Wednesday, December 30, 2009

Debt Plan for Aiful

Aiful is the fourth-largest consumer-finance firm in Japan, and it has been in trouble of late, not only as a result of the general global economic downturn, but because Japan has been tightening the regulations concerning consumer finance.

It now appears though that Aiful has some good news to celebrate this holiday season. It will not have to liquidate, because its own creditors have agreed to a debt rescheduling plan through an out-of-court mediation. Here's the link to a PDF of the company's announcement.

The new regulations that led to this point were inspired, it appears, by a decision of Japan's Supreme Court in January 2006 see details here.

The short version is this: The high court ruled that consumer loan interest rates in excess of 20% are illegal, under a 1954 statute. In response, the couyntry's legislature passed the Money Lending Business Law, which endorsed the 20% cap, but allowed for a transition period during which companies could continue to charge more than 20%, although only in the expectation that this was breathing-room, like the yellow traffic light you see before it turns red.

Anyway, the red light is about to come on -- and this situation is chasing out some of the foreign-based consumer lending companies that had been doing business in Japan, as well as throwing a scare into the home-grown companies like Aiful.

Tuesday, December 29, 2009

NACCO Sues Applica

On December 22, the Chancery Court in Delaware denied a motion to dismiss in the matter of NACCO Industries v. Applica Inc., a lawsuit arising out of a takeover battle in 2006.

What underlies this lawsuit is a classic "white knight" situation. The executives at Applica, an appliance firm which markets under the Black & Decker brand, weren't at all happy at the prospect of being taken over by NACCO. But another suitor, Harbinger Capital Partners, appeared more likely to let these executives keep their job. So (these unproven allegations run), some of the executives at NACCO passed nonpublic information to a consultant working for Harbinger. Harbinger then alegedly used that information to craft disclosure documents of its own that helped sink the deal.

Eventually (this part is not allegation, but public fact), Harbinger won the bidding war and combined Applica with another appliance company it controls, Salton Inc.

The whole opinion is available here, but to my mind, the most intriguing of the counts in the lawsuit is the allegation of tortious interference with contract, pp. 57-60.

There are five common-law elements for such a claim: (1) a contract, (2) a third party's knowledge of this contract, (3) an intentional act by that third party, (4) that act must be without justification and (5) it must cause damage.

The court said that there could be "no meaningful dispute" about either of the first two elements, and that in earlier sections of the opinion (dealing with breach of contract) he had setled the fifth, on the face of the complaint, in the plaintiff's favor. So what was unique to the tort claim was the dispute over elements (3) and (4).

The Court of Chancery found that the complaint satisfied these points, as well, by alleging that "Harbinger ... obtained an unfair advantage over NACCO by accumulating a large stock position based on false disclosures. Because of Harbinger's actioons, NACCO did not receive the full benefit of the contractual protections that NACCO bargained for...."

As merger-and-acquisitions activity revives from its recent dormancy, many are the market participants who will want to study this decision.

Monday, December 28, 2009

Cellulosic Ethanol

The Obama administration wants to encourage the production of cellulosic ethanol. As a story in today's WSJ (p. C2) tells us, this is a "cornerstone" of its plan to "curb greenhouse-gas emissions." Besides, it seems to have finally occurred to people that driving around on corn-based ethanol means burning what might otherwise have been somebody's food in one's car.

The story, by Naureen Malik, is devoted chiefly to the wariness of private investors to get into cellulosic ethanol, and concomitantly to the wariness of the Dept. of Energy to contribute money in this area until private investors have been lined up, in what Malik calls a "chicken-and-egg problem." (Psssst. Malik. Why consider it a 'problem'? It may be the optimal result -- the non-waste of taxpayers' dollars on a boondoogle.)

She quotes Arnold Klann, chief executive of BlueFire Ethanol Fuels, on the difficulties of finding investors for the projects he has in mind: "They all want to be the first to finance the second project, they won't finance the first."

After all these years, are we still talking as if "the first" cellulosic-ethanol project is a matter for the use of the future tense? The answer: because all the talk of break-throughs in the past has been just that: talk.
Here's a Motley Fool piece on the subject from nearly three years ago. Jack Uldrich was at that time encouraging "investors in ethanol companies such as Pacific Ethanol (Nasdaq: PEIX), Archer Daniels Midland (NYSE: ADM), and Aventine (NYSE: AVR), to begin boning up on cellulosic ethanol...."

Well, I don't suppose the reading could have done them a lot of harm, but there were other things they might more profitably have been boning-up on in terms of market-ready projects.

Sunday, December 27, 2009

Cheering for Chris Clair

A friend of mine, Chris Clair, has given me an unexpected present this holiday season: a chance to brag about him.

In the middle of this month, a Reuters investigative reporter, Matthew Goldstein, was working on a story about Steven Cohen, a big fish in the hedge fund pond. Goldstein apparently had good reason to believe and report that the SEC is investigating Cohen on charges of insider trading. He of course called Cohen for a reaction. Cohen wasn't satisfied with the usual "I have done nothing wrong" or "no comment." Instead, Cohen called Goldstein's superiors in Reuters (also Chris Clair's superiors) and they spiked the story.

Talking Biz News is is on it.

Anyway, Clair blogs about hedge funds for Reuters, and he wrote as follows:

News organizations are supposed to break news, not make it. Too often, though, in my nearly 20 years in this business, the news has become the news. Jayson Blair, Patricia Smith, Stephen Glass, Rick Bragg, the reporting leading up to the Iraq War … the list goes on and on, and those are just the high-profile cases. Friends of mine—good, honest, hard-working journalists looking to tell the truth—have had stories killed for all sorts of reasons that had nothing to do with the accuracy or relevance of the pieces.

And now, in my own back yard, comes word of the latest journalistic stinker.... When I read about the incident, I was befuddled and beside myself. At first I didn’t want to believe it. Then, the more I thought about it the more I realized that given the state of journalism today, it really wasn’t all that surprising. What was surprising, in fact, was that I hadn’t heard about something like this before.

Some cancerous chickens are coming home to roost in journalism. This was a profitable business for a long time. The information monopoly, as monopolies tend to be, was a lucrative one for those who controlled it. Profits attracted businesspeople, who moved up the chain of command both on the editorial side and the business side by devising plans to increase profits still further. Reporters at larger papers and news outfits started earning more money, which helped change the makeup of those seeking jobs in journalism. And the rise of the public relations industry meant that for many journalism was just a stepping stone to real money and power.

There is a good deal more, but the bottom line is that Clair has succeeded in drawing wider attention to the story -- or rather to both of them, the one about Cohen and the one about the spiking of the story about Cohen.

As for example here.

Wednesday, December 23, 2009

Biogen's Bid for Facet

Earlier this month, Biogen Idec Inc., the Cambridge- Massachusetts based company known for its multiple sclerosis drugs, wanted to acquire Facet Biotech Corp., and has bid $493 million toward that end. That works out to $17.50 a share.

Facet refused the bid, and Biogen threatened a proxy contest.

This seemed to have the effect that an unwanted suitor often does -- the maiden looks about for a white knight. She "lets down her hair," like the gal at the top of the Tower, if the right man is standing beneath. Thus, we get an announcement like this:

Facet Biotech recently announced that it has agreed to amend its rights agreement [i.e. let down said hair] to permit Baupost Group to purchase a number of additional shares without the rights under the rights agreement becoming exercisable. Baupost beneficially owned 3.5 million shares of Facet Biotech common stock on December 16, 2009, which represents 14 percent of the total shares outstanding. The amendment will increase the ownership limit for Baupost from 15 percent to 20 percent of the total outstanding shares of Facet Biotech common stock.

Ah, the ways of love.

Tuesday, December 22, 2009

OSTK's stock price

The price of a share of Inc.'s equity has drifted downward considerably since the company filed that shockingly unaudited 10Q a little more than a month ago.

A share was worth $16.25 at the close of business November 16, but only $13.22 after yesterday.

Still, one might fairly argue that the Refco analogy that immediately sprung to my mind at the time was hasty. Refco folded within a single week after its accounting came under scrutiny. That scrutiny began in earnest, as I've mentioned before, on October 10, 2005 when the company announced it had discovered a receivable owed to the company in the amnount of $430 million. Refco filed for chapter 11 protection only one week later. Since Overstock is still around, should we dismiss the proposed analogy?

Not entirely. Financial services firms, like Refco, are especially vulnerable to a quick unravelling, simply because trust is all they are selling. It is their stock in trade. If Overstock were only selling trust in its value as a counter-party, it would likely be done now, too. But Overstock is selling physical merchandise, a fact that can slow the forces of destruction.

The Facebook shenanigans that have more recently garnered attention began well before the fall-out of auditee with auditor. Yet the emergence of the former into the light of dayt so soon after the latter has a poetic appropriateness to it, and some of the statements that Byrne and Bagley have made since the matter became public have had the sound of desperation.

Oh, BTW, a moment ago I mentioned that Overstock sells physical merchandise. I wonder, though, if that is still what underlies its stock price. Perhaps for purposes of stock analysts Overstock is really selling a share of its lawsuits. But more on that possibility another time.

Monday, December 21, 2009

Leaving London?

Real or threatened regulations or taxes in London have become sufficiently onerous that many in the financial community there are threatening to leave. Since "Galt's Gulch" is a fictitious place, the first destination of which they speak when they talk of leaving is Switzerland, which is European by geography but not by law.

