litigation, as it affects Wall Street right now. In the process, he draws a connection I hadn't thought of before.
"In February," he writes, "Merrill Lynch repaid the City of Springfield, Massachusetts about $13.9 million for collateralized debt obligations it had sold to the municipality with the permission of city officials."
That's true, of course, and I've made a couple of references to that dispute in my other blog, Pragmatism Refreshed.
What I hadn't realized is that the old rule about the need to punish every good deed applies here. Wighton points out that after Merrill Lynch repaid the disputed amount, the Mass secy of state "promptly launched a fraud case against Merrill."
I also wouldn't have thought to make a connection between that fraud case and a civil action brought this week against Merrill Lynch in connection with auction-rate securities. Wighton tells me that cell phone operator MetroPCS has filed a lawsuit claiming that Merrill didn't properly explain the risks, selling auction-rate securities to MetroPCS as "low-risk and highly liquid," in compliance with that company's investment policy.
Why was a cell phone company interested in auction-rate securities at any rate? Wighton doesn't spell it out, but if I understand him accurately this was a way of saving money for its employees' pension plan. I'll have to look into that a bit.
Wighton's over-riding point is that companies (and municipalities) "across the US are considering taking an unusual step to counter disappointing returns from their corporate treasuries: legal action."
We've lost the ability to suck it up and move forward. We always have to sue somebody. We ought to learn the stereotypical stiff-upper lip from Mr. Wighton's fellow countrymen.
He's got a point.
Tuesday, March 25, 2008
Motorola
Motorola has scheduled its annual meeting for May 5. There might be a lot of fireworks between now and then, because Carl Icahn, no less, wants four seats on their board -- one-third of the total.
Motorola has offered him two seats. Icahn isn't in the mood for compromise and has turned that down.
Aside from the vote on who sits where, the meeting will also include a resolution to recoup unearned management bonuses. This looks like a turn-the-heat-up tactic on Icahn's part. The proposed resolution asks the board to seek to "recoup all unearned incentive bonuses or other incentive payments to all senior
executives to the extent that their corresponding performance targets were later
reasonably determined to have not been achieved or resulted from error(s)."
Icahn has also brought a lawsuit for access to documents. Delaware law requires that a demand for inspection have a specific basis -- the investor making such a demand can't be on a fishing expedition. On the basis that this is exactly what Icahn is doing, Motorola will contest the matter.
The stock price, by the way, has fallen dramatically over the last five months, from above $19 to below $10.
That might lead one to suppose, "gee, they must have lots of dissatisfied investors on their hands, so maybe the ground is fertile for Icahn's challenge."
It ain't necessarily so, though. The investors who are the most disgruntled about Motorola's management are those who would have been most likely to sell already -- to sell out at some point between $19 and $10. So those who still had stock as of the record date earlier this month, almost by definition, are those who believe that the problems are short-term and have some faith in a turnaround.
A real shake-out price drop on this scale, in other words, might be good news for a would-be self-entrenching management.
Actually, I have no idea. I'll know when you folks do.
Motorola has offered him two seats. Icahn isn't in the mood for compromise and has turned that down.
Aside from the vote on who sits where, the meeting will also include a resolution to recoup unearned management bonuses. This looks like a turn-the-heat-up tactic on Icahn's part. The proposed resolution asks the board to seek to "recoup all unearned incentive bonuses or other incentive payments to all senior
executives to the extent that their corresponding performance targets were later
reasonably determined to have not been achieved or resulted from error(s)."
Icahn has also brought a lawsuit for access to documents. Delaware law requires that a demand for inspection have a specific basis -- the investor making such a demand can't be on a fishing expedition. On the basis that this is exactly what Icahn is doing, Motorola will contest the matter.
The stock price, by the way, has fallen dramatically over the last five months, from above $19 to below $10.
That might lead one to suppose, "gee, they must have lots of dissatisfied investors on their hands, so maybe the ground is fertile for Icahn's challenge."
It ain't necessarily so, though. The investors who are the most disgruntled about Motorola's management are those who would have been most likely to sell already -- to sell out at some point between $19 and $10. So those who still had stock as of the record date earlier this month, almost by definition, are those who believe that the problems are short-term and have some faith in a turnaround.
A real shake-out price drop on this scale, in other words, might be good news for a would-be self-entrenching management.
Actually, I have no idea. I'll know when you folks do.
Monday, March 24, 2008
GenCorp settlement
Defense contractor GenCorp now appears to be headed to an uneventful annual meeting this week (Wednesday) after reaching an agreement with Steel Partners, the hedge fund that controls 14% of its equity.
As part of the settlement, GenCorp's president and chief executive, Terry Hall, has stepped down. The interim CEO is J. Scott Neish, and efforts to recruit a permanent replacement for Hall are underway.
Also, three new directors recommended by Steel Partners will take seats on the 8-member board of directors.
The parties apparently reached this agreement on March 5, but didn't announce it until the 17th. In the first two trading days after the announcement, GenCorp's stock price rose markedly. But in the following two days the price slide back to the pre-announcement level. The lesson, I suppose, is that although investors were happy with the resolution, broader market turmoil overwhelmed that narrow-gauge sort of happiness.
As part of the settlement, GenCorp's president and chief executive, Terry Hall, has stepped down. The interim CEO is J. Scott Neish, and efforts to recruit a permanent replacement for Hall are underway.
