Monday, October 4, 2010


I will not be adding new posts to Proxy Partisans for some time now.

It has been fun and a privilege, and I hope to resume when the time is right.

Thank you to all readers.

Sunday, October 3, 2010

Posen's speech

Adam Posen is a senior fellow at the Peterson Institute for International Economics , and you can click on that link to learn more about him. Heavy-duty important economist with trans-Atlantic influence. Member of the monetary policy committee of the Bank of England, etc.

Posen spoke on September 28 to the Hull and Humber Chamber of Commerce, and laid out "the case for doing more." See the whole speech here.

For more of what? by whom? Central bankers "in the UK and beyond," should be doing more to promote recovery, and should not concern themselves with the risk of inflation that this creates.

"[P]olicymakers should not settle for weak growth out of misplaced fear of inflation. If price stability is at risk over the medium-term, meaning over the two- to three-year time horizon ... it is on the downside."

That just sounds insane to me. It seems that our economics gurus have uterly lost sight of the most basic facts about the business cycle. Maybe this video will help. Surely recent events have vindicated Hayek's concern about the boom and bust cycle? Those responsible for the bust are always those who stoked the preceding boom.

We're suffering from the hangover from the last boom-bust, and we're reaching for a hair of the dog. Breaking the addiction would be a better plan.

Wednesday, September 29, 2010

Dividend policy

Let's put some links together on the broad subject -- one of great relevance to all the themes of this blog -- of corporate dividend policy. How do companies decide how much cash their stockholders get on a regular basis?

Here's a pdf from Deutsche Bank on the theory and practice.

And here are a few words from scholars at UPenn.

One piece of the puzzle is the fact that individuals in the US are generally taxed more for dividends than for the capital gain on the sale of stock. The dividends are "ordinary income." So, shouldn't a rational investor want the company to keep reinvesting its cash, building up that strike price, and earning him that capital gain? Why does anyone even want a dividend?

On the other hand, a stock that doesn't pay dividends has a Madoff-like air to it. I'm holding on to it so I can sell it at a higher price to someone else, you say? Well, why would he want it? Because he expects to sell it to a yet greater fool further down the road? Somewhere, somebody has to receive a stream of income/cash in order to anchor those capital gains. That, at any rate is one common sensical take on the issue.

At any rate, once a company has a history, a track record as to the quantity of dividends it pays, there is a good deal of pressure to keep it up. The dividend level is "sticky." Why? Because any departure can be taken as a signal. A cut in dividends can be considered proof the company is in trouble and desperately needs to hold onto its cash. An increase in dividends can also be taken as a signal that the company is in trouble, specifically that it is making a desperate move to perfume that fact!

Consider that Lehman Brothers, the broker-dealer that famously declared bankruptcy in September 2008 and set off that autumnal crisis, had increased its own dividends by 13% earlier in the year. You may as well give that some consideration -- if you are the member of a board of directors that institutes such a cut, signalling theorists will consider it for you!

Finally, if you are an investor, you might want to consider a dividend reinvestment plan. Especially because it goes by such a neat acronym. Such a plan is known as a DRIP.

Tuesday, September 28, 2010

Europe's Hedge Funds

Deliberations among the nations of the European Union about a new level of regulations for hedge funds there have reached an impasse.

I wrote here 11 months ago that the draft directive circulating at that time was dead as written. There have been lots of developments since.

The U.K., where most of the Europe-headquartered funds actually are, has been working to water down the more draconian aspects of these proposals from within the EU system, and the U.S. has been exerting some pressure from without.

The Brits are worried that this will hurt London's status as one of the world's great financial hubs, while the U.S., and in particular Treasury Secretary Geithner, worries that the EU is going protectionist -- that it will put barriers in the path of any institutions and high net worth investors there who want to entrust their money to operations in New York.

Meanwhile, the French and the Germans are pulling in the other direction, to make the regulations tougher on the nasty hedge funds, whether of New York or London, than the drafts of the directive would have it.

There is an idea circulating in some quarters that hedge funds were at fault in the 2007-08 credit crunch. That is utter nonsense. Quite old-fashioned, supposedly conservative and stodgy, institutions like banks were the real trouble makers. The hedgers generally did a good job of keeping their head while bankers all around them were losing theirs.

At any rate: the news this week is that EU diplomats tried to push the process forward at a meeting Monday, the 27th, but they failed.

A big possible winner is Switzerland. A map will tell you that the Swiss are in Europe, but they don't act like it. They've stayed away from the EU, and if EU rules do become too onerous for HFs, we might see a lot of them developing a taste for Alpine air.

Monday, September 27, 2010

Buy Some Furniture, Give the Cat A Name

This is the chart for the performance of Tiffany's common stock over the last six months. As you can see, there was an early peak at $52, then a jagged decline to $36 by early July. It has since risen from that, to the neighborhood of $46, although there was another dramatic-looking dip at the end of August.

That dip may have come about largely because Trian Fund, the investment vehicle of Nelson Peltz, has been selling. Trian still owns a 5.43% stake, whichmakes it Tiffany's biggest stockholder.

Tiffany did better-than-expected in recent quarters. But even that hurts it in Shapira's estimation, because she thinks it did well on the basis of declining commodity prices, and its profit margins are not sustainable.

The relevant Goldman Sachs analyst has downgraded Tiffany from neutral to sell. That analyst is Adrianne Shapira by name. She says, "TIF trades at a 26% premium to an index of department stores, which is approaching one standard deviation above the 3-year average premium of 15%. We believe as [earnings estimate] beats moderate in the near term, peak valuations will be tough to sustain."

There is not especially good reason for me to be discussing Tiffany's right now, but it does give me a chance to quote the famous dialog from a certain classic Audrey Hepburn movie:

Holly: Poor old Cat. Poor slob. Poor slob without a name. The way I look at it, I don’t have the right to give him one. We don’t belong to each other; we just took up by the river one day. I don’t even want to own anything until I can find a place where me and things go together. I’m not sure where that is, but I know what it’s like. It’s like Tiffany’s

Fred: Tiffany’s? You mean the jewelry store?

Holly: That’s right. I’m crazy about Tiffany’s…Calms me down right away. The quietness and the proud look of it. Nothing very bad could ever happen to you at Tiffany’s. If I could find a real-life place that made me feel like Tiffany’s then…then I’d buy some furniture and give the cat a name.

Here's hoping that Tiffany's itself finds that place.

Sunday, September 26, 2010

Airgas/Air Products

As regular readers will recall, this blog has traced the sometimes stormy relationship between two competitors in the market for industrial gas supplies, both headquartered in Pennsylvania: Air Products (APD), of Allentown, [get out of my head, Billy Joel!] and Airgas (ARG), of Radnor.

APD bid for ARG back in February and signalled at that time a readiness to wage a proxy fight for control.

Airgas held its annual meeting recently -- September 15. So ... what happened?

Shareholders elected the three nominees for director promoted by APD. But that doesn't mean an acquisition will go through uncontested. The board is staggered, so APD would have to win another election to gain majority control. Even in announcing their election, Airgas cautioned them against over confidence in this regard.

"Although our new directors were originally nominated to stand for election to our Board by Air Products, like all Board members, they have fiduciary duties to all AIrgas stockholders. These duties do not allow them to act in Air Products' interests, or in affiliation with Air Products."

Meanwhile, shareholders also voted on three proposed bylaw amendments designed for the benefit of the would-be acquirer, and it isn't clear what the result was of these votes.

Wednesday, September 22, 2010

ISS Sides with Burkle in B&N Matter

Institutional Shareholder Services (ISS) a major proxy-advisory firm, has recommended that shareholders in Barnes & Noble vote for the dissident slate backed by Yucaipa Cos. in the ongoing proxy fight.

B&N holds its annual meeting a week from today. Each of the other three major proxy-advisory firms, Glass Lewis, PROXY Governance, and Egan-Jones, has come down on the management's side.

This is in accord with the developing pattern. The folks at ISS are more likely to back insurgents than their colleagues.

In this case, ISS says: "Barnes & Noble’s history of poor performance, analysts’ lack of confidence in management’s ability to achieve its targets, corporate governance concerns regarding the company’s employment relationships with Leonard and Stephen Riggio, concerns about the independence of the current board, and questions over the rationale for the 2009 acquisition of Barnes & Noble College Booksellers from Chairman Leonard Riggio."

The book selling business is in the midst of a major transformation, and B&N has tried to keep ahead of the curve, bring out its Nook to compete with Amazon's Kindle and the other eReaders on the market for example. B&N has been increasingly aggressive over the last year in using its bricks-and-mortar stores to push the eReader on shoppers. That sounds a bit odd: "Buy this, and you'll never have to come here again!" -- but such is the transition to a digital age. Or to whatever the heck we are all heading for.