Bloomberg has put out a story on some of the problems with the proposed flight to Switzerland, especially Geneva. There are all those quotidian non-novelistic details with which to deal, like a housing shortage there for example. There is also the question of office space. The Bloomberg report quotes Tim Dawson, who works in Geneva himself, saying: "There is more office space in Canary Wharf than in the whole of Switzerland."

Canary Wharf, BTW, is a large office/shopping development largely constructed in the 1990s, in East London, in an area of idled docks. At an early stage of development, in 1993, Canary Wharf's working population was only 7,000. By January 2000, that working population figure was 27,000. So although financial business can and did in that interval leave central London's famous "Square Mile" for a place about 3 miles as a crow flies to the east and south, to continue all the way to Geneva presents graver problems.

Clearly the Bloomberg reporter and Mr Dawson are right to make this point, it does not follow though that the government in London can continue to increase the burden of doing business there with impunity. People who work in the financial district of London (either the Square Mile or Canary Wharf!) come from a lot of places around the world. The financial centrality of London is preserved by these ex-pats. And where will most of them go if the burdens become too great? To no single place. Simply: home.

Sunday, December 20, 2009

Icahn and Take-Two Interactive

At the end of last week, Carl Icahn (an old friend of this site) reported that he has purchased more than 11% of the equity of the video game maker Take-Two Interactive Software Inc., (Nasdaq: TTWO) for about $70.6 million.

Other news on TTWO is at the other end of this click.

TTWO is notorious as the publisher of Grand Theft Auto, a series of video games that features sometimes shockingly realistic depictions of violence. Though the Grand Theft series has been wildly popular, TTWO is at present a money loser.

Last year, TTWO successfully resisted a $2 billion bid by Electronic Arts (EA). Be careful what you wish for, though, you might get it: independence, in particular, can be costly. The stock's value was at $17 when EA made the offer. It immediately lept to $26, reflecting EA's interest, and stayed in that neighborhood until the market understood that the deal wasn't going to go through after all, whereupon the price of TTWO began to fall. And kept falling. To less than $6 this March.

TTWO has recovered a bit since. It was close to $12 in mid-November, and has wildly zig-zagged, mostly downward, since.

I'm sure Icahn will have something to say about how it should be run, and we'll have a chance to revisit Take Two here.

Wednesday, December 16, 2009

Beer Company Intrigue

All sorts of good stuff in this story., or rather this meta-story.

Way back in November 2001, several European-centered news organizations, including Reuters, The Financial Times, and the Guardian, received under unclear circumstances what appeared to be a presentation originally prepared in connection with a planned corporate acquisition. The leak, if trustworthy, was important: Interbrew, a large Belgian-based beer company, (best known for Stella Artois and Beck's) was about to launch a bid to buy SAB, the South Africa based rival best known for Carling Black Label. And it was prepared to pay up to 650p per share for SAB, but it was going to try a low-ball bid of 500p first.

Some of the news organizations ran the story. They didn't say the bid would happen, but they did say they had received documents claiming, etc. On Nov. 29, 2001, for example, the Guardian published a story saying that it had a “secret document” which it said had been couriered to a “large chunk” of the business press. The price of SAB rose, of course, and my guess is that the leaker then sold his shares of it for a nice quick profit.

The truth behind these documents seems to be that they were real, but that the price and had been tampered with. (The actual price range contemplated in the real documents had been 400-550, not 500 - 650. The leaker presumably changed the numbers to create a higher price bounce.) Interbrew decided it would not go forward with the proposed bid. And it was furious at the unknown leaker, so it sued the media outlets and demanded to know where they had gotten this material.

Don't cry for Interbrew. They later became Inbev, and still later took over Anheuser-Busch. Anyway, back to 2001...the outlets resisted, Interbrew filed a lawsuit in the UK, and over the course of the following years, the case wound its way up to the European Court of Human Rights.

Possibly important point: NONE OF THE MEDIA OUTLETS INVOLVED had ever promised confidentiality to the leaker. Yet they resisted giving up information about their receipt of the tampered-with documents because they believed doing so would hurt their ability to make such promises when it was warranted.

December 15, 2009: ECHR has ruled in favor of the news outlets. "Interbrew's interests in eliminating, by proceedings against X, the threat of damage through future dissemination of confidential information and in obtaining damages for past breaches of confidence were, even if considered cumulatively, insufficient to outweigh the public interest in the protection of journalists' sources."

Comments, anyone? (And yes, Mr. Rather, you may go to the airline ticket counter immediately if you like.)

Tuesday, December 15, 2009

Two bankruptcy cases: what SCOTUS Won't Decide

The Supreme Court of the United States yesterday announced that it will not grant cert to bankrupt flatware maker Oneida, which sought to use its chapter 11 filing in 2006 to relieve itself of the obligation to make its payments to the Pension Benefit Guaranty Corp.

The ERISA says simply: "[T]here shall be payable to the corporation [PBGC], with respect to each applicable 12-month period, a premium at a rate equal to $1,250 multiplied by the number of individuals who were participants in the plan immediately before the termination date.” But the bankruptcy court agreed with Oneida that this was a pre-petition claim under chapter 11, subject to relief. This is a matter of enormous concern to many companies who find, as the population of the US (like that of much of the rest of the industrialized world) ages, that pension obligations are a significant burden.

It is a burden they have largely brought upon themselves. I don't know anything of Oneida's specific situation, but many US companies have used the prospect of juicy pensions as a way of easing otherwise difficult labor negotiations. The unions representing their workers were also complicit in this game, because they could present higher pension promises as a negotiating victory to their rank-and-file, without worrying much about whether those promises were funded or just hot air. So the bill comes due, and the restaurant's diners keep passing it around the table.

The 2d Circuit has since overturned the bankruptcy court's discharge, though, preserving the ERISA obligation. And it was the 2d Circuit decision whence the company sought a writ of certiorari. Now SCOTUS has let that ruling stand, leaving the other circuits free to go their own ways without guidance. Of course, if those other circuits follow the 2d Circuit's precedent, there will never be a need for SCOTUS to weigh in. This is one of a class of cases in which SCOTUS prefers to wait until a split among the circuits develops.


Another decision-not-to-decide: the Chrysler bankruptcy. Yesterday the Justices dismissed an appeal brought by Indiana pension funds who objected to the ham-handed way in which the Obama administration pushed the old Chrysler through bankruptcy at their expense. The 2d Circuit in June had approved of the shotgun sale of most of Chrysler's assets to Fiat, but Justice Ginsberg stayed the sale soon thereafter. Now the Justices have sent the case back to the 2d Circuit with an order that the circuit dismiss the challenge to that sale as moot.

The state treasurer in Indiana says that he is happy with the high court's decision not to decide on mootness grounds. The manner in which it is done effectively erases the Second Court's decision as a precedent, and this means there is no precedent upholding the kind of emergency proceeding employed here. Its critics survive to fight another day.

Monday, December 14, 2009

Three more brief items

1. Dragon Oil holders

Today's Wall Street Journal informs me that shareholders of Dragon Oil PLC, a Dublin-based operation, have rejected a takeover offer from Dubai-based Emirates National Oil Co. This is despite a recommendation by the advisory group RiskMetrics, which says that in its view the price offered is fair.

Dragon Oil's principal asset is the Cheleken contract area in the Caspian Sea, with what the story, with James Herron's byline, calls "proven and probable reserves of 645 million barrels of oil and contingent gas resources of 3.2 trillion cubic feet as of June 2008."

As I observed last month, the answer to the question, "what is a 'proven' reserve?" is not as self-evident as the naive among us might expect. I wonder how solid these numbers are, especially since they have to be date-stamped to a year and a half ago.

2. Paul Samuelson, RIP

Paul Samuelson, the economist who wrote the textbook in which generations of undergraduate college students have learned the basics of supply and demand, micro and macro, fiscal and monetary policy tools, etc., has passed away at the age of 94. I have seen anything more specific about the cause of death than ... welll ... the fact that he was 94.

Samuelson was married to Marion Crawford from 1938 until her death in 1978. In 1981 he re-married, Risha Eckhaus, who survives him, as do six children from his first marriage. As does a nephew named Lawrence Summers, Obama's chief economic advisor.

3. The GSI bankruptcy

GSI is a multi-national family of companies that supply technology to the global medical, electronics, and industrial markets. Three of the entities within this family filed for chapter 11 reorganization last month in the bankruptcy court in Delaware: GSI Group Inc., the parent Canadian holding company; GSI Group Corp.; and MES International, Inc., a non-operating subsidiary of GSI Group Corp.

On November 23, Stephen Bershad requested the creation of an equity committee. It now appears that he'll get his wish. He has entered into an agreement with the debtors in possession that they will support this request, in return for his commitment not to contest the April 30, 2010 meeting date set by the Board of Directors.

If the equity committee is not formed by December 31, 2009, or, if formed, is disbanded for any reason, Mr. Bershad retains his right to challenge the April 30, 2010 meeting date.

Sunday, December 13, 2009

Three brief items

Let us update three matters that we've left dangling.

1. Cisco and Tandberg. On Wednesday, December 2, I wrote here that Cisco Systems had extended the offer period in its effort to acquire Tandberg, a Norway based company.

Apparently, Cisco soon thereafter won its prize. That link will also give you a tick-tock on the whole courtship.