Also, three new directors recommended by Steel Partners will take seats on the 8-member board of directors.
The parties apparently reached this agreement on March 5, but didn't announce it until the 17th. In the first two trading days after the announcement, GenCorp's stock price rose markedly. But in the following two days the price slide back to the pre-announcement level. The lesson, I suppose, is that although investors were happy with the resolution, broader market turmoil overwhelmed that narrow-gauge sort of happiness.
Sunday, March 23, 2008
Section 6.10
Those wonks who've been following the news about the disintegration of Bear Stearns in recent days will know at once to what the above subject line refers.
Section 6.10 is the "deal protection" clause of the merger agreement between Bear and itsacquirer, JP Morgan.
The agreement as a whole in all its 47 pages of glory is readily available. Here's one of the clicks that will get you there.
6.10 provides that if the shareholders of Bear Stearns vote against this chintzy two-dollar deal, "each of the parties shall in good faith use its reasonable best efforts to negotiate a restructuring of the transaction provided for herein ... and to resubmit the transaction to Company's shareholders for approval, with the timing of such resubmission to be determined at the reasonable request of Parent."
"Company" is Bear and "Parent" is JPMorgan.
What this seems to mean is that the shareholders can't say "no." At least not on the first try. They can at worst say, "maybe not, restructure it a bit and try us again."
But how many times would they have to say that before it amounted to a "no"? This seems a bit like the infamous closed loop on the shampoo bottle's instructions, said to keep many a blonde busy for days. "Apply, lather, rinse, repeat."
The Deleware courts have imposed certain restructions on the enforceability of such "deal protection devices," such that this language may be subject to challenge by those shareholders.
For more on the legal issues involved, you might want to click here.
Section 6.10 is the "deal protection" clause of the merger agreement between Bear and itsacquirer, JP Morgan.
The agreement as a whole in all its 47 pages of glory is readily available. Here's one of the clicks that will get you there.
6.10 provides that if the shareholders of Bear Stearns vote against this chintzy two-dollar deal, "each of the parties shall in good faith use its reasonable best efforts to negotiate a restructuring of the transaction provided for herein ... and to resubmit the transaction to Company's shareholders for approval, with the timing of such resubmission to be determined at the reasonable request of Parent."
"Company" is Bear and "Parent" is JPMorgan.
What this seems to mean is that the shareholders can't say "no." At least not on the first try. They can at worst say, "maybe not, restructure it a bit and try us again."
But how many times would they have to say that before it amounted to a "no"? This seems a bit like the infamous closed loop on the shampoo bottle's instructions, said to keep many a blonde busy for days. "Apply, lather, rinse, repeat."
The Deleware courts have imposed certain restructions on the enforceability of such "deal protection devices," such that this language may be subject to challenge by those shareholders.
For more on the legal issues involved, you might want to click here.
Wednesday, March 19, 2008
Proxy Fight Updates
1. The New York Times has settled its dispute with hedge funds Harbinger and Firebrand.
The Times agreed Monday to expand its board of directors by two seats and appoint to those seats Scott Galloway and James Kohlberg. These are two of the nominees who had been on the dissident slate.
This resolution shows either (a) that even the Times with its dual stock structure isn't immune from outside pressures, or (b) that the Times has cleverly fending off a challenge by giving up seats that will prove meaningless, proving that it remains effectively immune to outside pressure.
Your call.
2. CSX files lawsuit.
As regular readers of Proxy Partisans know, the railroad corporation CSX faces a proxy challenge from the London-based hedge fund TCI which contends that the company 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.
On Monday, CSX filed a lawsuit in the federal court in Manhattan, where TCI's US operations are based. The allegations are fairly complicated, but the main point of the lawsuit involves federal laws that require that shareholders who own more than a threshold amount of the equity of a company to disclose this fact as they pass the threshold. The idea is to prevent an ambush -- to bring takeover contests and such out into the open.
CSX claims that TCI has played games to hide how much of CSX it owns, violating the threshold rules in fact while pretending to abide by them in name. TCI denies having done anything wrong.
3. Begelman, former Office Depot president, aims for a director's position.
Mark Begelman was president of Office Depot in the early 1990s. Martin Hanaka knows the office-supply business too. Hanaka is the former president of Staples. They are both now nominees for the Office Depot board, their names put forward by disaffected investors who want to fire Steve Odland, present CEO.
The company's annual meeting is scheduled for April 23. March 3 is the record date.
That's it for this week. We'll meet again Sunday, proxy-fight fans!
The Times agreed Monday to expand its board of directors by two seats and appoint to those seats Scott Galloway and James Kohlberg. These are two of the nominees who had been on the dissident slate.
This resolution shows either (a) that even the Times with its dual stock structure isn't immune from outside pressures, or (b) that the Times has cleverly fending off a challenge by giving up seats that will prove meaningless, proving that it remains effectively immune to outside pressure.
Your call.
2. CSX files lawsuit.
As regular readers of Proxy Partisans know, the railroad corporation CSX faces a proxy challenge from the London-based hedge fund TCI which contends that the company 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.
On Monday, CSX filed a lawsuit in the federal court in Manhattan, where TCI's US operations are based. The allegations are fairly complicated, but the main point of the lawsuit involves federal laws that require that shareholders who own more than a threshold amount of the equity of a company to disclose this fact as they pass the threshold. The idea is to prevent an ambush -- to bring takeover contests and such out into the open.
