I'm not sure whether this case is important in the big scheme of things, so I'll try to think it through here. If any one out there has commentary, I'd be happy to hear it.
Joyce v. Morgan Stanley is a decision of the 7th circuit court of appeals, issued August 19, that arose out of a merger of two telecomm firms in 1999.
The decision itself is available through the website of Wachtell Lipton.
Morgan Stanley was the financial adviser to one of the firms involved in the merger, the target company. Stockholders in the corporation it was advising brought this lawsuit, alleging that MS didn't warn them how to minimize their exposure to a decline in the value of the counterparty's stock's price.
On the plaintiff's theory, MS had a fiduciary responsibility to the shareholders in the target corp., and it breached that because of a prior conflict-generating relationship with the acquirer.
At first blush, then, the shareholders' claim is of the sort usually characterized as a "shareholders derivative" lawsuit. The district court certainly thought so. It dismissed the case on the ground that the plaintiffs had failed to follow the proper procedures for bringing a derivative claim. Thus, they were dismissed at the district court level for lack of standing.
The appellate court made things more complicated. It said this ISN'T a derivative lawsuit, because it wasn't a decline in share price per se that constitutes the harm alleged by a failure to hedge against such a decline. So the district court was wrong to use the standing argument.
But, the appellate court continued, Morgan Stanley didn't have any duty to warn the shareholders that they should hedge, so the question of whether it had any "conflict" with that alleged duty doesn't arise, and the district court was right to dismiss the case anyway.
As I indicated above, I'm not sure whether this is important. In fact my head hurts just thinking about it.
Sunday, August 31, 2008
Wednesday, August 27, 2008
Investing in Timminco: Counting on a Miracle
A recent analysts' report, in preparation over a period of three months, suggests that investors should be very wary of Timminco, a Canadian silicon-processing company.
The report, by Neeraj Monga and Chris Silvestre of Veritas Investment Research, was picked up on last week by a reporter for the (Toronto) Globe & Mail.
Timminco claims to have developed a revolutionary way of producing the silicon used in solar cells at low cost, a claim that is certainly an enticing one in the present lets-escape-from-hydrocarbons climate.
These claims became especially newsworthy this spring when Sprott Asset Management went public. Timminco's stocks are central among those assets Sprott has been managing of late.
The Veritas report says: "Our review of industry literature, the view expressed by various industry participants in public forums, circumstantial evidence surrounding lack of progress in volume delivery at Timminco, a convoluted ownership structure ... all suggests it will be a miracle if Timminco can deliver on its promises."
The story is worth following, because this is one of several cases in recent years when a company experiencing a stock price drop has blamed malicious rumors spread by short sellers. And, as with many other such cases, those malicious rumors turn out to be true. The short sellers were on to something.
I could name some other examples of company's blaming shorts for telling truths, but instead I think I'll just move on to a couple of bits of housekeeping.
Damien Park, of Hedge Fund Solutions LLC, has started a new blog on "activist investing."
If you're interested enough in the struggles for control in corporate suites to be reading Proxy Partisans, you'll probably want some familiarity with Park's new site, too.
In other news of a bibliographic sort, CRC Press has published an Encyclopedia of Alternative Investments, edited by Greg N. Gregoriou.
I haven't seen it yet. But Gregoriou, an associate professor of finance at the State University of New York (Plattsburgh) has an impressive reputation in the field.
Stay groovy.
The report, by Neeraj Monga and Chris Silvestre of Veritas Investment Research, was picked up on last week by a reporter for the (Toronto) Globe & Mail.
Timminco claims to have developed a revolutionary way of producing the silicon used in solar cells at low cost, a claim that is certainly an enticing one in the present lets-escape-from-hydrocarbons climate.
These claims became especially newsworthy this spring when Sprott Asset Management went public. Timminco's stocks are central among those assets Sprott has been managing of late.
The Veritas report says: "Our review of industry literature, the view expressed by various industry participants in public forums, circumstantial evidence surrounding lack of progress in volume delivery at Timminco, a convoluted ownership structure ... all suggests it will be a miracle if Timminco can deliver on its promises."
