Carlos Slim has just infused some much-needed capital into the good grey New York Times - given it some "breathing room" as the saying goes.
Slim, the Mexican telecommunications billionaire, is lending the paper $250 million.
He is buying senior unsecured notes. They will be due in 2015 and will carry a 14.053% percent annual interest payment. Payments will be semi-annual.
The Times has the right to prepay the notes beginning in 2012.
Slim isn't an "activist investor." He appears uninterested in shaking up the operations of the company. Indeed, if there is a change of control during the pendency of these loans, it will trigger a “repurchase right” wherein Slim can require full repayment almost immediately. So the deal may be understood as entrenching the present control group.
The notes carry detachable warrants providing the right to buy up to 15.9 million shares of the Times Co.’s Class A stock at a strike price of $6.3572 a share. Slim, who already owns 6.4% of the company, could bring that stake up to 17% by converting these warrants, thereby making himself the third largest shareholder.
Slim doesn't get a board seat.
I don't know what to make of any of this, but I've chronicled the recent history of The New York Times in this blog and I'll continue to do so. I have a feeling that one way or another this transaction may in the fture be seen as a benchmark.
Wednesday, January 28, 2009
Tuesday, January 27, 2009
Three brief items
1. Selectica
Last time we checked in on the Delaware courts, Selectica had doubled the number of shares of common stock held by all of its shareholders except those of its would-be acquirers, Versata and Trilogy. It had also filed a complaint in court looking for a declaratory judgment -- it wants the court to give a goodhousekeeping seal to its actions.
More recently, (January 16) the defendants, Versata and Trilogy, filed their answer, with a copy to the SEC. You can read it for yourself here, I expect I'll discuss it next week.
2. Berndt out at Telular
Telular, a wireless communications company, has settled a pending proxy contest with Simcoe Partners, which owns just over 5% of its stock.
Simcoe's founder, Jeffrey Jacobowitz, will take a seat on Telular's board of directors, and the chairman of that board, John Berndt, will not stand for re-election. A new chairman will be chosen at the first board meeting after the 2009 annual meeting, which will likely take place in March. The announcement is a buit vague about timing. It mentions a 2010 annual meeting in March of that year, and it mentions a 2009 anual meeting upcoming -- so I'm guessing March for the more proximate meeting as well.
3. Circuit City, the electronics chaim that filed for bankruptcy in November, now says it is in talks with two potential buyers in connection with re-organization.
Meanwhile, its stores are holding "liquidation sales" that look suspiciously like those of an operation not too keen on liquidating. Discounts are at 10%, no more. This would make sense if the new buyers actually want to inherit an ongoing enterprise.
Last time we checked in on the Delaware courts, Selectica had doubled the number of shares of common stock held by all of its shareholders except those of its would-be acquirers, Versata and Trilogy. It had also filed a complaint in court looking for a declaratory judgment -- it wants the court to give a goodhousekeeping seal to its actions.
More recently, (January 16) the defendants, Versata and Trilogy, filed their answer, with a copy to the SEC. You can read it for yourself here, I expect I'll discuss it next week.
2. Berndt out at Telular
Telular, a wireless communications company, has settled a pending proxy contest with Simcoe Partners, which owns just over 5% of its stock.
Simcoe's founder, Jeffrey Jacobowitz, will take a seat on Telular's board of directors, and the chairman of that board, John Berndt, will not stand for re-election. A new chairman will be chosen at the first board meeting after the 2009 annual meeting, which will likely take place in March. The announcement is a buit vague about timing. It mentions a 2010 annual meeting in March of that year, and it mentions a 2009 anual meeting upcoming -- so I'm guessing March for the more proximate meeting as well.
3. Circuit City, the electronics chaim that filed for bankruptcy in November, now says it is in talks with two potential buyers in connection with re-organization.
Meanwhile, its stores are holding "liquidation sales" that look suspiciously like those of an operation not too keen on liquidating. Discounts are at 10%, no more. This would make sense if the new buyers actually want to inherit an ongoing enterprise.
Monday, January 26, 2009
Lowering the rating on US Treasury bonds.
Yesterday, after babbling along a bit about The New York Times, the new administration, etc., I ended up with a brief discussion of the credit rating agencies. I want to pursue that point today.
I wrote that "I'd just like to point out in a cynical spirit that S&P and Moody's could strike back were they to feel really threatened by any regulatory change. They could lower the credit rating of US Treasury bonds. How devastating would that be to the ability of the US to keep borrowing on a world-historically absurd scale."
The chairman of S&P's sovereign ratings committee, John Chambers, raised the issue of lowering that rating four months ago.
Now, ask yourself: does this really have deterrent value? Would it be devastating? I can imagine treasury Secy Geithner telling President Obama, "Our bonds will be just as valuable the day after their downgrade as they were the day before. There will still be the uninterrupted history, from Alexander Hamilton's day to my own, in which every payment has been made on every bond. Are there lots of other institutions with such a 200-year-plus track record? Let's not fear S&P. They can't make our bonds unattractive by calling them names."
But if Geithner gives such a speech to the Prez, won't it imply that markets can IN GENERAL look beyond the S&P rating (and the Moody's rating too) and reach rational conclusions about the instruments being rated?
Are the ratings agencies irrelevant, or are they important? If they are important enough to be worth regulating, aren't they important enough to be a serious threat to the marketability of bonds?
Obama might after all reply to Geithner in our imagined conversation in the Oval Office: "If we shouldn't fear S&P, it is because they don't really matter to the buyers of such instruments. But if they don't really matter, what is the point of regulating them?"
And that would be a very good question.
I wrote that "I'd just like to point out in a cynical spirit that S&P and Moody's could strike back were they to feel really threatened by any regulatory change. They could lower the credit rating of US Treasury bonds. How devastating would that be to the ability of the US to keep borrowing on a world-historically absurd scale."
The chairman of S&P's sovereign ratings committee, John Chambers, raised the issue of lowering that rating four months ago.
Now, ask yourself: does this really have deterrent value? Would it be devastating? I can imagine treasury Secy Geithner telling President Obama, "Our bonds will be just as valuable the day after their downgrade as they were the day before. There will still be the uninterrupted history, from Alexander Hamilton's day to my own, in which every payment has been made on every bond. Are there lots of other institutions with such a 200-year-plus track record? Let's not fear S&P. They can't make our bonds unattractive by calling them names."
