Wednesday, October 29, 2008

Update on the Pershing Square story

Yes, as he promised, Pershing Square's principal Bill Ackman did explain his plan to improve the value of the equity of Target Corp. today.

He said that the company should spin off a separate entity that will own the land on which its stores are built, then lease the land from its corporate offspring for a period of 75 years.

Target responded non-committally. It is reviewing the plan, but it has "serious concerns on a number of important issues."

It sounds like sleight-of-hand to me, but I'll give myself three days to mull it over. Catch you folks here Sunday.

Three brief items

1. More on Porsche, VW, etc.

A report in today's Wall Street Journal says that several hedge funds have taken a beating as a result of their speculation in VW shares, and the spike in VW's share price I discussed in yesterday's entry.

"Those affected by the moves include Greenlight Capital, SAC Capital, Glenview Capital, Marshall Wace, Tiger Asia, Perry Capital, and Highside Capital," the p. C1 story said.

There have been rumors of effects going beyond that list, and beyond the hedge fund world.

2. Ackman has a plan for Target

Pershing Square Capital Management, which owns nearly 10% of the giant retailer Target, said it has a plan for a transaction that will boost Target's value. It will present its plan today, Wednesday.

Bill Ackman is the principal of Pershing Square, a hedge fund that has been involved in some memorable corporate in-fighting over the years. To his credit, Ackman was arguing in a very public way, before it became a commonsensical observation, that credit ratings agencies and banks were co-operating to prop up bond insurers such as MBIA so that the banks wouldn't have to write down their exposure to such insurers.

Anyway, Pershing's latest statement on Target is as follows: "Pershing Square believes that the insights gained by sharing the potential transaction in a public forum will benefit Target and all of its stakeholders."

One clue to what he has in mind: Mr. Ackman recently expressed interest in a potential derivatives transaction that he said would let Target effectively retire more of its own shares. That provides a nice segway to my final item of the morning.

3. Canada wants to restrict bank share buybacks

The most important fnancial regulator in Canada at the federal level, the Superintendent of Financial Institutions, put out an advisory note Monday that banks shouldn't be buying back their own shares. That runs counter to the goal of strengthening their balance sheets.

Canada's banks are in general in better shape than those in the US or in Europe, where as one would expect the temptation to buyback/retire shares just isn't a big problem right now. Canada's financial institutions generally have a strong retailing base, and their mortgage-lending practices have remained conservative. So I'm a bit baffled by the SFI's concern.

Apparently, though, he thinks their practices may not be quite conservative enough. The SFI's note said: "The current environment calls for increased conservatism in capital management."

Tuesday, October 28, 2008

Porsche and VW

VW shares shot up on the Deutsche Börse over the last two days in what looks like a classic "short squeeze." I'll take this as an opportunity to go into full-pedantry mode and explain what a short squeeze is. Those of you who already know, or who neither know nor care to learn, are of course free to click yourselves elsewhere at this point!

The price of a share of equity in Europe's largest auto manufacturer increased by 147% Monday, and is up again, though somewhat less dramatically, today.

Here's a closely-related fact: as of last Thursday, 12.9% of VW's shares were on loan to short sellers.

A short squeeze in an uncomfortable event in the life of a short seller. Specifically, it is what happens when a substantial share of a company's stock is out on loan for purposes of a short play, and the stock's price unexpectedly starts to rise. The short sellers need to cover, and they all may decide they need to cover at the same time, because they now expect the stock price to continue rising and they have to cut their losses. So they head for the same exit door at the same time, shouting "buy, buy, buy!"

This of course makes the price of passage through that exit increasingly expensive.

That, then, is what is going on with VW. Over the weekend, Porsche unexpectedly disclosed that through the use of derivatives it has recently accumulated a 74.1% stake in VW, up from 34%. The state of lower Saxony owns 20.1% This means that there is a "free float" of only 5.8% of VW's capitalization. It also means, as a matter of arithmetical necessity, that some of those shares on loan must actually be the property of Porsche or Saxony, though the short sellers presumably obtained them through the services of a prime broker.

It didn't take long for short sellers to do the math and decide that the exit door was shockingly narrow.

VW is one of the shares on which the Teutonic DJIA, the Dax index, is built. So Dax has shot up along with VW. This morning the Financial Times quotes one analyst thus: "This is a special situation and I think it will go on as long as Deutsche Börse doesn't make a decision regarding these extreme movements in VW shares."

