Wednesday, May 28, 2008

Jerome Kerviel

Société Générale hosted its shareholders' meeting yesterday, five months after the disclosure of $7.7 billion in trading losse, which it blamed on rogue trader Jerome Kerviel.

Shareholders weren't happy. Daniel Bouton, ther company chairman, was lustily booed while he stood impassively at the podium and one shareholder, Jean Richard, shouted, "Who do you take us for" to approval of the crowd. Or so the scene is captured in The New York Times' report.

When SocGen first reported the Kerviel losses, Bouton was both chairman and chief executive. Criticism of his captaincy has been intense -- some of it coming from President Sarkozy -- and Bouton has since given up the CEO post. But he does remain the chair.

Since the start of the year, the value of their shares has declined by 28%. It isn't surprising they're ticked off.

Back in February, it was Felix Salmon, of Portfolio, who put his finger on the key point. Kerviel's profit-and-loss balance for last year was a wild zig-zag on both sides of the zero line. Entering December, though, he found himself sitting on a pot, more than 1 billion euros in the black. He suddenly gets extremely conservative, as if sitting on that pot untilt he year's end. Either he stopped trading entirely or his hedging was perfect.

Then, comes January ... he starts trading again and almost immediately ends up below -4 billion euros.

More is happening than meets the eye if the eye is looking here.

Tuesday, May 27, 2008

Amending a Complaint

The state of Ohio wants to amend a four-year-old complaint in its lawsuit against insurance giant AIG.

In 2004, that state's attorney general filed a class action on behalf of three public pension funds that had investment in AIG, seeking compensation for the losses those funds sustained because of certain accounting improprieties.

The accounting dispute (though not specifically Ohio's action) led to the ouster of Hank Greenberg as AIG honcho in 2005.

On Friday, May 23, the federal district court in Manhattan that is hearing the Ohio case, and several others with which it has been consolidated, issued an order on the scheduling of discovery -- the proceedings by means of which each party learns what it needs to know about the other party's case. Discovery is to be completed in February 2010.

Anyway, the AG's office must smell blood, because four years in, it was also on Friday that the office announced it wants to add claims to that complaint "relating to AIG's recent multi-billion dollar write-downs stemming from its exposure to problems in the residential housing market."

It has to have the permission of the court for this, of course, and there will be a hearing on the issue a week from today.

It is possible that AIG will consent to the amendment and the court wil grant it on that basis. If so, this would be a calculation in which AIG's lawyers decide it's easier to fight this new grievance under the same heading, that to require Ohio to file another lawsuit separately and fight them both.

It say that is "possible" because lots of things are possible. But my own impression is that Ohio is trying to shoehorn in some very different allegations into an established four-year-old action, that AIG's lawyers will likely make a lot of contrary noises, and that those noises will be heeded.

My guess, furthermore, is that some young eager-beaver in the attorney general's office got ahead of himself.

Monday, May 26, 2008

Massey Loses Big in Court

Massey Energy Co., headquartered in Richmond, Vir., is the parent company of Central West Virginia Energy Co., and thus a party to some high-stakes litigation against Wheeling-Pittsburgh Steel Corp.

About a year ago, a trial jury found that Massey and CWVE had reneged on a contract to supply coal to WPS. It found damages of $220 million: $120 million compensatory; $50 million punitive assessed against the parent-corp. defendant; another $50 million punitive assessed against its subsidiary.

Massey had argued unsuccessfully that the apparent breach was actually an instance of "force majeure," i.e. a circumstance in which performance had become impossible for reasons that could not reasonably have been anticipated.

Last week, the West Virginia Supreme Court said that it would not hear an appeal -- which in turn means that it appears the verdict will stand, and Massey is on the hook for the full $220 million plus post-judgment interest.

In a press release, Massey sought to allay shareholder concern by saying that the amount at issue is "approximately only 5 percent of the company's market capitalization." Only? One-twentieth of the company is gone with the stroke of the appellate court's pen and they say this is a matter worthy of the word "only"?