The story is worth following, because this is one of several cases in recent years when a company experiencing a stock price drop has blamed malicious rumors spread by short sellers. And, as with many other such cases, those malicious rumors turn out to be true. The short sellers were on to something.
I could name some other examples of company's blaming shorts for telling truths, but instead I think I'll just move on to a couple of bits of housekeeping.
Damien Park, of Hedge Fund Solutions LLC, has started a new blog on "activist investing."
If you're interested enough in the struggles for control in corporate suites to be reading Proxy Partisans, you'll probably want some familiarity with Park's new site, too.
In other news of a bibliographic sort, CRC Press has published an Encyclopedia of Alternative Investments, edited by Greg N. Gregoriou.
I haven't seen it yet. But Gregoriou, an associate professor of finance at the State University of New York (Plattsburgh) has an impressive reputation in the field.
Stay groovy.
Tuesday, August 26, 2008
CSX/TCI Arguments
Yesterday, the second circuit court of appeals heard arguments from lawyers on both sides of the CSX/TCI case.
There are several issues at stake. I am especially interested inone: the relevance (or otherwise) of an investor's position in total return swaps to the disclosures required by 13D.
Why is that important? Because it is part of the much broader question of whether ownership is a single fact or an arbitrary bundle. When I went to law school, the basic property law course began with an effort to disabuse students of the naive idea that ownership is a simple solid sort of fact. The ownership of land, for example, consists of the right to exclude others from it, the right to reside there and enjoy it, the right to sell it in whole or in part, the right to lease it out, etc.
When can contracting parties break up the bundle and redistribute elements of ownership to their hearts content? when are they stuck with a stick simply becauise they're holding another stick thereof?
The trial court judge in this case rendered a decision that strongly implies that the bundle isn't arbitrary, and thus isn't infinitely malleable. Not, at any rate, in the matter of the ownership of shares of stock. Now we'll see how well that inference does at the next level up the judicial hierarchy.
That's an amateur historian/philosopher's view of the case, not the way the lawyers will describe the issues. What lawyers will tell you is that the fund is obligated to report beneficial ownership of equity securities, AND the refrain from engaging in any "scheme to evade" that requirement. The railroad pitched two different theories to the trial court: that the cash-settled derivatives that TCI owned are in effect equity securities, or that for quite specific reasons that may not apply in a lot of other cases the fund was employing those derivatives as part of a scheme to evade. There is, in short, both a broad and a narrow theory at stake.
The trial court judge indicated that if he feels sympathetic toward the broader theory. But that was as lawyers say "dicta." He actually ruled against TCI, to the extent that he did, only on the narrower theory.
The appeals court could, for all I know to the contrary, reject both theories and find that TCI's actions were as pure as the driven snow. Or it could accept the broad theory.
The betting line at the moment, though, is that the appellate court like the trial court will "split the difference" and go with the narrower theory. Although even within the narrower theory there's a lot of room for differences between the two courts and there will certainly be some. A simple "judgment affirmed" isn't in the cards. That is the one point on which I am bold enough to make a prediction.
We'll see how things shake themselves out.
There are several issues at stake. I am especially interested inone: the relevance (or otherwise) of an investor's position in total return swaps to the disclosures required by 13D.
Why is that important? Because it is part of the much broader question of whether ownership is a single fact or an arbitrary bundle. When I went to law school, the basic property law course began with an effort to disabuse students of the naive idea that ownership is a simple solid sort of fact. The ownership of land, for example, consists of the right to exclude others from it, the right to reside there and enjoy it, the right to sell it in whole or in part, the right to lease it out, etc.
When can contracting parties break up the bundle and redistribute elements of ownership to their hearts content? when are they stuck with a stick simply becauise they're holding another stick thereof?
The trial court judge in this case rendered a decision that strongly implies that the bundle isn't arbitrary, and thus isn't infinitely malleable. Not, at any rate, in the matter of the ownership of shares of stock. Now we'll see how well that inference does at the next level up the judicial hierarchy.