Monday, October 27, 2008

More BCE Excitement

Common shareholders of BCE Inc., the holding company of telecomm giant Bell Canada, have filed a class action lawsuit demanding the payment of a dividend they had expected this summer.

Black-letter law is that no one can claim a right to a dividend. If an investor wants regular payments as a matter of right, the instrument he wants isn't a stock, it's a bond. Dividend policy is a matter within the business judgment, i.e. the nearly-unlimited discretion, of the board of directors.

The real point of the lawsuit, it would seem, is to derail the underlying deal. What the owners of equity do get, instead of a guarantee of payments, is a right to have a say in the major corporate decisions. That right is the basis for the existence of this blog, after all. I'm not entirely clear on how, in the plaintiffs' view, they've been deprived of that right here, but it seems that "pay us the dividends" is more a measure of damages in their eyes than the alleged legal injury.

The privatization of BCE will be (if the teachers'-pension folk behind it manage to pull it off) the largest leveraged buy-out ever. The deal was signed more than a year ago, though the closing has had to be delayed because the prevailing buisness climate has hardly been conducive to such wheeling-dealing.

A bond rating agency has estimated that if the deal does go through this December as now scheduled, BCE's consolidated debt will be C$42 billion, which is more than twice last year's revenue.

The deal has already generated some fascinating litigation. If you follow that link, you'll get to my earlier discussion of a challenge to this same transaction by bondholders.

So it may yet generate more.

Sunday, October 26, 2008

Chuck Grassley v. Linda Thomsen

Senator Chuck Grassley now alleges that he has information (from an "anonymous but specific" informant) that Linda Thomsen, the director of enforcement at the Securities and Exchange Commission, has given information to the general counsel of JP Morgan Chase, concerning the state of various SEC investigations into Bear Stearns.

You'll remember that JPM took over what was left of Bear in a shotgun wedding arranged by the federal government in March.

Apparently it was while that transaction was pending that the executives at JP Morgan became (understandably!) very interested in the regulatory/compliance questions concerning this particular pig in a poke. The general counsel of JP Morgan Chase spoke to Ms Thomsen about the matter.

Ms Thomsen (again, according to Sen. Grassley's source, not according to me!) made representations about these investigations without talking to the staff doing the investigation.

Such conduct, worries Grassley, "would reinforce the appearance that Enforcement decisions, and disclosures of information about them, are sometimes based not on the merits, but rather on access to senior officials by influential representatives of power brokers on Wall Street."

Grassley put all of this in a letter he wrote to SEC chairman Christopher Cox dated October 21 -- Tuesday.

If the charges are right, if these phone conversations did take place, what harm might have been done by Ms Thomsen's indiscretion?

Grassley's answer is that if Morgan received "inside information" in that way,m it might have been able to put together a low-ball bid to Bear and the US government.

What this seems to mean is that there may have been other potential bidders for Bear out there who were scared off by the possibility of enforcement action. But JPMorgan wasn't scared off. Presumably, its general counsel had heard something re-assuring from Ms Thomsen.

Intriguing theory. We'll have to see how this plays out.

Wednesday, October 22, 2008

A book about AIG

For those who have an interest in entrepreneurship, or the history of the insurance industry, or just the recent business/regulatory history of the United States, I'd like to recommend a book, FALLEN GIANT: The Amazing Story of Hank Greenberg and the History of AIG (2006).

The book is the work of Ron Shelp "with Al Ehrbar." As usual that formulation means that Shelp is the insider guy, but Ehrbar is a professional writer who helped Shelp put this into shape for publication.

Shelp was a trouble-shooter and righthand man for Greenberg in the 1970s and 1980s. The book isn't a corporate PR department style puff piece, though. I don't think a puff piece would include this anecdote, about the kitchen for the company headquarter's dining room.

"At one point [circa 1981] there was an equal opportunity suit threatened by an Irish waitress against AIG because the dining room had exclusively Chinese waiters. To make matters worse, allegedly the Chinese weren't all legal immigrants. So a group of Irish waitresses were hired. They all quit within a relatively short time span because the Chinese made their lives absolutely miserable. I don't know what they did back in the kitchen, but it worked. Today, there are still all Chinese waiters but a few Chinese waitresses as well."