CSX claims that TCI has played games to hide how much of CSX it owns, violating the threshold rules in fact while pretending to abide by them in name. TCI denies having done anything wrong.
3. Begelman, former Office Depot president, aims for a director's position.
Mark Begelman was president of Office Depot in the early 1990s. Martin Hanaka knows the office-supply business too. Hanaka is the former president of Staples. They are both now nominees for the Office Depot board, their names put forward by disaffected investors who want to fire Steve Odland, present CEO.
The company's annual meeting is scheduled for April 23. March 3 is the record date.
That's it for this week. We'll meet again Sunday, proxy-fight fans!
Tuesday, March 18, 2008
CNET to appeal
In a ruling last week arising out of the Jana-led proxy fight for control of CNET, the Chancery Court in Delaware interpreted CNET's one-year notice rule as a matter of "proxy access," not one of "advance notice" for a nomination as such.
Proxy access -- the situation in which a dissident shareholder gets to piggyback off of the proxy materials that companies must provide their shareholders, and make its own case within those materials -- is determined by the federal regulatory system.
The court said that CNET's one-year requirement means that a shareholder,m even one who meets the relevant federal test, doesn't have a right to access to management-generated materials prior to that company's shareholder meetings if it has only acquired its stake in the company recently. Nonetheless, if it isn't interested in piggybacking, if it is willing and able to bear the cost of its own materials itself, as Jana is, then it can proceed with its nomination and its resolutions.
This ruling came as a surprise to a lot of observers, including yours truly.
Yesterday (when, by happenstance, most of the financial world was too absorbed by the Bear Stearns saga to notice), CNET said it is appealing to the Delaware Supreme Court.
"CNET Networks said that it continues to believe that its by-law provisions, which were approved by stockholders and have been in place since the Company's IPO, are fully applicable to hedge fund JANA Partners, LLC's proposals, and are valid and in the best interests of stockholders. The Company also said that the lower court decision incorrectly calls into question the by-laws of a large number of companies with the same or similar by-law provisions."
The chancery court decision may "call into question" all those other company's by-laws to the extent that if they use the same words, they'll be subject to the same interpretation. But it doesn't void them, and a company can re-write the wording of its by-laws to be more clear that it isn't merely limiting the piggy-backing.
Another big question here: why is it sometimes Jana and sometimes JANA? The company itself seems to use JANA consistently. But so far as I know, the letters don't stand for anything. Many news organizations, including the New York Times, have accordingly treated "Jana" in this context as a word.
The take-away though is this: advance notice requirements haven't been declared void in Delaware, even those that extend for the unusual period of a year. Still, such notices may be treated to narrow construction due to a feeling of the chancery court that they are against public interest, especially if the newly-0staked dissident is willing to put up its own resources for the proxy contest.
Proxy access -- the situation in which a dissident shareholder gets to piggyback off of the proxy materials that companies must provide their shareholders, and make its own case within those materials -- is determined by the federal regulatory system.
The court said that CNET's one-year requirement means that a shareholder,m even one who meets the relevant federal test, doesn't have a right to access to management-generated materials prior to that company's shareholder meetings if it has only acquired its stake in the company recently. Nonetheless, if it isn't interested in piggybacking, if it is willing and able to bear the cost of its own materials itself, as Jana is, then it can proceed with its nomination and its resolutions.
This ruling came as a surprise to a lot of observers, including yours truly.
Yesterday (when, by happenstance, most of the financial world was too absorbed by the Bear Stearns saga to notice), CNET said it is appealing to the Delaware Supreme Court.
"CNET Networks said that it continues to believe that its by-law provisions, which were approved by stockholders and have been in place since the Company's IPO, are fully applicable to hedge fund JANA Partners, LLC's proposals, and are valid and in the best interests of stockholders. The Company also said that the lower court decision incorrectly calls into question the by-laws of a large number of companies with the same or similar by-law provisions."
The chancery court decision may "call into question" all those other company's by-laws to the extent that if they use the same words, they'll be subject to the same interpretation. But it doesn't void them, and a company can re-write the wording of its by-laws to be more clear that it isn't merely limiting the piggy-backing.
Another big question here: why is it sometimes Jana and sometimes JANA? The company itself seems to use JANA consistently. But so far as I know, the letters don't stand for anything. Many news organizations, including the New York Times, have accordingly treated "Jana" in this context as a word.
The take-away though is this: advance notice requirements haven't been declared void in Delaware, even those that extend for the unusual period of a year. Still, such notices may be treated to narrow construction due to a feeling of the chancery court that they are against public interest, especially if the newly-0staked dissident is willing to put up its own resources for the proxy contest.
Monday, March 17, 2008
Bear Stearns
Will the shareholders go along?
Bear Stearns, JPMorgan, and various central banking and Treasury Dept. greybeards seem to have had a busy weekend, arranging the deal whereby JPM will buy Bear.
So desperate to sell itself was BS, in fact, that JPM got a fire sale price. That raises a question in my mind: will the deal hold?
In many respects, this is analogous to the deal in November 2001 whereby Dynegy agreed to buy what was left of rapidly-imploding Enron Corp. But there was a lot of room for slippage between contract and closing. And this one never came off.