But if Geithner gives such a speech to the Prez, won't it imply that markets can IN GENERAL look beyond the S&P rating (and the Moody's rating too) and reach rational conclusions about the instruments being rated?
Are the ratings agencies irrelevant, or are they important? If they are important enough to be worth regulating, aren't they important enough to be a serious threat to the marketability of bonds?
Obama might after all reply to Geithner in our imagined conversation in the Oval Office: "If we shouldn't fear S&P, it is because they don't really matter to the buyers of such instruments. But if they don't really matter, what is the point of regulating them?"
And that would be a very good question.
Sunday, January 25, 2009
The New York Times
A front page story in today's New York Times, by Stephen Labaton, onthe basis of "recent interviews with officials" and statements at the incoming crowd's confirmation hearings, tells us that the new administration will "move quickly to tighten the nation's financial regulatory system."
Both Mary Schapiro and Timothy Geithner -- the new heads of the SEC and the Treasury Department respectively -- say for example that they want to change the compensation model of credit rating agencies.
I'll link you to what I said about this issue in October in my other blog. If you don't feel like chasing that link, here's an incentive. Cows are involved.
But if even that incentive leaves you unmoved, here's the crucial (non-bovine) paragraph:
There is a powerful case to be made that the credit rating agencies have had an inherently conflict-prone business model, and that this has introduced an element of instability into the US financial system in recent years. In short, they're paid by the issuers they rate. If they rate an issuer's garbage AAA, that issuer will presumably give them repeat business. If they downgrade, the issuer has had the option of shopping around for a higher rating elsewhere. So there's been a race to the bottom, and anyone can get a AAA.
My own instinct, when faced with a perverse incentive structure of that sort, is to ask not "how soon can we get the government to prohibit this?" but raher, "what has the government done to encourage/empower this?"
In ther case of the CRAs and their compensation model, there are good answers to the latter question. But I don't like to become too predictable, so I won't pursue that. Consider it your homework assignment, dear reader.
Instead, I'd just like to point out in a cynical spirit that S&P and Moody's could strike back were they to feel really threatened by any regulatory change. They could lower the credit rating of US Treasury bonds. How devastating would that be to the ability of the US to keep borrowing on a world-historically absurd scale.
Mutual assured destruction. Just like the old Cold War.
Both Mary Schapiro and Timothy Geithner -- the new heads of the SEC and the Treasury Department respectively -- say for example that they want to change the compensation model of credit rating agencies.
I'll link you to what I said about this issue in October in my other blog. If you don't feel like chasing that link, here's an incentive. Cows are involved.
But if even that incentive leaves you unmoved, here's the crucial (non-bovine) paragraph:
There is a powerful case to be made that the credit rating agencies have had an inherently conflict-prone business model, and that this has introduced an element of instability into the US financial system in recent years. In short, they're paid by the issuers they rate. If they rate an issuer's garbage AAA, that issuer will presumably give them repeat business. If they downgrade, the issuer has had the option of shopping around for a higher rating elsewhere. So there's been a race to the bottom, and anyone can get a AAA.
My own instinct, when faced with a perverse incentive structure of that sort, is to ask not "how soon can we get the government to prohibit this?" but raher, "what has the government done to encourage/empower this?"
In ther case of the CRAs and their compensation model, there are good answers to the latter question. But I don't like to become too predictable, so I won't pursue that. Consider it your homework assignment, dear reader.
Instead, I'd just like to point out in a cynical spirit that S&P and Moody's could strike back were they to feel really threatened by any regulatory change. They could lower the credit rating of US Treasury bonds. How devastating would that be to the ability of the US to keep borrowing on a world-historically absurd scale.
Mutual assured destruction. Just like the old Cold War.
Wednesday, January 21, 2009
The Chicago Sun-Times
Davidson Kempner Capital Management says that it has received the votes (technically, the "consents") that it needed for the success of its solicitation campaign. It says it is entitled now to have its nominees on the board of the Sun-Times Media Group, the parent company of the Chicago Sun-Times, and take control.
Sun-Times Media hasn't yet conceded defeat. It says it will retain an independent inspector to verify the results.
Davidson Kempner has criticized what it calls the “cash burn rate” under the incumbent directors. The cash balance apparently fell by about $20 million in the course of the third quarter of 2008.
Earlier this month RiskMetrics Group/ ISS endorsed the consent campaign.
Looking at the stock chart insert, youy can understand shareholder unhappiness. But such are the difficulties of the dead-tree newspaper business these days that it isn't obvious a change of control will do a lot of good.
Tuesday, January 20, 2009
Patent trolls and trading algorithms
US patent law may have turned away from a cliff in recent months.
Bernard L. Bilski had tried to patent an "energy risk-management method." Basically, he was seeking to claim rights to the idea of commodity hedging, as a "method of managing the consumption risk costs of a commodity [such as heating oil] sold by a commodity provider at a fixed price."
This was not a frivolous claim, either. There was some language in the precedents that seemed to encourage it. The more's the pity.
Fortunately, the US Court of Appeals has upheld the Patent Office in rejecting Bilski's claims.
The court said that a business process is eligible for a patent if and only if it is (a) tied to a particular machine or apparatus, or (b) involves the transformation of particular article into a different state or thing.
Anyone have any illuminating comments on business process patents, trading algorithms, etc. in this context? I'm all ears.
Bernard L. Bilski had tried to patent an "energy risk-management method." Basically, he was seeking to claim rights to the idea of commodity hedging, as a "method of managing the consumption risk costs of a commodity [such as heating oil] sold by a commodity provider at a fixed price."
This was not a frivolous claim, either. There was some language in the precedents that seemed to encourage it. The more's the pity.
Fortunately, the US Court of Appeals has upheld the Patent Office in rejecting Bilski's claims.
The court said that a business process is eligible for a patent if and only if it is (a) tied to a particular machine or apparatus, or (b) involves the transformation of particular article into a different state or thing.
Anyone have any illuminating comments on business process patents, trading algorithms, etc. in this context? I'm all ears.