Balancing the Chinese with the Irish? It sounds like the recipe for a transcontinental railroad, not a personnel policy for a major corporation in the 1980s.

Just one more anecdote, then I'll leave you to discover the rest of this book for yourself. Some time in the early 1970s, AIG hired Tommy Corcoran as a lobbyist.

In 1975, Hugh Carey became Governor of New York, and a fellow named Matt Nimitz ran Carey's transition operation. Matt's office while he was doing this was in NYC, not Albany.

Anyway, Corcoran called Nimitz and said, "I am calling on behalf of AIG and we are very interested in talking to you and the Governor-elect about who the next State Insurance Commissioner will be."

Nimitz replied that he was busy.

Corcoran: "No problem, take this telephone number down and call me when you are free. It is a pay phone in Times Square and I will stay here until I hear from you!"

Corcoran was an old man -- and something of a legend within the Democratic Party. He had been part of the brains trust of FDR, and later of LBJ as well. A Carey appointee wasn't going to leave him waiting at a phone booth in Times Square. [Of course, this wouldn't work today, everybody has a cell and everybody knows that everybody has a cell.]

Nimitz made time for him. Later, Nimitz told Shelp, "I actually doubt now that he really was at a Times Square phone booth," but the ploy got Corcoran into Nimitz' office, and "in fact we chose an excellent insurance commissioner whom Hank and others felt comfortable with."

Tuesday, October 21, 2008

Shake-up at Deutsche Borse

Kurt Viermetz has resigned as chairman of the board of Deutsche Boerse AG, effective December 8.

Deutsche Borse owns the Frankfurt stock exchange, Clearstream (a settlement operation), Eurex (the dominant force in European equity derivatives), and Eurex Clearing.

Viermetz has been its chairman for just three years, and although it isn't clear just what happened behind the scenes leading to his departure, the folks who put him there seem to have lost faith in him.

The hedge funds Atticus Capital and TCI were instrumental in Viermetz' rise to the chairmanship three years ago. The best guess at this point is that they expected him to initiate a buyback of the company's equity by this point. He has resisted doing so, and now he's out.

Atticus reacted quickly to the news: "Atticus is pleased by Mr. Viermetz's decision to resign from the supervisory board of Deutsche Boerse AG, which we believe is in the best interests of the company and its shareholders," it said in a statement this weekend. "We wish to recognize and thank Mr. Viermetz for his years of service on the supervisory board."

To those of us who don't happen to own DB stock, the issue of whether the company is to initiate a buyback may seem a rather trivial one. An operational issue is also under discussion there, though: whether the company should spin off some of its units.

From the point of view of the stock or derivatives investing publics, is it better to deal through an exchange that is separate from the clearing/settlement operation, or with a single integrated company that performs both functions? Should we be hoping that whatever shake-up underway at DB results in a break-up?

Monday, October 20, 2008

A 'beer war' after all?

InBev, the Brussels based company that has entered into an agreement to buy Anheuser-Busch, faces a rebellion at last -- coming from a perhaps-unexpected quarter, from Grupo Modelo and allies.

InBev and AB agreed on the terms of their combination in July. Shareholders of the target company are to get a sizeable premium over the price of their stock before the bid, and Budweiser (not Stella Artois) will be the flagship brand of the combined company.

The key fact for understanding the new development is this: AB owns half of the equity in a Mexican beer company, Grupo Modelo, best known for Corona.

GM has initiated an arbitration action against AB, claiming that the latter was obligated under a 1993 agreement to consult it before concluding a deal with InBev. The arbitration action has instigated rumors that what GM really wants is a chance to buy back that 50% share of its equity. But a spokeswoman for the Mexican company denied this to a reporter for Reuters Friday.

InBev has a statement out expressing confidence "that the claims made by Modelo [and related parties] are entirely without merit."

Anyway, if Grupo isn't seeking the opportunity to buy back AB's interest: what does it want? To throw a monkey wrench in the works of the still-unclosed deal entirely? To get a greenmail pay-out for the shareholders who own the other half of its equity? What?

The price of Grupo shares was flat Friday on the Mexican stock exchange. The price of AB shares rose slightly.

Sunday, October 19, 2008

I didn't see it coming

In a sudden fit of humility, suitable perhaps for a Sunday morning, I've decided to remind you of a prediction I made a month ago that has proven false.