And Enron had to enter bankruptcy, resulting in eventual liquidation, anyway.
In the case of Bear Stearns, the unravelling if it comes would take a somewhat different form than it took than. It may take the form of shareholder rebellion.
"Even the headquarters building and the land on which it stands would seem to be worth more than JPM is offering for the whole company." Expect to hear some form of THAT sentence more and more often in the days to come, until you'll think Wall Street has been taken over by Henry George's disciples.
Bear Stearns, JPMorgan, and various central banking and Treasury Dept. greybeards seem to have had a busy weekend, arranging the deal whereby JPM will buy Bear.
So desperate to sell itself was BS, in fact, that JPM got a fire sale price. That raises a question in my mind: will the deal hold?
In many respects, this is analogous to the deal in November 2001 whereby Dynegy agreed to buy what was left of rapidly-imploding Enron Corp. But there was a lot of room for slippage between contract and closing. And this one never came off.
And Enron had to enter bankruptcy, resulting in eventual liquidation, anyway.
In the case of Bear Stearns, the unravelling if it comes would take a somewhat different form than it took than. It may take the form of shareholder rebellion.
"Even the headquarters building and the land on which it stands would seem to be worth more than JPM is offering for the whole company." Expect to hear some form of THAT sentence more and more often in the days to come, until you'll think Wall Street has been taken over by Henry George's disciples.
Sunday, March 16, 2008
German corporate law.
It appears that German corporate law requires that, unless a corporation's by-laws provide otherwise, certain decisions can only be made if they are opposed by fewer than 25% of the proxy shares voted. This makes the figure 25% the "blocking minority."
Volkswagen has written into its own bylaws a still more generous provision for dissenters. It has a blocking minority of only 20%.
Twenty percent is also the share of the equity of VW owned by the government of Lower Saxony, VW's home state.
That not only gives Lower Saxony blocking power, but it makes that state the second largest of the company's shareholders. The largest shareholder is thw sports car maker, Porsche.
A ruling last year by the European Court of Justice has pressured VW toward making some corporate governance changes, fitting in more coherently with the rest of the EU. Porsche understands the ECJ to mean that VW should increase the blocking percentage. This wouldn't mean a shift to simple majority rule. It would probably be an increase to the German default option of 25% block. But even so, it would mean that in order to prevent some change that it didn't like, Lower Saxony would have to find shareholder allies.
This would be, if you will, a sort of deregulation.
Unsurprisingly, Lower Saxony doesn't see the ECJ ruling the same way Porsche does.
My sympathies are always against the government. Go, Porsche!
The punchline of an old joke says it best. "It's not a porch, it's a Mercedes."
Volkswagen has written into its own bylaws a still more generous provision for dissenters. It has a blocking minority of only 20%.
Twenty percent is also the share of the equity of VW owned by the government of Lower Saxony, VW's home state.
That not only gives Lower Saxony blocking power, but it makes that state the second largest of the company's shareholders. The largest shareholder is thw sports car maker, Porsche.
A ruling last year by the European Court of Justice has pressured VW toward making some corporate governance changes, fitting in more coherently with the rest of the EU. Porsche understands the ECJ to mean that VW should increase the blocking percentage. This wouldn't mean a shift to simple majority rule. It would probably be an increase to the German default option of 25% block. But even so, it would mean that in order to prevent some change that it didn't like, Lower Saxony would have to find shareholder allies.
This would be, if you will, a sort of deregulation.
Unsurprisingly, Lower Saxony doesn't see the ECJ ruling the same way Porsche does.
My sympathies are always against the government. Go, Porsche!
The punchline of an old joke says it best. "It's not a porch, it's a Mercedes."
Wednesday, March 12, 2008
CME Buying Nymex
In an entry here four months ago, I asked Who Wants to Buy Nymex?
At that time, the Chicago Mercantile Exchange was an unlikely candidate for that honor, because CME had just completed an acquisition of the long-time cross-town rival, the Chicago Board of Trade.
Now, though, the juices of digestion seem to have done their work, and CME is back at the table. Nymex is the new dish according to reports coming out. of the Futures Industry Association's annual meeting.
One new complication: the US Justice Department has in the meantime made some noise about how it would like to enhance the level of competition amongst exchanges.
But the antitrust division's focus isn't on horizontal issues (acquisition of one exchange by another) so much as it is on vertical issues (maintenance by an exchange of its own captive clearing corporation). It is of the opinion that if exchanges and clearing houses were separate, there'd be lots of new entrants, entrepreneurs would be starting up new exchanges faster than the older ones could merge with each other.
Or, in antitrust jargon, the vertical tie creates a barrier to entry.
Both the Nymex and the CME group have such a "captive exchange," which presumably will be merged as the mother corporations merge. If the merging parties have their druthers. Which may not be.
What I'm leading up to is a guess, or to be nicer to myself a speculation. The antitrust division MAY end up approving the merger of the exchanges only on the condition that they spin-off their clearing operation(s).
Just free-associating here ... members of the Democratic Party might see some hope for their own future in the very existence of CME/Nymex talks. After all, if two certain Senators -- one representing Illinois and one representing New York -- can kiss and make up, they'll have their dream ticket.
McCain simply represents the Justice Department merger review!
At that time, the Chicago Mercantile Exchange was an unlikely candidate for that honor, because CME had just completed an acquisition of the long-time cross-town rival, the Chicago Board of Trade.
