Monday, June 30, 2008


The activist hedge funds are claiming that they won four of the five seats at issue (at a 12-seat board of directors) at last week's CSX shareholder's meeting.

The company says the vote is too close to call.

The official results are due in late July, and oral arguments about some of the legal issues this proxy fight has stirred up will take place before the appellate court in early August.

The legal issue that fascinates me is the relevance (or otherwise) of an investor's position in total return swaps to the disclosures required by 13D.

Why is that important? Because it is part of the much broader question of whether ownership is a single fact or an arbitrary bundle. When I went to law school, the basic property law course began with an effort to disabuse students of the naive idea that ownership is a simple solid sort of fact. The ownership of land, for example, consists of the right to exclude others from it, the right to reside there and enjoy it, the right to sell it in whole or in part, the right to lease it out, etc. These rights can be severed from one another by statute or precedent.

Well, okay ... point taken. Still, there's something to be said for the naive view. The bundle is not arbitrary, the acts of severance that have historically made it look more like a fascis than like a single stout branch -- that has been arbitrary.

With the ownership of stock in particular, I submit that we need to stick with the single stout branch, and that the position of CSX in that respect is the more sound.
The hedge funds are trying to 'own' stock through "total return swaps" in a way that remains largely opaque to the market and their fellow shareholders.

Though they might be right about much, they are wrong about this.

Saturday, June 28, 2008

FERC decision

This looks important at first glance though I'm not sure what to make of it exactly. It has little to do with proxy fights or the other usual subjects of this blog, but hey -- it's my blog -- and I'll allow myself some topic drift.

The subject today then, electricity generation, contracted-for rates, and regulatory interference therewith.

I looked into this a bit last fall, when the International Swaps & Derivatives Association filed an amicus brief on the case. ISDA was unhappy about the circuit court's opinion because it had essentially told the Federal Energy Regulatory Commission to reconsider its approval of certain rate-setting contracts.

As necessary backgroud: the Federal Power Act requires that FERC ensure that all rates, terms, and conditions for the sale of power be "just and reasonable." In 1956the US Supreme Court created what is known as the "Mobile-Sierra doctrine," which makes it very difficult for FERC to intercede and invalidate a market contract between two commercial entities: between, say, the owner of a power plant and the owner of the transmission wires. There must be an "unequivocal public necessity" to justify such abrogation.

In effect, this limits FERC's unilateral rate setting ability to the retail market, where commercial entities deal not with each other but with unsophisticated normal folk.

Yet FERC has played a larger role than you might think, because the practice has developed (and the courts have blessed it) among some commercial parties of contracting out of Mobile-Sierra, creating agreements that specifically allow the FERC to change rates. In such a case, the transmission and the generation company are essentially stipulating that the FERC shall be their mediator if either side comes to believe that the contracted-for rate has become unfair by virtue of subsequent developments.

Nowadays power contracts are often themselves traded by financial institutions in much the same way that stocks and bonds are traded. This was one of Enron's innovations, and a practice that has survived that company's demise. Thus, the appellant in the case the Supreme Court decided Thursday is the Morgan Stanley Capital Group.

FERC had refused to modify the long-term contracts that parties entered into in 2000-2001, a period of tremendous price spikes and blackouts on the west coast. The 9th circuit had remanded, indicated that it did think there ought to be modification, because the unlawful activities of various parties in the spot market may have also affected the forward contract market.

This is what ticked off ISDA, leading to the amicus brief that first drew my attention to the matter. ISDA's amicus brief maintained, in the spirit of Mobile-Sierra, that contract rates negotiated at arms length are presumptively fair and reasonable, and that "buyers should not be permitted to escape contractual commitments because the contract was negotiated during a period of market dysfunction."

Now SCOTUS has spoken. But, as it sometimes does, SCOTUS has spoken with a stutter. It has said on the one hand that the 9th circuit was right to remand the case to FERC, but that it did so on the wrong rationale. If I understand it, the decision re-affirms Mobile-Sierra, but nonetheless says that this might (for all it can tell on the record) be one of those "unequivocal public necessities" that justify abrogation of contracts. Accordingly, it has remanded the case to FERC to build a better record. I think.