But some are skeptical of whether they really are out in front. Goldman Sachs, in a late-August report, said: "Results fell short of our forecast and, more importantly, reduced visibility on objectives going forward, given two factors: (1) Additional disclosure revealed surprisingly low gross profit margins for the .com business, reflecting both sharp, structural margin cuts in the traditional (physical) .com realm, and poor underlying profitability of the digital business in aggregate (Nook + ebooks). (2) Soft superstore sales, as results missed guidance issued two thirds of the way through the July quarter."

Tuesday, September 21, 2010

Boyd and Interoil

Roddy Boyd, in his blog, The Financial Investigator, has a fascinating post on The Interoil Math. Interoil is an oil and gas producer that, Boyd says, "recently raised cash at exorbitant rates and appears to be internally valuing its assets way below what the market appears to think they are worth."

So, on such revelations, its stock price should be tanking, right?

Ummm ... no. The stock price rose sharply in the middle of the day Wednesday, September 15, and held level at close to $64 a share through Thursday and Friday, and resumed moving north on Monday.

"To be sure," Boyd continues, "the bull’s case is both elegant and obvious: If there is oil and natural gas is in Papua New Guinea, and in the volumes suggested on the company’s properties, shareholders are in for an instant windfall to the tune of several dozen points worth of price appreciation."

And if my car had a propeller, it would be The Spirit of St Louis.

Provable reserves as I noted last November are hard to come by.Separately: any company that found them in Papua New Guinea would still have to be willing and able to spend the money to exploit them. Yet Interoil is cash strapped -- sufficiently strapped to need to pay those card-card-like interest rates we mentioned above.

Interoil will naturally tempt short selling. Of course, if you do go down that road, you take enormous chances, even if your underlying case is strong. Such intriguing recent books as CONFIDENCE GAME, whatever else they do, make this clear. I don't recommend shorting -- indeed, I don't recommend anything at all. [Except this: for roughly 99% of investors who have an interest in the equity markets, the best course is a simple passively managed fund, tracking some broad-based index.] Still, Interoil is the sort of spectacle that makes one wish there was more shorting activity in the financial world than there is. The number of nest eggs that have to be sacrificed to prove the prophetic powers of P.T. Barnum is unnecessarily high.

Monday, September 20, 2010

The CFTC on CPOs

The Commodity Futures Trading Commission (CFTC) has asked for public comment on a rulemaking petition from the National Futures Association (NFA), which would narrow the scope of the regulatory exclusion for registered investment companies from commodity pool operators (CPO) status.

Registered investment companies are at present eligible for a broad exemption from CPO status. 17 C.F.R. 4.5, but the petition would require that RICs seeking such an exemption represent that their funds will use commodity futures and commodity options contracts only for bona fide hedging purposes and that the fund will not be marketed to the public as a commodity pool.

The petition contemplates the application of these limits even retrospectively, to companies that previously had filed notices under the broader exemption, though it recommends that these companies be given time to come into compliance.

October 18 (my 52d birthday) is the deadline for comments.

Sunday, September 19, 2010

Inflation and the 1970s

In a lazy-Sunday mood, my mind is wandering back to the 1970s, assisted in its wandering by a recent book, RIGHT STAR RISING, by Laura Kalman.

Kalman's book covers the period 1974 to 1980, a period that began with the resignation of Richard Nixon and ends with the election of Ronald Reagan. How did we get from one to another? One might reasonably have suspected, a priori, that Nixon's fdall would signal a leftward move in the country's politics. Why did that not happen? That is the question that fascinates Kalman.

What I have read of her book has forcefully reminded me of the centrality of inflation in the politics of that period: inflation at levels we have not known since, and inflation that came to be taken for granted year-to-year. Ford declared that we could stop it, and introduced ridiculous WIN buttons. The inflationary environment stimulated more serious policy disputes, such as that over common situs picketing.

So let's think about inflation today. With all the "quantitative easing" and stimulus packages of the last couple of years, shouldn't we have expected some of late? Why has it remained so tame in 2010? Here's a take from The Motley Fool back in March.

One reason it has remained tame is simply that other currencies have taken harder hits than the dollar, and this has allowed the dollar to retain its significance as a safe haven. Switzerland, and its franc, has long been considered another safe haven, but its status as such took some hits in 2009, because the Swiss economy is so closely tied to world banking, and banking as an industry was so much under siege. For investors even nervous about Switzerland, the US dollar looked even better. (Sort of like the way the girls [boys, if you prefer!] all look cuter at closing time?)

Of course the safe-haven notion increased demand for the dollar, and the increased demand has kept its value up, i.e. has foiled the forces that would otherwise have pressed for inflation/devaluation.

But I think we've gotten as much mileage out of that as we're going to get, and we may be headed back to the '70s sans DeLorean.

Wednesday, September 15, 2010

Three Brief Items

1. Genzyme Refocus

The Wall Street Journal yesterday told us that Genzyme is selling one of its non-core units, its genetic-testing business, as part of its effort to "fend off" the takeover efforts of Sanofi-Aventis SA.

Genzyme is apparently trying to rid itself of two other units also, a diagnostics concern (that sells tests and testing supplies) and a pharma intermediaries operation. The proceeds from these sales are supposed to go into a pot whence the company will buy back $2 billion of its stock.

2. Mike Castle

Rep. Mike Castle (R-Del.) lost a hotly contested primary campaign in yesterday's voting in Delaware. The usual characterization of this race has been that Castle represents the Republican "establishment" while Christine O'Donnell is the Palin-endorsed, tea-partying "insurgent." As my use of scare quotes indicates, I take such characterizations with more than a grain of salt -- and I don't take salt in my tea. Here's a story from Monday from the AP, about the home stretch of that campaign.

What I do know about Mike Castle, though, is that he was half of the team of Capuano and Castle. Together, he and Michael Capuano (D-Mass.) introduced the Hedge Fund Adviser Registration Act of 2009. It didn't become law as such, but it was one important step in the long legislative history that led to Dodd-Frank, the bill that did become law (with Castle's support)in July 2010.

3. Casey's General Stores

The logic behind consolidation in the retail "convenience outlets" market remains strong. The situation with regard to Casey's General Stores remains confusing.

As regular readers of Proxy Partisans may remember, Alimentation Couche-Tard, the Canadian convenience store concern that owns the Circle K brand, bid $36 a share for Casey's in April, and raised that to $36.75 in May. That price valued Casey's at $1.9 million.

Casey's has resisted, and to good effect. On September 1 the bid went up again, to $38.50 per share.

Even since then, there's a new suitor. Casey's has revealed that it is in talks with a white knight, 7-Eleven Inc. They are talking about a $40 a share offer, though so far that is merely vapor.

Tuesday, September 14, 2010

FASB Roundtables

The Financial Accounting Standards Board (FASB) says that it wil host two public roundtable meetings to hear what participants have to say about private company accounting and reporting issues.

The board's statement attributes to its assistant director for nonpublic entities, Jeffrey Mechanick, the following: “We want to hear a variety of perspectives on how high-quality financial reporting can be achieved while taking into account the specific needs of the private company sector.”

BTW, how cool a surname is "Mechanick"? It gives you confidence that Jeffrey M. really gets under the hood of accounting issues and isn't reluctant about using some elbow grease.

The first roundtable will take place at home, the second on the road. Here is the schedule:

Tuesday, Oct. 12, 2010
FASB Public Roundtable Meeting on Private Company Accounting and Reporting Issues
Time: 1:00-4:00 p.m. (Eastern Daylight Time)
Location: FASB offices, 401 Merritt 7, Norwalk, CT 06856

Tuesday, Nov. 2, 2010
FASB Public Roundtable Meeting on Private Company Accounting and Reporting Issues
Time: 9:00 a.m.–12:00 p.m. (Central Time)
Location: Dallas, TX (exact location to be announced later)

Monday, September 13, 2010

New Basel Rules

True to their self-imposed schedule, the top central bankers and banking regulators have announced a deal on Basel III -- the latest step in the globalization of banking regulation.

Here's the official statement.

The statement attributes to Nout Wellink, president of the Netherlands Bank, the following sentiment: "The combination of a much stronger definition of capital, higher minimum requirements and the introduction of new capital buffers will ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth."

The new capital requirements are summarized here.

The most relevant US officials are our Fed chairman, Ben Bernanke; our FDIC head, Sheila Bair; and the acting head of the Office of the Comptroller, John G. Walsh. Their agencies issued a joint statement praising the accord. "The agreement represents a significant step forward in reducing the incidence and severity of future financial crises, providing for a more stable banking system that is less prone to excessive risk-taking, and better able to absorb losses while continuing to perform its essential function of providing credit to creditworthy households and businesses," they said.