Crude oil prices.

I noted the ongoing fall of crude oil prices. They had been at around $150 at their mid-summer peak, but by last month had dipped into the upper $90s.

With my customary brilliance, I said, this has "likely gone as far as it is going to go."

Oops. It has lost another $30 per barrel. And, even better, the fall has shown up in the price of gasoline at the pumps. I'm delighted to have been wrong.

The effective halving of the price of crude might be the only thing keeping our economy going at all at the moment, given the credit squeeze and consequent Wall Street meltdown.

Wednesday, October 15, 2008

Orient Express and its shareholders

I reported last week in this place that two hedge fund shareholders in Orient-Express Hotels Ltd. had offered a proposal to dismantle the dual-class shareholding system in play there.

OEH held its shareholder meeting Friday. Based on the preliminary results reported by the independent inspector, 70% of shareholders supported that proposal.

But of course the vote is of psychological rather than managerial experience. A scheme devised to effectively disenfranchise class A shareholders can't be effectively dismantled by the vote of the class A shareholders!

In a statement yesterday, the principals of the two hedge funds demanded a meeting with the OEH board. They also said: "We continue to believe that the Company’s circular ownership and voting structure – in which an entrenched Board controls 80% of the shareholder vote and remains accountable only to itself – is unlawful."

The company's response is that the board and its management "consider the matter addressed by the Special General Meeting to be closed, and [they] will continue to focus on delivering shareholder returns and managing the business in the best interests of all [their] shareholders."

Nothing very revealing has happened in terms of the stock chart in the two business days since the meeting. The price of a share of OEH gained some ground Monday and lost that ground again Tuesday.

I wouldn't want to get on a goo-goo high horse here, and I've offered the usual caveats in some of my earlier posts. But OEH's structure does seem uniquely unresponsive, and I wonder how long the market will support that. Presumably, the recourse of class A shareholders unhappy with the situation is to sell. If OEH wants to support its stock price, it should concern itself with the archaic nature of this arrangement.

Tuesday, October 14, 2008

Overstock and Gradient: Friends at Last Inc., the discount retailer based in Salt Lake City, Utah, has announced the settlement of its lawsuit against Gradient Analytics, of Scottsdale Arizona.

Fans may recall that Gradient is the independent stock analyst formerly known as Camelback Research Alliance Inc. Overstock's complaint, brought in a state court in California, was that in 2005, Camelback conspired with hedge fund Rocker Partners to issue falsely negative reports about Overstock in order to benefit Rocker's short positions.

The settlement comes after an unsuccessful effort on Gradient's part to persuade California's courts to set aside the complaint on first amendment and/or SLAPP grounds. [SLAPP is an acronym for "strategic lawsuits against public participation," and a California law aimed at discouraging the practice of stifling public debate by such means.]

According to the statute: "A cause of action against a person arising from any act of that person in furtherance of the person's right of petition or free speech under the United States or California Constitution in connection with a public issue shall be subject to a special motion to strike, unless the court determines that the plaintiff has established that there is a probability that the plaintiff will prevail on the claim."

The word "probability" in that statute appears to mean something different for this court than it means to, say, a casino manager. The court said it isn't making a decision about which side has the better hand, but that for purposes of deciding the motion, it accepts as true all evidence favorable to the plaintiff.

Both the appellate court and the state supreme court have said that Overstock's lawsuit isn't a SLAPP, Gradient responded by filing a cross-complaint this spring, and the parties had been preparing to try the matter on the merits, with a trial date set for this coming April.

Now there's been a sudden outbreak of amity. The terms of the settlement are confidential, though Gradient put out a statement Monday, Christopher Columbus notwithstanding, saying that Overstock's accounting policies "did in fact conform with generally accepted accounting principles (GAAP) and regrets any prior statements to the contrary." Rocker Partners [or, strictly, its progeny, Copper River], remains a party.

The chairman and CEO of Overstock, Patrick Byrne, said in his company's statement: "I wish Gradient Analytics the best in their future endeavors. will now focus on the remaining defendants, Copper River, David Rocker, and Mark Cohodes."

Sports fans can take cheer in that last bit. There will still be a trial. The focus thereof has narrowed a bit.

Monday, October 13, 2008

What a cool name for a hedge fund!