Monday, January 19, 2009
Ramius' white paper
Ramius Capital, an activist hedge fund we have had reason to discuss here before, has put out a white paper, "The Case for Activist Strategies."
I read these things so you don't have to.
Here are five key points from the paper:
1) It traces the recent prevalence of activist strategies in part to Eliot Spitzer. Spitzer successfully pushed for certain reforms back when he was New York's attorney general that had the consequence of pushing professional analysts away from the sell side. Unsurprisingly, those analysts have found another lucrative use for their skill set: on the buy side.
2) A crowding-out effect is observable in the empirical data on this strategy. This is a textbook point: if a business plan works often enough to draw emulation, the emulation will reduce the profitability of that plan. Specifically, "the average benchmark adjusted return attributed to hedge fund activism ... declined during the 2001 to 2006 time period."
3) Many activist investors have had negative results in 2008. This is not, Ramius assures us, a defect in the strategy, "the performance of top-tier managers relative to equity indices has been outstanding."
4) Even in the case of not-so-outstanding results, the authors of the white paper don't want us to fault the strategy, because macroeconomic factors and technical pressures "completely overwhelmed fundamentals [last year], causing companies to trade at or below intrinsic value despite the activist manager's otherwise thoughtful plan to unlock value."
5) When allocating capital to an activist investor, it is a good idea to consider that they aren't all the same, and that the best variants of the strategy for the present climate may be those that push primarily for strategic or operational change (rather than financial or governance changes).
I read these things so you don't have to.
Here are five key points from the paper:
1) It traces the recent prevalence of activist strategies in part to Eliot Spitzer. Spitzer successfully pushed for certain reforms back when he was New York's attorney general that had the consequence of pushing professional analysts away from the sell side. Unsurprisingly, those analysts have found another lucrative use for their skill set: on the buy side.
2) A crowding-out effect is observable in the empirical data on this strategy. This is a textbook point: if a business plan works often enough to draw emulation, the emulation will reduce the profitability of that plan. Specifically, "the average benchmark adjusted return attributed to hedge fund activism ... declined during the 2001 to 2006 time period."
3) Many activist investors have had negative results in 2008. This is not, Ramius assures us, a defect in the strategy, "the performance of top-tier managers relative to equity indices has been outstanding."
4) Even in the case of not-so-outstanding results, the authors of the white paper don't want us to fault the strategy, because macroeconomic factors and technical pressures "completely overwhelmed fundamentals [last year], causing companies to trade at or below intrinsic value despite the activist manager's otherwise thoughtful plan to unlock value."
5) When allocating capital to an activist investor, it is a good idea to consider that they aren't all the same, and that the best variants of the strategy for the present climate may be those that push primarily for strategic or operational change (rather than financial or governance changes).
Sunday, January 18, 2009
Mary Schapiro
Schapiro, the incoming President's nominee to head the Securities and Exchange Commission, testified before the Senate Banking Committee on Thursday.
In my lazy Sunday sort of way, I'm just going to paste the bulk of her opening statement at that hearing here.
Like millions of families, my parents worked hard to save enough to buy a home, send their children to college, and have a secure retirement. They taught my siblings and me right from wrong – and that we could get ahead by working hard and playing by the rules.
Perhaps that’s why I’ve spent my career – at the SEC, CFTC, and most recently at FINRA – committed to building a financial regulatory system that protects investors and supports and strengthens free and fair markets.
We cannot underestimate the situation we are now in: the capital markets have collapsed; trillions of dollars of wealth have been lost; our economy is in recession; and investor confidence has been badly shaken. Middle-class families who were relying on that nest egg to pay to send a son or daughter to college or for a secure retirement now, don’t know where to turn.
There are many reasons for this crisis – and one of them is that our regulatory system has not kept pace with the markets and the needs of investors.
It is precisely during times like these that we need an SEC that is the investor’s advocate – that has the staff, the will and the resources necessary to move with great urgency to bring transparency and accountability to all corners of the marketplace, to vigorously prosecute those who have broken the law and cheated investors, and to modernize our country’s regulatory system to match the realities of today’s global, interdependent markets.
These urgent responsibilities would fill any agenda, but, Mr. Chairman, allow me to highlight a few of my top priorities.
First and foremost, if confirmed as Chairman, I will move aggressively to reinvigorate enforcement at the SEC. With investor confidence shaken, it is imperative that the SEC be given the resources and the support it needs to investigate and go after those who cut corners, cheat investors, and break the law. As the first SEC Chairman, Joseph Kennedy, told the nation 75 years ago in explaining the agency’s role, “The Commission will make war without quarter on any who sell securities by fraud or misrepresentation.”
I look forward to working closely with you, Mr. Chairman, and the members of the Committee to ensure the SEC has the capability, to fulfill this critical mission – as well as to perform all of its other important duties.
Second, I want to re-engage the SEC with the people we serve, namely, investors. The investor community – from the largest pension fund to the family who has scrimped and saved in their 401(k) or 529 plan – needs to feel that they have someone on their side, that they can go to the SEC for advice, to seek redress, or to have their opinions heard.
Third, as I work to deepen the SEC’s commitment to investor protection, transparency, accountability, and disclosure, I also want to ensure these commitments are preserved in any regulatory overhaul that may be undertaken.
Indeed, as a member of the President’s Working Group on the Financial Markets, I hope I can offer its members, the Administration, and Congress both the benefits of my years as a regulator as well as the decades of experience the professionals at the SEC have in these areas.
The American people want and expect us to update the regulatory system that has failed them – and to prevent the kinds of abuses that have contributed to the economic crisis we now face. I assure you that I will always keep their concerns front and center.
Seventy-five years after the SEC was founded, the Commission finds itself in a situation where, once again, it must play a critical role in reviving our markets, bolstering investor confidence, and rejuvenating our economy.
I am under no illusion that this will be an easy job. There is a lot of work to be done – quickly and diligently – in the months ahead. But I look forward to this challenge, to helping the millions of investors who rely on strong markets and a strong economy, and to working with the professionals at the SEC and the members of this Committee.
In my lazy Sunday sort of way, I'm just going to paste the bulk of her opening statement at that hearing here.