2. Cadbury. This one is still up in the air. The relevant trade union is unhappy with the idea of Kraft taking over. On the other hand, Kraft's interest has attracted other bidders, and it seems likely Cadbury will lose its independence to somebody, although the question "to whom?" remains unanswered.

The European Commission has given itself until January 6 to study the matter.

3. MRV Communications. Back in early October I told you that MRV, the California based networking-ethernet company, was going to hold an annual shareholder meeting on November 11, and it would face a proxy challenge at that time. So ... what happened?

The two sides kissed and made up, that's what. Spencer Capital secured an agreement from the company that three of the board members would resign on the day of the annual meeting: Furchtgott-Roth, Jaensch, and Tsui. In return, Lotan, Margalit, Fischer, Herman, Keane, and Shidlovsky would all be re-elected without opposition. So there are three new faces on the board: Charles M. Gillman, Michael J. McConnell and Kenneth H. Shubin Stein.

Intriguingly, one of the three winners who has been put out to pasture in this way, Daniel Tsui, won the Nobel Prize in Physics in 1998, for the discovery of "a new form of quantum fluid with fractionally charged excitations,"

Wednesday, December 9, 2009

Directors of Banks

Ropes and Gray have pointed out in a recent Client Alert that the directors of banks face special liabilities that the directors of other businesses
do not.

This includes a greater risk of personal liability and enforcement actions by the federal bank regulators. Further, federal regulations restrict the degree to which banks may indemnify their directors in the event of such enforcement actions. You might ask: why should bank directors be at a disadvantage vis-a-vis other directors? The best short answer is that it is an artefact of history. Banking has always been different.

Heck, I recently became the owner -- half inadvertently -- of two recent books about notorious bank robbers of the 1930s. One concerns the Barrow gang -- Clyde Barrow, Bonnie Parker, and their shifting cast of associates. The other treats of John Dillinger, who was following the same pursuit at the same time though with a range somewhat to their north. One common theme from both books is that there was a certain degree of popular Robin-Hoodish delight in the tales of these outlaws and their derring-do. An audience watching the newsreels before a movie might think, "Well, the banks have been stealing from me, I can hardly feel sympathy for them when someone steals from them."

Banks have been different since long before that. The Medici will forever be remembered as bankers. Heck, they are sometimes misremembered as if they invented banking, and double entry bookkeeping into the bargain.

And surely amongst the many people with their homes "underwater" nowadays, owning more than the house in total is worth, there will be few who will consider bank board directors, even given their extra layers of liability as described by the folks from Ropes & Gray, as especially plausible objects of sympathy.

Tuesday, December 8, 2009

USA Technologies

USA Technologies Inc., a company based in Malvern, PA that provides "networked credit-card and other non-cash systems in the vending, commercial laundry, hospitality, and digital imaging industries," has a shareholders meeting scheduled for Tuesday, December 15.

The board elections are being contested by a shareholders group calling itself Shareholder Advocates for Value Enhancement (SAVE).

Glass Lewis & Co. is supporting SAVE. It believes "that the Board's recent amendments to the Company's bylaws call into question whether the Board is truly acting in shareholders' best interests." Apparently, these recent amendments eliminate the ability of shareholders to call special meetings and stagger the Board into three classes -- taking the pro-entrenchment side of two of the classic contentious issues of corporate governance.

On its own behalf USA Technologies has characterized the situation thus: "At precisely the moment in the Company's history when we achieved market leadership and have developed a roadmap to achieve profitability, we believe the dissidents are opportunistically seeking to take control of your Company to serve their own agenda. The dissidents are attempting to distort and discount our achievements by cherry-picking stock price data that paints our Company management team and Board in the worst possible light."

I don't see a specific defense of the recent bylaw amendments in these materials. But I suppose management if they believe the above assertions would also say, "This sort of dissident is exactly the reason we need to be able to entrench ourselves."

Monday, December 7, 2009

UK's trade minister

The United Kingdom's trade minister, Lord Davies, has flown to Saudi Arabia with the intent of persuading two defaulting Saudi conglomerates, the Saad Group and Ahmad Hamad Algosaibi & Bros (AHAB) to stop giving preference to local banks over British banks in terms of the restructuring of their loans.

Earlier this year, as it happens, Lord Davies faced a good deal of pressure to resign his office over a now-forgotten scandal that involved his supposed excessive coziness with the Mugabe regime in Zimbabwe. That appears to be all settled, or perhaps just forgotten, now.

Here's a link from that forgotten era of February 2009.

Such things forgotten, Davies is now expected to head off unsatisfactory results in the Gulf. Results so unsatisfactory, in fact, that the Times of London says this morning that the two defaulting Saudi firms could "do as much damage to the Gulf's bruised financial reputation as the Dubai shock of ten days ago."

The two conglomerates involved are not in a position to present a united front, so if Davies is clever he may be able to make use of the tensions between them. Specifically, AHAB has accused the chairman of Saad of a fraud that could amount to $10 billion.

Sunday, December 6, 2009

The Charges Re: Galleon Go Way Back

This week, a federal district court in California unsealed documents indicating that Raj Rajaratnam received confidential information, wrongly forwarded to him by an employee at Intel, in 1999.

That is of course a full decade before insider-trading charges were brought against Rajaratnam this October.

Roomy Khan was a products marketing manager at Intel. It appears that she faxed confidential sales and pricing information to Raj's hedge fund, Galleon, in 1998. She was charged with, and in time (in 2002) pleaded guilty to, wire fraud in this connection.

I have to wonder: how material is such information? Obviously in principle sales and pricing information could lead a trading in receipt of such a leak to the conclusion that Intel's latest sales are in excess of projections -- and that when this fact becomes public, the price will rise to reflect it. Or the other way around. Such information could then inspired buying or selling, respectively. But how big a piece would her leak have been without the over-all mosaic of information relevant to whether the price of Intel stock will rise or fall on a given day?

Imagine just for the sake of a hypothetical that Intel made the following two announcements on the same day: it is planning a new stock issuance, and it had just sold more chips than it had expected. If these two announcements are the only bits of news relevant to Intel's value that day, and if there is nothinng industry-wide or economy-wide that swamps their effect, then the relative size of the two developments will presumably determine whether the dilutive effect of the former announcements sends the over-all stock value down, or the value-enhancement of the latter sends it up. It isn't like looking at the back of the book of the teacher's edition of a textbook to cheat on your homework.

In the market, there is no teacher's edition, except for the actual passage of time, and the real movement of that stock.

Wednesday, December 2, 2009

Cisco's Offer for Tandberg

Cisco Systems has extended the offer period in its effort to acquire Tandberg, a Norway based company. It raised its bid in November to 10 billion Norwegian crowns (or $3.37 billion US dollars) -- a raise of 10%, and this latest extension likely means that the higher offer is getting some traction.

Reuters is quoting one analyst thus: "I think Cisco will succeed. They would not have extended the offer if they had a low acceptance level."

Cisco is the world's largest network equipment maker. Tandberg is the leader in videoconferencing equipment -- which sounds like a natural hook-up. Apparently, videoconference is a market segregated by "tiers," and Tandberg's great strength is in the mid-tier, in terms of price and sophistication.

Even before the increase, Cisco's initial offer was a 38.3% premium on the closing share price of Tandberg as of July 15. That is how it is characterized on Cisco's corporate blog in a entry by senior vice president Ned Hooper.

But is July 15th a relevant day? Hooper calls it "one day prior to major media reports of a possible transaction."

But as you'll see if you go to that blog entry and look at the comments beneath it, some doubt the significance of July 15th as a measuring point. The Norwegian stock market as a whole apparently rose significantly in the weeks subsequent to that "major media report," so some at least of the change in Tandberg's stock value reflects that broader rise, and is unrelated to the possibiliuty of this transaction. Since the investors in Tandberg would have participated in that rise anyway (so runs the reasoning) estimate of the true size of the "premium" have to be adjusted.

Tuesday, December 1, 2009

Asian Citrus

It appears that Hong Kong securities authority, the SFC, should amend its listing rules.

Why? An orange-plantation firm called "Asian Citrus": that's why. Asian Citrus has traded on the Alternative Investment Market of the London Stock Exchange since August 2005. The group's first orange plantation (which was acquired from a precursor entity) is 30.9 sq. kilometers in Hep County, Guangxi province. The second, which the group established, is 37.1 sq kil in Xinfeng county, Ganzhou, Jiangxi province. A third is under development, in Dao country, Human province.

But the recent excitement has nothing to do with the LSE and little to do with the actual business of growing and selling oranges. No ... Asian Citrus was listed on the Hong Kong Exchange last week, and promptly more than 85% of its initial value.

This happened because even before its listing, AC had split its shares 10-for-1. But in the summary section of its listing document, not only did it neglect to mention this fact, but it based its earnings-per-share figure on the number of shares outstanding before the stock split. So the ersatz earnings-per-share figure was ten times the one that an accurate document would have shown. The same shenanigans apply to the company's disclosure of its net tangible asset value.

Monday, November 30, 2009

Mark Pittman RIP

Mark Pittman died this week (on Wednesday).

Pittman was with Bloomberg News. He was part of a team that won the Loeb Award last year for a five-part series in the financial crisis.

He also did pathbreaking work on Goldman Sachs' interest in the AIG bailout, Hank Paulson's role in creating the subprime mess, and the irresponsibility of the ratings agencies increating the conditions for its spread. In June 2007 he wrote a very detailed and incisive piece about the credit agencies that holds up well even with the benefit of 2 and 1/2 years of hindsight.