Noront Resources Ltd., a Toronto-based minerals-exploration company, has a shareholders meeting scheduled for October 28.

Its incumbent board faces a challenge led by a hedge fund named Rousseau Asset Management Ltd., which owns or controls approximately 9.2% of Noront's common shares.

I know very little about the underlying dispute. But I was intrigued by the name. Rousseau Asset Management? Do they often use the acronym "RAM".

I'm reminded of the song "High Hopes." Maybe they should wage a proxy fight against some company that has just finished construction of a million kilowatt dam.

Aside from the acronym: Is "Rousseau" the family name of the founder? Or was he paying a tribute to the famous painter?.

Or perhaps, less likely I suppose, it was a tribute to the philosopher of the state of nature and the debilitating consequences of civil society.

More prosaically, there's an Henri Paul Rousseau who was the chairman and chief executive of Caisse de dépôt et placement du Quebec, from 2002 until earlier this year. Does RAM have any connection to him or his kinfolk?

If anyone in the wide readership of Proxy Partisans knows anyone connected with RAM, let them know I'm curious. About the name, as about the specific strategy and performance record. [I don't see any "Rousseau" in the TASS database.] Curiosity may have killed a cat or two but I doubt its done any harm to a RAM of late.

Sunday, October 12, 2008

GM news

I found the stock price drop-off on Thursday surprising. If you'll read my commentary Wednesday you'll see why. I had thought the fall-off earlier in the week was the result of a one-time event: pressure on a lot of hedge funds to liquidate some of their equity holdings in order to satisfy end-of-quarter redemption demands from dissatisfied investors.

I had hoped/expected some levelling off by Thursday. Instead, the DOw fell another 600-plus points.

Allow me then to make the point that this proves how I don't know nuttin'. So don' take this blog (or any other blog!) as a dispensary of investment advice. Please.

My best guess about Thursday is that the market was spooked chiefly by an S&P announcement in the late afternoon Wednesday. Standard & Poor's put General Motors, a US corporate icon if ever there was one, on "credit watch negative."

By the end of the week, Barclay's had lowered its loss-per-share estimate for GM for 2008. It had previously predicted that when this year's books are done, GM would lose $15.68 per share. Now it's guesstimating $15.87.

How has GM responded? Officially, thus: "Clearly we face unprecedented challenges related to uncertainty in the financial markets globally and weakening economic fundamentals in many key markets. But bankruptcy protection is not an option GM is considering. Bankruptcy would not be in the interests of our employees, stockholders, suppliers or customers."

Unofficially, GM is said to be in talks with Chrysler -- or rather with its parent company -- about a merger. How will that help? Won't that simply absorb badly-needed cash (or strain the credit that S&P just put on watch)? Apparently, the idea is that GM will pay for Chrysler with its remaining interest in its financing arm, GMAC. General Motors spun off GMAC two years ago, selling a bare majority of the equity, retaining 49%. So now it will give Cerberus that 49% and ger Chrysler.

Why? To increase its market share, presumably, though that hardly amounts to a cure to its ills. Chrysler suffers from the same ills, which is why it isn't part of Daimler-Chrysler any more.

The reported talks leave me wondering: why has it still occurred to no one that the most logical business combination of the world would be a takeover of the auto industry by the petroleum companies?

I've raised this before, hoping to get some explanations of why I'm wrong. Still nothing. But it seems to me that the logical model here is that of the shaving-blade industry. Gillette sells the razors at a loss. It can afford to do so, because the economic significance of a razor is to lock a consumer into buying a stream of blades that fit it, and the profit from those blades more than compensates the loss on the razor.

If Exxon-Mobil and its peers bought up the US auto industry, they could afford to sell automobiles for a loss, for the same reason. The economic significance of a car is to lock a consumer into the purchase of fuel.

So get to work, deal makers!

Wednesday, October 8, 2008


What was the selling Tuesday on Wall Street all about?

On Monday, the market spent most of the day going down, but had a significant uptick in the final minutes.

But then yesterday ... boom. The Dow, the S&P, and Nasdaq all declined by more than 5% of their total value which, in the case of the Dow, amounted to more than 500 points.

As usual, the pundits have their theories:

1. The big one-day decline was a response to an announcement from Bank of America that it was cutting its dividend, or
2. It was a reaction to a rumor that MUFG is pulling out of a deal to acquire a large chunk of Morgan Stanley, or
3. Bernanke scared the traders with his mid-day statement, or
4. all of the above and other stuff.