That's an amateur historian/philosopher's view of the case, not the way the lawyers will describe the issues. What lawyers will tell you is that the fund is obligated to report beneficial ownership of equity securities, AND the refrain from engaging in any "scheme to evade" that requirement. The railroad pitched two different theories to the trial court: that the cash-settled derivatives that TCI owned are in effect equity securities, or that for quite specific reasons that may not apply in a lot of other cases the fund was employing those derivatives as part of a scheme to evade. There is, in short, both a broad and a narrow theory at stake.
The trial court judge indicated that if he feels sympathetic toward the broader theory. But that was as lawyers say "dicta." He actually ruled against TCI, to the extent that he did, only on the narrower theory.
The appeals court could, for all I know to the contrary, reject both theories and find that TCI's actions were as pure as the driven snow. Or it could accept the broad theory.
The betting line at the moment, though, is that the appellate court like the trial court will "split the difference" and go with the narrower theory. Although even within the narrower theory there's a lot of room for differences between the two courts and there will certainly be some. A simple "judgment affirmed" isn't in the cards. That is the one point on which I am bold enough to make a prediction.
We'll see how things shake themselves out.
Monday, August 25, 2008
Talking about Biden's Son
My readers are no doubt aware that the presumptive Democratic Party nominee for President, Sen. Barack Obama, has now selected Joseph Biden, a sort of Senate foreign-policy mandarin, as his running mate.
This means that Biden, and his immediate family members, come in for the usual scrutiny that follows such an announcement.
One of the first consequences of the new scrutiny involves Biden's son, Hunter, who was for a time the president of a hedge fund group, Paradigm Companies.
Hunter and his uncle James Biden (the Senator's brother) are now engaged in civil litigation with Anthony Lotito Jr., a former Paradigm partner. Lotito accuses the Bidens, and they in turn accuse him, of fraud.
The Washington Post had a big write up on the matter yesterday.
What piques my interest is the possibility that Senator Biden at some point made a strategic decision, that it was better for him politically to have a son in the hedge fund industry than to have a son who is a lobbyist. The negative fall-out woiuld be lesser in the former case than in the latter.
Lotito's complaint: Senator Biden "was concerned with the impact that Hunter's lobbying activities might have on his expected campaign for the 2008 Democratic presidential nomination," and, "told Lotito that, in light of these concerns, his brother had asked him to seek Lotito's assistance in finding employment for Hunter in a non-lobbying capacity."
I wish hedge funds well, because in a sense they are a proxy for my own broader belief in a vigorous capitalist financial environment. So, I'm happy that the political climate is such that a powerful politician would set his son up in a hedge fund as a way of getting him out of harm's way.
This means that Biden, and his immediate family members, come in for the usual scrutiny that follows such an announcement.
One of the first consequences of the new scrutiny involves Biden's son, Hunter, who was for a time the president of a hedge fund group, Paradigm Companies.
Hunter and his uncle James Biden (the Senator's brother) are now engaged in civil litigation with Anthony Lotito Jr., a former Paradigm partner. Lotito accuses the Bidens, and they in turn accuse him, of fraud.
The Washington Post had a big write up on the matter yesterday.
What piques my interest is the possibility that Senator Biden at some point made a strategic decision, that it was better for him politically to have a son in the hedge fund industry than to have a son who is a lobbyist. The negative fall-out woiuld be lesser in the former case than in the latter.
Lotito's complaint: Senator Biden "was concerned with the impact that Hunter's lobbying activities might have on his expected campaign for the 2008 Democratic presidential nomination," and, "told Lotito that, in light of these concerns, his brother had asked him to seek Lotito's assistance in finding employment for Hunter in a non-lobbying capacity."
I wish hedge funds well, because in a sense they are a proxy for my own broader belief in a vigorous capitalist financial environment. So, I'm happy that the political climate is such that a powerful politician would set his son up in a hedge fund as a way of getting him out of harm's way.
Sunday, August 24, 2008
Harbinger & Cleveland-Cliffs
Cleveland-Cliffs Inc., an iron ore and processing company, is opposing a hedge fund's efforts to increase its stake.
Under the law of the state of incorporation, Ohio, the hedge fund, Harbinger Capital, needs shareholder approval to acquire more than 20% of the company. Harbinger now has about 15.57% thereof, and says it wants to own more than the 20% threshold, but less than one third.