Like millions of families, my parents worked hard to save enough to buy a home, send their children to college, and have a secure retirement. They taught my siblings and me right from wrong – and that we could get ahead by working hard and playing by the rules.
Perhaps that’s why I’ve spent my career – at the SEC, CFTC, and most recently at FINRA – committed to building a financial regulatory system that protects investors and supports and strengthens free and fair markets.
We cannot underestimate the situation we are now in: the capital markets have collapsed; trillions of dollars of wealth have been lost; our economy is in recession; and investor confidence has been badly shaken. Middle-class families who were relying on that nest egg to pay to send a son or daughter to college or for a secure retirement now, don’t know where to turn.
There are many reasons for this crisis – and one of them is that our regulatory system has not kept pace with the markets and the needs of investors.
It is precisely during times like these that we need an SEC that is the investor’s advocate – that has the staff, the will and the resources necessary to move with great urgency to bring transparency and accountability to all corners of the marketplace, to vigorously prosecute those who have broken the law and cheated investors, and to modernize our country’s regulatory system to match the realities of today’s global, interdependent markets.
These urgent responsibilities would fill any agenda, but, Mr. Chairman, allow me to highlight a few of my top priorities.
First and foremost, if confirmed as Chairman, I will move aggressively to reinvigorate enforcement at the SEC. With investor confidence shaken, it is imperative that the SEC be given the resources and the support it needs to investigate and go after those who cut corners, cheat investors, and break the law. As the first SEC Chairman, Joseph Kennedy, told the nation 75 years ago in explaining the agency’s role, “The Commission will make war without quarter on any who sell securities by fraud or misrepresentation.”
I look forward to working closely with you, Mr. Chairman, and the members of the Committee to ensure the SEC has the capability, to fulfill this critical mission – as well as to perform all of its other important duties.
Second, I want to re-engage the SEC with the people we serve, namely, investors. The investor community – from the largest pension fund to the family who has scrimped and saved in their 401(k) or 529 plan – needs to feel that they have someone on their side, that they can go to the SEC for advice, to seek redress, or to have their opinions heard.
Third, as I work to deepen the SEC’s commitment to investor protection, transparency, accountability, and disclosure, I also want to ensure these commitments are preserved in any regulatory overhaul that may be undertaken.
Indeed, as a member of the President’s Working Group on the Financial Markets, I hope I can offer its members, the Administration, and Congress both the benefits of my years as a regulator as well as the decades of experience the professionals at the SEC have in these areas.
The American people want and expect us to update the regulatory system that has failed them – and to prevent the kinds of abuses that have contributed to the economic crisis we now face. I assure you that I will always keep their concerns front and center.
Seventy-five years after the SEC was founded, the Commission finds itself in a situation where, once again, it must play a critical role in reviving our markets, bolstering investor confidence, and rejuvenating our economy.
I am under no illusion that this will be an easy job. There is a lot of work to be done – quickly and diligently – in the months ahead. But I look forward to this challenge, to helping the millions of investors who rely on strong markets and a strong economy, and to working with the professionals at the SEC and the members of this Committee.
Wednesday, January 14, 2009
Second agreement
The December agreement between O'Charley's and Crescendo Partners was actually the second accord between this particular issuer and this particular hedge fund.
They entered into a settlement agreement back in March pursuant to which the restaurant company's board took on three Crescendo representatives (Arnaud Ajdler, Gregory Monahan and Douglas Benham), and agreed to declassify itself.
The company had a nine-member board at the start of 2008, but as part of the March agreement it expanded the size of that board to eleven, and one of the incumbents stepped aside, making room for the three Crescendo reps.
Now, with the renewed discontent of Crescendo, and the revised treaty, the hedge fund has taken another step toward outright control. They're going to get a fourth rep, and the board itself is going to shrink to 10 members. So they'll only need one convert from the non-Crescendo members to produce a tie vote on a given issue.
The fourth Crescendo rep is: Philip J. Hickey Jr.
Mid-market restaurant chains are often squeezed in times like these. Consumers trade down. Those who previously ate at the upper end of the market may go to the mid-market places, but that is more than compensated for by consumers who used to eat at the mid-market who go to the bottom feeder drive-through places or just stay home.
My guess is that Crescendo sees O'Charley's as a long-term play. Eventually, there will be a recovery and the customers will return, and Crescendo wants to be in a position to profit when that happens.
Be fearful when everybody else is greedy, but be greedy when everybody else is fearful.
They entered into a settlement agreement back in March pursuant to which the restaurant company's board took on three Crescendo representatives (Arnaud Ajdler, Gregory Monahan and Douglas Benham), and agreed to declassify itself.
The company had a nine-member board at the start of 2008, but as part of the March agreement it expanded the size of that board to eleven, and one of the incumbents stepped aside, making room for the three Crescendo reps.
Now, with the renewed discontent of Crescendo, and the revised treaty, the hedge fund has taken another step toward outright control. They're going to get a fourth rep, and the board itself is going to shrink to 10 members. So they'll only need one convert from the non-Crescendo members to produce a tie vote on a given issue.
The fourth Crescendo rep is: Philip J. Hickey Jr.
Mid-market restaurant chains are often squeezed in times like these. Consumers trade down. Those who previously ate at the upper end of the market may go to the mid-market places, but that is more than compensated for by consumers who used to eat at the mid-market who go to the bottom feeder drive-through places or just stay home.
My guess is that Crescendo sees O'Charley's as a long-term play. Eventually, there will be a recovery and the customers will return, and Crescendo wants to be in a position to profit when that happens.
Be fearful when everybody else is greedy, but be greedy when everybody else is fearful.
Tuesday, January 13, 2009
Burns out at O'Charley's
I'm a little late with this -- it was on December 24 -- but hey, sue me.
A restaurant operator, O'Charley's Inc., has reaxched agreement with a hedge fund under threat of a proxy contest.
Under the agreement, long-time CEO Gregory Burns is stepping down, effective Fevruary 12.
The hedge fund involved is Crescendo Parties, of which we have ghad cause to speak on this blog before.