Now, though, the juices of digestion seem to have done their work, and CME is back at the table. Nymex is the new dish according to reports coming out. of the Futures Industry Association's annual meeting.
One new complication: the US Justice Department has in the meantime made some noise about how it would like to enhance the level of competition amongst exchanges.
But the antitrust division's focus isn't on horizontal issues (acquisition of one exchange by another) so much as it is on vertical issues (maintenance by an exchange of its own captive clearing corporation). It is of the opinion that if exchanges and clearing houses were separate, there'd be lots of new entrants, entrepreneurs would be starting up new exchanges faster than the older ones could merge with each other.
Or, in antitrust jargon, the vertical tie creates a barrier to entry.
Both the Nymex and the CME group have such a "captive exchange," which presumably will be merged as the mother corporations merge. If the merging parties have their druthers. Which may not be.
What I'm leading up to is a guess, or to be nicer to myself a speculation. The antitrust division MAY end up approving the merger of the exchanges only on the condition that they spin-off their clearing operation(s).
Just free-associating here ... members of the Democratic Party might see some hope for their own future in the very existence of CME/Nymex talks. After all, if two certain Senators -- one representing Illinois and one representing New York -- can kiss and make up, they'll have their dream ticket.
McCain simply represents the Justice Department merger review!
Tuesday, March 11, 2008
Fairness Opinions and Deep Pockets
Last month, the seventh circuit court of appeals absolved Credit Suisse of the liability that lawyers for a bankrupt corporate estate tried to attach to it on the basis of a fairness opinion.
Fairness opinions are, in general, something of a racket. They seem designed as security blankets for timid executives. They certainly aren't meant as money-back guarantees.
The case I have in mind had its origin in the irrational exuberance of the late 1990s and the bursting of that bubble in 2000. A company called HA-LO Industries seems to have had a nice, profitable, though undramatic business selling promotional products (such as coffee mugs with another company's logo).
In the go-go Clinton/Greenspan years, this wasn't good enough. They wanted to get into something hip, dotcomish. HA-LO CEO John Kelley became enamoured of an internet start-up called Starbelly.com, which had an e-commerce system on which it hadn't yet made any money. It was burning through its venture capital but, on the plus side, it was named for a Doctor Seuss story as you can see here! So what could go wrong?
So Kelley decided to buy Starbelly for a deal that combined stock swap with cash. The cash portion was for more than $70 million, and more than HA-LO had on hand. So he and his company went to CSFB (as it was known then, now Credit Suisse) to try to structure a loan. Credit Suisse also provided a "fairness opinion," which said: "as of the date hereof [January 17, 2000] the merger consideration is fair to HA-LO from a financial point of view."
They also went to an auditor, Ernst & Young. But they didn't get any security blanket there. E&Y told HA-LO that Starbelly's earnings projections were unrealistic.
The Nasdaq composite index, the best single metric of the high-tech sector of the economy at that time, peaked about two months after HA-LO got its fairness opinion.
In April, before the deal had closed, but with hi-tech stock prices headed dramatically down, a major investor asked HA-LO to seek a new fairness opinion. HA-LO declined.
The deal closed in May. It never did pay off. Indeed: fourteen months later, HA-LO filed for bankruptcy court protection. The bankrupt company's Trust then litigated, seeking to get some cash from the presumably deep pockets of Credit Suisse. Their argument? it should have volunteered an updated opinion after the Nasdaq peak, even though (a) it had only contracted to provide one opinion, (b) it had provided that one, (c) and that opinion was on its face date-specific.
Judge Easterbrook, for the seventh circuit, refused to go along with this proposed exercise in bank robbery. Good for him.
Easterbrook alludes to the controversy over fairness opinions. He writes that some people believe that the Delaware Supreme Court has encouraged companies incorporated in that state to seek expensive worthless opinions, thus doing harm to the interests of the shareholders of the companies that seek them. Still, as the federal appellate court observed, that's none of his concern.
"If the Supreme Court of Delaware had held in a tort suit that all of HA-LO's promotional mugs must be shipped in crates made of inch-thick steel, to prevent all risk that pottery shards from breakage in transit could escape and injure anyone, that would geatly increase the costs of doing business and injure HA-LO's investors but wouldnot support an award of damages against the sellers of steel crates."
I like that analogy.
Fairness opinions are, in general, something of a racket. They seem designed as security blankets for timid executives. They certainly aren't meant as money-back guarantees.
The case I have in mind had its origin in the irrational exuberance of the late 1990s and the bursting of that bubble in 2000. A company called HA-LO Industries seems to have had a nice, profitable, though undramatic business selling promotional products (such as coffee mugs with another company's logo).
In the go-go Clinton/Greenspan years, this wasn't good enough. They wanted to get into something hip, dotcomish. HA-LO CEO John Kelley became enamoured of an internet start-up called Starbelly.com, which had an e-commerce system on which it hadn't yet made any money. It was burning through its venture capital but, on the plus side, it was named for a Doctor Seuss story as you can see here! So what could go wrong?
So Kelley decided to buy Starbelly for a deal that combined stock swap with cash. The cash portion was for more than $70 million, and more than HA-LO had on hand. So he and his company went to CSFB (as it was known then, now Credit Suisse) to try to structure a loan. Credit Suisse also provided a "fairness opinion," which said: "as of the date hereof [January 17, 2000] the merger consideration is fair to HA-LO from a financial point of view."