Aside from reserve numbers, the new rules have a feature known as the "countercyclical capital buffer." The idea here is that banks should have to have more capital when times are good than would be required of them in bad times. The extra "buffer" requirement is intended to dilute the booze at the party at times when credit is growing more quickly in a nation than is that same nation's underlying economy.

Sunday, September 12, 2010

Harrisburg crisis

So, what's the story with Harrisburg, PA and its bonds?

The WSJ in its weekend edition said: "Officials of Harrisburg ... and the state of Pennsylvania are considering several options, including a short-term bank loan, to help the state's debt-laden capital avoid default on a general-obligation bond payment it is scheduled to make in the coming week...."

As Mr MacKay, of South Park Elementary, would put it: "defaulting is bad, mmm-kay?"

An energy incinerator project seems to be at the heart of the crisis.

The whole thing reminds me of Orange County, Calif., in 1994. Except Harrisburg doesn't have the enviable climate of Orange County.

Fiscal officials in Harrisburg can draw some comfort from this. Their chief OC counterpart, Robert Citron, never actually went to prison. He did 1,000 hours of community service, and five years of supervised probation.

Stupid time.

Wednesday, September 8, 2010

AuthenTec and UPEK Announce Merger

On Independence Day this year I said that UPEK "has now given up on" its efforts to merge with Authen Tec.

Authen Tec is Florida based, UPEK is a California company. They are both in the biometric identification market -- fingerprint recognition doodads and stuff.

But the merger will go forward. A friendly deal has been reached. This will be accomplished as an Authen Tec purchase of UPEK rather than, as once expected, the other way around.

The two firms have of late been adversaries in IP litigation. In May of this year, the Northern District for the District Court of California, in San Jose, issued this procedural ruling in that case. I haven't kept up with it since, but imagine that the new combined company won't continue suing itself.

Tuesday, September 7, 2010

I Love These Google Images

In the case of each of these many images, somebody somewhere decided that the graphic would serve some purpose in explaining how risk management works. Perhaps some of these were first a powerpoint slide.

You have to appreciate the third one from the left on the top row.

I hope all my readers enjoyed their holiday weekend.

Monday, September 6, 2010

Eli Lilly and a generic

The U.S. Federal Circuit recently upheld a district court on a patent law matter concerning Eli Lilly's drug, Evista (chemical name, raloxifene).

The district court enjoined any manufacture or distribution of a generic version of raloxifene, which is used in the treatment of osteoporosis in postmenopausal women.

The defendant, Teva Pharmaceuticals, disputed the validity of Eli Lilly's patents on the ground of obviousness. In the words of the court, Teva contended "that the Bone Loss Patents or the Low Does Patent would have been obvious to one of ordinary skill in the art."

In finding nonobviousness, the Federal Circuit discussed an earlier study of te use of raloxifene, the Buzdar study, under the heading of "prior art." The critical fact here is that the Buzdar study failed, and "in light of Dr. Budzar's published report describing that failure, the district court correctly found that a person of ordinary skill would have been discouraged from using raloxifene" in further tests. Thus, the scientists working for Lilly were using something more than ordinary skill, and the patent is upheld.

Sunday, September 5, 2010

Aleynikov Wins a Round

In July 2009, FBI agents arrested Sergey Aleynikov, who had formerly worked in the high-frequency trading business of Goldman Sachs Group Inc.

High-frequency trading has become a good deal more prominet in pubklic/regulatory controversies in the intervening 14 months.

But for what exactly was Aleynikov arrested? The charges were: theft of trade secrets; transportation of stolen property in interstate commerce; and illegal access to a computer without permission. The arrest came soon after Aleynikov had left Goldman, and started work for Teza Technologies. Allegedly, Aleynikov had copied and encryptred files from a Goldman server, uploaded those files to a website, then later to a portable memory device, so he could share it with his new buddies as Teza.

Why bring this all up now? Because I see that a Manhattan district court judge Denise Cote has just dismissed one of the charges, unauthorized access. Aleynikov's alleged actions took place in his final days of employment at Goldman, when he did still have permission to access the firm's computers, and Cote found that he did not exceed the authorization he had been granted.

Prosecution will continue as to the other counts, but this dismissal does show that these sorts of actions are very difficult -- prosecutors have a tough time prevailing.

Which is as it ought to be.

Wednesday, September 1, 2010

Bankruptcy and Disclosure

The bankruptcy case concerning WMI, the former holding company of WaMu, continues its slow-paced way through the pertinent court in Delaware, under the guidance of Judge Mary Walrath.

On August 30, the consortium of trust preferred security holders (the TPS consortium) filed a motion that the debtors be deemed to have made certain admissions.

The WMI litigation was at one time chiefly a dispute between the debtor estate itself, on the one hand, and JPMorgan on the other., Back in the chaotic autumn of 2008, the FDIC seized WaMu, ran a quick min-auction, and sold it to JPMorgan. Everything was done so quickly that there was no real sorting out of the assets -- what belonged to the holding company, which thereafter declared bankruptcy, and what belonged to the operating company, which was now part of JPM.

So those two sides fought out the allocation of assets in bankruptcy court. They have more recently kissed and made up. Their making up is known as the "global settlement." But ... not so fast! says the TPS Consortium. "We're not sure we want you guys to make up."

Go here and then go to page 12 of that PDF. That was a letter written July of this year.

In the money quote, TPS says that in the pre-settlement litigation, "Debtors made numerous claims of value purportedly owned by, or owed to, the Debtors, which claims, if successful, could have resulted in significant distribution to creditors in these cases, including members of Class 19. But, prior to entering into the 'global settlement' to compromise substantially all of those claims (including claims as to the ownership of the Trust Preferred Securities), the Debtors had conducted, in the view of the TPS Consortium, minimal (and in some cases, perhaps, no) discovery or analysis of such claims. Moreover, it appears the Debtors’ attorneys responsible for negotiating the 'global settlement' had potentially disabling conflicts of interest with certain parties who, under the settlement, would receive significant additional benefits, including, without limitation, JPMC."

Bottom line? TPS wants to derail the settlement.

Enough background. Now we're back up to this week. On Monday, TPS filed its "motion to deem all requests admitted." Why should the court "deem" this? Because the debtors have been evading requests for admissions where TPS is, according to its attorneys, entitled to a yes or no answer.

"Debtors’ response is wholly inadequate because it is riddled with boilerplate
objections that cannot be sustained. In particular, Debtors make fourteen general objections (the “General Objections”) to every request and further object to every request as “vague, ambiguous, overbroad and unduly burdensome.”

"Debtors further improperly assert the attorney-client
privilege and work-product doctrine claiming that general facts are privileged."

The requests are, for example, that: "Counsel for the Debtors, Weil, Gotshal & Manges LLP, et al., were the sole negotiators of the Proposed Global Settlement Agreement for the Debtors."

Presumably they are asking this because they want to argue that Weil Gotshal was conflicted, and its conflict of interests should void the settlement. If they were the "sole" negotiators, the route from point A to point B is straighter and narrower.

I'll keep an eye on this.

Tuesday, August 31, 2010

What is Driving M&A These Days?

There's an awful lot of merger-and-acquisition activity underway in the US these days. If you wanted to 'play' it in a relatively accessible way you could doso through a merger and arb oriented ETF, such as John Spence discusses in his "Fund Track" in today's Wall Street Journal.

(I'm not suggesting you do any such thing, by the way. The observation was purely hypothetical. My readers are clearly too smart to take market advice from blogs.)

Anyway: what is driving it? Are these directors, eager to build empires? CNBC says not, that it is shareholder driven.

It may simply be that there is too much cash out there. Nobody wants to sit on cash. One wants to put it to work. But over the last couple of years, the idea of putting cash to work has been scary. Buying another firm, one that has a track record or perhaps one with assets that create some synergy with one's own, may be one of the least scary ways to do so.

Monday, August 30, 2010

Sanofi and Genzyme: They'll do it the hard way

Negotiations for a friendly merger between Sanofi-Aventis and Genzyme, which I discussed here a month ago, now seem to have fallen apart.

Sanofi's CEO has written a "bear hug" letter in the first instance to the Genzyme CEO but in reality to the Genzyme shareholders. The idea is to get the shareholders ticked off that their management is standing between them and a nice pay-out.

Here's a discussion from two and a half years ago about the art of giving a bear hug.

A little history. Back in 2004, a company then called Sanofi-Synthélabo made a 47.8 bn euro for Aventis, a Strasbourg based concern. At first, Initially, Aventis spurned the bid, and a three-month battle resulted. The merger did in time come about, but the price increased, from the original 47.8 billion to 54.5 billion euros.