O'Charley's operates three restaurant chains, the eponymous O'Charley's, as well as Stone River Legendary Steaks and 99. I'm a regular patron of the Enfield, CT 99 restaurant, so this proxy fight strikes me as more interesting than some I have chronicled.
Burns has been around for a long time. He has been with O'Charley's for 25 years, and has been CEO for 16 of those. What led to his downfall?
An ugly stock chart(Nasdaq: CHUX), for one thing. The common stock was selling for $10 a share at the start of September. Three months later that was down below $2.
Of course, those three months were bad for a lot of listed companies. The Nasdaq 100 and the S&P indexes both show losses of 40% of their respective value over the same period. Still, CHUX lost 80% of its value, so stockholders naturally feel that the loss was twice as bad as it had to be.
More tomorrow.
A restaurant operator, O'Charley's Inc., has reaxched agreement with a hedge fund under threat of a proxy contest.
Under the agreement, long-time CEO Gregory Burns is stepping down, effective Fevruary 12.
The hedge fund involved is Crescendo Parties, of which we have ghad cause to speak on this blog before.
O'Charley's operates three restaurant chains, the eponymous O'Charley's, as well as Stone River Legendary Steaks and 99. I'm a regular patron of the Enfield, CT 99 restaurant, so this proxy fight strikes me as more interesting than some I have chronicled.
Burns has been around for a long time. He has been with O'Charley's for 25 years, and has been CEO for 16 of those. What led to his downfall?
An ugly stock chart(Nasdaq: CHUX), for one thing. The common stock was selling for $10 a share at the start of September. Three months later that was down below $2.
Of course, those three months were bad for a lot of listed companies. The Nasdaq 100 and the S&P indexes both show losses of 40% of their respective value over the same period. Still, CHUX lost 80% of its value, so stockholders naturally feel that the loss was twice as bad as it had to be.
More tomorrow.
Monday, January 12, 2009
Bankruptcy has macroeconomic consequences
Thank you, Mr. Icahn. But my gratitude has its limits.
The positive first. I've been seeking to make the point for some time now that bankruptcy laws have macroeconomic consequences, and that in particular the depth of this present bust has a lot to do with malfunctions in the corporate re-organization system. (Follow that link to an entry on my other blog where I made this point back in sunny July.)
Nobody has listened to me, and I've been hoping somnebody who can command a broader audience than lil' old Christopher Faille would come along and say the same thing.
Now Mr. Icahn has stepped forward as that somebody. See his op-ed piece in Friday's Wall Street Journal.
That's all for the positive side, though. On the negative side, Icahn's agenda for bankruptcy reform seems to me wrong. The spotlight is good (thanks again) the proposal is bad. Icahn wants to abolish the rule that gives incumbent management (the debtor in possession) an exclusive opportunity to prepare a re-organization plan for the first 18 months after a filing.
He asks: "Why should the same management that got the company in trouble have the right to lock up its assets for an extended period of time?"
The simple answer to that question is that the management of a corporation has to make the decision to file for bankruptcy in the first place. Legislators have decided it is better to give them some incentive to do so than to have them continue to preside over an empty shell of a company until creditors force bankruptcy on them. The 18 month period that riles Icahn is part of a package aimed at inducing voluntary filings while there is still enough fo a company left for the filing to be in the public interest.
Maybe the legislature has made the wrong call there, but it isn't an inherently irrational call.
The problem with bankruptcy law, Mr. Icahn, isn't with the managers. It is with the overly aggressive liquidation trustees who bring "avoidance" actions and their kin at the real or imagined drop of a hat.
As trustees have become more aggressive in pressing such actions, financial entities all along the spectrum have become more sensitive about ending up as defendants therein. Regardless of the eventual outcome, just being a party to such a dispute is a catastrophe. What does one do to stay clear of that? In the absense of a time machine, the only way to avoid "avoidance" lawsuits is to refuise to be the counter-party of any institution that seems weak, or is even rumored to be considering a bankruptcy filing.
The trustees, in other words, have collectively created a hairtrigger mentality. If a hedge fund manager hears a rumor that his prime broker may be in trouble, he may not be able to afford to wait for evidence that the rumor is true. He has an incentive to sever his ties with that prime broker (read: Bear Stearns) on the rumor.
As Judge Posner wrote in the matter of Maxwell v. KPMG, "While the management of a going concern has many other duties besides bringing lawsuits, the trustee of a defunct business has little to do besides filing claims that if resisted he may decide to sue to enforce."
Bankruptcy reform has to focus on the task of reining-in such trustees.
The positive first. I've been seeking to make the point for some time now that bankruptcy laws have macroeconomic consequences, and that in particular the depth of this present bust has a lot to do with malfunctions in the corporate re-organization system. (Follow that link to an entry on my other blog where I made this point back in sunny July.)
Nobody has listened to me, and I've been hoping somnebody who can command a broader audience than lil' old Christopher Faille would come along and say the same thing.
Now Mr. Icahn has stepped forward as that somebody. See his op-ed piece in Friday's Wall Street Journal.
That's all for the positive side, though. On the negative side, Icahn's agenda for bankruptcy reform seems to me wrong. The spotlight is good (thanks again) the proposal is bad. Icahn wants to abolish the rule that gives incumbent management (the debtor in possession) an exclusive opportunity to prepare a re-organization plan for the first 18 months after a filing.
He asks: "Why should the same management that got the company in trouble have the right to lock up its assets for an extended period of time?"
The simple answer to that question is that the management of a corporation has to make the decision to file for bankruptcy in the first place. Legislators have decided it is better to give them some incentive to do so than to have them continue to preside over an empty shell of a company until creditors force bankruptcy on them. The 18 month period that riles Icahn is part of a package aimed at inducing voluntary filings while there is still enough fo a company left for the filing to be in the public interest.
Maybe the legislature has made the wrong call there, but it isn't an inherently irrational call.
The problem with bankruptcy law, Mr. Icahn, isn't with the managers. It is with the overly aggressive liquidation trustees who bring "avoidance" actions and their kin at the real or imagined drop of a hat.
As trustees have become more aggressive in pressing such actions, financial entities all along the spectrum have become more sensitive about ending up as defendants therein. Regardless of the eventual outcome, just being a party to such a dispute is a catastrophe. What does one do to stay clear of that? In the absense of a time machine, the only way to avoid "avoidance" lawsuits is to refuise to be the counter-party of any institution that seems weak, or is even rumored to be considering a bankruptcy filing.