That strikes me rather as whistling past the graveyard.

Massey has in the past attracted attention from activist shareholders. Last year (just a couple of months before the jury verdict) hedge fund Third Point waged a successful proxy campaign to get two of its representatives on the Massey board.

Third Point is no longer at all so heavily invested in Massey as they once were, although they aren't out completely. As their last quarterly filing with the SEC they said they owned $59,000 of its stock. Will they sell it now? Or will they perhaps hold on, expecting that in time this storm will pass -- that 5% loss will be sustained and growth will nonetheless resume?

Sunday, May 25, 2008

Hong Kong rivalry, cont.

A HK English language newspaper, The Standard, reported in February that Walter Kwok had been making many business decisions of late under the influence of his mistress of four years, Ida Tong Kam-hing.

This (either the newspaper story or the reality behind it) may have been the catalyst of the decision of other family members -- Walter's two brothers and the family matriarch -- to oust WK from his role as chief executive at Sun Hung Kai, as I chronicled in an entry here last week.

By the way, The Standard itself has some amusing history. It was once known as The Tiger Standard, the creation of Aw Boon Haw, a fittingly Asian mutation of the William Randolph Hearst publishing/tycoon type.

Aw's signature product was Tiger Balm, a cure-all muscle rub that may be a placebo but is a marvellously successful one. Preservationists might want some re-assurance: no tiger parts are employed in the creation of the product.

But back to the Kwok family, its construction/realty business, and Friday's hearing. Walter sought but was refused an injunction against a board meeting. So it now appears that his brothers and mother will be able to oust him from any operational role in Sun Hung Kai.

This doesn't mean that Walter will go quietly. He's suing for defamation.

Hmmm. The business seemed to be doing pretty well before this public tumult began. Maybe they all need to calm down and find a way to go back to work. Could there be a simple balm for soothed egos?

Wednesday, May 21, 2008

Proxy Fight at J-Power

The hedge fund TCI now says that it will wage a proxy contest among the shareholders of the Japanese electricity wholesaler J-Power, demanding higher dividends and a limit on cross-shareholdings.

Last month, TCI sought permission from the government of the country to raise its stake in J-Power to 20%. The government denied that request as I noted at the time, so the activist fund still has just below the 10% limit.

J-Power's annual meeting is set for June 26. TCI says that it plans to "expose serious conflict of interest of supplier and cross-shareholders" between now and then.

Cross-shareholding is a major corporate-governance issue that we haven't yet discussed on this blog. It refers to the practice whereby two corporations may hold shares in each other, therebvy entrenching the management of each against possible dissidents. The practice is quite common in Japan.

Should we stigmatize pressure upon Japanese countries of this sort, brought to bear by a London-based fund, as neo-imperialist? I don't see how that assists understanding, although those who wish may use the label at their pleasure. The world is getting to be a smaller place, and Japan of all countries knows the impossibility of autarky.

Tuesday, May 20, 2008

Sibling Rivalry in Hong Kong

Sun Hung Kai Properties, a major property developer in the special administrative region of Hong Kong, has become the prize in a nasty family quarrel.

SHK is chiefly owned by three billionaire brothers: Raymond, Thomas, and Walter Kwok. Walter brought a lawsuit against his brothers last week, and persuaded a judge to enjoin a board meeting. Why? He claims that Raymond and Thomas had him diagnosed as mentally ill (specifically, as bipolar) in order to get him out of the way, silencing his criticism of certain business decisions they want to push through.

Markets don't like turmoil at the tip. The company's stock lost 1% of its value Thursday and 1.7% on Friday.

According to an AP report: Walter "arranged for a Stanford University doctor to visit Hong Kong, fed him misinformation that led him to diagnose Kwok with bipolar affective disorder and called a board meeting for Feb. 18 to discuss Kwok's dismissal."