The French government played a big role in that imbroglio. The government was concerned that a Swiss company (Novartis) would step in as Aventis' white knight if Sanofi-Synthélabo didn't raise its bid. That would lead to Aventis falling under the control of foreigners. Indeed, non-EU foreigners! (The Swiss are only geographically part of Europe.)

The lesson: there is good reason, based on their fiduciary obligation to their shareholders, for the management of Genzyme to make this difficult for Sanofi. They shouldn't make it impossible, but they should make it difficult.

Sunday, August 29, 2010

From Both Sides of the Chunnel

The Brits have fined the UK branch of Societe Generale 1.58 million pounds [US$2.44 million] for failure to file acciurate reports on transactions that occurred between November 2007 and February 2010.

Some of the transactions weren't reported on at all, others were treated inaccurately.

The FSA said the failure was branch was "a serious breach of our rules as it can have a damaging impact on our ability to detect and investigate suspected market abuse.”

This fine has nothing to do with Jerome Kerviel, but I thought I'd mention him, because no story abouyt SG is complete without some such mention.

By the way, Kerviel has a book out, L’engrenage: Mémoires d’un Trader (Gears: Memoires of a Trader). There seems as of yet to be no English language edition.

Wednesday, August 25, 2010

A Potash Auction?

The giant Anglo-Australian mining concern BHP Billeton (LSE: BLT) -- which has a stock symbol that reminds me of a sandwich -- has bid $38.6 billion for Potash Corp., of Canada, and has also put on something of a charm offensive, seeking to persuade Canadians that locals will continue to run the place.

Canadian regulators have taken a permissive attitude of late toward foreign companies who want to take over the mining concerns of the Great White North. Xstrata, of Switzerland, bought Falconbridge (a nickel miner) without a fuss, for example.

Anyway, the key question here is: how much will Potash go for? Can the incumbent board set off an auction? You need more than one bidder for a good auction. Potash is apparently in discussions with a couple of Chinese concerns: the Sinochem Group and Hopu Investment Management.

As you can see from the chart, the course of BHP's stock price has been pretty rocky since April. Nonetheless, the company has deep pockets, and analysts are convinced it can sweeten its offer if it has to.

Indeed, Marius Kloppers, the CEO of BHP, has referred to the bid -- which stands at US$130 per share, as "full and fair." If he had wanted to say "last and best," he would have done so.

Tuesday, August 24, 2010

Penn and Teller

The famous magicians -- the one who talks and the one who doesn't -- have their own program on Showtime called Bullshit! In which they seek to expose various forms of, yes, Bullshit.

Recently, they did an episode of that program on multi-level marketing. The above link will take you to a collection of clips from it. The next link will take you to a blog specifically devoted to expansive treatment of some of the issues that P&T could but raise.

I whole-heartedly agree with the gist of the Penn & Teller critique of the whole practice. I wrote about this in May specifically in the Medifast context, but it bears repeating.

The Amway case, and its 70/30 rule, have given a cloak of legitimacy to an industry. But, in my view and that it seems of most of those who have looked at the matter dispassionately, the distinction between lawful MLM and unlawful pyramids is itself something of a sham. MLM systems as defined above inevitably create a context in which the success stories are the sales people at the top of the chain, and those at the bottom are their suckers. The success stories are held up as role models, and this is used to generate more suckers.

Just to be fair to that company, here's the official site for Medifast.

And just to be fair to potential suckers thereof, here's a contribution to discussion of their business model by Barry Minkow.

Who is Barry Minkow? This may jog your memory.

Monday, August 23, 2010

Marketing Gases

The Airgas annual meeting is set for Wednesday, September 15.

Airgas, based in Radnor, Pennsylvania, sells gas to industrial and commercial users.

Air Products, another firm in that field, has offered to acquire it, but Airgas management is resisting.

But you've read that much before. What's new?

Just this: Air Products sent a fairly entertaining letter to its rival's shareholders on August 19 detailing what it calls the "numerous inconsistencies and misstatements regarding our bid.

Sunday, August 22, 2010

Intel and McAfee

I don't get it. Where is the synergy here?

Here's an effort to explain it

But a company known for making chips is buying a company that offers protection from viruses. It is not at all obvious that the one provides any support for the other that has to be done "in house," that can not be accomplished just as well through arms-length bargaining between separate entities.

Wednesday, August 18, 2010

Dell: The Company and the Man

What is going on with Dell these days?

The owners of 378 million shares withheld their support from Michael Dell's re-election as chairman of the board of the company that bears his surname.

That reminds me of the brouhaha at Disney in the period 2003-2005.

But what is the "big picture" at Dell? My understanding is that its core business remains the sale of "the box," the physical computer you stick on top of your desk. It typically has Intel's chips, and MS software. Furthermore, since the selling of boxes is competitive, whereas both the software and the chip making markets have a single dominant firm each, most of the profit goes to Microtel. Dell's core business has a slim margin.

Accordingly, in recent years, Dell has tried to branch out into non-core areas where it might be less tightly squeezed. Last year, Dell bought Perot Systems, a provider of a wide range of IT services.

There's also this.

It seems to me that the missteps that led to investor dissatisfaction, and all those withheld votes, have to be understood in this context. Dell is changing course, and there will be some stumbling as a result of such a change. The right thing to do, nonetheless, is to persist.

Tuesday, August 17, 2010

CEOs and Debt

We have all become rather accustomed to the fact that executives of a company are often compensated for their services in part by equity in the corporation -- or, in the alternative, by options to buy equity.

Not only does this seem normal, there is a superficially plausible case to be made that it aligns incentives properly. A CEO with stock in the company has "skin in the game," as the saying goes.

There are two sides to that, though. As Roger Lowenstein wrote in ORIGINS OF THE CRASH (2004), "For an incentive to functiom properly, there must be a prospect of pain as well as gain" and the the 1990s dotcom bubble with which Lowenstein was concerned in that book, the very possibility of CEO pain was "trivialized."

Another common complaint about reimbursement through equity is that if executives see themselves as equity holders, they have an incentive to shift wealth away from debt holders, toward themselves and their fellow stockholders. How might they do this? By over-paying dividends, most obviously. If a company is in trouble (in the "zone of insolvency" as lawyers sometimes say, although not across that line yet) and it pays its shareholders a generous dividend anyway, then the company is essentially making sure the shareholders get cash while the 'gettin' is good.' That cash will never be available to pay off the bondholders should the company default and either voluntarily file bankruptcy or be pushed in that direction by debtor action.

So: if executives are compensated in stock, they may have a commonality of interests with their fellow shareholders, but this may express itself not in productive dcisions, but in beggaring other stakeholder groups.

What, then, about compensation in bonds? Perhaps a CEO who really wants to show us that he has skin in the game will load up on debt instruments issued by his company. Here is the recent discussion of that point that has gotten me thinking.

Monday, August 16, 2010

Barnes & Noble settlement talks

Settlement talks between the parties in the fight over the famous bookstore chain seemed promising early last week. Talks went late into the night on Wednesday. But by week's end, things had fallen apart.

In a brief statement B&N said that it and Yucaipa "were unable to conclude an agreement on mutually acceptable terms."

Yucaipa is an investment company alter ego for Ron Burkle. According to scuttlement, a tentative deal had emerged in which B&N would expand the size of its board of directors by three seats and let Burkle name directors to the new seats. In return, Burkle would support the candidates director nominees for this meeting and the next. He would also stop litigating to try to have B&N's poison pill plan invalidated, thereby allowing B&N to continue in effect to limit the size of his investment in their company.

On Thursday, that tentative agreement unravelled. The parties communicated that to the chancery court in Delaware, and that court issued its ruling on the pending motion to dismiss. Barnes & Noble won the litigation -- or at least this round of it -- in a ruling by Judge Leo Strine.

The "rights plan" a/k/a the poison pill, by the way, provides that if an outside acquires 20 percent or more of the company's stock, other investors get to buy common shares at a 50 percent discount. So Burkle can only pass the 20 percent threshold if he is willing to accept enormous dilution in stock value thereafter.

"The defendants have shown that their adoption and use of the rights plan was a good, fair, reasonable response to a threat to Barnes & Noble and its stockholders," Strine said, dismissing Burkle's lawsuit.

The name of the decision is: Yucaipa American Alliance Fund II LP v. Riggio, CA5465, Delaware Chancery Court.

Sunday, August 15, 2010

Blackstone and Dynegy

The Blackstone Group and Dynegy Inc. have entered into a definitive merger agreement. Dynegy stockholders will receive $4.50 in cash for each of their shares. This is a 62% premium on the closing share price as of the Thursday, August 12.

Separately, but not-so-separately, Blackstone and NRG Energy have entered into an agreement through which NRG will buy four natural gas-fired assets currently owned by Dynegy for a total cash consideration of $1.36 billion. Three of the facilities involved are in California, the other is at Casco Bay, Maine.