The reason for its interest in upping its stake? Harbinger believes that Cleveland-Cliffs is making a counter-productive strategic decision in buying Alpha Natural Resources, and it wants to be in a position to oppose that purchase effectively. The ALpha deal will require a two-thirds vote of shareholders in the acquiring company for approval, so by buying up to 1/3, Harbinger will make this very easy for itself.
Shareholders of record as of Sept. 2 will be able to vote at the meeting on Oct. 3, Cleveland-Cliffs said.
In its proxy materials asking its shareholders to vote against Harbinger's request, Cleveland-Cliffs unsurprisingly reiterated its view of the merits of the Alpha deal. It also said that the issue goes beyond that: Harbinger would acquire a veto on any other analogous transactions.
Under the law of the state of incorporation, Ohio, the hedge fund, Harbinger Capital, needs shareholder approval to acquire more than 20% of the company. Harbinger now has about 15.57% thereof, and says it wants to own more than the 20% threshold, but less than one third.
The reason for its interest in upping its stake? Harbinger believes that Cleveland-Cliffs is making a counter-productive strategic decision in buying Alpha Natural Resources, and it wants to be in a position to oppose that purchase effectively. The ALpha deal will require a two-thirds vote of shareholders in the acquiring company for approval, so by buying up to 1/3, Harbinger will make this very easy for itself.
Shareholders of record as of Sept. 2 will be able to vote at the meeting on Oct. 3, Cleveland-Cliffs said.
In its proxy materials asking its shareholders to vote against Harbinger's request, Cleveland-Cliffs unsurprisingly reiterated its view of the merits of the Alpha deal. It also said that the issue goes beyond that: Harbinger would acquire a veto on any other analogous transactions.
Wednesday, August 20, 2008
Big Win for Steel Partners
Point Blank held its long-deferred annual meeting yesterday. And Steel Partners II won a smashing victory, putting five nominees on a seven-member board.
Point Blank is a Florida based manufacturer of body armor.
It would now seem to be in the control of Warren Lichtenstein, the principal of Steel Partners. Mr. Lichtenstein's victory statement said: "We continue to believe that Point Blank should not remain a standalone company competing on uneven terms against much larger competitors in a weakening market."
He and his associates will presumably begin the search for a buyer.
The vote wasn't even close. Seldom are victories for the dissidents this lopsided. Steel's five nominees received 65 percent of the voted shares, compared with only 14 percent for Point Blank's candidates.
The results render moot some litigation now before the Chancery Court of the state of Delaware.
Point Blank is a Florida based manufacturer of body armor.
It would now seem to be in the control of Warren Lichtenstein, the principal of Steel Partners. Mr. Lichtenstein's victory statement said: "We continue to believe that Point Blank should not remain a standalone company competing on uneven terms against much larger competitors in a weakening market."
He and his associates will presumably begin the search for a buyer.
The vote wasn't even close. Seldom are victories for the dissidents this lopsided. Steel's five nominees received 65 percent of the voted shares, compared with only 14 percent for Point Blank's candidates.
The results render moot some litigation now before the Chancery Court of the state of Delaware.
Tuesday, August 19, 2008
Three brief items
No real common thread here. Just three observations.
1. Cape Fear [not the movie].
Cape Fear Bank Corporation announced yesterday that it has reached agreement with a group of investors led by Maurice Koury about reconstituting its board of directors.
The two biggest advisory services rather forced their hand in this. RiskMetrics (ISS) supported two of Koury's nominees: James S. Mahan III and Mort Neblett. Glass Lewis also supported two: Mr. Mahan and David Lucht.
Under the settlement, the reconstituted board will include each of those three gentlemen, as well as another Koury nominee: Scott Sullivan.
The company likely knew a challenge was coming as soon as it reported, back in April, that it had identified material weaknesses in its internal controls over financial reporting. Glass Lewis' report said: "We believe such material weaknesses may signal weak internal accounting expertise, poor internal controls, and aggressive financial reporting practices at the company."