He fending off dismissal in February by agreeing to a three-month leave. Nearly three months later, on May 8, he called a board meeting inorder to present his own psychiatric evidence. His brothers apparently had that meeting rescheduled for May 18 and, in Walter's view anyway, they were working to undermine whatever presentation he had planned.

Hence the lawsuit and the injunction. No meeting took place on the 18th.

Apparently a court hearing has been scheduled for this Friday.

The Lex column, in today's Financial Times, alludes briefly to this case, as one instance of several of in-fighting among Asiatic business dynasties.

Such fall-out, the columnist thinks, is inevitable "as founding fathers, many in their 70s and 80s, prepare to hand control to the next generation."

Walter is the eldest of the sons of the family patriarch, but primogeniture doesn't seem to give him any extra pull. The patriarch, Kwok Tak Seng, died in 1990. The matriarch is still around.

Monday, May 19, 2008

More on Yahoo

Carl Icahn is the "indirect beneficial owner" of a little more than 59 million shares of stock of Yahoo.

As I noted in yesterday's entry, citing his letter to the board, some of these are actual shares, some are "share-equivalents."

What that means, according to other recent SEC filings, is that Icahn owns about 10 million actual shares and more than 49 million call options.

Yahoo's annual meeting is set for early July. I don't believe a record date has been set yet, so he could presumably convert all of those call options into actual voting shares in time to use them at the meeting.

Meanwhile, Microsoft has given off equivocal signals about whether it has really "moved on" or whether it wants a deal with Yahoo still and, if the latter, what kind of deal it now wants. It doesn't want to acquire Yahoo anymore, but it wants a "collaboration," apparently having something to do with advertising and eyeballs.

MS hasn't made much progress lately in turning itself into an internet company. It remains wedded to the desktop model which (though comfortably profitable and likely to remain so for awhile yet) seems a bit like the wave of the past.

One amusing sidenote. A columnist in the Wall Street Journal recently suggested that what MS ought to do is split itself up. The specifics of the split-up he suggested sounded a lot like -- the trial judge's divestiture order of a few years back, one that MS appealed and freed themselves from.

Everything old is new again.

So where do things go from here? Wish I knew.

Sunday, May 18, 2008

Icahn enters the Yahoo fray

When last we looked in, Yahoo has successfully warded off takeover aspirations by Microsoft, using what looked like a scorched-earth defense chronicled here.

I've also mentioned, though I'm afraid I spoke rather slightingly about, the possibility of a Yahoo shareholder revolt, on the part of those who believe management should have sold the company to MS.

Well, nobody, not even a doofus such as myself, can speak slightingly of that scenario now. Yahoo has a full-fledged rebellion on its hands, led by the formidable Carl Icahn.

On Thursday, Icahn wrote to the board of Yahoo. It is "quite obvious," his letter said, "that Microsoft's offer of $33 per share is a superior alternative to Yahoo's prospects on a standalone basis."

He said that over the preceding ten days (since MS had formally withdrawn its proposal) he had purchased 59 million "shares and share-equivalents of Yahoo," and formed a 10-person slate prepared to run a proxy campaign to replace the current board.

Yahoo replied the same day. They made several points, such as that the formal written offer from MS was for $31, not $33. They acknowledged that MS did indicate a willingness to go to $33, but this "was never delivered in writing and did not include details of a cash/stock mix."

Yahoo also maintains that during the negotiations MS never made clear its "thinking with regard to the regulatory issues associated with a potential transaction," and that their lawyers asked for additional information on that point on March 28, but it was never supplied.

Those of you with good instincts for corporate infighting might be saying "whoa there, back up!" Icahn's letter had mentioned a purchase of 59 shares, some of which weren't really of STOCK of Yahoo but were of something called "stock equivalents".

What exactly does that mean, and how much of Icahn's purchases are of "equivalents" rather than of real shares of stock? I'll look into that.