The closing of the merger transaction between Dynegy and Blackstone is contingent upon the concurrent closing of the Blackstone and NRG deal.

News involving Dynegy always perks up my ears because Dynegy was involved in the big energy-markets story of 2001, the demise-of-Enron. Dynegy was the white knight who never quite arrived to save the damsel from the dragon of insolvency.

That's an episode that goes unmentioned in the company's official version of its own history. But there is a fine account, with some Dynegy background, in the Smith/Emshwiller book n Enron's fall.

Smith/Emshwiller tell us that the companies jointly announced a merger agreement at 5 PM Houston time, November 9, 2001. "Who would have imagined it? Enron officials had looked down on Dynegy as one of the little kids on the energy block, with assets of a 'mere' $25 billion compared with Enron's more than $60 billion. The planned merger was just one more example of the unintended consequences of the Enron debacle...."

Wednesday, August 11, 2010

WaMu bankruptcy

The Delaware bankruptcy court has authorized a study of the circumstances that led to the bankruptcy of Washington Mutual by Joshua Hochberg of the law firm McKenna Long & Aldridge.

This was part of those overly dramatic days of the fall of 2008. The FDIC seized the operating company, i.e. the actual bank, and unceremoniously sold it to JP Morgan Chase. This was all done hurriedly. As Sorkin wrote, "The FDIC typically conducts seizures of troubled banks on Friday evenings, to allow regulators time over the following weekend to readsy the institution to open under government oversight on Monday. But WaMu was deteriorating so rapidly -- nearly $17 billion had been withdrawn in ten days -- that the regulators had no choice," but to run the auction on Wednesday and effectuate the seizure on Thursday.

That didn't involve a bankruptcy court at all. But immediately thereafter its holding company (WMI) filed for bankruptcy protection. All this happened so quickly that no one had a chance to work out which assets belonged to WaMu and which to WMI, so they proceeded to argue that out in court. In a development that may have helped generate some changes in the law, JPMC sought full disclosure of all information called for by Bankruptcy Rule 2019(a), not just the names of the members of the WMI Noteholders Group and the aggregate value of their interests. Following the 2005 decision of the United States District Court for the Southern District of New York in In Re Northwest Airlines Corp., the court granted JPMC's motion and ordered full compliance back in December 2009.

It appears, though that the issue of disclosure in other forms is still bedevilling this particular bankruptcy proceeding.

Anyway, I look forward to an enlightening report from Hochberg.

Tuesday, August 10, 2010

Geoff Sorbello to Okapi

Sorbello, who has been with ISS/RiskMetrics, is the new hire at Okapi Partners.

In a statement yesterday, Sorbello said, "During my seven-plus years at ISS, I had the privilege of working with many of the world's best advisors on shareholder rights issues, proxy contests and [mergers & acquisitions]. I look forward to adding to Okapi Partner's existing expertise and stellar reputation."

Okapi is a proxy solicitation firm launched a little more than two years ago -- in February 2008 -- by Bruce H. Goldfarb and Patrick J. McHugh.

At that time, Goldfarb said: "Companies and their investors are increasingly recognizing the need for more proactive strategies and tactics to influence the outcome of shareholder votes. In this environment, Okapi Partners is well-positioned to provide senior-level attention and conflict- free advice to our clients."

I hate the word "proactive," but it seems to be unstoppable at this point anyway.

An urgent question: why do they call themselves Okapi? It's the name of a girafe-like animal. But with a shorter neck. What does that have to do with proxy solicitation. Damned if I know.

Monday, August 9, 2010

Black-Scholes and Monte Carlo

Aside from the lattice method discussed in yesterday's entry, the two most important methods of valuing the expense of stock options as compensation are: the Black-Scholes-Merton (BSM) formula, and a Monte Carlo simulation.

BSM is here.

This amounts to valuing an option to buy a share of stock by making certain simplifying assumptions. The devisers of the formula were explicit about these assumptions. One of the more important of them is that extreme price changes are very rare, because the movements in the value of the underlying stock follow lognormal distribution. Many scholars have quarrelled with this, but BSM does still offer a useful approximation of the value of such options.

Still: the "Monte Carlo" method has by far the cooler name, paying homage as it does to the city whose image I've uploaded with this entry.

Through the miracle known as a digital computer, modelers can run thousands of simulation paths covering possible price movements in the underlying asset -- the stock - and can assign a value to the option for each of these paths. The present value of the average of all those values is the Monte Carlo value of the option.

Sunday, August 8, 2010

More on Stock-based Compensation

It was only a few flicks of the calender away, it was as recently as 2004, that one could say that generally accepted accounting principles (GAAP) in the United States didn't require employers to recognize in the books they showed the investing public that by issuing stock options to their employees they were incurring an expense.

The move of the FASB that year toward standards explicitly requiring this was caught up in the election-year debates. The FASB held its ground, although if I remember correctly it had backed down under political pressure on the same score a decade before. But the second time around it held its ground and made the expensing of stock options mandatory for all annual and interim reports, effective beginning June 15, 2005.

Over the last few years the nature of the debate has shifted. Now that we know companies are supposed to expense their stock options, the question is: how?

There are three dominant methods thus far. There's the Black-Scholes-Merton (MSN)formula, the Monte Carlo os 'simulation' methods, and the lattice model.

The lattice model is the most intriguing of the three in my eyes so I'll expound upon that a bit.

The modelers start by dividing the time between the issuance of an option and its expiration into a definite number of discrete time periods. These periods might be, for example, months or quarters.

Given input variables and assumptions that the company and its modelers must makle explicit, they can then assign a probability to an "up" and to a "down" move in each period. This yields two (or more, depending on how the particular lattice is constructed) end points, which are then starting points (nodes) for the next jump.

The model continues to generate nodes in an ever-widening pattern, looking a bit like a branching tree turned on its side (because the horizontal axis by convention represents the passage of time) until time runs out; that is, until option expiration.

Modelers then employ the whole lattice to decide what would be the value of an option in the final time segment. It helps that the ending is in a sense binary. Either the exercise price of the option is less than the current stock price or it is not, and that simplicity makes calculation straightforward. From there, one can work backward, step by step, until one comes eventually to a value for the option at time 0.

Wednesday, August 4, 2010

EBITDA and Stock-Based Compensation

The acronym "Ebitda" is in the news again.

For the record, this stands for "earnings before interest, taxation, depreciation and amortization," and is sometimes thought a useful statistic as an approximation of cash flow.

Over time, the significance once attributed to the P/E ratio has come to be relocated -- the value/EBITDA ratio is now the important one.

Value, for such purposes, is a modification of the simpler statistic of market cap, or price.

So: why do I bring it up today? Because it is in the news, of late. Two listed companies, Penson Worldwide (NASDAQ: PNSN) and Comtech Telecommunications (NASDAQ: CMTL) have been called out on fiddling with their EBITDA calculation.

Penson has added stock-based compensation into the EBITDA figure, while Comtech has addedf the amortizationof stock-based compensation. Well ... the A does stand for amortization, but not as it happens that amortization.

Of course, if the EBITDA figure itself can be jiggered with in this way, then any ratios of which EBITDA forms a part become less useful for any investors who might be relying on them. If an investor is diligently working out the value-to-EBIDTA ratio, he'll end up with a smaller ratio that he "should" for these firms. Smaller, that is, than he would if the rules were adhered to consistently. That smaller ratio might well lead him to include, "these stocks are at bargain prices."

Sam Antar has done good work bringing these shenanigans to public notice, and I congratulate him on that.

Another way of looking at this story, though is as a new episode in a continuing controversy over how to account for stock-based compensation. On that, I hope to have something to say next week.

Tuesday, August 3, 2010

Portugal Telecom

The European Court of Justice (ECJ) has ruled against the largest telecommunications provider in Portugal in a much-watched case that involves the legal significance of "golden shares" within the EU framework.

Portugal Telecom was a legal monopoly in that country until 1994, when the government began privatizing the company and liberalizing the market. But through that period of liberalization, the government wanted to ensure that it would retain a veto right to certain corporate decisions, so it created the "golden shares," -- 500 shares with extended voting rights, effectively allowing it to block a takeover of the company by outsiders.

Here's a link to a discussion, by Jaron van Bekkum, who professes himself baffled.

Monday, August 2, 2010

DWS Enhanced

On July 29 the board of directors of DWS Enhanced announced that at the annual meeting of shareholders July 22 three things happened:

a) the board's proposal to merge the fund into DWS Enhanced Commodity Strategy Fund received approval
b) none of the nominess for director "received a sufficient number of votes to be elected" despite the presence of a quorum.
c) a proposal presented by Western Investment LLC to end the IM agreement between DWS Enhanced and Deutsche Investment Management Americas failed.

See here for some background.