I don't know whether ISDA is happy with this outcome or not. I could ask them but, hey, that's too much work. My guess is that their chief interest isn't in who wins or how long it takes, but in re-affirming the principles, and that accordingly they are content with this decision. The folks over at Morgan Stanley may not be thrilled, though. This means further rounds of hearings and at least some continued uncertainty about their contracts. They're interested in the outcome more than the "principle of the thing"!

Wednesday, June 25, 2008

Emageon's stall

As we discussed yesterday, Emageon is in the business of allowing easy access to medical imaging.

To an utter outsider like yours truly, this business sounds like it would be a great profit opportunity. It must seem that way to Oliver Press, likewise, or they wouldn't have put the money into this position that they have, (they purchased 12% of Emageon's equity last summer) or bothered to wage the proxy fight to get representation on the board.

Nearby you can see a price chart for Emageon covering the last two years. The stock price (Nasdaq: EMAG) was securely in double-digit terrain through 2006, began a step-like descent, entered the high single digits in April 2007, and took a sharper fall, into the bottom half of single-digit territory, in November.

What's going on? I don't know and looking through the SEC filings so far hasn't told me.

OPP claims that the market has lost confidence in the Emageon management. As explanations go, that one's just a waste of oxygen. What if anything has that management done wrong, in an operational sense, that could warrant such a 'loss of confidence' and that new-blood board members might help to fix? I have no idea.

For the record, management says their record should be measured against their peer group. Some of the companies in their peer group, as they understand it?: Vital Images Inc., Amicas Inc., Emageon Inc., Merge Technologies Inc., Nighthawk Radiology Holdings Inc., and Virtual Radiologic Corporation.

All these companies are suffering "from similar market conditions and decreases in government reimbursement programs in recent years."

But even sticking to the company's own comparisons, Emageon seems to be suffering somewhat more than those peers. So ... what is going on? I'm open to thoughts from the public. Comment away.

Tuesday, June 24, 2008

Emageon proxy fight settles

Emageon Inc., a medical imaging software maker, said yesterday it will add three new directors to its board as part of the settlement of a proxy contest with Oliver Press Partners LLC.

Two of the new seats will go to Augustus Oliver, principal of OPP LLC, and Benner Ulrich, its director of research. The third seat will also be filled by OPP LLC, but with a infielder-to-be-named-later.

Ulrich and the unnamed infielder will both be on the company's strategic alternatives committee, which is considering alternatives including a sale of the company.

I've heard it said, "the best way to sell stock is to sell a story." I'm not going to buy any Emageon stock (because I don't stock pick, I do my equity investing only via broad-based indices)but ... I do like their story.

When most of us think of "medical imaging," we think of old-school X-rays, or perhaps the sonograms that are nowadays a pre-childbirth ritual. These two sorts of image are still rather mysterious to us non-physicists, but at least they're familiar. The field, though, includes a vast array of techniques and results -- at least five different forms of tomography alone.

Tomography, by the way, involves the imaging of a single plane or slice of an object. A CAT scan is obtained by "computed axial tomography."

Anyway ... if I had been asked not long ago how medical imaging is accessed, I would probably have thought the question pointless. Obviously, somebody has a filing cabinet and keeps all the X-rays and such in there, in proper alphabetical order by name of patient. It could be cumbersome, but surely it isn't very complicated.

I would have been wrong, thinking thus in pre-digitization terms. Emageon as a company grew out of research in imaging performed at the medical center of the University of Alabama at Birmingham, in 1997. It produces hardware and software for accessing images.

That's a field in which there ought to be money to be made, which presumably explains the interest of Messrs Oliver and Ulrich. Best of luck to all the parties in the settlement.

Monday, June 23, 2008

BHP/Rio Tinto

In November, the huge Australian mining company BHP Billiton announced a bid to acquire a rival company, the Rio Tinto Group, with a 3-to-1 share swap. In other words, it wanted Rio stockholders to turn in each of their shares for three shares of the new, larger, combined company.

The offer was sweetened a bit in February (3.4 to 1) and in that form is still on the table. Oddly, the prices of the two companies haven't really been trading as if the market finds this offer credible.

If there were a significant amount of arb activity, and a general expectation that the deal would go through, one would expect that the price of a share of Rio stock on the market would be, roughly, 3.4 times the value of a share of BHP stock. So if (just choosing my numbers to make the math easy here) BHP is trading for Aus$40 on a given day, you'd expect to see Rio shares trading for Aus$136.