The trustees, in other words, have collectively created a hairtrigger mentality. If a hedge fund manager hears a rumor that his prime broker may be in trouble, he may not be able to afford to wait for evidence that the rumor is true. He has an incentive to sever his ties with that prime broker (read: Bear Stearns) on the rumor.
As Judge Posner wrote in the matter of Maxwell v. KPMG, "While the management of a going concern has many other duties besides bringing lawsuits, the trustee of a defunct business has little to do besides filing claims that if resisted he may decide to sue to enforce."
Bankruptcy reform has to focus on the task of reining-in such trustees.
Sunday, January 11, 2009
Gary Ackerman's bill
On Thursday, Rep. Gary Ackerman introduced into the House of Representatives a bill (HR 302) that would require the SEC to reinstate the uptick rule.
This bears watching. I don't think the Obama administration will give it high priority, simply because they'll have too much else on their plate, but if it should strike a chord the incoming administration surely won't get on the opposite side.
Ackerman, a Democrat, represents New York's fifth congressional district -- the northwestern corner of Nassau County and the northeastern chunk of Queens.
His bill has six co-sponsors. It has been referred to the Financial Services Committee, chaired by Barney Frank.
This bears watching. I don't think the Obama administration will give it high priority, simply because they'll have too much else on their plate, but if it should strike a chord the incoming administration surely won't get on the opposite side.
Ackerman, a Democrat, represents New York's fifth congressional district -- the northwestern corner of Nassau County and the northeastern chunk of Queens.
His bill has six co-sponsors. It has been referred to the Financial Services Committee, chaired by Barney Frank.
Wednesday, January 7, 2009
Selectica's poison pill
As I noted yesterday: on December 22, Selectica filed a complaint in Delaware looking for a declaratory judgment upholding its poison pill provisions, and therevy beating back what looks like a gradual take-over attempt by the defendants in that action, Trilogy and its subsidiary, Versata.
It doesn't appear that the court has taken any action in the interim.
The poison pill (or "rights plan") involved had/has a 4.99% beneficial ownership trigger. [Those of us who are following the CSX/TCI mess know what a controversy-generating concept "beneficial ownership" itself can be.]
The company has described the goal of the plan as "to help protect the value of the company's net operating loss carryforwards while continuing to provide customary protections against abusive takeover tactics."
What is new here is that the board of directors pulled the trigger on January 2, announcing that the company is doubling the number of shares of common stock held by all its stockholders except for Versata and Trilogy.
Selectica registered the resulting new securities with the SEC on Monday, January 5.
Passage of a threshold amount by a particular acquirer is sometimes called a "flip-in event." In a case like this, it might better be called a flip-the-bird event.
It doesn't appear that the court has taken any action in the interim.
The poison pill (or "rights plan") involved had/has a 4.99% beneficial ownership trigger. [Those of us who are following the CSX/TCI mess know what a controversy-generating concept "beneficial ownership" itself can be.]
The company has described the goal of the plan as "to help protect the value of the company's net operating loss carryforwards while continuing to provide customary protections against abusive takeover tactics."
What is new here is that the board of directors pulled the trigger on January 2, announcing that the company is doubling the number of shares of common stock held by all its stockholders except for Versata and Trilogy.
Selectica registered the resulting new securities with the SEC on Monday, January 5.
Passage of a threshold amount by a particular acquirer is sometimes called a "flip-in event." In a case like this, it might better be called a flip-the-bird event.
Tuesday, January 6, 2009
A poison pill
On December 22, Selectica Inc. filed a complaint with the Chancery Court in Delaware seeking a declaratory judgement about a poison pill. It wants the court to declare its pill to be valid, in order to limit the amount of its equity owned by Versata Enterprises Inc.
Who is suing whom? Before we look into this particular poison-pill controversy, let's fill in the background.
Versata, the defendant in the lawsuit, began life as a software consulting company, Vision Software, in the early 1990s.
In March 2000 Vision Software went public under the new name, Versata, acquiring an astonishing market cap of $4 billion.
It went private again in February 2006, when it was acquired by Trilogy Inc., a Texas-based software concern. Versata operates as a wholly-owned subsidiary of Trilogy, and is nowadays engaged in intellectual-property disputes with SAP and Sun-Microsystems. It has
So who is the plaintiff? Selectica is a San Jose, California based concern that describes the purpose of its products as the unification of its customers' business processes "to correctly configure, price, and quote offerings across multiple distribution channels."
Looking into its history a little, I've found that Selectica received and spurned a $4 per share tender offer from Trilogy in Jan. 2005, more than a year before Trilogy became the parent company of Versata. So now,in January of 2009, Selectica has been resisting such offers from Trilogy and/or Versata for an even four years.
That's the background. More on this particular poison pill tomorrow.
Who is suing whom? Before we look into this particular poison-pill controversy, let's fill in the background.
Versata, the defendant in the lawsuit, began life as a software consulting company, Vision Software, in the early 1990s.
In March 2000 Vision Software went public under the new name, Versata, acquiring an astonishing market cap of $4 billion.
It went private again in February 2006, when it was acquired by Trilogy Inc., a Texas-based software concern. Versata operates as a wholly-owned subsidiary of Trilogy, and is nowadays engaged in intellectual-property disputes with SAP and Sun-Microsystems. It has
So who is the plaintiff? Selectica is a San Jose, California based concern that describes the purpose of its products as the unification of its customers' business processes "to correctly configure, price, and quote offerings across multiple distribution channels."
Looking into its history a little, I've found that Selectica received and spurned a $4 per share tender offer from Trilogy in Jan. 2005, more than a year before Trilogy became the parent company of Versata. So now,in January of 2009, Selectica has been resisting such offers from Trilogy and/or Versata for an even four years.
That's the background. More on this particular poison pill tomorrow.
Monday, January 5, 2009
BS v. BS II
So: what do I think about the "Black Swans versus Black-Scholes" dispute I tried to chronicle in yesterday's entry?