So, if nobody was elected to the board: who is running the show? According to the post-vote press release, "[T]he incumbent Class I Directors, Dawn-Marie Driscoll, John W. Ballantine and Henry P. Becton, Jr., and the incumbent Class III Directors, Rebecca W. Rimel, Paul K. Freeman, William McClayton, William N. Searcy, Jr. and Robert H. Wadsworth, will continue as Directors until such time as their respective successors are duly elected and qualify."

Not sure what that means.

Sunday, August 1, 2010

Crown Crafts' CEO

The Crown Crafts annual meeting is set for August 10.

Crown Crafts is a Louisiana based marketer of products for babies and toddlers: nursery decor, burb cloths, bibs, and so forth.

The dissidents, led by the Wynnefield Group, have claimed that the CEO of Crown Craft, Randall Chestnut, has a "history of long non-publicly explained absences from the Company."

Even when Chestnut had heart bypass surgery, the company says, he was only out of the office for two weeks. As for the present, "he is in great health and remains totally immersed in running the business."

Wynnefeld has also expressed concern that "there is no publicly disclosed succession plan to address the possibility of the CEO being unable to carry out his duties or obligations."

Crown Crafts has rebuked them for that is well. They do have a plan, and there is good reason it has not been publicly disclosed. Nobody does that.

"[In]line with long-established corporate governance best practices, no public company board, to our knowledge, discloses its carefully constructed succession plan outside the board room."

Blah and counter-blah. I'm just passing it along today folks. Go hit the beach, if you live anywhere near one. Or a good pool, otherwise.

Wednesday, July 28, 2010

Financial Accounting Standards Board

The FASB recently issued an exposure draft on new accounting standards concerning litigation contingencies.

The gist of it is that companies who are the defendants in lawsuits will be required to disclose the contentions of the parties and tell the end-users of the financial statements how they can obtain further information on point.

The proposals would require disclosure of publicly available quantitative information, such as the claim amounts, other relevant non-privileged data, and in some cases filers would disclose how much they would be entitled to draw from insurance and other sources against a judgment.

This is hardly the board's first look at the issue. The FASB put out a draft in June 2008 (which only SEEMS like twenty years ago!). This draft attempts to address some of the criticisms that were levelled at that one.

Nonetheless, I'm sure this will be a bone of contention in the accounting/auditing world for a long time yet.

Tuesday, July 27, 2010

Three brief items

1. Auction for Genzyme?

Genzyme Corp., a biopharm company based in Cambridge, Mass., has rejected a takeover offer from Sanofi-Aventis, the largest drug manufacturer in France.

According to a Bloomberg story, the discussions thus far have been informal, but "Sanofi may send a formal letter to Genzyme detailing its interest in an acquisition as soon as this week."

Genzyme has had the pleasure of Carl Icahn's company for some time now. Icahn curently controls two seats on the board. Icahn will surely make his views on the subject known if this does play itself out over the weeks to come.

GlaxoSmithKline is also sometimes mentioned as an interested party, so a real auction for Genzyme is a possibility.

2. Higher cross-border bid.

Alimentation Couche-Tard, the Canadian convenience store concern that owns the Circle K brand, has increased its bid for Casey's General Stores. It was bidding $36 a share in April and has now raised that to $36.75.

This values Casey's at $1.9 million, including debt says DealBook.

The offer expires at 5 PM on August 6 -- which, it so happens, is my baby sister's birthday. (Hello, Beth!)

Oh, and perhaps I' naive, but this strikes me as odd.

3. GSI Group Emerges from Chapter 11.

GSI is a multi-national family of companies that supply parts ("precision technology") to the medical, electronics, and industrial markets. Parts that, so far as I can tell, involve lasers.

Three of the entities within this family filed for chapter 11 reorganization in November 2009, in Delaware: GSI Group Inc., the parent Canadian holding company; GSI Group Corp., of Massachusetts; and MES International, Inc., a non-operating subsidiary of GSI Group Corp.

But now they have returned from that legal world of the undead to that of the truly living.

The Boston Business Journal, in May, described the descent into bankruptcy as
"a slew of regulatory and accounting setbacks that stemmed from revenue-booking practices between 2004 and 2008."

That got me curious, so I went here. Seventeen months ago, and eight months before its bankruptcy filing, GSI announced the results of an internal accounting probe and admitted to material revenue-recognition errors.

Monday, July 26, 2010

Bankruptcy and Dodd-Frank

Does the new Dodd-Frank bill have anything to say about corporate bankruptcies?

Yes, and to say myself the trouble of paraphrasing, I'll simply link you to a fine listing of direct and indirect consequences.

None of it seems to address the core dysfunction of our corporate bankruptcy system, though.

Back in March 2008, Judge Posner, of the 7th circuit court of appeals, suggested the key dysfunction -- out-of-control bankruptcy trustees. Posner wrote, “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.”

In particular, trustees had become very aggressive by that time (BEFORE the worst of the credit crunch that autumn) in pressing claims for fraudulent conveyance. The result was that counter-parties to any institution that might even have been close to bankruptcy, which may even be rumored to be close to bankruptcy, have got very jittery. Why set one’s self up to be the defendant in a lawsuit brought by the next aggressive trustee?

It was and still is a legal climate that encourages “runs on the bank,” and that is what we have gotten.

It is more than a pity that neither Dodd nor Frank nor any of the many cooks that shared the legislative kitchen creating this crazy soup saw fit to address that problem head on. It is more than a pity, it is a symptom.

Sunday, July 25, 2010

Proxy Contests and the Dodd-Frank bill

Back in the 1980s, hostile corporate takeovers received a lot of attention, and several states decided that they ought to protect their homegrown corporations' managers from outsider threats.

Naturally, these laws were themselves challenged on the ground that they impinged upon federal jurisdiction, either as actually expressed in federal statute or in more dormant form.

But the Supreme Court of the United States upheld one such law, and upheld the bunch of them by implication, in a case arising out of Indiana, CTS Corp. v. Dynamics Corp. (1987).

The Dodd-Frank bill, which contains several provisions that speak to proxy contests, represents the continuing federalization of the field. So, is CTS Corp. v. Dynamics still good law? Or is it ripe for a challenge?

Here is a related discussion by Professor Bainbridge, written just before Dodd-Frank became the law of the land.

Bainbridge quotes in that blog post an article he wrote in 2003, with the then-new Sarbanes-Oxley Act in mind. At that time, he said: "No one seriously doubts that Congress has the power under the Commerce Clause to create a federal law of corporations if it chooses. The question of who gets to regulate public corporations thus is not one of constitutional law but rather of prudence and federalism. In this essay, I advance both economic and non-economic arguments against federal preemption of state corporation law. Competitive federalism promotes liberty as well as shareholder wealth."

Possibly it does. But at some point the duplicative regulation by both feds and states becomes itself enough of a drag that the gains one might get from "competitive federalism" are lost. It is at this point that preemption is supposed to kick in.

After Sarbanes-Oxley, and now after Dodd-Frank: are we there yet?

Wednesday, July 21, 2010

On the Road

I'm traveling today. This entry is something I cooked up last weekend so it would appear on this date. I don't usually do that sort of thing, but such is life.

Tomorrow, July 22, will be the meeting of the shareholders of the DWS Enhanced Commodity Fund, a fund controlled by Deutsche Bank AG.

In recognition thereof, I'll simply provide you with a quote from a recent filing from Western Investment LLC on the subject of that meeting and how it came to be scheduled for that date.

"By now you probably received the latest "fight" letter, dated July
6, 2010, from the fund's chairman, telling you he adjourned the
June 28, 2010 annual meeting of shareholders to July 22, 2010, and
blaming Western. Don't be fooled by this dishonest letter.
This long-overdue GCS annual shareholders meeting (the last one
was held in 2008) was convened as scheduled on June 28, 2010. A
quorum was present, and all business on the agenda could have been
conducted, including voting on the resolutions to terminate
Deutsche Asset Manager as the fund's investment adviser and to
approve the merger of GCS into an open-end Deutsche fund. Vote
tabulations available to both sides in the proxy contest, as
reported by Broadridge Financial Solutions, Inc. showed that a
majority of the fund's shares outstanding had voted "FOR" approval
of the merger and that approximately 2/3 of the shares present at
the meeting had voted "FOR" termination of Deutsche.
But the board adjourned the meeting to July 22, 2010 without
allowing any of those votes to be counted officially."

Tuesday, July 20, 2010

Barnes & Noble trial

I'll just linkfarm today.

The trial in the Barnes & Noble poison pill case is underway.

Corporate managers aren't usually eager to pick fights with their second-largest shareholder. But of course nothing is business-as-usual that involves Ron Burkle, the adversary-shareholder in question.