Wednesday, May 14, 2008

Glass Lewis

One of the frequent complaints of good-governance activists is that many corporations today, especially those headquartered in the United States, combine the roles of quarterback and coach -- or, to drop the metaphor, they combine the roles of chief executive and chairman of the board.

Activist shareholders of Exxon Mobil -- where Rex W. Tillerson bears both titles -- have brought this issue to a head -- it will be voted on as "Proxy Item 5" at the company's annual meeting May 28.

They did likewise last year, and garnered 40% of the vote. The task this year will be to build on that figure. They have an ally in Glass Lewis, an independent proxy advisory firm, which is recommending that shareholders support the call for an independent chairman.

In a statement yesterday, Glass Lewis said that such a separation is "almost always a positive move."

I wonder whether there is any arb fund out there that makes use of such good-governance principles by pairing companies. One might find two companies that are in the same industry and otherwise similar operationally, BUT FOR one of these "takle your vitamins" type rules the folks at Glass Lewis like to tell us about.

Oil company A has two people in these two roles, oil company B combines them.

So (on my imagined scenario) an arb fund would be long on A and short on B.

Is anybody doing that? And how well?

If anyone reading this knows the answer to that question: get in touch. Thanks.

Tuesday, May 13, 2008

Three quick notes

1. Melnyk's astonishment

Let's just try to keep up today with three of our continuing stories. As I reported month, there was a shake-up at the Canadian pharma company Biovail. The company is doing its best to disassociate itself from its founder, Eugene Melnyk, whom it blames for a roster of legal troubles. This is tricky, because Melnyk remains the largest shareholder, with just under 12% of the equity.

And he isn't a happy camper. Indeed, in a letter to the reconstituted board of his old company, dated May 8, he professes himself astonished by the latest measures in this continuing distancing.

He is "very concerned about the circumstances surrounding the entering into of the employment agreements with senior management and the change in control provisions in those agreements. I intend to pursue this matter further."

He can pursue it on June 25, the day of the annual shareholders' meeting. The "record date" for the meeting is April 28 -- i.e. you'd need to have been a shareholder "of record" by then to be qualified to vote.

2. More from Ben Stein

You remember Ben Stein? I last wrote about him in January, when he used his New York Times column to set out a theory of "trader realism," i.e. that the whims and machinations of speculators in Manhattan or London are so important to pricing of strategic commodities that they render the fundamentals ("supply," and "demand" and other stuff and nonsense) essentially irrelevant.

This is a lunatic theory, and since then Stein has shown signs of abandoning it for a cause even dearer to his heart -- "biologist realism" linked here.

But watch out economics. Stein, like a poltergeist, is baaa-ack.

Felix Salmon does him justice.

3. The latest at CSX

The feud between railroad company CSX and activist investor TCI continues, pending some resolution at next month's meeting.

TCI has posted a white paper titled "CSX: The Case for Change," it claims that numerous opportunities for productivity improvements could add $2.2 billion to annual earnings within five years, and it complains that the incumbents ()the folks who have left those opportunities unexploited) have also awarded themselves the highest pay packages in the industry.

Yesterday, TCI sent out a "dear shareholders'" letter asking its fellow investors to go to their website and check out that white paper.

Monday, May 12, 2008

A market-driven spin-off

EnCana, an oil and gas company, announced this weekend that it plans to split itself into two: "one a natural gas company with an outstanding portfolio of early life, North American, natural gas resource plays and the other a fully integrated oil company with industry-leading in-situ oilsands properties and top-performing refineries, as well as an underlying foundation of reliable oil and gas resource plays."

So it said in a Mothers-Day release/

This presumably means that it has decided that the 'synergies' from those two lines are negative: they're more profitable apart than together.

There has been a good deal of discussion in recent years about the "agency" problem in corporate governance. The boards of directors are formally the agents of the investors, and in a situation where a split-up works best for those investors, should work toward a split up. But do they?