None of that looks persuasive to me. One can hypothesize that one of those butterflies caused this hurricane, but I think there's a much larger wing than any of those flapping about.

Call this the hedge fund capitulation. Hedge funds have lock-up periods, sometimes for months at a time. As the term suggests, hedge funds are by design illiquid. An investor, having put his money in on Monday, can't simply say, "I've changed my mine, I want to liquidate my interest" on Wednesday.

Well, actually, he can say it on Wednesday if he wants, but he can't expect the managers will act on that demand any time soon thereafter. They're entitled to wait until the lock-up period has expired, i.e. that the "redemption" date has arrived.

This can have a systemic impact on the markets because it is natural for hedge fund managers and investors to agree on the end of a financial quarter as the redemption date. Much of the hedge fund industry was committed to allowing hedge fund withdrawals on October 1, AND much of the industry had just had a lousy third quarter, making it very likely that they'd receive demands by September 30.

Those hedge funds that didn't have enough cash hanging around in the office furniture to meet the redemption demands they've just received have taken to selling shares of stock to obtain the liquidity needed to pay off these exiting investors. Hence the downward pressure we've seen of late.

I call this the hedge fund capitulation , because the italicized term is used in finance-world jargon to mean a particular sort of crash -- one with a valuable cleansing effect. It means the final shuddering sell-off after which everybody who can be scared away has been scared away. All the selling likely to be done any time soon will have been done, and a floor established.

October 1987 saw a capitulation. The Dow lost 20% of its value in a single day. Within 1.5 years, it had returned to the pre-crash level.

We didn't have 20% at one clump this time, but the market has lost almost that in about two months. But as August of this year began, the Dow was at 11,500. It is now at 9,447, which is about 18%. Let's hope that's enough, and that with the final kicking-in of this hedge fund liquidation component, capitulation has been accomplished.

Tuesday, October 7, 2008

The Orient Express

Yes, the hotel management company, Orient-Express Hotels Ltd., is the company that operates the famous tourist train, the Venice Simplon Orient Express.

More germane to my concerns in this blog, though, the company has an annual meeting scheduled for Friday, Oct. 10.

Two hedge fund shareholders, DE Shaw and CR Intrinsic Investors, have offered a proposal that would dismantle the dual-class structure of the company.

RiskMetrics, known until recently as ISS, has supported that proposal. Its report on this particular dispute reads in relevant part: "Irrespective of whether the current structure would be deemed legal or not, the proponents have made a strong case with regards to how the elimination of Class B shares would benefit the company in terms of good governance, which may in turn have a positive effect on the firm's value. The company, on the other hand, has not sufficiently justified how the current share structure benefits Class A shareholders."

Glass Lewis, on the other hand, supports management. Its report: "We suspect that most shareholders both understand and accept the nature and extent of Orient-Express Holdings 1 Ltd's control over the Company and the composition of its Board, particularly since this structure has been in place for a considerable period of time."

The company trades on the NYSE with the ticker symbol OEH. Its value is now at only one-third what it was a year ago.

Yes, everybody has had a bad year. But not that bad. The Dow Jones Industrial Average, for example, is at about 75% of where it was a year ago.

Yet the tourist industry is notoriously fickle, since it represents the first item many families cut when they start worrying about jobs, security, etc.

The question for shareholders asked to choose sides is: does the corporate governance issue that the activists have raised spill into performance, and thus into stock price? If not, why should I care about the abstract rightness of a dual stock structure?

Monday, October 6, 2008

Cleveland-Cliffs Inc.

Cleveland-Cliffs, the Ohio-based operator of iron ore mines, announced Friday that its shareholders have voted decisively against a proposal by hedge fund Harbinger Capital -- a proposal that might have allowed Harbinger to block Cleveland-Cliffs' planned acquisitionof Alpha Natural Resources.

Harbinger requested approval from the other shareholders to increase its stake in the company from 15.57% to 33%. Ohio law requires such approval when one party passes the 20% threshold.

In a statement Friday, Cliffs' chairman Joseph Carrabba said that he was pleased that the non-Harbinger shareholders "voted to retain their right to provide meaningful input on the future strategic decisions of the Company."