Burkle, the "grocery billionaire" who shows up in stories about the Clinton family, had enough juice to get Jared Paul Stern fired from the Post back in 2006. But, it seems, not quite enough juice to have Stern to get him prosecuted.

That Jared is not to be confused with this guy.

Anyway, the present excitement concerns Barnes & Noble, in a trial before Chancery Court Judge Leo Strine.

Burkle claims that certain directors are engaged in a “self-dealing scheme designed to entrench the Riggio family.”

Go at it, Rock'em, Sock'em robots!

Monday, July 19, 2010

Greenlight: Shorting Moody's Was A Good Idea

I'd like to thank the good folks at Dealbreaker for bringing to my attention a "Dear Partner" letter from Greenlight Capital, reviewing the unlamented but departed second quarter of 2010.

Greenlight has made some gains for its investors, though they are as the letter acknowledges far from spectacular. There are three partnerships involved, and the year-to-date returns on the three are 1.6 %, 2.2%, and 0.8%.

Greenlight professes to have "no idea" what will happen in the economy in the second half, and to be maintaining "a conservative and defensive portfolio, with a small net long position throughout."

What were their two best plays during the second quarter? They own some gold, and it has appreciated nicely. That's first. The second, and only other "significant" winner, was a short position on Moody's Investors Service (MCO).

Moody's took a hit, the letter explains, because the "proposed financial reform bill raises the rating agency legal liability more than the bulls expected." Of course, the bill itself didn't pass in time for the effects of its passage to be felt in the second quarter numbers. So, filling in the blanks a bit ... we can infer that as the likelihood of passage of the Moody's-impairing provisions became obvious, the stock price fell in anticipation of the legislation, and Greenlight locked in its profit from this short position during the quarter.

I've included a one-year stock chart of Moody's. The stock's price has hit its recent peak near the end of the first quarter. It was $30.26 on March 22. It went on a long slide at that point, bottoming out at $18.89 on May 31. So, yes, shorting was a good idea.

As it happens, it is the courts that decide what does or doesn't violate the first amendment, not the Congress. So insofar as the amendment has provided Moodys with a defense in the past, it might continue to do so. In that case, we may someday judge that the market over-corrected.

"Buy on the rumor, sell on the fact" -- may in this case translate, "sell on the threatened legislation, buy on its passage."

Usual disclaimer: THIS IS NOT INVESTMENT ADVICE! Don't buy or sell any damned thing because any blogger says so. Emphatically including me.

Still, Moody's may have an intriguing future.

Sunday, July 18, 2010

The Second Circuit on "willfulness."

Mark P. Kaiser, once the marketing chief for U.S. Foodservice, received a seven year sentence in 2007 for his role in a securities fraud that, according to the prosecution, overstated earnings by $800 million between 2000 and 2003.

Here's an AP report on the sentence at the time.

Kaiser appealed his conviction on several grounds, one of which was that under 32(a) of the 1934 Exchange Act, contrary to the usual bromide, ignorance of the law is an excuse. Section 32(a) of the Act criminalizes only "willful" violations of most of that Act's provisions. See p. 264 of that PDF.

The good news for Kaiser is that he won his appeal and his conviction has been vacated.

But he did not win on the willfulness theory. He won because the trial judge failed to give a crucial instruction on another issue.

The court -- a panel of the 2d circuit Court of Appeals -- was unimpressed with the defendant's contentions on the statutory meaning of willfulness -- and indeed apparently unimpressed with its own precedents on this point. Solomon Wisenberg at the White Collar Crime blog explains it well, here.

Wednesday, July 14, 2010

Brown and Snowe on Board with Dodd-Frank

This huge Rube Goldbergian contraption seems finally on the verge of becoming a law.

Senators Scott Brown and Olympia Snowe, of Massachusetts and Maine respectively, say that they are now on-board, which should give the bill's proponents the votes they need to overcome any filibuster.

Byrd's replacement? That is still an unknown. Governor Manchin has the power to make the appointment, and he is taking his time. Some announcement is likely this weekend.

Still, the Dood-Frank bill should come to a vote tomorrow, Thursday, even with that seat still empty. The Democrats, it appears, don't need that vote. They have, with Brown and Snowe and one other, a total of three Republican votes, and if they stay together as a party that should do the job.

This blog has been following the developments regarding this legislation for months. There was, for example, this observation last month about the fiduciary-obligation issue, and this one about the Volcker rule.

Going back to January, I wrote about the ambivalence of the President on these matters.

But here we are. It will probably be a done deal tomorrow. A small part of it is the "Collins amendment," a provision that would, after a three-year phase-in beginning on January 1, 2013, eliminate Trust preferred securities as Tier 1 capital for bank holding companies that had $15 billion or more in assets as of December 31, 2009. Where do you think that third Republican vote comes from? In the name of this amendment lies a clue, grasshopper.

This could all result in certain bank holding companies having to raise significant amounts of new Tier 1 capital. And that, in turn, (as the Wachtell Lipton law firm asserted in a memo they sent out yesterday) could result in significant capital structure inefficiencies.

That is just one of many respects in which this bill just seems to be a flailing-of-the-arms by politicians who don't have a clue what to do, but who feel strongly that they ought to do "something". Beware always the siren call of doing "something"!!!

Tuesday, July 13, 2010

Reactions to Bilski

Although I discussed the Bilski decision, the latest effort by the Supreme Court of the United States to reconcile patent law with the digital world, in this blog two days after it was issued, I'd like to return to the subject now that the dust is beginning to settle, to look at what the rest of the blogosphere is saying.

Matt Lee, writing for the Free Software Foundation, is both ecstatic and wary.

On the one hand, the ruling "undoubtedly represents a breakthrough," and on the other "software patent attorneys are formulating new incantations...."

Yes, that is their job. Also, the ad hoc nature of the court's opinion rather encourages them to get to work on those new incantations.

Rob Tiller, writing at OpenSource, and with the same PoV as Lee, takes a different, more lawyer-like, tone. Tiller is content that the court "followed the traditional methodology, and addressed only" the fact pattern immediately before it, "the issue of business method patents." When it does get to software, he says, it will find that "the rationale for invalidating the Bilski patent is one that could easily be applied to void some software patents."

Erik Sherman at BNET reports that he recently spoke to one of those tricky patent attorneys Lee mentions. Sherman spoke to Scott Bain, litigation counsel of the Software and Information Industry Assn., who said: "Things are pretty similar if not the same as before Bilski. The Supreme Court decided this single case on these facts, but didn't give much guidance on how other cases will come out."

Meanwhile, the Patent Office is trying to explain the ruling to its own examiners. In essence, their instructions are to stick to the machine-or-transformation test "as a tool for determining whether the claimed invention is a process under section 101."

Steven Seidenberg, of Intellectual Property Watch, gives us a suitable final word.

"The ruling, it appears, will keep patent litigators in the United States very busy for quite some time."

Monday, July 12, 2010

SEC Notice to Amedisys

Amedisys (Nasdaq:AMED), a provider of home health care nursing services, said on June 30 that it has "received notice of a formal investigation from the Securities and Exchange Commission ... pertaining to the company, and received a subpoena for documents relating to the matters under review by the Senate Finance Committee."

Amedisys, which is run out of Baton Rouge, La., also said that it will cooperate with the investigation.

Back in April, the Wall Street Journal ran a story that strongly suggested abuse of the Medicare reimbursement system by Amedisys, the largest company in the sector.

Sam Antar makes the case that the WSJ report wasn't as hard-hitting as it could have been.

Going back a bit, I should note that in September 2009, the president and chief operating officer of Amedisys, Larry Graham, resigned those posts suddenly. So did Alice Ann Schwartz its Chief Information Officer.

The company didn't give any reason for these departures. Not even their desire to spend more time with their families. Just a bald, " pursue other interests." That sort of thing is always ominous.

The U.S. Senate Finance Committee investigation to which the company referred in its statement involved four companies in the field. In addition to Amedisys, the Senate was curious about Almost Family Inc., Gentiva Health Services Inc., and the LHC Group, and their "internal policies and guidelines regarding the number of visits provided to each patient...."

Sunday, July 11, 2010


More must be said about Air Products versus Airgas.

AP is now offering to buy its rival at $63.50 a share, but the market is valuing Airgas at a premium above that. You can see this for yourself in the chart nearby, reproducing the trading from Friday, July 9.

Both companies provide gas to industrial and commercial users. Among others, these users include refineries, which remove sulfur from crude oil, by saturating the fuel with hydrogen first, producing hydrogen sulfide, which can then be removed from the mix. ARG is also apparently involved in the liquefaction of natural gas.

Airgas, based in Radnor, Pennsylvania, has said this: "This Board has unanimously concluded that Air Products’ unsolicited tender offer and proxy solicitation for its hand-picked nominees are an opportunistic attempt to advance Air Products’ goal of transferring the value of Airgas to Air Products at a grossly inadequate price.