Some economists argue that an empire-building impulse prevents or obstructs such developments. To put it baldly: a typical CEO would rather be at the top of a large company than of one of two smaller ones. This may even be the case when it means he's the boss of an under-performing large company rather of a better-performing small one. That (if true) makes them untrustworthy agents.

In this one case, anyway, it would seem not to be true. So hurrah for the board of EnCana. I hope their mothers are proud.

Though no shareholder-activist campaign seems to have been required to force their hand, I'll observe (if only to tie this entry in clearly with the over-arching themes of this blog) that such campaigns are often directed at producing precisely such a restructuring effect.

Sunday, May 11, 2008

Nick Maounis

Bloomberg is reporting that Nick Maounis, formerly the boss of Brian Hunter at Amaranth Advisors, is trying to raise money for a new hedge fund.

I'm not sure that they're right. Bloomberg seems to have been reporting this story for a long time. They ran this worried column on the subject sixteen months ago.

Amaranth collapsed in September 2006. As Mr. Maounis explained in a teleconference that month with investors: "We lost a lot of our own money this month. We lost even more of yours."

The reaction of many commentators back in January 2007 to the possibility that Maounis might be trying to start up a new fund was: It's too soon.

Well, this is May 2008. Is it still too soon? If it will always be "too soon," then the problem isn't timing and one shouldn't pretend that it is.

My own view, for what it's worth, is that Maounis seems to have been duped by his employee, Brian Hunter. If that's right, then it is possible nearly two years of reflection has taught him something about, say, the need for rigorous in-house controls. So take another shot, Nick! Best of luck.

Wednesday, May 7, 2008

SWFs versus activism

I don't believe I've used the initials SWF yet in the brief history of this blog.

So here's a definition. Outside of the personal-ads section of a newspaper, where they of course refer to single white females, the initials SWF stand for "sovereign wealth funds," the quasi-public investment funds established by nations with revenues that exceed their operational needs.

So what? Maybe nothing. Maybe it's old-fashioned profit maximization (or its close relative, risk hedging) and nothing more. The most oil-rich nations on the map have themselves already drilled all the "easy oil." The peak is nearing -- we may already be there -- and the down slope, when the industrialized world makes the necessary and long-delayed adjustments to a new system of energy use -- could be nasty for them. The sensible use of their SWF funds is simply to prepare against that day.

One example is Dubai International Capital, which is said to have $13 billion worth of assets under management.

Still, oil peak oil schmeak. That's a lot of weight to throw around. Who, if anyone, should be worried? That is a question now coming under debate in both the "mainstream press" and here in the blogosphere. Will DIC throw its financial weight around on behalf of political goals rather than profit maximization? And, if so, at whose expense?

Meanwhile, Singapore has a couple of large SWFs, the more venerable of which is known as Tamasek. Tamasek has a substantial stake in both Merrill Lynch and Barclays.

The People's Republic of China's SWF, unsurprisingly named the China Investment Corp. assisted Morgan Stanley's balance sheet last year with a $5 billion infusion.

Indeed, the major western banks and brokerage firms that have weathered the recent crises best are precisely those that have had timely infusions from SWFs. But gratitude isn't much of a factor in these matters.

I have my own pet theory about SWFs, not a very original theory but one dear to me nonetheless. My view is that the real problem they pose is to activist investing. The notion that shareholders can and should shake things up, challenging intrenched laxy managers via proxy fights, is one that has only slowly gained ground in recent years. But what if managers can call in heavy-weight support on the scale of SWFs to squelch any possible proxy fight? Then ehy'll be able to go back to sleep again, won't they?

As a "proxy partisan," as one who thinks that proxy fights are in general a good thing, I'm wary of the passive investing model that SWFs seem in general to follow. They may become the ultimate benevolent fairy godmothers of their favored managers of their favored western corporations. And in that very quiet way they may do a good deal of harm.

I'm still thinking these things through, though.

Tuesday, May 6, 2008

A new hire at Silver Lake

A very prominent manager of private equity funds, Silver Lake Partners LP, has brought a new senior adviser on board.

