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.
Tuesday, January 13, 2009
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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