By way of answering, let me re-introduce you to Emanuel Derman. I mentioned him yesterday -- he was a co-author, with Taleb, of "The illusions of dynamic replication," the 2005 article that seems to have started the whole anti-Black-Scholes campaign.
Derman dropped out of the story then, because Taleb started shifting his line of attack and acquired new co-authors for the new approach.
But Derman, a one-time subatomic physicist, and the 2006 recipient of the Wilmott Award for Contributions to Quantitative Finance, has re-appeared. Now he shows up more as a defender of Black-Scholes than as a critic. See his New Years' Day blog comment on the Wilmott website.
So far as I understand these things: I think Derman is right. the Black-Scholes-Merton model was a real advance in the understanding of financial economics, one that has the benefit of being very clear about its simplifying assumptions. To oppose simplifying assumptions, after all, is to oppose a good deal more than this particular model for the pricing of stock options. It is to oppose a crucial step in the achievement of every major scientific advance on record.
And yes, I think with the anonymous recent poster at FT, that BSM has been on the whole a force for good in this crazy mixed-up world.
One intruguing sidebar to this controversy is the whole "teaching birds to fly" meme. Taleb and others on his side of the debate sometimes speak as if the idea of teaching birds to fly is inherently ridiculous, and if Black, Merton, and Scholes were trying to teach options traders to trade, describing methods the options traders already (instinctively?) possessed.
The linguist Noam Chomsky has invoked the same meme, as it happens, in his evaluation of primate-language research. Chomsky believes that langauge is a distinctively human attribute, that humans are hard-wired for it, and that the efforts to teach human language to other primates have failed in a predictable way, making this point. In an interview he gave in 1983 link, he said: "That's exactly what we should expect, I think. Why should we expect it? Because, if it turned out, contrary to what has so far been shown, if it turned out that apes really did have something like a capacity for human language, we would be faced with a kind of biological paradox. We would be faced with something analogous to, say, the discovery on a previously unexplored island that there is a species of bird with all the mechanisms for flight that has never thought of flying, until somebody comes along and trains it and says, look, you can fly. That's not impossible, but it's so unlikely that nobody would take the possibility very seriously."
Chomsky and Taleb, then, share the teaching-birds-to-fly meme.
But it seems to me, from either source, a bit presumptuous. There is nothing inherently absurd in teaching birds to fly. In fact, when I googled that phrase just now, I came up with this.
Birds are, it appears, taught how to fly, just as Elsa was taught how to be a free-ranging lion.
Cue the Born Free theme music please.
By way of answering, let me re-introduce you to Emanuel Derman. I mentioned him yesterday -- he was a co-author, with Taleb, of "The illusions of dynamic replication," the 2005 article that seems to have started the whole anti-Black-Scholes campaign.
Derman dropped out of the story then, because Taleb started shifting his line of attack and acquired new co-authors for the new approach.
But Derman, a one-time subatomic physicist, and the 2006 recipient of the Wilmott Award for Contributions to Quantitative Finance, has re-appeared. Now he shows up more as a defender of Black-Scholes than as a critic. See his New Years' Day blog comment on the Wilmott website.
So far as I understand these things: I think Derman is right. the Black-Scholes-Merton model was a real advance in the understanding of financial economics, one that has the benefit of being very clear about its simplifying assumptions. To oppose simplifying assumptions, after all, is to oppose a good deal more than this particular model for the pricing of stock options. It is to oppose a crucial step in the achievement of every major scientific advance on record.
And yes, I think with the anonymous recent poster at FT, that BSM has been on the whole a force for good in this crazy mixed-up world.
One intruguing sidebar to this controversy is the whole "teaching birds to fly" meme. Taleb and others on his side of the debate sometimes speak as if the idea of teaching birds to fly is inherently ridiculous, and if Black, Merton, and Scholes were trying to teach options traders to trade, describing methods the options traders already (instinctively?) possessed.
The linguist Noam Chomsky has invoked the same meme, as it happens, in his evaluation of primate-language research. Chomsky believes that langauge is a distinctively human attribute, that humans are hard-wired for it, and that the efforts to teach human language to other primates have failed in a predictable way, making this point. In an interview he gave in 1983 link, he said: "That's exactly what we should expect, I think. Why should we expect it? Because, if it turned out, contrary to what has so far been shown, if it turned out that apes really did have something like a capacity for human language, we would be faced with a kind of biological paradox. We would be faced with something analogous to, say, the discovery on a previously unexplored island that there is a species of bird with all the mechanisms for flight that has never thought of flying, until somebody comes along and trains it and says, look, you can fly. That's not impossible, but it's so unlikely that nobody would take the possibility very seriously."
Chomsky and Taleb, then, share the teaching-birds-to-fly meme.
But it seems to me, from either source, a bit presumptuous. There is nothing inherently absurd in teaching birds to fly. In fact, when I googled that phrase just now, I came up with this.
Birds are, it appears, taught how to fly, just as Elsa was taught how to be a free-ranging lion.
Cue the Born Free theme music please.
Sunday, January 4, 2009
BS v. BS: Black Swans against Black-Scholes
On December 30, the Economist's website posted an anonymous column about the Black-Scholes-Merton options pricing formula. Access it here if you please.
The columnist observes that BSM has come under attack of late, and it has even been used as a prime example of why the Nobel Prize in Economics ought to be discontinued. Scholes and Merton received that august prize in 1997 for their work on this model in articles published in 1973 [Fischer Black had died in 1995 and the award is never given posthumously.]
The critics of the BSM model to whom the Economist alludes include Nassim Nicholas Taleb, the author of Fooled by Randomness (2001) and The Black Swan (2007), who attributes much of the recent financial dislocation to what he sees as the fallacious view of financial risk and risk management of which the BSM model is an important part.
In 2005, Taleb and co-author Emanuel Derman wrote "The illusions of dynamic replication," in the journal Quantitative Finance. This was a brief nerdy paper in quant jargon. In essence, "dynamic replication" refers to the replication of the value of a derivative by the continuous ("dynamic") trading of its underlyings.
Presumably, dynamic replication would render the derivative itself redundant, and this fact allows for the determination of its value by means of the no-arbitrage principle.