Felix Salmon, usually a quite astute guy, criticized Pittman for that story, and now regrets that.

Pittman was an old-school reporter, a native of Kansas City, whose first job was covering police for the Coffeyville Journal in southern Kansas in the early 1980s. Later he was at the Times Herald-Record in Middletown, NY, for twelve years, joining Bloomberg in 1997.

The obits I've seen are not very forthcoming about the cause of death, except that it was heart-related. Regardless: it is a loss.

For more, go here.

Sunday, November 29, 2009

Dubai World

The talk this weekend is of Dubai World, the investment company that manages a portfolio of business for the government of Dubai.

Within its portfolio there is Dubai Ports World, the third-largest port operator on the globe, and Nakheel, a real estate developer associated with the Palm Islands.

A timeline:

  • Wednesday, November 25, the government announced that the company "intends to ask all providers of financing to Dubai World and Nakheel to 'standstill' and extend maturities until at least 30 May 2010". Thus "standstill" includes payments due for next month.
  • Thursday, November 26, the US markets were closed for Thanksgiving. Asian markets took a hit on the news, though, in the wake of reports that some of Japan's bigest banks were heavily exposed to Dubai World.
  • Friday, November 27, Markets in the US started down big, but seemed to discount the significance of thre news as the day went on.
  • Saturday, November 28, The National, an English language paper based in the United Arab Emirates, reported that Dubai World "could still meet the December 14 deadline on the US$4 billion ... payment of a sukuk from Nakheel under one option being considered by advisors to the conglomerate." It is also considering an 80% redemption offer.

Today, the UAE's central banks is making reassuring noises about "standing behind" that country's banks.

One intriguing feature of the situation involves the sukuk bonds involved. Any default, or lesser "credit event" here will compound some of the uncertainties I discussed on May 19 in this blog.

Wednesday, November 25, 2009

From Overstock's Former Auditor

Quote Nietzsche on us, will they??? We'll show them who's the Ubermench!

As you'll remember, and we chronicled here, on November 16, Overstock filed with the Securities and Exchange Commission an "unreviewed" Form 10-Q for its results in the quarter that ended September 30. It claimed that it had had to dismiss its auditor, Grant Thornton, because of a sudden change of heart on the part of Grant Thornton as to how a certain matter should be treated.

Specifically, it seems that the key to the dispute was the account of a particular "fulfillment partner." Often, when you order a product through Overstock's website, you are not buying it from Overstock, but from a third party, a business looking to unload its own inventory, and using Overstock as the cyberspace go-between for this purpose. Overstock has said that it accidentally overpaid one of these partners approximately $700,000 in 2008, and the partner informed it of this in February of this year. So ... doesn't that mean that the partner is acknowledging a debt, and that this debt is an asset (an account payable) that should be reflected as such on Overstock's books?

If so, then since the overpayment occurred in 2008, the account payable was an asset as of December 31, 2008. Overstock decided not to treat it as such, but to treat the later payment of $785,000 from that partner (principal and interest?) as part of its acknowledgement of the receipt of one-time non-recurring income of $1.9 million. That involved lumping the $785,000 in with certain other matters we won't trifle with here.

According to paragraph 7 of this press release, which is worth quoting in full because it has now become the crux of the controversy: As our auditors, Grant Thornton reviewed our financial statements in Q1 and Q2 2009 before we filed Form 10-Q's for those quarters. Throughout 2009, our Audit Committee has repeatedly asked Grant Thornton if there was any accounting that it would do differently, and repeatedly received the answer, "No." In fact, as recently as late-October 2009, Grant Thornton confirmed to us that it supported our accounting method for recognizing the $785,000.

Then, somehow, in November Grant Thornton changed its collective mind and decided that the account at issue should have been recorded as an asset in 2008 after all. Grant Thornton then reportedly gave Overstock an ultimatum: restate your 2008 results accordingly or we won't sign off on your third quarter filing. That's why Overstock fired them and, insteads of simply letting the clock continue to run while it searched for a new auditor -- filed the now notorious unreviewed 10Q. Of course, that clock is still running anyway, because they are out of compliance until they come up with an audited one. This filing remains bizaare.

But the new twist to the tale is that on November 20, (Friday, around the time Overstock was revealing that Nasdaq might de-list them), Grant Thornton LLP sent a letter to the Securities and Exchange Commission giving its own account of the story behind Overstock's recent 8K.

The short summary would be: "They are lying about why we left, and we left because they were lying before that." They say that (contrary to paragraph 7 as quoted above) they were not "repeatedly asked" throughout 2009 whether the treatment of this money was proper, and they never signed off on it.

"We disagree with the Company’s statement in paragraph 7 'that upon further consultation and review within the firm, Grant Thornton revised its earlier position' regarding the previously filed 2009 interim financial statements. This statement is not accurate. The Company brought the overpayment to a fulfillment partner to Grant Thornton’s attention in October. After additional discussions with the Company, the predecessor auditor and receipt of additional documentation from the Company we determined that the Company’s position as to the accounting treatment for the overpayment to a fulfillment partner was in error."

Sam Antar makes the case, not for the first time, that what is going on here is the maintenance of a cookie-jar reserve. Antar knows fraud, having committed more than his share of it. On his account, he's now trying to stay out of hell. Theology aside, I think the case he makes is worthy of the the SEC's full attention.

The whole affair continues to have the odor of Refco's hide-the-loan scheme, which unwound four years and one month ago. It looks so far like a low-rent variant of that, but it does not look good.

Tuesday, November 24, 2009

What is Ramius Up To?

Ramius Capital is increasing its investment in the technology sector, in particular in the wireless services firm Immersion Corporation (NASDAQ: IMMR), where it now owns 15% of the equity, having been aggressively buying since August.

Between late August and early October, presumably in some part due to this buying, the price of IMMR rose from $3.75 to $5. It peaked there and headed down again, though, and was back down around $3.75 at the start of this month. In the last three weeks, there has been a rebound, so that at the close of business Monday, Nov. 23, the price of the stock was $4.12.

Instead of trying to give meaning to that zig-zag, I'll move on to another example of Remius' tech buying. They've bought the stock of PC motherboard manufacturer Phoenix Technologies Ltd. (NASDAQ: PTEC). Ramius has added 535,535 PTEC shares to its current holdings, for a total of shares outstanding of 13.4%. Ramius offered to buy PTEC in 2007.

PTEC's stock price took a tumble in mid-October when it announced said its fourth-quarter results. The net loss widened to $5.02 million from $4.57 million in the prior year period. Thomson Reuters had polled three analysts and on average they expected the company to report a loss of $0.06 per share for the quarter. They actual loss per share was $0.15.

Just some wonkish facts for the day. Look for significance elsewhere.

Monday, November 23, 2009

What's a Proven Reserve?

The accountants for oil companies report their employers' "proven reserves" of crude oil. Not a difficult concept to grasp, right? A "reserve" is like a company's inventory -- except that insofar as it is "reserve" it hasn't been recovered yet -- it is still in the ground. But we known where it is, because that is implied in the adjective "proven," right?

Well ... maybe not. Alan von Altendorf suggests that there is some controversy about these simple-seeming terms.

Altendorf begins with the fact that the SEC has two new regulations coming into effect on January 1, 2010, that bear on this matter: S-K and S-X.

I'll skip down to page 7 of the PDF for you: "The new SEC rules are a joke and
professional explorationists know it. Very few will speak out about it, because there was a wave of computer automation and black box software to cover up and gloss over the shortage of experienced oil & gas geoscientists."

Who is Altendorf? The principal of CWSF, an independent oil consultancy out of Houston. I know nothing first-hand about him, but normally reliable folk think he's a bright guy who knows the field. It which case, the new rules may just be a cover for fraud and very bad news.

Sunday, November 22, 2009

Cadbury and Shareholder Democracy

The argument in favor of shareholder democracy (and the argument in favor of making the expression of this democracy ever more direct) has long been that the owners of equity are the residual risk-holders of the company, and that as such they ought to be making the decisions on which those risks turn.

Why is it so much easier, so much more common, to be nervous as a passenger on an airplane than to be nervous driving one's own car? The latter is more dangerous, but while driving the car you feel that you are in control of your fate, whereas while a passenger on a plane (or a bus for that matter) a perfect stranger has control of your fate. Owners of equity naturally want to drive the car.

One of the counter-arguments to shareholder democracy, or any very direct expression thereof, is that many of the shareholders have a very short-term perspective. They don't intend to maintain the car properly, so to speak, because they plan to sell their interest in it after one quick trip. Managers and directors with a more long-term perspective are to be trusted. As are the institutional investors typically in for the long haul, like pension fund managers.

These theories and arguments collide directly in the emerging bidding war for Cadbury. Look for example, at a story Andrew Ross Sorkin of The New York Times recently published, "Do Stockholders Really Know What's Best?".

The money quote from Sorkin, "Indeed, one parlor game in London has been to guess how much of Cadbury’s long-term shareholder base has already sold out to arbitrageurs, whose goal is to see the company sold as quickly as possible and then move on to another deal .... People involved in the deal estimate that about a third of the shares have already changed hands, moving from long-term shareholders to hedge funds. Those funds, said Joseph Grundfest, a professor at Stanford Law School, 'have a long-term time horizon of about 12 minutes.'"