They also went to an auditor, Ernst & Young. But they didn't get any security blanket there. E&Y told HA-LO that Starbelly's earnings projections were unrealistic.
The Nasdaq composite index, the best single metric of the high-tech sector of the economy at that time, peaked about two months after HA-LO got its fairness opinion.
In April, before the deal had closed, but with hi-tech stock prices headed dramatically down, a major investor asked HA-LO to seek a new fairness opinion. HA-LO declined.
The deal closed in May. It never did pay off. Indeed: fourteen months later, HA-LO filed for bankruptcy court protection. The bankrupt company's Trust then litigated, seeking to get some cash from the presumably deep pockets of Credit Suisse. Their argument? it should have volunteered an updated opinion after the Nasdaq peak, even though (a) it had only contracted to provide one opinion, (b) it had provided that one, (c) and that opinion was on its face date-specific.
Judge Easterbrook, for the seventh circuit, refused to go along with this proposed exercise in bank robbery. Good for him.
Easterbrook alludes to the controversy over fairness opinions. He writes that some people believe that the Delaware Supreme Court has encouraged companies incorporated in that state to seek expensive worthless opinions, thus doing harm to the interests of the shareholders of the companies that seek them. Still, as the federal appellate court observed, that's none of his concern.
"If the Supreme Court of Delaware had held in a tort suit that all of HA-LO's promotional mugs must be shipped in crates made of inch-thick steel, to prevent all risk that pottery shards from breakage in transit could escape and injure anyone, that would geatly increase the costs of doing business and injure HA-LO's investors but wouldnot support an award of damages against the sellers of steel crates."
I like that analogy.
Monday, March 10, 2008
The credit squeeze
There's quite a perceptive Lex column in today's Financial Times.
The item that especially caught my attention concerned activist investors and the effects of the present credit squeeze on their strategies.
The columnist means by "activist investors" not the folks who are interested in, say, a businesses' carbon footprint or whether it does business with Burma. He means the investment funds that seek to make a profit off of pressing managements for changes -- telling the managers, sometimes through the mechanism of an actual or threatened proxy fight, that they should merge with somebody, or sell off non-core subsidiaries, or initiate a stock buy-back program, etc.
This has become a more difficult way of making money than it used to be. The reason? In order to do this, you have to start off with a substantial chunk of a company's stock, and you (the activist) would generally acquire that chunk with borrowed money. Obviously, as money gets harder to borrow in relevant quantities this gets more complicated.
But that's not the worst of it. For as credit gets tight, its harder to make the case for dividend pay-outs or stock buy-backs. Management push-back against such proposals will be more vigorous.
The spin-off of non-core assets gets more difficult, too. Spin them off to whom? Who is buying these days?
"Many activist funds" the FT tells us, "may be in for a long, hard slog."
The item that especially caught my attention concerned activist investors and the effects of the present credit squeeze on their strategies.
The columnist means by "activist investors" not the folks who are interested in, say, a businesses' carbon footprint or whether it does business with Burma. He means the investment funds that seek to make a profit off of pressing managements for changes -- telling the managers, sometimes through the mechanism of an actual or threatened proxy fight, that they should merge with somebody, or sell off non-core subsidiaries, or initiate a stock buy-back program, etc.
This has become a more difficult way of making money than it used to be. The reason? In order to do this, you have to start off with a substantial chunk of a company's stock, and you (the activist) would generally acquire that chunk with borrowed money. Obviously, as money gets harder to borrow in relevant quantities this gets more complicated.
But that's not the worst of it. For as credit gets tight, its harder to make the case for dividend pay-outs or stock buy-backs. Management push-back against such proposals will be more vigorous.
The spin-off of non-core assets gets more difficult, too. Spin them off to whom? Who is buying these days?
"Many activist funds" the FT tells us, "may be in for a long, hard slog."
Sunday, March 9, 2008
CSX and CEO Pay
Two different hearings on Capitol Hill last week pointed in two very different directions.
On Wednesday, the subcommittee on railroads -- a panel of the Transportation Committee -- held a hearing chiefly for the purpose of excoriating activist investors, especially the UK based fund TCI, who have lately been agitating for management changes at CSX. The general attitude of the solons doing the questioning (especially the subcommittee's chairwoman, whose district includes CSX's headquarters) was that the railroad has been doing a fine job, employs a lot of people, and how dare these Londoners come into this picture to mess things up.
On Friday, another house committee -- this time a full committee, Oversight and Government Reform -- held a hearing about CEO salaries. It turns out they're shockingly high. The general attitude of these solons was that managements get out of control, grant themselves salaries not checked by market forces, and it would be good to have some more activist investors holding them in check.
Do these two sets of committee members never even talk to each other?
On Wednesday, the subcommittee on railroads -- a panel of the Transportation Committee -- held a hearing chiefly for the purpose of excoriating activist investors, especially the UK based fund TCI, who have lately been agitating for management changes at CSX. The general attitude of the solons doing the questioning (especially the subcommittee's chairwoman, whose district includes CSX's headquarters) was that the railroad has been doing a fine job, employs a lot of people, and how dare these Londoners come into this picture to mess things up.