Why? Because there's a good deal of speculative activity out there that is specifically in the merger arb business. (Sometimes, much less fittingly, called "risk arb," a usage I'll ignore). If the two company's market valuation got out of line, you'd expect the people and institutions in the merger arb business to act on it. Suppose, in may example, BHP is at $40 and Rio is a good deal lower than the valuation implicit in the 3.4 to 1 ratio. Suppose Rio went to $80, which implies a 2:1 ratio. What would happen?

The merger arbs would move in and buy Rio shares like mad. They'd do so in the expectation of being able to trade in each one for their 3.4 shares of BHP -- getting a return of $136 for each investment of $80, an easy $56 if ever there was one. The very fact of their moving in to do this would constitute an increase of demand for the stock of course, increasing its price -- forcing its price up to the level dictated by that 3.4 offer.

To repeat, that's what would happen IF two conditions obtained: there was a general expectation the deal would close, and there was a lot of arb activity.

Apparently one or both of those conditions is missing. Rio is trading at a discount of more than 8% to where it "should" be on such reasoning. Why? I'm guessing the market believes regulators in one or another of the many affected jusridictions will intervene and stop or complicate the deal.

Sunday, June 22, 2008

Icahn's Slate Loses at BIIB

I reported in April that Carl Icahn was making waves at a company called Biogen Idec.

Now we can report that Icahn put forward a three-nominee slate in a contested election for four open board seats at the annual meeting held last week.

It isn't clear what the margin of defeat was. But it is now clear that all the Icahn-backed candidates were defeated.

The management candidates received an important assist from each of the major proxy advisory services. ISS Governance Services, part of RiskMetrics Group, said in its report that "the dissident has not met its burden of proving that board change is warranted at Idec. Absent a showing that the incumbent board has failed in some fashion, we find it difficult to support the removal of directors."

Said Glass Lewis: "Shareholders should support management's nominees. In our opinion the current board and executives have created substantial value for shareholders and we believe that the Company has solid growth opportunities as a stand-alone entity."

And to make it unanimous, Proxy Governance weighed in thus: "Given the track record of this board and its management team over the five years since Biogen and Idec merged, as well as significant performance targets to which the company has committed itself through 2010, we believe shareholders will be better served by re-electing the management slate of nominees."

The thing about Icahn is -- he keeps up with these things, and over time can simply wear opposition down. He may have something more to say about BIIB going forward, or he may sell his shares and move on to something else.

He might, for example, (I'm just guessing!) want to liquidate his position in BIIB in order to buy more shares of Yahoo, where his nuisance value is only beginning to manifest itself.

Wednesday, June 18, 2008

Reverse Stock Split

Tomorrow, Biotech firm Cell Therapeutics Inc. will hold a shareholders' meeting in Seattle, Wash., at 10 AM local time, to elect directors to its board, approve a reverse stock split, and conduct other business.

It doesn't appear that there will be any fireworks at this meeting, but I'm intrigued by the company's dual listing -- it is listed both on Nasdaq and on the MTA, the Italian stock exchanged headquartered in Milan. [For those who need to know what initials stand for in any language, the MTA is the Mercato Telematico Azionario.]

Looking at the Nasdaq one-year chart, I have to say: it isn't a pretty sight. A share of CTIC was worth $3.50 a year ago. It had a brief upward move to $5 in mid-July 2007. But it has been steadily downhill ever since, and at close of business yesterday that share was fetching just $0.52.

Hence the "reverse stock split," a strange expression but one to which the business world seems accustomed. I've always wondered, "why not call it a stock meld?" or some other word with a meaning antithetical to "split"? If a company has a stock split, and I own two shares, then tomorrow I'll own four. Presumably if nothing else changes in the meantime the price of a share of that stock will be cut in half by the split, too. If my company has a stock meld (aka a reverse split) and I own two shares, then tomorrow I'll own just one share, presumably of twice the market value.

This is a matter of cosmetics, but a share price of $1.04 looks better to many observers than a share price of $0.52.

It doesn't go that smoothly for everybody. As the proxy materials warn, the reduction in the number of shares will increase the number of shareholders who hold less than a “round lot,” or 100 shares. Typically, the transaction costs to shareholders selling “odd lots” are higher on a per share basis, so somebody is going to get hosed for this cosmetic improvement.

And it still sounds like a strange expression.