Frankly, such an appeal leaves me cold. After all, every completed transaction has two parties. These short-termers have bought up a lot of stock from the institutions with longer-term horizons that used to hold it, you say? Why have those institutions sold it? Because, in whatever temporal horizon interests them, some other investment looked better, right? They sold to get the cash to put that cash somewhere else.

When and why did Cadbury cease to be an attractive place to have their assets for those long-termers? We can hardly blame that on the short termers who (this is inherent in this diagramming of the situation) hadn't bought yet.

I don't know what Cadbury's fate is going to be. But it seems to me that arguing that it ought to remain an independent company forever because that is the long-term best thing to do, because only short-termers buy stock is just ... well, silly. People who 'reason' that way should put the chocolate down and try some brain food.

Wednesday, November 18, 2009

Going Private

Perhaps we should spend more time in this blog on "going private" transactions. I think this is the first time I've ever even mentioned such deals here.

Yet it will only be a mention: a sort of IOU. I write-and-run. Landry's stock rose dramatically after Pershing Square announced its opposition to the CEO's efforts to take the restaurant company.

The chairman of Landry's Tilman Fertitta, proposes to take the company private in a $14.74 per share buyout. This means in essence that Fertitta wants to work for himself and a group of friendly known investors, not for the every-shifting multitudes of public shareholders who are always buying and selling stock. And not, presumably, for Bill Ackman.

Pershing Square says in a filing last week that it has economic exposure to more than 3.8 million of Landry's outstanding shares, or 23.7%.

"The reporting persons do not intend to support the transaction," it also says. Fertitta had been attempting to take Landry's private for nearly two years, going back to a January 2008 offer of $23.50 a share.

The $14.75 deal values Landry's at $238 million.

Tuesday, November 17, 2009

Overstock Files Unreviewed 10Q

This is amazing.

A tip of the hat to Overstock-news-junkie Gary Weiss here. As Weiss points out, even Bernie Madoff had "some accountant somewhere" who would review his filings. But Overstock files this quarter without an auditor review. And it opens up its press release on the subject by quoting Nietzsche: "All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth."

I'm getting a Refco-in-October-2005 kind of vibe about Overstock right now.

You may remember that the first time the naive portion of the world learned that there was anything wrong at Refco it was Monday, October 10, 2005, when Refco announced that through an internal review over the weekend it had discovered a receivable owed to the company in the amount of approximately US$430 million.

That struck many people as a rather strange thing to suddenly 'discover' and the stock price started tanking.

Over the course of that week, further revelations came out. I won't go into them now because I have no reason to believe they are useful to the analogy. But the gist of it is, the initial market sell-off was more than justified by the underlying facts. Only one week later, Refco filed for chapter 11 protection.

I'm not saying that the same will happen here. I have no idea. And Overstock's argument with its (former) auditor, Grant Thornton, seems to have involved a matter quantitatively much smaller than the sum involved in the news that broke on October 10, 2005. But this has that feel -- a bit of accounting-matter weirdness that is sufficiently unusual that one suspects there is more to it. Overstock made this announcement after the markets had closed (check the PR Newswire announcement to which I linked you above -- it gives the time of release as 5:35 EST Monday.)

The market will make a judgment soon enough.

Monday, November 16, 2009

Bingham McCutcheon

On October 28th I reported here that dissident shareholders led by Shamrock had won a showdown with the incumbent board of Texas Industries (TXI) the supplier of cement and other building materials (not to be confused with Texas Instruments).

I've just discovered a press release in which the prominent law firm Bingham McCutcheon crows about these results. It tells us that its partners, David Robbins and John Filippone, assisted by associate James Parker, represented Shamrock Activist Value Fund, L.P. in this matter.

Personally, I'm not at all clear about what those three gentlemen did. Did they give advice? Was there ancillary litigation in which they made themselves useful?

There are lots of documents to be drafted in the course of a proxy fight. And of course there are complicated documents that govern the relations among the Shamrock entities and between them and their underlying investors. So there is plenty these gentlemen might have done. I just wish the release they put out had been a little bit more explicit.

Sunday, November 15, 2009

A Tale of Two Dick Fulds

Gasparino or Sorkin. Who are you reading this Fall? about last Fall's ... um, fall. Gasparino is the author of The Sellout, a new book outlining what Gasparino sees as the 30 year long history behind the financial meltdown of 2008, finding fault in both Wall Street greed and government mismanagement. Sorkin is the author of Too Big to Fail, a bigger book that offers more of an "inside story" on the crisis and the bailout efforts it inspired. Or, like me, you may be obsessively reading both.

Dick Fuld, I'm guessing, is reading both. He's the former CEO of the now defunct broker-dealer Lehman Brothers, and Time magazine gave him a spot on its list of "25 People to Blame for the Financial Crisis," here.

Both Sorkin and Gasparino give an account of a certain dramatic incident in Fuld's rise up the corporate hierarchy at Lehman, from his days as an impatient young trader. Here is Sorkin:

One day he approached the desk of the floor's supervisor, Allan S. Kaplan (who would later become Lehman's vice chairman), to have him sign a trade, which was then a responsibility of supervisors. A round-faced man, cigar always in hand, Kaplan was on the phone when Fuld appeared and deliberately ignored him. Fuld hovered, furrowing his remarkable brow and waving his trade in the air, signalling loudly that he was ready for Kaplan to do his bidding.

Kaplan, cupping the receiver with his hand, turned to the young trader exasperated: "You always think you're the most important," he exploded. "That mothing else matters but your trades. I'm not going to sign your fucking trades until every paper is off my desk!"

"You promise?" Fuld said, tauntingly.

"Yes," Kaplan said, "Then I'll get to it."

Leaning over, Fuld swept his arm across Kaplan's desk with a violent twist, sending dozens of papers flying across the office. Before some of them even landed, Fuld said, firmly but not loudly, "Will you sign it now?"


A version of that story has been published before, but Sorkin in his notes assures us that his own reporting is responsible for the level of detail with which he tells it. Curiously: Sorkin lets the story expire and moves on to later incidents in Fuld's career -- he doesn't close out that anecdote by telling us whether Kaplan actually signed off on the deal or not. Here it is Gasparino, who gives the matter only four sentences, who is more informative.

Fuld, as most people knew, even early in his career, was among the most aggressive traders at the firm, something he cultivated to bully his way through the management ranks. When the loan officer said he 'needed to clear' his desk before approving the trade, Fuld took matters into his own hands and cleared the man's desk for him -- literally by shoving the papers to the floor.

The officer was stunned, but he approved the trade. And Lehman made money on it.

So never make the mistake of using the expression "I have to clear my desk" while in the presence of a Type A personality.

The compare-and-contrast exercise here is worthwhile, I think. Sorkin gives to Kaplan a bad-guy characterization, so that we understand and even sympathize with Fuld's rudeness. Sorkin for example has Kaplan "deliberately ignore" Fuld when Fuld first approaches his desk. And then he has Kaplan telling Fuld off before he gets to the "clear my desk" remark. For Sorkin, I think, the men (and a few women -- such as Erin Callan, Lehman CFO) at the center of the crisis were facing grave challenges and doing the best they knew how to save their companies in the face of those challenges. Heck, if Kaplan had been more central to Sorkin's story he might not have been fitted for the Snidely Whiplash moustache in the telling of that Fuld-as-young-man anecdote.

For Gasparino ... well, did I mention that his book is named "The Sellout"? He is looking to assign blame. They weren't facing challenges in 2008, they were working through a disaster of their own creation. Since Fuld is a prominent recipient of blame, there is no need even to give Kaplan's name. The story is only meant to show that the Gorilla routine was a deliberately adopted tactic whereby Fuld bullied his way through management ranks.

I prefer Gasparino as a writer, for both precision and concision; I think they both are sadly deficient as analysts, though if I were to write such a book I think I'd adopt something more akin to Sorkin's tone.

Wednesday, November 11, 2009

Some poetry

I've learned the real truth about the Kraft/Cadbury shenanigans.

It seems that Cadbury is actually run by a very eccentric genius named Willy Cadbury, who looks a lot like Gene Wilder. He wants to retire, so he held a contest involving golden tickets.

Kraft won the contest, but now Cadbury wants to pull out of the deal, because the Oompa-Loompas have warned him against the Kraft fellow, in a song that goes something like this.

Oompa-Loompa Dumpety daft

We won't work for this here guy Kraft.

Oompa-Loompa Doopety Doo

If you weren't crazy we'd clobber you.

What will we get will you listen now please?

Nothing but their Macaroni and Cheese.

Whose is the stock that we're going to swap?

It tastes no good without ... cream on top.

Oompa-Loompa Doopety Broom,

If you are wise you'll hide in your room.

Oompa-Loompa Dipedy Daft,

We'll have an ambush ready for Kraft.

Tuesday, November 10, 2009

The Bilski arguments

The US Supreme Court heard arguments yesterday on the Bilski case, i.e. on the statutory appropriateness of patents for "business methods."

My own view is that the doctrinal development of patent law in the United States some time ago took a wrong turn. There are just too many artificially created "property" rights erected by bureaucratic decree and judicial laxity, and the result has been the development of a lot of intellectual fences, which have broken up the grazing plains of creativity. [Okay, that isn't a great metaphor. But it's mine.]

Consider the meaning of the word "obvious." An advance can not be patented if it was obvious. And that is a simple enough word, of transparent (self-referential!) significance, right? Maybe not. The U.S. Supreme Court wrestled with that one two years ago, in the case of KSR v. Teleflex.