On Friday, another house committee -- this time a full committee, Oversight and Government Reform -- held a hearing about CEO salaries. It turns out they're shockingly high. The general attitude of these solons was that managements get out of control, grant themselves salaries not checked by market forces, and it would be good to have some more activist investors holding them in check.
Do these two sets of committee members never even talk to each other?
Wednesday, March 5, 2008
Melnyk and a Comeback
On February 28, Eugene Melnyk wrote the board of directors of the company he founded, Biovail, indicating that he's unhappy with their current direction.
He was the chairman of that board until last June, when he quit as part of a settlement with Canadian regulators over insider trading allegations.
Eight months of idleness appears to have been wearying, though. Melnyk, who owns 18.2 million shares (about 11% of the outstanding) writes: "I am at this juncture formally informing the Board that I have decided to explore, and am exploring, various options available to me in connection with my interest in Biovail, including the possibility of joining with a partner or partners to acquire the remaining shares of Biovail, selling all or a portion of my current Biovail shares to a third party, continuing to hold my shares for investment, or seeking changes to the composition of the Board of Directors."
Biovail is a pharmaceutical company specializing in making time-release versions of medicines (or, as their website puts it, "drug-delivery technologies.")
Between May and mid-July of last year, Biovail stock was trading in the neighborhood of $25. There was a sharp downward move in July, when the US FDA refused to approve a once-daily salt formulation of an anti-depressant. In August it found a floor at $16.
It fell trough that floor in December, when it announced it expected to settle a class-action lawsuit in the federal courts by making a payment of $85 million. The settlement, as is customary, includes no admissionof wrong-doing.
The stock price didn't find its new floor until mid January 2008, when it reached $12. It has rebounded a bit since then. But so far as I can tell, Melnyk believes that his successor has been inadequately aggressive as a litigant, leading to his 'decision to explore options.'
My own guess? (Just a guess folks, and don't take anything I say as investment advice -- if you do, you're an idiot!) My guess is that Biovail is better off without him, and ought to resist any "options" he explores that might put him back in a decision to make decisions. Melnyk was part of the problem, he isn't part of the solution. They can work their way through the tough times they've encountered.
"Once you went away, I was petrified/ Kept thinking I would never live without you by my side ... I will survive/ I will survive."
He was the chairman of that board until last June, when he quit as part of a settlement with Canadian regulators over insider trading allegations.
Eight months of idleness appears to have been wearying, though. Melnyk, who owns 18.2 million shares (about 11% of the outstanding) writes: "I am at this juncture formally informing the Board that I have decided to explore, and am exploring, various options available to me in connection with my interest in Biovail, including the possibility of joining with a partner or partners to acquire the remaining shares of Biovail, selling all or a portion of my current Biovail shares to a third party, continuing to hold my shares for investment, or seeking changes to the composition of the Board of Directors."
Biovail is a pharmaceutical company specializing in making time-release versions of medicines (or, as their website puts it, "drug-delivery technologies.")
Between May and mid-July of last year, Biovail stock was trading in the neighborhood of $25. There was a sharp downward move in July, when the US FDA refused to approve a once-daily salt formulation of an anti-depressant. In August it found a floor at $16.
It fell trough that floor in December, when it announced it expected to settle a class-action lawsuit in the federal courts by making a payment of $85 million. The settlement, as is customary, includes no admissionof wrong-doing.
The stock price didn't find its new floor until mid January 2008, when it reached $12. It has rebounded a bit since then. But so far as I can tell, Melnyk believes that his successor has been inadequately aggressive as a litigant, leading to his 'decision to explore options.'
My own guess? (Just a guess folks, and don't take anything I say as investment advice -- if you do, you're an idiot!) My guess is that Biovail is better off without him, and ought to resist any "options" he explores that might put him back in a decision to make decisions. Melnyk was part of the problem, he isn't part of the solution. They can work their way through the tough times they've encountered.
"Once you went away, I was petrified/ Kept thinking I would never live without you by my side ... I will survive/ I will survive."
Tuesday, March 4, 2008
GenCorp meeting date set
GenCorp's shareholder's meeting is now set for March 26 at the Ritz-Carlton in Washington, DC. The record date is February 1.
To their credit (in my humble opinion) the board of GenCorp has made some moves over the last couple of years to modernize their system of governance. It has separated the role of chairman from that of chief executive; it has allowed the expiration of an old "poison pill" provision; and it has declassified its board.
Of course, it has done these things under pressure. Still, it has done them.
Also, over the same two year period the price of a share of GenCorp (NYSE: GY) has been in decline. It was worth about $19 two years ago, and is worth somewhat less than $11 today.
The dissident slate available to voters at this month's meeting is backed by hedge fund Steel Partners.
To their credit (in my humble opinion) the board of GenCorp has made some moves over the last couple of years to modernize their system of governance. It has separated the role of chairman from that of chief executive; it has allowed the expiration of an old "poison pill" provision; and it has declassified its board.
Of course, it has done these things under pressure. Still, it has done them.
Also, over the same two year period the price of a share of GenCorp (NYSE: GY) has been in decline. It was worth about $19 two years ago, and is worth somewhat less than $11 today.
The dissident slate available to voters at this month's meeting is backed by hedge fund Steel Partners.
Monday, March 3, 2008
New York Times stock price
On Friday, both the New York Times and Harbinger filed their preliminary proxy statements with the SEC. One thing that piques my interest in the Harbinger filing is the disclosure of an equity-swap deal Harbinger has made with a London company doing business as TradIndex.