Monday, June 16, 2008

Chairman and CEO

More on AIG. Robert Willumstad is now chairman and CEO of AIG.

Willumstad isn't someone who was groomed within the company, one of Hank Greenberg's protoges. He was brought onto the board of directors and made its chairman (nothing like starting at the top) only a little more than two years ago, and almost a tear AFTER Greenberg's departure.

RW comes from Citigroup, where he was the chief operating officer and a candidate for the CEO post, though that never materialized.

A possible problem here is that although banking and insurance are related industries, they are sufficiently distinct (different sets of regulators and so forth) that some might question the relevance of RW's Citi experience.

At any rate, his appointment may head off any proxy fight. Greenberg remains an important stockholder -- sufficiently important that any new CEO will have to make peace with him -- will have to "reach out," as the cliche goes.

Willumstad, according to reports, has already done so.

In a letter he wrote in May, Greenberg stated the reasons for his dissatisfaction thus: "The company's problems are more than financial and extend far beyond its subprime credit exposure or approach to capital management. Core businesses are also deteriorating. U.S. life operations are stagnant. The company has lost its leading and unique market positions in China and Japan. The life business in Asia had been a crown jewel, but now the company's position has eroded. In Taiwan, the company must now find up to an additional $1 billion to cover losses. To what extent are Taiwan losses due to regulatory changes, as has been suggested, and to what extent are they attributable to the failure to hedge certain non-Taiwanese dollar denominated investments?"

Not a bad summary.

Sullivan out at AIG

This weekend, the board of directors at AIG fired its CEO, Martin Sullivan, and replaced him with its chairman, Robert Willumstad.

This runs counter to the general trend in "good corporate governance" these days. The trend is to separate the two posts of chairman and CEO, on the theory (as it is often expressed) that the same person shouldn't be quarterback and head coach.

This particular team has just fired its quarterback and the head coach, with the consent of the other coaches, has just sent himself in to QB. We'll see how the team does.

Stockholders are probably happy to think that there is a strong hand at the helm, though (and yes, I'm aware of the abruptness of my switch to a nautical metaphor) because AIG has been caught in some pretty nasty seas.

On Friday, a story in the Wall Street Journal said that AIG is under investigation at both the SEC and the Department of Justice on the possibility that the financial products division may have intentionally overstated the value of contracts linked to subprime mortgages.

This comes in addition to the litigation by private plaintiffs I've discussed in earlier posts, and it comes at a time when the price of a share of AIG stock is near its 11-year nadir.

For the record, AIG is saying nice things about Mr. Sullivan while he is on his way out the door. Board member George Miles said, "On behalf of the board and the entire organization, I want to thank Martin Sullivan for his extraordinary dedication and service to AIG for over 35 years."

Bye bye.

Sunday, June 15, 2008

Three brief items

1. Biogen Idec Gets Some Support

Carl Icahn is waging a classic dissidents' campaign for three seats of the board of Biogen Idec, a biopharmaceutical concern.

Biogen is a Nasdaq-listed company HQed in Cambridge, Mass. Cambridge, moreover, is where the annual meeting will be held, this coming Thursday.

In recent days, the major proxy-advisory concerns have generally lined upin support of the incumbent board, though.

Riskmetrics: "The dissident has not met its burden of proving that board change is warranted at Biogen. Abesent a showing that the incumbent board has failed in some fashion, we find it difficult to support the removal of directors."

Glass Lewis: "In our opinion the current board and executives have created substantial value for shareholders and we believe that the Company has solid growth opportunities as a stand-alone entity."

2. Clumsy France Telecom ultimatum

Meanwhile overseas. On June 5, France Telecom rather brusquely informed a Swedish company, TeliaSonera, that they'd better commence "friendly" talks with regard to a takeover. Or else. The "or else what" part was left unspoken.

But the statement was sufficiently undiplomatic to create a backlash, and the Financial Times is reporting that there is a risk of "the type of nationalist backlash that scuppered Renault's attempts to buy Volvo in the 1990s. So France Telecom has now sensibly decided on a more softly-softly approach."

Softly-softly or otherwise, TeliaSonera is so far unswayed.

3. Who will feed the Clydesdales?

This is likely not the first place you've heard this, or the twentieth, but: a Brazilian-Belgian beer company, InBev, wants to buy Anheuser-Busch. It's offering US$46 billion [30 billion euros).