The Derman-Taleb paper made the case that dynamic replication is much too complicated—there are simpler ways to get the results. The most important of these simpler ways is static replication. Their idea was to drop the principle of continuous trading and construct a portfolio consisting of a long position in a call and a short position in a put. The traditionally discounted expected value of their payoffs must replicate a forward contract.
The Black-Scholes option pricing formula could have been discovered much more rapidly than it was, Taleb and Derman maintained, had this simpler route to that goal been adopted.
In 2006, the same journal published a responsive comment from two students of Robert Merton, Doriana Ruffino and Jonathan Treussard, who took issue with the Derman-Taleb reasoning. Ms. Ruffino and Mr. Treussard wrote in their paper that although it's conceivable the same result could have been reached by mathematicians making use of put-call parity without dynamic replication, it would have been a fluke, a "matter of pure chance."
In 2007, Taleb changed partners and somewhat changed his line of attack. He wrote a paper with Espen Haug entitled "Why We Have Never Used the Black-Scholes-Merton Options Pricing Formula." They proposed that the name "Black-Scholes" itself be relegated to the dustbins. They would call the options pricing formula Bachelier-Thorp, after the early stochastic-process theorist Louis Bachelier and blackjack-sharp hedge-fund pioneer Ed Thorp.
The Taleb-Haug paper attracted more attention than did its Derman-Taleb precursor. I wrote about the controversy myself at that point.
On December 7, 2008, the Financial Times ran an opinion column by Taleb and another co-author, Pablo Triana, using the intervening market chaos to reinforce their argument against contemporary financial risk management in general and the BSM model in particular.
"Ask for the Nobel prize in economics to be withdrawn from the authors of these theories," they urged their readers. "Boycott professional associations that give certificates in financial analysis that promoted these methods. The fraud can be displaced only by shaming people, by boycotting the orthodox financial economics establishment and the institutions that allowed this to happen."
So it was that the same Pablo Triana wrote an open letter to the Swedish central bank, which gives out the Nobel Prize in this field (it isn't one of the real Nobel Prizes, instituted by the old peace-loving dynamiter of that name.) Triana said: "Stop doing this! You only encourage theorists who come up with these terrible ideas that lead us all off a cliff!" -- that my paraphrase of his letter, but I submit it's a fair one.
And so we come back to the column in The Economist, which takes issue with Triana and with the whole campaign, contending that the BSM model has been "a force for good," i.e. that the world is much better off in terms of how risks are managed than it would have been had the three authors written nothing at all.
So much for the history of this dispute. I'll wade into it (unworthily, for I'm a humble scribe who has just named several people all of whom are much smarter than am I) tomorrow.
The columnist observes that BSM has come under attack of late, and it has even been used as a prime example of why the Nobel Prize in Economics ought to be discontinued. Scholes and Merton received that august prize in 1997 for their work on this model in articles published in 1973 [Fischer Black had died in 1995 and the award is never given posthumously.]
The critics of the BSM model to whom the Economist alludes include Nassim Nicholas Taleb, the author of Fooled by Randomness (2001) and The Black Swan (2007), who attributes much of the recent financial dislocation to what he sees as the fallacious view of financial risk and risk management of which the BSM model is an important part.
In 2005, Taleb and co-author Emanuel Derman wrote "The illusions of dynamic replication," in the journal Quantitative Finance. This was a brief nerdy paper in quant jargon. In essence, "dynamic replication" refers to the replication of the value of a derivative by the continuous ("dynamic") trading of its underlyings.
Presumably, dynamic replication would render the derivative itself redundant, and this fact allows for the determination of its value by means of the no-arbitrage principle.
The Derman-Taleb paper made the case that dynamic replication is much too complicated—there are simpler ways to get the results. The most important of these simpler ways is static replication. Their idea was to drop the principle of continuous trading and construct a portfolio consisting of a long position in a call and a short position in a put. The traditionally discounted expected value of their payoffs must replicate a forward contract.
The Black-Scholes option pricing formula could have been discovered much more rapidly than it was, Taleb and Derman maintained, had this simpler route to that goal been adopted.
In 2006, the same journal published a responsive comment from two students of Robert Merton, Doriana Ruffino and Jonathan Treussard, who took issue with the Derman-Taleb reasoning. Ms. Ruffino and Mr. Treussard wrote in their paper that although it's conceivable the same result could have been reached by mathematicians making use of put-call parity without dynamic replication, it would have been a fluke, a "matter of pure chance."
In 2007, Taleb changed partners and somewhat changed his line of attack. He wrote a paper with Espen Haug entitled "Why We Have Never Used the Black-Scholes-Merton Options Pricing Formula." They proposed that the name "Black-Scholes" itself be relegated to the dustbins. They would call the options pricing formula Bachelier-Thorp, after the early stochastic-process theorist Louis Bachelier and blackjack-sharp hedge-fund pioneer Ed Thorp.
The Taleb-Haug paper attracted more attention than did its Derman-Taleb precursor. I wrote about the controversy myself at that point.
On December 7, 2008, the Financial Times ran an opinion column by Taleb and another co-author, Pablo Triana, using the intervening market chaos to reinforce their argument against contemporary financial risk management in general and the BSM model in particular.
"Ask for the Nobel prize in economics to be withdrawn from the authors of these theories," they urged their readers. "Boycott professional associations that give certificates in financial analysis that promoted these methods. The fraud can be displaced only by shaming people, by boycotting the orthodox financial economics establishment and the institutions that allowed this to happen."
So it was that the same Pablo Triana wrote an open letter to the Swedish central bank, which gives out the Nobel Prize in this field (it isn't one of the real Nobel Prizes, instituted by the old peace-loving dynamiter of that name.) Triana said: "Stop doing this! You only encourage theorists who come up with these terrible ideas that lead us all off a cliff!" -- that my paraphrase of his letter, but I submit it's a fair one.
And so we come back to the column in The Economist, which takes issue with Triana and with the whole campaign, contending that the BSM model has been "a force for good," i.e. that the world is much better off in terms of how risks are managed than it would have been had the three authors written nothing at all.
So much for the history of this dispute. I'll wade into it (unworthily, for I'm a humble scribe who has just named several people all of whom are much smarter than am I) tomorrow.
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