He's Miles Flint, until last September president of Sony Ericsson.

The Financial Times has a brief piece on this new hire this morning, at the bottom of page 17. It caught my eye because I would have supposed that the ongoing credit squeeze would make corporate types like Mr. Flint wary of joining PE firms. A Silver Lake, as a rule, is much more dependent on leverage, and much more vulnerable to a squeeze there, than is a Sony Ericcson.

But ... there you go. If I had "supposed" that, I would have been wrong.

By the way, the California Public Employees Retirement System, CalPERS, the huge pension fund, owns nearly 10% of Silver Lake. (This wasn't an investment in SL funds, it was an investment in the management company itself.) That was only the latest cozying-up in a long-term relationship.

In 1999, CalPERS invested $73.2 million in one of Silver Lake's funds, a fund that has earned a 26% annualized return since then.

In 2004, CalPERS invested $125 million into another SL fund, and it has gotten a 22.3% return on that one.

Best wishes then, from this blogger, to all the parties mentioned above, and especially to the now retired folk who used to grind out their daily labor on the public payroll in California and who now rely on CalPERS' decisions as if they were their own. My Miles Flint and his new colleagues do well for you.


Monday, May 5, 2008

Yahoo: The Price of Victory

AP has a story this morning about an incipient revellion amongst Yahoo! shareholders about the management's refusal to sell the company to MS.

The story relies chiefly on a single interview, with Darren Chervitz, co-manager of an internet-devoted investment fund.

In the final days of negotiations, MS had expressed a willingness to go as high as $33 per share. Yahoo took the position that nothing less than $37 would suffice. Having drawn their lines in the sand, there seems to have been no face-saving way for either side to suggest ... um ... $35?

Anyway, Chervitz would have liked to have had that $35 per share, or even perhaps that $33 per share, and he's unhappy. "There is probably blame to go around on both sides, but I think most of it is in Yang's hands."

The AP story doesn't give any indication of how many shares Chervitz' find owns, or (if it doesn't own enough of a block to cause much fuss at the next annual meeting itself) how representative it is. All we have is the fact that HE is unhappy, and the conclusion that this MAY be symptomatic of a broader rebellion. Or maybe not.

So I did some supplementary research myself. The "Jacob Internet Fund" owns 144,274 shares of Yahoo, which is just a little more than one percent of one percent (i.e. one share out of every ten thousand) of the whole. Not enough to cause much fuss at all.

Yahoo's annual shareholder meeting will be a forum for venting anguish, but there isn't enough time to put forward an alternative slate, so the most anyone can expect to organize is a symbolic "vote no" campaign.

Allow me this anodyne conclusion. If any major shakeup occurs at the top of Yahoo's governance structure as a result of their having successfully spurned MS, I for one will be surprised.

Still: I've been surprised before.

Sunday, May 4, 2008

Microsoft Backs Off a Fight

Microsoft chief executive Steve Ballmer has written his counterpart at Yahoo, Jerry Yang, in a letter dated May 3 and posted on MS' website, to say that MS has reached the "conclusion of the process regarding a possible combination" of those two companies, and that MS has decided NOT to initiate a proxy fight in order to force the acquisition over Yang's opposition.

One passage in the letter mystifies me, because it appears to be designed chiefly tohelp future potential targets. Ballmer, referring to some conversations he has had with Yang over the last week, says that he has come to believe that if he pressed the matter "you would take steps that would make Yahoo! undesirable as an acquisition for Microsoft."

It's called "shark repellent," though such impolite terms aren't used in the letters released via one's corporate website.

Anyway, Ballmer then proceeds to list in some detail the particular plans on Yahoo's part that did the repellent job, even including a bullet list.

Hey, Ballmer, your company remains one of the biggest meanest sharks out there. Why give future prey a detailed description of how to ward you off?

BBC News, on its website, has posted an intelligent analysis of where MS goes from here..