This year's struggle was with the word "process." The relevant statutory language says: "Whoever invents or discovers any new or useful process, machine, manufacture, or composition of matter, or any new or useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title." Bilski and an associate have attempted to patent a means of hedging the price of natural gas. This method is obviously not a "machine, manufacture, or composition of matter...." If it is any of the above, it must be a process.

As I noted here back in January, the Court of Appeals upheld the Patent Office. They have both said that the law does not authorize the patenting of an abstract idea, and the "process" Bilski has devised is a dressed-up abstraction. More specifically, the Court of Appeals said that a process becomes patentable only if it is tied to a "particular machine," or if it transforms a particular article into "a different state or thing."

This immediately raised the question: has the Court of Appeals nixed the patenting of software altogether? Any software is designed to run on some hardware, but it is not clear that "any digital computer" would satisfy the Court of Appeals' understanding of the phrase "particular machine." That court punted this question of application in a footnote: "We leave to future cases the elaboration of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine."

I suspect that footnote earned this decision its grant of certiorari to the Supreme Court of the United States.

At arguments yesterday, the Justices seemed unhappy with the idea of granting Bilski his patent, but they also seemed unhappy with the reasoning of the court below. Chief Justice Roberts asked Bilski's attorney, "How is that not an abstract idea? You initiate a series of transactions between commodity providers and commodity consumers. You set a fixed price at the consumer end, you set a fixed price at the other end, and that's it."

My own expectation is as follows: (a) the Justices will uphold the court below in its finding that Bilski's 'process' is really an abstract idea and thus not patentable; and (b) they will work harder than the court did below in order to define what is or isn't an abstract idea. After all, digital computers are a pretty integral part of the US economy these days, and pretending to decide such a question while saying "we'll think about computers later" borders on insincerity.

Monday, November 9, 2009

SEC Looking at Proxy Voting Mechanics

Nothing new in the news here, but I dutifully pass it along.

The chairman of the Securities and Exchange Commission, Mary Schapiro, gave a speech November 4 to the Practicing Law Institute, and addressed the issue of shareholder voting.

First, by way of throat clearing, she said things like this: "I know that we might sit on opposite sides of the table in any given matter, but I believe that all of us — regulators, attorneys, and business people alike — all share the common goal of ensuring that our capital markets work — and work fairly and effectively."

But, hey, why should I offer you a Readers' Digest version of what she said? Here is the link.

Sunday, November 8, 2009

Bear Stearns Trial: Final Arguments

Defense lawyers made their final arguments Friday on behalf of both Matthew Tannin and Ralph Cioffi, the former Bear Stearns managers accused of securities fraud largely on the basis of the e-mails they sent one another.

Mr. Tannin, for example, emailed to Cioffi on the basis of a recent market research report, saying that if the report is "ANYWHERE CLOSE to accurate, I think we should close the funds now." But soon thereafter, he told investors he was "comfortable" with the funds' performance. According to the prosecution, this crosses the line between permissible puffing and criminal lying.

In final argument, Tannin's attorney, Susan Brune, said that in the context of the whole email the "anything else" comment ceases to seem incriminating. She asked the jury to "send Matt home to his family."

Was she crying when she said this? I wasn't there, but apparently somebody heard or thought that they heard a quaver in her voice. The rule for a professional advocate is: what works, within the law. And there is no question but that a quavering voice is within the law. we'll see how it works.

Wednesday, November 4, 2009

Mutual fund fees before SCOTUS

The Supreme Court of the United States considered mutual fund fees in oral arguments in the case of Jones v. Harris Associates, on Monday.

The plaintiffs in this litigation contend that retail shareholders are paying higher fees that institutional shareholders and that this is unfair. Harris Associates runs the Oakmark Fund, which apparently charges less than one-half of one percent to an unnamed institutional investor for managing assets of $160 million, or $720,000. But individual investors pay 0.88% on the same portfolio. Is that fair? More to the point, is it a violation of fiduciary duties?

The established precedent is the Gartenberg decision of 27 years ago. In that decision, the Second Circuit said that breach of fiduciary duty will be found only if the fee charged by an investment advisor is "so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining." Subsequently, the Second Circuit enumerated five factors that may be used to inform this test, and other Circuits have until quite recently followed its lead. Those factors are:

•The nature and quality of services provided to fund shareholders by the adviser;
•The profitability of the fund to the adviser;
•The fall-out benefits enjoyed by the adviser;
•The existence of economies of scale; and
•The independence and conscientiousness of the trustees.

It is this test that the plaintiffs said the Harris Associates' tiered structure of fees, at the expense of the retail investors, violates. And it is the seventh circuit thathas rocked this doctrinal boat, rejecting Gartenberg in the Jones v. Harris Associates matter. The Secenth Circuit Court said that investors do not need judicial protection so long as the advisors make full disclosure concerning their fees. Investors are then free to avoid or sell high-cost funds, in effect voting with their feet.

This was the issue before SCOTUS. For more, go here.

Tuesday, November 3, 2009

Kraft and Cadbury, continued

I'll just do some quick link farming today, to catch us up on Kraft/Cadbury matters.

An analyst's note from Merrill Lynch says: "The third quarter offers Kraft a chance to demonstrate that 'old Kraft' is continuing to turn the corner before potentially pairing up with Cadbury.

But there is no luxury of time. Under the Takeover Panel's deadline, Kraft must make an offer by the end of the business day on November 9 or walk away for six months.

Kraft will report those third-quarter reports later today. Here is a preview.

Kraft's transaction info is here.

And Cadbury's response? voila!.

Monday, November 2, 2009

Zweig Total Return Fund

It appears that Zweig Total Return Fund will remain a closed-end fund.

At the recent special meeting of Zweig TRF's shareholders, held October 27, the shareholders had the option of converting the fund to an open-ended fund, but only 8% of outstanding shares were voted in favor of such a proposal.

It seems that the conversion proposal was presented to shareholders in accordance with Zweig TRF's Articles of Incorporation because its shares traded on the New York Stock Exchange during the quarter ended June 30, 2009 at an average discount from their net asset value of 10% or more.

The amount of the discount is determined on the basis of the figure at the end of the last trading day in each week during the quarter.

Sunday, November 1, 2009

RIP, John O'Quinn

Famed Houston, TX based trial attorney John O'Quinn died Thursday morning, after losing control of his SUV on a rain-slicked highway. Said vehicle then crashed into a tree.

O'Quinn is perhaps best known to the general public as one of the lawyers involved in successful litigation against tobacco companies. He has also been called the "unchallenged king of breast implant," litigation.

But the reason I knew him, and the reason his death is worth mentioning here, is that in his final years he become involved in the anti-nakedness crusade, i.e. the effort to characterize "naked short selling" as a destroyer of companies and a rampant form of stock market manipulation. I spoke to O'Quinn a handful of times on the subject -- and though I think the cause misguided, O'Quinn himself was always a gentleman and with his passing I will remember him as such.

Wednesday, October 28, 2009

Texas Industries and others

1. What happened with Texas Industries?

Texas Industries (TXI) the supplier of cement and other building materials (not to be confused with Texas Instruments) held its annual meeting of shareholders Thursday October 22d.

Yesterday, the Inspectors of Election certified the results. [Wait for it. Isn't this moment exciting? I feel like I'm ripping open an envelope for you.]

The results represent a sweeping victory for the dissidents, led by Shamrock. Their three nominees were elected to the board, and their resolutions passed. The three new directors are: Marjorie L. Bowen, Dennis A. Johnson and Gary L. Pechota. The resolutions involved: the declassification of the board of directors; the submission of the company's poison pill plan to a vote of shareholders next year.

2. Evidentiary Ruling from the trial of Matthew Tannin

Meanwhile, the trial of Ralph Cioffi and Matthew Tannin on securities fraud charges moves ahead in the US federal court for the eastern district of New York.

It intrigues me that Judge Frederick Block has ruled that the jury cannot see a personal email Tannin wrote in 2006 expressing anxieties about work and the state of the market. Tannin had written an email to himself, in which he said, quote "we could blow up". I haven't had the chance to do more than scan Block's ruling, which is 21 pages long, but it seems to have focused on the scope of the warrant that was used to seize these e-mails, which "did not, on its face, limit the items to be seized from Tannin's personal email acount to emails containing evidence of the crimes charged in the indictment, or, indeed, any crime at all. It was, therefore, unconstitutionally broad ...."

3. Carl Icahn Quits the Yahoo board.

Icahn has left the Yahoo! board of directors. He first assumed his post there back when he was pressing then-CEO Jerry Yang to accept a takeover bid from Microsoft. That didn't happen, and meantime Icahn's attention has wandered to the CIT matter.

On CIT: Icahn has announced a 30 day tender offer for small CIT bondholders' securities at 60 cents on the dollar. Here's what Bloomberg has to say.

Can I find some connection between any one of these points and the year 1987? What was Icahn doing in '87? I'd like to use that year as a post label again.

Tuesday, October 27, 2009

What's Going On At Legg Mason

There it was on the front page of yesterday's Wall Street Journal, a story with the following lede: "Nelson Peltz, an activist investor in businesses ranging from diamong rings to hamburgers, is set to grab a seat on the board of Legg Mason Inc. after quietly accumulating a significant stake in one of the nation's biggest mutual fund families."