There are obvious economies-of-scale considerations in the brewing business which are said to have created the recent wave of consolidation. The larger brewing companies can cut the better deals for raw materials, and can economize on the distribution network as well. But I have to wonder if that fully explains recent developments.

Another random point: We always see some Busch family scion on the television commercials (when they aren't showing us their beautiful horses). But I wonder ... how much of the company does the family still own? I'll have to look into that in the days ahead.

At any rate, here some further discussion.

Wednesday, June 11, 2008

Mining frauds

I'm just thinking today, through a wayward stream of associations, of a couple of recent awe-inspiring mining frauds, both with a Canada connection.

Bre-X was the most spectacular mining swindle in history, bursting upon the world as it did during the 1990s bubble, and possessing before the furor died down the added drama of a fatal fall from a helicopter.

At one point, indeed, Bre-X was claiming the rights to 8% of the world's gold at a site in Busang, Indonesia. How much would you pay to own a share in a company with 8% of the planet's gold? That was the question they had investors asking themselves. And it was the wrong question. There was no gold at the site at all.

The moral of the story: ask the right questions!

Another story comes to mind today. CMKM Diamonds. As it happens, CMKM isn't a Canadian company, just as Bre-X was never an Indonesian company. CMKM is a US company, that over a four year period (2003-07) sold $200 million in stock to the public in the expectation that their capital would help exploit diamond wealth of Saskatchewan, Canada.

By the spring of 2007, CMKM was a penny stock company with, in essence, no assets and $558 in the cash drawer.

CMKM still exists, but it exists chiefly for the purpose of pursuing a lawsuit against its former insiders in the hope of acquiring some assets to distribute to those too trusting shareholders.

As to that fall from a helicopter I mentioned above. In May 1997, Michael de Guzman, a field geologist with Bre-X and someone who would have to have been in the thick of any salting of the rock cores, jumped to his death from a helicopter. Or maybe he fell. Or maybe he was pushed.

Or maybe he didn't die after all. A body was recovered, but never positively identified. In June 2005, one of his widows [there are four widows in all!] told reporters that he is still alive and living in Brazil, and had sent her a money order for $25,000.

The moral? who the heck knows!

Tuesday, June 10, 2008

TCI/CSX showdown. Themes

Continuing yesterday's entry about the Riskmetrics-sponsored webcast....

Michael Ward, the railroad's CEO, said early on in the company's presentation that "there's a growing recognition among public policymakers of the critical role of rail."

He seemed to mean a couple of things by that. First, I believe he wanted to wrap his cause in the mantle of homeland security. Imagine how terrible it would be if the US rail system fell into the hands of foreigners?

GI Joe and Tommy have been fighting together in the desert for some time now, so even given certain premises, most people find this a less than compelling danger when the damn furriners in question have their HQ in London.

But I think he meant something else, too. He meant that building up the rail system might be part of a national energy policy. They get more freight-transporting bang for the hydrocarbon buck than highway-travelling trucks. Letting TCI get seats on the board would threaten this because (in his view) TCI isn't interested in building up the railroad, but in deconstructing it for a quick buck.

Another speaker on the CSX side was Donna Alvarado, one of the incumbent directors. She took umbrage at TCI's contention that they're trying to shake up a lazy and entrenched board, that has let value-enhancing opportunities pass it by. Ms Alvarado said that, so the contrary, CSX is a model of enlightened corporate governance, "the board has opted out of anti-takeover statutes" for example, and its elections aren't staggered.

That was an interesting point, and frankly a better one than any Mr. Ward had made.

When TCI got its turn, they did in fact make the charge that Ms Alvarado had sought to pre-empt. Christopher Hohn, the fund's founder, said: "We see a really dramatic difference between companies that have strong boards and companies that have rubber-stamp boards," and that CSX is, alas, one of the latter.

Also, in reply to much of Mr. Ward's presentation, Mr. Hohn said: "If we were just looking to make a quick buck, we would have left CSX a long time ago."

Monday, June 9, 2008

CSX Update

I'm beginning this post while listening to music in my right ear.

I'm on hold as a teleconference is about to begin, sponsored by RiskMetrics. They've brought together representatives from both sides of the TCI/CSX dispute.

FT Alphaville, helping with the hype, has said that this will be a first, "a pixelated and very public showdown between CSX, a container and logistics group, and its activist hedge fund tormentors, TCI and 3G Capital."