On January 17, around the time the NYT price was hitting $15. "TradIndex agreed to pay the Special Fund an amount equal to any increase, and the Special Fund agreed to pay TradIndex an amount equal to any decrease, in the official market price of 320,455, 300,000 and 390,480 notional shares, respectively ...."
This sounds like a "contract for difference," a way of separating voting interest from the economic significance of stock ownership. I'm guessing (and that's all I'm doing at this point) that Harbinger entered into the deal to protect itself against the further decline in the value of Times' stock that it plans to use to get some seats on the Times board.
It certainly had reason to worry, based on the charts. In June of last year, the stock price of the New York Times was at $26. That was a gain of $4 per share from its value as of a year before. But it was not to last.
By August the stock (NYSE: NYT) was back at summer of 2006 levels. It continued to fall, right through them.
By mid-October, it was near $18, then rallied briefly, up to $21, before falling back to $18 at the start of November.
Once we were into the new year, the newspaper company reported a December revenue drop off of 22.4%, and the stock price quickly came to reflect this news, getting to below $15 in mid-January. That, as I say, was when Harbinger entered into this hedge.
There's been something of a rally since then, in part at least because the January revenue results were an improvement over those for December, and in part because of the interest Harbinger and Firebrand have show. The price is now back above $18. So it appears that Harbinger could close out its deal with TradIndex for a profit.
Nothing untoward about this -- it all seems to be a Marquis of Queensbury proxy fight, and civil enough so far to sound like some of the Clinton/Obama debates. Should somebody get Mr. Sulzberger a pillow?
Still, the whole idea of CFDs and the separation of economic from voting interest raises policy/regulatory issues.
On January 17, around the time the NYT price was hitting $15. "TradIndex agreed to pay the Special Fund an amount equal to any increase, and the Special Fund agreed to pay TradIndex an amount equal to any decrease, in the official market price of 320,455, 300,000 and 390,480 notional shares, respectively ...."
This sounds like a "contract for difference," a way of separating voting interest from the economic significance of stock ownership. I'm guessing (and that's all I'm doing at this point) that Harbinger entered into the deal to protect itself against the further decline in the value of Times' stock that it plans to use to get some seats on the Times board.
It certainly had reason to worry, based on the charts. In June of last year, the stock price of the New York Times was at $26. That was a gain of $4 per share from its value as of a year before. But it was not to last.
By August the stock (NYSE: NYT) was back at summer of 2006 levels. It continued to fall, right through them.
By mid-October, it was near $18, then rallied briefly, up to $21, before falling back to $18 at the start of November.
Once we were into the new year, the newspaper company reported a December revenue drop off of 22.4%, and the stock price quickly came to reflect this news, getting to below $15 in mid-January. That, as I say, was when Harbinger entered into this hedge.
There's been something of a rally since then, in part at least because the January revenue results were an improvement over those for December, and in part because of the interest Harbinger and Firebrand have show. The price is now back above $18. So it appears that Harbinger could close out its deal with TradIndex for a profit.
Nothing untoward about this -- it all seems to be a Marquis of Queensbury proxy fight, and civil enough so far to sound like some of the Clinton/Obama debates. Should somebody get Mr. Sulzberger a pillow?
Still, the whole idea of CFDs and the separation of economic from voting interest raises policy/regulatory issues.
Sunday, March 2, 2008
The New York Times
It's on. The proxy fight is official.
The Times' January results show a steep drop in advertising sales and a weakening of online growth, and that led S&P to indicate that it may downgrade the NYT's credit rating.
It went further, S&P's statement said, "the downgrade may not be limited to one notch." How ominous is that?
This will certainly feed the rebellion by the Harbinger-Firebrand group, which has now put forward four nominees for the board of directors.
The rebels' problem is that the New York Times board is designed so as to perpetuate the control of the Ochs-Sulzberger clan. Class A stock, which is the sort Harbinger etc. own, can elect only up to four members of the board. The rest of the 13-member body is determined by Class B stock, which is privately held. In fact, 88% of the Class B stock is held by members of the controlling family.
This is the sort of self-perpetuating elitist structure that would normally be denounced in the editorial pages of, say, The New York Times.
Cheap irony to the side, though, there are ways of losing these things even when the fix seems to be in. Think of the way Eisner was run out of Disney.
More on this tomorrow.
The Times' January results show a steep drop in advertising sales and a weakening of online growth, and that led S&P to indicate that it may downgrade the NYT's credit rating.
It went further, S&P's statement said, "the downgrade may not be limited to one notch." How ominous is that?
This will certainly feed the rebellion by the Harbinger-Firebrand group, which has now put forward four nominees for the board of directors.
The rebels' problem is that the New York Times board is designed so as to perpetuate the control of the Ochs-Sulzberger clan. Class A stock, which is the sort Harbinger etc. own, can elect only up to four members of the board. The rest of the 13-member body is determined by Class B stock, which is privately held. In fact, 88% of the Class B stock is held by members of the controlling family.
This is the sort of self-perpetuating elitist structure that would normally be denounced in the editorial pages of, say, The New York Times.
Cheap irony to the side, though, there are ways of losing these things even when the fix seems to be in. Think of the way Eisner was run out of Disney.
More on this tomorrow.
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