"The Board continues to recommend that stockholders reject the Air Products offer."

Here is what BusinessWeek has to say.

Wednesday, July 7, 2010

SAP versus Oracle

I'm going to channel my inner IT nerd today.

The German software giant SAP AG and the US/California based Oracle are competitors on a range of products, but none more intensely so that in ERP, (or, for the uninitiated, Enterprise Resource Planning). The Californians have a better name, in that it evokes the image I have displayed here. The word "sap" evokes an image in English too, but I don't think its something the Germans were going for.

Here's a link to a general commentary on the rivalry from back in 2006, and here is something more recent.

SAP's original business plan was to conquer the then-new ERP market, whereas Oracle seems to have bumbled into the field half by accident, through a series of acquisitions. They are an aggressive second-place runner, like "Avis" back in the day when there were only two rental car companies that counted, and Avis used to advertise: "We're number two. We try harder."

Here's a link to an issue of InfoWorld from August 1998, those golden days of the dotcom madness. Look at the column on the left, "ERP & Services Briefs." SAP's ERP suite was dominant, and other software companies were working to integrate with it in offering related services. But (says the second graf of that column): "versions for other ERP suites, such as Baan and Oracle, are in the works."

Oracle, as I've noted, has since made a big splash in this pond. What happened to Baan? That is a fairly tangled story, worth a separate entry.

So: what's my point? Only the old one that competition is good, even if it is only a duopoly. Keep it up, guys!

Tuesday, July 6, 2010

Situation Awareness???

Right off of PRNewswire recently, I see a story about an agreement settling a proxy contest involving Ezenia! Inc. (OTC BB: EZEN).

What caught my attention is the release's description of the business that Ezenia-with-exclamation-point is in. It is a "leading market provider of situation awareness." Doesn't "situation awareness" sound a bit too much like a new age therapy?

Anyway, its a biz-software goal.

So, for the record, the annual meeting (which will now, given the agreement, be a love fest) is scheduled for July 26. The now-mollified dissenters were a stockholders' group led by North & Webster, a value fund,
and N&W has agreed to withdraw its shareholder nominations. It will "cease all efforts to nominate or elect its nominees to the Ezenia! Board of Directors in connection with the 2010 annual meeting."

What did N&W get in return for its amiability? It will "have the right to appoint Samuel A. Kidston or another nominee to the Board in January 2011 in the event that Ezenia! does not meet the revenue and operating income targets in its operating budget for fiscal year 2010."

Monday, July 5, 2010

Insider Trading Case: AKO Capital

A London, England court has sentenced a former trader at a hedge fund there, AKO Capital LLP, who has pleaded guilty on insider trading charges. The trade, Anjam Ahmad, must pay about 287,000 pounds ($421,000) in fines and restitution.

There are as many as twenty two different companies involved in the trades that are the subject of the prosecution.

Judge Geoffrey Rivlin suspended his sentence, so and Ahmad, who is 39 years old, will serve no jail time.

Judge Rivlin at the sentencing June 22 said: "You cooperated immediately with the authorities and were very frank about the part you played in all this.”

The Financial Servcies Authority (FSA) has gotten a good deal more aggressive in such matters recently. Regular readers of this blog will probably understand that I believe that is unfortunate not only for Ahmad but for the economy and general public of the British isles.

Regulators and prosecutors are interested in trophies they can put on their walls. They aren't interest in what is best for the people paying their salaries. It isn't in their job description to be interested in what is best.

Sunday, July 4, 2010

Upek Gives Up on Authen Tec

Happy independence day everybody.

It is appropriate to mention that Authen Tec seems to have won its own continued independence.

Authen Tec a company headquartered in Melbourne, Florida, though I understand it has a parent corporation in Shanghai, China. It creates "smart sensor" products. This appears to mean that it sells components to computer manufacturers that allow those products to use smooth touch pads, rather than such grosser doohickies as track balls, mouse buttons, or joysticks.

Upek, a privately held company headquartered in Emeryville, California, is one of its rivals, and has long sought a combination. Under the Upek plan proposed in Januray of this year, stockholders of each company would have ended up with 50% of the stock of the combined entity, and the new entity would have been listed on the Nasdaq Stock Market.

Upek had combined its merger proposal with a proxy solicitation campaign. But it has now given up on both.

The catalyst for this decision was the resignation of Robert E. Grady from the Authen Tec board. As near as I understand, Grady was their friend on the inside. Yet he is now gone.

"My decision results from my increasing discomfort with the Company's de facto embrace of the status quo, and tolerance of management leadership's actions to resist value-creating transactions," Grady said as he left.

Anyway, Upek, while applauding Grady, has given up its own efforts at soliciting proxies or otherwise inducing a merger.

Upek and Authen Tec have also engaged in patent litigation, which is virtually inevitable nowadays among two firms both working within such a highly technical field.

Wednesday, June 30, 2010

SCOTUS on Bilski

The Supreme Court of the United States decided a much-watched patent-law appeal on Monday, as part of its wrap-up of this term.

The Bilski case, as regular readers of this blog will remember, involves an effort to patent an "energy risk-management method" -- in essence, an application of the familiar idea of commodity hedging.

That would seem to fail under the non-obviousness test. But obviousness is the dog that hasn't barked here. The Bilski case has been litigated almost entirely with reference to what is or isn't a "process."

The Court of Appeals upheld the Patent Office. Both said that the law does not authorize the patenting of an abstract idea, and that 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 is known as a matter of shorthand as the machine-or-transformation test.

The Supreme Court has now agreed with every other authority who has looked at the matter in rejecting the notion that Bilski should have a patent on commodity price hedging. But it also rejected the machine-or-transformation test as an answer to the question "why not?". Nor has it substituted any alternative test of its own as to what is a "process" in the relevant sense.

The brief the government -- via solicitor general Elena Kagan -- submitted to the Supreme Court on this matter, asked the court to uphold machine-or-transformation.

The software industry was concerned about this. Software is designed to run on a very general sort of machine, but to read machine to include any digital computer might allow for the patenting of very abstract ideas anyway, precisely what the phrasing is supposed to avoid. The Court of Appeals had refused to address that point: "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."

Kagan's brief on appeal to SCOTUS acknowledged that the software industry was unhappy about the test she was embracing. But she took the view that reference to a digital computer is not enough to create patentability, so most software would probably not be patentable. The consolation prize for the software industry is copyright law, and "the other legal doctrines that protect non-technological commercial activities," trademark law, common law notions of contract and tort, etc.

Again: although SCOTUS ruled against Bilski, it did not do so for the reasons the circuit court, or solicitor general suggested. Referring to amici briefs it had received from the Business Software Alliance, the Biotechnology Industry Organization, and the Boston Patent Law Association, Judge Kennedy writing for the court agreed that the machine-or-transformation test would create unacceptable uncertainties in the software industry.

More generally, in the course of applying such a test, "courts may pose questions of such intricacy and refinement that they risk obscuring the larger object of securing patents for valuable inventions without transgressing the public domain." Let's keep our eye on the ball, then! But Kennedy produces no alternative test, except that the courts below should reason by analogy to its various precedents such as Flook, Benson, Diehr, etc.

A group of four concurring Justices (Stevens, Ginsburg, Breyer, and Sotomayor) put forward their own views. They too agreed that Bilski tried to patent an unpatentable abstraction. They also agreed that machine-or-transformation is nopt a good rule for the meaning of "process." But they did want to give the lower courts more guidance than Kennedy had.

In an opinion written, as a cap to his judicial career, by Justice Stevens, these four argued for a bright-line rule against "business method" patents: "[A] claim that merely describes a method of doing business does not qualify as a 'process' under §101." This rule would overturn a good deal of what has been regarded as established law, going back to State Street.

The State Street case, a 1998 Circuit Court decision that SCOTUS did not review, and which has been very influential since, involved a patent for software used in administering a "hub and spoke financial services configuration." The spokes were investment funds that served as "feeders" of assets into one broader, master fund.

Although the decision in State Street can be read narrowly as upholding the patent on software, it has usually be read as if it upheld a patent on the hub-and-spoke system itself ... a business method. Stevens wants to put an end to that reading of State Street, at least, and to patents issued on that basis.

"If business methods could be patented," he writes, "then many business decisions, no matter how small, could be potential patent violations. Businesses would either live in constant fear of litigation or would need to undertake the costs of searching through patents that describe methods of doing business, attempting to decide whether their innovation is one that remains in the public domain."

The only thing wrong with that passage is the hypothetical construction. Business decisions can be patented, since they have been for several years and Stevens was unable toget the five votes to stop it. Furthermore, for this very reason, business in ther US do live in constant fear of litigation.