There's a lot going on in that sentence! Let's break it down piece by piece.

1. Who is Nelson Peltz? He is the principal of Trian Fund Management, and in that capacity we have met him in this blog before. The cute reference to diamond rings derives from Peltz's interest in Tiffany & Co. The last time I checked, Peltz/Trian controled slightly less than 7% of Tiffany's stock. And the hamburgers? Wendy's.

2. Legg Mason, the mutual fund family: where does it stand?

Well, it has had a tough couple of years. Its Western Asset Management fixed-income business, in particular, was clobbered as it unwound its position in short-term debt issued by structured investment vehicles (SIVs). The SIVs involved had issued this debt in order to raise money to buy into the sky-rocketing value of real estate not long ago. As the SIVs took a bath on that plan last year, the debt held by Western Asset Management sudedenly looked over-valued. As a result, it sold $1.4 billion of these notes early this year, taking its loss. Separately, Legg Mason also sold $0.4 billion of notes that had been supported through a total return swap with a major bank (no, I don't know which).

3. Did Peltz really "grab a seat"?

It hadn't happened yet when the WSJ went to press yetserday morning, so with appropriate caution the paper didn't say he "has received a seat," but that he was "set to" receive one -- or "grab one," in a nicely vivid turn of phrase. What was "set to" happen did in fact happen, I can now report.

4. How big a "significant stake"?

Trian holds about 6.9 million shares of Legg Mason's common stock, or about 4.3%.

The Wall Street Journal's story tries to hard to try to turn this into a landmark event. Peter Lattman gets the byline, and he writes in his fifth paragraph, "In previous years, companies would have paid little heed to activist investors. But since the middle of this decade, there's been a broader philosophical shift, giving big outside shareholders more influence in running companies."

Well ... no. Philosophy hasn't "given" Peltz more of a stake. A lot has been going on, in various cross-currents, and I've tried to make some sense out of it in this blog, but I can't really buy into Lattman's phrasing.

Anyway, but for that one lame 'graph, it is a fine story.

Monday, October 26, 2009

Europe's Draft Directive: Dead as Written

Most of Europe now seems to understand that the Draft Directive on Alternative Investment Fund managers issued back in April needs more work.

I'll just do some quick link farming on the subject today. I covered the basics in July.

Paul Myners, the UK Financial Services Secretary to the Treasury, discussed some of the troubles with the plan here.

More recently, the International Swaps and Derivatives Association (ISDA) explained some of these problems in a Comment dated October 21, and available through its website.

And perhaps a bit less predictably, the European Central Bank has joined the chorus.

And here, finally, is a summary of Sweden's position in an issues note set out in September.

Sunday, October 25, 2009

Renewed Argentinian Excitement

A little more than a month ago (on September 21), the Wall Street Journal reported that there was a deal in the works in which Argentina would re-open a debt exchange deal that the country had closed in 2005.

Among public-finance wonks this caused a flurry of excitement. But then various parties noticed that the markets weren't reflecting any such optimism, and talk waned. See this blog's contribution to that discussion, two days after the WSJ report here.

The excitement was a tad premature, but the WSJ did not have the story wrong. On Thursday, Oct. 22, Argentine Economy Minister Amado Boudou announced a debt swap plan. The plan will seem quite niggardly to those who have held on to the old 2001 instruments all thse years -- more so even than the deal they rejected in 2005. Still, it is important, because it requires the country to change its laws, amendingt he official position that the 2005 offer was the last ever offer.

A law enacted in 2005 in the wake of that earlier swap prohibited the country from ever offering a new swap to investors who had refused that one. The executive branch has asked Congress to repeal that law.

What does all this mean? Those of us who don't have a vested interest in the 2001 instruments are of course free to look at it all dispassionately. What it means is that Argentina has ridden a commodity price bull market since 2005. It didn't need to worry about the fact that its credit in the international markets was lousy -- it had stuff to sell the rest of the world wanted to buy. Now, times are tight, and the Argentines want access to international credit once again, so they have to do something conciliatory.

Wednesday, October 21, 2009

Three brief items

1. Trident Microsystems

Trident, based in Santa Clara, Calif., is a designer and marketer of integrated circuits and associated software. It recently concluded a deal with a Dutch company, NXP Semiconductors, buying NXP's television systems and set-top box business lines.

Pursuant to this deal, NXP is receiving "newly issued shares of Trident common stock equal to 60% of the total shares outstanding post-closing, including approximately 6.7 million shares that NXP will purchase at a price of $4.50 per share, resulting in cash proceeds to Trident of $30 million."

The deal resolves a proxy contest that had been brewing. The disaffected stockholders, led by Spencer Capital Management LLC, had been complaining of Trident's poor performance. Now they seem to concede that Trident is trying a new direction, and they are giving that new tack a chance, withdrawing their intent to nominate a slare of directors.

"They also serve who only stand and threaten."

2. Prepackaged bankruptcy for CIT.

CIT, the bank holding company (NYSE: CIT) the survived a near-death experience in July, has seen its stock price return to ... a little above a dollar.

It continues to work to reduce its $30bn debt load by at least $5.7bn through a debt exchange, and is also soliciting votes for a pre-packaged Chapter 11 bankruptcy filing, which it will use if too few bondholders agree to the debt exchange.

Now Carl Icahn has stepped in, contending that the company's plans are unfair to bondholders, and he has a better idea. It isn't yet clear (to me at any rate) just what his angle on this is. I'm guessing he isn't helping those bondholders out of a charitable impulse.

3. Cerberus consolidates the gun and ammo industry

Cerberus, the hedge fund and private equity fund group that took something of a beating in the automotive industry, is now working on a new business plan.

The Wall Street Journal reports that Cerberus has been in the market for small guns-and-ammo operations see here. It has bought seven of them over three years, and now it has consolidated them into one, and plans to take that one public.

In the first half of 2008, Cerberus owned gun operations lost $6.1 million. In the first half of this year, they made $23 million. That sounds like a nice turnaround.

Tuesday, October 20, 2009

Texas Industries Meeting, this Thursday

Texas Industries Inc., (NYSE: TXI) headquartered in Dallas, is a company that produces cement and other construction materials -- not be be confused, BTW, with Texas Instruments.

TXI's annual meeting takes place this Thursday, and its board faces a challenge from Shamrock Capital Advisors. I understand that settlement talks have not gone well.

Shamrock has charged that "the Company's performance lags its peers, hundreds of millions of dollars of the Company's funds have been 'invested' in ill-timed capital expansion projects that have failed to generate any incremental profits, and there appears to be no credible plan to address these shortcomings."

The expansion projects at issue consist of: $427 million on the Oro Grande project (2005-2008); $294 million on the Hunter expansion (2007-2009); and $55 million of capitalized interest (2005-2009).

Of course there hasn't been a lot of large-scale construction requiring cement over the last year or so. The price of cement, for the good old supply/demand reason, has plummeted, which helps explain the difficulties encountered by expansion plans developed before the downturn.

The principal of Shamrock Investment fund, by the way, is Roy Disney -- Walt's nephew. Now if someone were only building a new theme park, THAT would generate demand for cement!

Monday, October 19, 2009

Marc Dreier

For those of you who may have forgotten, Marc Dreier was the big finance-world criminal who made headlines just before Bernie Madoff. Madoff's scheme was so large that it drove everything else of that genre out of the minds of the personally unaffected, but the Dreier case has its own charm.

There is, of course a wiki article if you'd like a more detailed refresher course.

Very briefly, though, Dreier was a lawyer who duped a lot of hedge funds into buying forged notes, many of them supposedly issued by Solow Realty, a corporate vehicle of a real-enough client of Dreier's, developer Sheldon Solow.

But he also forged notes supposedly issued by the Ontario Teachers' Pension Plan. This turned out to be a bit of overreaching. People who moved in Solow's circles knew Dreier and vice versa, and they could take it on faith Dreier was speaking for Solow as to the notes. But the OTPP? The would-be note buyers wanted re-assurance. And so it was that it was at OTPP headquarters in Toronto that the scheme reached its bizaare denoument on Tuesday, December 2.

This comes to mind because Bryan Burrough has a fine article on the Dreier case in the November issue of VANITY FAIR. what I especially like about the Burrough story is his discussion of the long and tangled Solow/Dreier relationship.

Dreier was often Solow's pitbull. When Solow pointed out a target, Dreier's fangs could sink truly and deeply. There was for example a tussle with Peter Morton of the Hard Rock Cafe chain, in which a judge dismissed the third Drier/Solow lawsuit on point, saying Solow has "had so many bites at the apple, [he] has swallowed the core."

And there was a dispute between Solow and another Manhattan developer, Peter Kalikow. The Solow/Dreier campaign of vindictiveness at Kalikow's expense led to some positively sputtering language by Judge Burton Lifland, who described Dreier's actions as "tacky, shabby, base, low, malicious, petty, nasty, unsavory" and other like descriptors.

That's laying it out for us, your honor.

Sunday, October 18, 2009

Firms and Transactions Costs

Last week, I wrote a few inadequate words about one of this year's Nobel laureates in economics, Elinor Ostrom.

Today, I will say a few about the other winner, Oliver Williamson. His work, as it turns out, cuts close to the core subject of this blog, the struggle for power in the corporate suites.

Williamson throughout his career has concerned himself with what is called the "theory of the firm." Crudely put, this is an effort to answer the question: why are some activities undertaken within a firm, and others are contracted for outside of its boundaries, in the market?