On the dais for the railroad, its chairman Michael Ward, its CFO Oscar Munoz, and others.

For the hedge funds: Snehal Amin, founding partner at TCI, and Alexandre Behring, Managing Director at 3G, etc.

Christopher Young will moderate (or referee if it gets good!). He's the head of mergers and acquisitions research at RiskMetrics.

I'm not going to try live blogging. I'll let you know my impressions in tomorrow's entry here, though.

Sunday, June 8, 2008

Insituform Technologies

Now THAT is a cleverly named company. Insituform.

At first blush, it seems almost a random collection of syllables, like the "speaking in tongues" of Pentacostals.

A closer inspection might break it down into "in situ form," where the first two words are the Latin expression meaning "at the place."

The name, then, is a perfectly apt one for what Insituform does. It repairs pipes, such as potable water delivery pipes. It does so of course while the pipes are still in place, and it uses a process it patented in 1977, the (trenchless) cured-in-place-pipe process.

Here's how it works.

The patent for the CIPP process, by the way, expired in 1994.

Anyway, the company lives on despite the passage of the originating IP into the public doman. Insituform held its 2008 annual meeting on May 19, and it announced the results on May 27. One of the five nominees of a dissident slate has been elected to its board.

The lucky newcomer is Nickolas W. Vande Steeg. Mr. Vande Steeg has an appropriate resume: he received a bachelors degree in Industrial Engineering from the University of California, Irvine in 1968. He went back to school in the 1980s to study business, getting an M.B.A. from Pepperdine University.

The company has had a tough couple of years -- Mr. Vande Steeg and the other nominees of the dissident slate (including one former Senator, Alfonse D'Amato) were concerned that its stock price was headed ... well ... down the pipes.

Vande Steeg alone likely won't be able to make much of a dent in company management. But both sides are making all the appropriate kiss-and-make-up noises.

I've brought all this up because Insituform seems to me to be in a fascinating business. Fresh water is the new petroleum. And though when we think of making a profit off of the human physiological demand for fresh water we probably think first of the company's that supply the stuff, second of company's in filtration, the pipe maintenance and repair niche seems in some ways a smarter play.

And personally, if I were a shareholder, I'd be rather happy that D'Amato isn't on the board.

Finally, consider this a shout-out to my homeboyz at HedgeWorld. We've got a new company blog which goes by the name "HedgeWorld's Alternative Reality."

Check it out.

Wednesday, June 4, 2008

David Einhorn

I'd like to congratulate David Einhorn on writing a fascinating book. I've been reading through it quite quickly.

The book is "Fooling Some of the People All of the Time: A Long Short Story" published this year by John Wiley & Sons.

The central narrative thread of the book is Einhorn's effort to make money by short-selling the stock of Allied Capital. The subtitle, as you'll notice, is a subtle pun on the terms "long" and "short" as used in finance versus the same terms as used in publishing.

This book is 356 pages long even before the end matter, so it surely isn't a "short story" as publishers use the phrase. It is of course a story about trying to short stock.

The main narrative thread of "FSOTPAOTT" concerns Allied, and its dubious or fraudulent accounting. There are subplots, though, and there are preliminary materials with which Einhorn has to deal, such as the formation of his short-selling hedge fund, Greenlight Capital.

There's also this neat bit about Lanny Davis. Allied brought in Davis as an advisor on pubklic relations when Einhorn began going public, and going to the authorities, with his analyses of their books. Hiring Davis sounds a bit like bringing in the junkyard dog.

Davis, as former White House counsel to President Clinton, was in charge of the successful defense of the impeachment trial in the Senate. Some of his subsequent causes haven't been so successful, though. His private sector p-r clients have included at least three blatantly fraudulent operations: Seitel, a seismic data licensing company whose CEO received a five year prison sentence in 2002 (Lanny's spinning couldn't prevent that); Lernout & Hauspie, a speech-recognition technology company that unravelled as its multi-billion dollar fraud became public; and HealthSouth, an Alabama based health care service provider whose former CEO, Richard Scrushy, was convicted of bribery charges in June 2006.

Davis had better luck protecting Allied and its bosses from the fate of Messr Scrushy.

And he has in recent months repeatedly appeared on television as a surrogate for Presidential candidate Hillary Clinton. That gig appears to be at an end. I wonder who he'll work for next?