The management victory is a time to reflect on a point sometimes neglected in popularizing accounts of the US based M&A world. It isn't all Delaware. Delaware obviously is of great importance, but there are major corporations that have chosen to charter themselves in other states, due in large part to the differences in the pertinent laws.

Ohio's statute in particular -- aimed overtly at protecting Ohio-based companies from unfriendly takeover -- made news back in 2003, when Northrop Grumman managed to overcome such obstacles and acquire the local company TRW. Ohio's response? -- to raise to bar again, by adding an anti-arb provision.

I would imagine that Ohio's statutes have been challenged in federal court at some point on the theory that they burden interstate commerce, thereby violating the "dormant" exercise of Congress' constitutional power in that area.

Commerce in the sense of the "dormant commerce clause doctrine" has generally meant something more tangible -- the act of moving objects into one state from another for sale there. But what about the handicapping of out-of-state investors in the way Ohio seems to have in mind? My suspicion (unconfirmed by any actual research into the question) is that challenges have been launched on this point, and they have failed.

If any of my alert readers know of litigation on this constitutional point, I'd be happy to hear of it. Thanks.

Sunday, October 5, 2008

Shorting Financial Stocks: Back in Town

In the middle of September, the SEC issued an emergency order, originally designed only to last two weeks, that banned all short-selling in the stock of financial services companies.

All short selling. This wasn't an order aimed at the "abuse" of short selling in one way or another. It prohibited the practice as a whole.

Two weeks later, the SEC extended that order until October 17 -- the end of the full 30 day period allowed for its "emergency" decrees under statute.

Fortunately (for those of us who think the ban was a stupid idea in the first place) the extension contained something of a loophole. The ban was re-jiggered to end at the earlier of two events: the expiration of the 30 days, or the passage of three business days from enactment of the Wall Street bail-out bill.

That bill -- another really stupid idea, but let that pass for now -- became law with the President's signature on Friday. Thus, the brief backbencher's revolt that had broken out Monday proved a cheering but brief incident.

Anyway, with the bail-out bill signed, the emergency order will expire Wednesday. Authentic price discovery is back. A small silver lining to the cloud of dumb political and bad financial news in recent days and weeks.

Wednesday, October 1, 2008

Three brief items

1. The credit crunch is having a predictable impact on merger and acquisition activity.

Still, a deal is a deal. Parties ought to be deterred from simply walking away when performance of their agreed-upon obligations has become onerous.

Vice Chancellor Stephen Lamb of the Delaware Chancery Court has refused to let Hexion Specialty Chemicals abandon its $6.5 billion buyout of Huntsman Corp.

Lamb's ruling came down Monday. "We are reviewing the decision and our options," said Hexion in a statement.

2. Ciena Capital has sought the protection of the bankruptcy courts. Ciena, a real estate lender, is 95% owned by Allied Capital, the bête noire of famed short seller David Einhorn.

Indeed, Einhorn wrote a book last year chiefly devoted to venting his frustrations at short selling Allied. He had begun making a public case for short selling, on the basus of the illiquidity of its portfolio, in the spring of 2002. Here's a link to an informative review of that book subscription required but free.

Short selling is all about timing. If you take a short position, you're betting not just that the stock will fall sometime, but that it will fall within the framework needed to make that position pay off. Einhorn's position in Allied over the period discussed inhis book was no diaster, but it proved no bonanza either.

No matter how badly the bankruptcy of Ciena may hurt Allied, then, it comes rather too late to vindicate views asserted in 2002. Though, let it be noted, Allied Capital stocks fell 14% yesterday, as general market indexes were rising.

3. Maurice Greenberg. A few days ago I would have saids that "Hank" Greenberg had given up on playing a continuing role at his old company, AIG.

He had filed a statement on September 25, after all, to the effect that he and entities under his control are selling 40 million shares of AIG stock. They took a big loss in doing so, too.

But AIG is being effectively nationalized, and its new Washingtonian masters want it to sell off assets.

This has created an opening for Greenberg to play a different sort of role. No longer as boss, no longer as quite so large a shareholder. But now he shows up as ... willing buyer.

Meanwhile the revolving door in from of the CEO office at AIG continues to twril. Greenberg sent his letter asking to be allowed to bid on the assets to ... Edward Libby. Who has been CEO for all of two weeks.