Suppose some firm (a corporation in the business of manufacturing widgts) owns the office building where it is headquartered. It could contract with another firm for janitorial services, or it could hire its own on-payroll janitors. In the one case, the maintenance functions of that building would be a market transaction, in the other case they would be a matter decisions made by the in-firm hierarchy. Obviously some firms do the one and other firms do the other. What determines which is which?

Williamson picked up on earlier work answering this sort of question by Ronald Coase (who received the Nobel himself in 1991). The Coase-Williamson answer is that there are costs as well as benefits in contracting a function out. There is the cost of searching among the possible providers, and checking among the competing maintenance servicers to see who has the better price, who has the fewer customer complaints and so forth. All of that requires time and expense. There are also costs asociated with striking a bargain with the outsiders, and costs associated with policing and enforcing compliance with the deal struck.

On the other hand, taking janitors onto the payroll, and creating an inhouse maintenance department for them, has costs, too. Just for example: there are various legal distinctions between "big business" and "small business" designed to favor the latter, and many of those distinctions turn on the number of employees. So creating such a department may push a firm past one or more thresholds whereby it will be treated more rigorously by the law of its jurisdiction as a "big business."

Separately, though, there is possibility that the in-house operation will be lazier than an outsourcing company. For that matter, so might a formally outsourced maintenance company with a sufficiently secure long-term contract. In either case, they won't be as "hungry" in a competitive sense as the widget making corporation might want them to be.

Williamson's point was the apparently simple one that both hierarchical and contractual means of solving a particular problem have costs, and that the relative size of those costs will differ from case to case. Businesses will tend to the approach that economizes on their costs. Or, as the press release put out by the Prize Committee says, Williamson say markets and firms as "represent[ing]. alternative governance structures which differ in their approaches to resolving conflicts of interest."

That is simple enough to say, but more complicated to work out in in sufficiently impressive detail to make a scholarly impression. Williamson did so, and contributed to the development of scholarly rigor in discussions of a range of issues in corporate governance.

Wednesday, October 14, 2009

Cioffi and Tannin on trial

The trial of Cioffi and Tannin on charges of securities fraud, while managing hedge funds operated under the brand of the late Bear Stearns broker-dealer, has begun.

As I have indicated before in this blog, I believe that this prosecution is misguided and hope for a defense victory. But the usual conflict is playing itself out here. I believe I owe this considerable attention, but I just do not have the time to pay it that attention right now. What to do? When all else fails ... link farm.

Here's an account that appeared in the New York Times more than a year ago, of the prominent role e-mails play in the prosecution's case.

The wonderful blog "Houston's Clear Thinkers" was on the case in those days (though its presiding genius, Tom Kirkendall, seems to have been distracted since): here's what you can find there.

For more recent news, here is a discussion of a crucial evidentiary hearing.

Bess Levin has used the case as a vehicle for some humor at the expense of the defendants' former bosses, Cayne and Schwartz at Dealbreaker.

And then there is jury selection, which hasn't gone all that smoothly.

And let us not forget the Wall Street Law Blog.

Gee, I hope some of these guys link to this blog some day. Is that so much to ask?

Monday, October 12, 2009

The Economics Prize Went to ...

Sunday, when I took a stab at predicting that the Swedish central bank would do, I distinguished two different sorts of recent award recipient -- those who may not have any economic background, but whose work drew economic applications from game theory considerations, and those who certainly had an economic background, and whose work fits within the traditional, autonomous, body of economic theory.

Monday, the prize committee gave its award to two people -- one of each of those two descriptions.

Today I'll say something about one of them, leaving the other for next week (and leaving the latest developments in the Bear Stearns trial until tomorrow).

Let's begin with the phrase "the tragedy of the commons," which was coined by Garrett Hardin, in a seminal article in 1968. This is a variant of the game theory conception of the "prisoner's dilemma (PD)" As you may know, the point of the PD is that decisions rational for each of the prisoners taken separately will lead to a sub-optimal result for both of them. In Hardin's variation, there are no human interrogators getting between the "prisoners," so the focus not on who outsmarts whom, but on how humans use their natural resources.

Hardin asked his readers to think of a common patch of land in the middle of an agrarian village, in which custom provides that any village member can let his cattle graze on that land.

The tragedy is that actions that are individually rational will prove collectively disastrous. Each herdsman will fatten up his own cows as much as possible, increasing their value as beef. All the benefit of that over-grazing goes into his own pocket, whereas he only bears a fraction of the risk from it -- the risk of overgrazing.

Wars or disease may delay a day of reckoning over time -- even for centuries. But when there is a social equilibriumn for long enough to allow full sway to the profit maximizing choice, then the commons will be over-grazed, and will become useless.

Hardin's parable has been invoked by two different sets of people -- regulators and libertarians. The former say, "This shows why we have to regulate the use of common property, such as the atmosphere or water rights, to avoid the equivalent of over-grazing." The latter say, "The best choice is generally to privatize the commons -- each rancer will worry about the long-time future of his own plot when it really is his own," though in the case of the atmosphere, applying that insight requires some ingenuity.

Hardin's parable continues both to fascinate and to depress. For one wants to believe that a smal group, a village or a co-op, not necessarily organized on hierarchical lines, and not necessarily reliant on a charter from Delaware, could manage to maintain a commons over a long period of time. Are we so pathetic as a species we can't manage that?

This brings us to the work of Elinor Ostrom, one of the two new economics laureates. She is not trained in economics, but in political science, and she approached the problem of the tragedy of the commons with the instincts of a historian. Thus, she came to write Governing the Commons: The Evolution of Institutions for Collective Action (1990).

She has asked in effect: have there in fact been communities that have handled their common property well over a long period of time? and, if so, what can we say about how they have done this? She applied the old rule: whatever is actual, is possible. Various sorts of commons' -- forests and fisheries, for example -- have proven susceptible to community use without over-use along the lines Hardin's model predicts.

I don't think she gets us to a "comedy of the commons," but her work does help to mitigate the sense of tragedy.

Eastbourne sells stake in Amylin

Eastbourne Capital, one of the shareholders who waged a proxy contest over Amylin Pharmaceuticals earlier this year, has sold its entire stake in that company, according to an SEC filing.

There are twelve seats on the Amylin board. Five of them were up for grabs at the meeting in May. The dissidents won two of those five.

Amylin, a San Diego based pharma company (NASDAQ:AMLN), focuses on drugs for the treatment of diabetes and obesity.

Dissidents have expressed frustration with some of the deals Amylin's management has cut, especially a partnership with giant Eli Lilly.

The stock price was between $11 and $11.50 at the time of that annual meeting. It rose in subsequent weeks, getting as far as $15.50 in early August, though the price has lost some of those gains since. Even with the recent slide, the stock price has considerably outperformed the Nasdaq-100 index in recent months.

This news made me curious about the size of the market for diabetes treatments. A little googling discovered the abstract of a book on the subject, INNOVATIONS IN THE MANAGEMENT OF DIABETES published last year.

The abstract begins: "Diabetes has become the fifth leading cause of death across developed markets, and cases of the disease are forecast to grow by 7.1% across the globe by 2013. The market for innovative diabetes treatments will be driven by this projected rise in prevalence, together with the substantial unmet need for drugs that can effectively halt or reverse disease progression. Although extended lifecycle management for existing antidiabetic therapies may offer sales growth in the short term, the development of new drugs from novel classes will become increasingly important in the future."

Sunday, October 11, 2009

A Game Theorist is Due?

The official Nobel Prizes have all been bestowed. What remains is the unofficial Nobel.

What is loosely termed the Nobel Prize in Economics is actually the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. It was not one of the prizes for which the old dynamiter provided in his will, althouh it has successfully ridden along on their coattails and established for itself an analogous eminence.

Regardless: tomorrow we will know the name of this year's winner(s) of this final 'Nobel.'

If we list the winners of the last five years, we can see that the committee has oscillated back and forth between general game-theoretic approaches to social science (inclusive of course of economics) on the one hand, and hardcore economics as an autonomous field on the other. This oscillation goes back to the Nash/Selten/Harsanyi award of 1995, immortalized by Hollywood but we'll stick to the more recent swerves.

2004 Finn E. Kydland and Edward C. Prescott. Kydland teaches at the University of California, Santa Barbara, Prescott at Arizona State. They won for work on the business cycle.

2005 Robert J. Aumann and Thomas C. Schelling. Aumann is at Hebrew University of Jerusalem, in Israel. Schelling is retired, but is most closely associated with Harvard University. They won for game theory. This prize was interpreted by some as evidence the economics Award was morphing into a more general social-sciences award.

2006 Edmund S. Phelps. This was more hadcore economics, though. Phelps won for work on "intertemporal tradeoffs in macroeconomic policy." Specifically, he postulated a "natural rate of unemployment." The simple but depressing idea that government policies designed to push unemployment below this rate will have adverse consequences later sounds a little better if it is called an intertemporal trade-off, doesn't it?

2007 Leonid Hurwicz, Eric S. Maskin, Roger B. Myerson. Hurwicz is affiliated with the University of Minesota; Maskin with Princeton; Myerson with the University of Chicago. This was again an award for game theory, although the prize committee referred to it as "mechanism design theory."

2008 Paul Krugman. Economics in a strict sense again.

So I'm thinking 2009 will be a year for social science and game theory once again.