Either way, Einhorn has written a fascinating book.

Tuesday, June 3, 2008

Sand in the Gears

The Chancery Court in Delaware unsealed a fascinating complaint this week, in litigation that might end up changing the rules for acquirers and their targets alike.

The complaint is one that was filed in January by two Detroit-based pension funds with an equity interest in Yahoo. It alleges that in October of last year, Yahoo's board and its chief executive, Jerry Yang, already expected a Microsoft bid to acquire the company and discussed ways of thwarting same.

That isn't suspect, although any board discussing such a matter should be sure that the minutes contain plentiful references to everyone's desire to maximize shareholder value.

What the pension funds objected to was what they actually adopted in that line, a generous and highly unusual severance plan designed to make acquisition of the company (which would of course bring with it the inheritance of the costs of the severance plan) prohibitively costly.

The complaint calls this "throwing sand in the gears of Microsoft's plans for a smooth integration," thereby breaching fiduciary duties.

On another Yahoo-related front...the Wall Street Journal's personal-technology columnist, Walt Mossberg, interviewed Jerry Yang, and the company president Sue Decker, at the "All Things Digital" conference last week.

SOme of the transcript sounds like a tutorial, in which Mossberg is seeking to instruct the two Yahoo honchos in how lucky they were, because Microsoft could have made things much tougher for them, but didn't ... backed off quickly and started talking about joint ventures rather than an acquisition.

This raises the old chicken-egg question of entrepreneurship. Does fortune favor the bold? Or do observers simply label as bold those whom fortune has favored?

Monday, June 2, 2008

How to draft a resolution

Suppose you, dear reader, are an activist.

You believe something wrong is underway, and want to use the mechanisms of capitalism to help make it right. You're concerned, for example, that a certain mining company, operating in a tropical region, may expand its operations in a way that would run roughshod over the interests of the indigenous inhabitants.

You might want to introduce a resolution at the next shareholders' meeting asking that the company postpone that expansion "until a just, accepted, peaceful and permanent resolution of local indigenous concerns can be reached in consensus-based process with all stakeholders."

Then you'll be happy to know that, at least if you word your resolution with some care, you can require the company to include it in the proxy materials sent to all shareholders, under existing Securities and Exchange Commission regulations.

I mention this because there is a fascinating discussion of this point on the Friends of the Earth website here.

Through that page and the others to which it links, FoE examine both resolutions that have been accepted onto the proxy materials (sometimes over management objections) and those that the management have successfully managed to exclude. A neat dos-and-don'ts primer.

Sunday, June 1, 2008

Insider Trading: A speculation

Paul Rose, an assistant professor of law at Moritz College of Law, Ohio State University, has circulated a draft of a paper, it seems, will be published later this year by the North Carolina Law Review, simply entitled “Sovereigns as Shareholders.”

As that title implies, the article deals with "sovereign wealth funds" (SWFs) and their investments, especially their equity investments, and discusses a variety of legal puzzles that may arise.

One scenario briefly addressed in that article is that of a peculiar sort of insider trading. An SWF, as the arm of sovereign nation Z, could learn that another arm of said sovereign is about to bring an enforcement action against, or impose a costly regulation to the disadvantage of, company X. The SWF may then sell (or short) its company X stock, and/or increase its investment in the equity of one of X’s competitors.

My own take, frankly, is that this is the sort of speculation (Mr. Rose doesn’t adduce any example of such an event in the fifty-plus years during which SWFs have operated) that helps stoke irrationality on the subject.

But, hey, let's speculate. Assume away my usual caveats about why 'insider trading' itself is considered problematic. Would it be possible to keep such maneuvers a secret? It seems to me that what Z and its fund were doing in such a case would be very visible, and would work against the fund’s long-term return as diversified investors, while also undermining Z as a desirable business climate.

These are probably two good reasons why it hasn't happened.

Go, Buckeyes! Go, Tarheels!

Of course, ideally I'd rather not have sovereigns investing in US equity. I'd rather all the equity of private-sector entities be truly private in character. For that matter, if ideally I'd rather not have sovereigns. Period.

But the world does have sovereigns, and one of them, the US, owes a heck of a lot of money to many of the others. Those others are naturally going to re-invest that money somehow, and it is in general a good thing that they invest much of it back in the US, in forms which subordinate themselves to market principles. This isn't a situation that should cause hysteria.