2. CME/Nymex
Both of the two sets of shareholders involved have now voted in favor of a deal that has CME Group acquiring the New York Mercanrtile Exchange for $7.6 billion. The two exchanges said in a statement that they expect to close on the deal by the end of this year.
The board of directors of CME will be expanded to included three directors from Nymex.
Brad Hintz, an analyst at Sanford Bernstein, is being quoted today thus: "CME wants this so badly because the futures market is ... one of the few monopolies left in the world. And it's a monopoly because they have their own clearing operation."
I beg to differ. It isn't a monopoly, although I do understand the point that the vertical link between an exchange and a clearing operation creates or enhances market power.
3. AIG returns to UK subprime.
American International Group has become the first US based party to subprime mortgage market in the United Kingdom.
Specifically, AIG has agreed to fund the launch of a non-conforming lender, Link Loans, through its subsidiary, Ocean Money.
So reports FTAdviser this morning, in a story by Joe McGrath.
To what does a nonconforming lender not conform? Is this someone who wears long hair and stays ahead of the curve on drug use? No ... that would be a nonconformist. A different matter. A nonconforming lender is a non-bank institution that offers loans to creditors who wouldn't meet the standards of a bank.
Is such activity about to pick up again, a little more than a year after the big chill began? Or is the AIG action an arrant outlier? For now, I'm guessing the latter.
1. Cape Fear [not the movie].
Cape Fear Bank Corporation announced yesterday that it has reached agreement with a group of investors led by Maurice Koury about reconstituting its board of directors.
The two biggest advisory services rather forced their hand in this. RiskMetrics (ISS) supported two of Koury's nominees: James S. Mahan III and Mort Neblett. Glass Lewis also supported two: Mr. Mahan and David Lucht.
Under the settlement, the reconstituted board will include each of those three gentlemen, as well as another Koury nominee: Scott Sullivan.
The company likely knew a challenge was coming as soon as it reported, back in April, that it had identified material weaknesses in its internal controls over financial reporting. Glass Lewis' report said: "We believe such material weaknesses may signal weak internal accounting expertise, poor internal controls, and aggressive financial reporting practices at the company."
2. CME/Nymex
Both of the two sets of shareholders involved have now voted in favor of a deal that has CME Group acquiring the New York Mercanrtile Exchange for $7.6 billion. The two exchanges said in a statement that they expect to close on the deal by the end of this year.
The board of directors of CME will be expanded to included three directors from Nymex.
Brad Hintz, an analyst at Sanford Bernstein, is being quoted today thus: "CME wants this so badly because the futures market is ... one of the few monopolies left in the world. And it's a monopoly because they have their own clearing operation."
I beg to differ. It isn't a monopoly, although I do understand the point that the vertical link between an exchange and a clearing operation creates or enhances market power.
3. AIG returns to UK subprime.
American International Group has become the first US based party to subprime mortgage market in the United Kingdom.
Specifically, AIG has agreed to fund the launch of a non-conforming lender, Link Loans, through its subsidiary, Ocean Money.
So reports FTAdviser this morning, in a story by Joe McGrath.
To what does a nonconforming lender not conform? Is this someone who wears long hair and stays ahead of the curve on drug use? No ... that would be a nonconformist. A different matter. A nonconforming lender is a non-bank institution that offers loans to creditors who wouldn't meet the standards of a bank.
Is such activity about to pick up again, a little more than a year after the big chill began? Or is the AIG action an arrant outlier? For now, I'm guessing the latter.
Monday, August 18, 2008
Another Soros Buy
I'll follow up a bit on the subject of yesterday's entry ... what is George Soros investing in these days?
Soros Fund Management has of late increased the size of its position in the investment bank Lehman Brothers. At the end of the first quarter of the year, SFM owned only 10,000 shares of Lehman. But by the end of the second quarter, June 30, it owned 9.47 million.
He is fishing in troubled waters. Lehman's shares have fallen by 75% so far this year as the credit crunch has played itself out. When Bear Stearns tanked in March and had to sell itself for the proverbial song, rumor had it that Lehman was 'next.'
Indeed, the SEC has reportedly investigated those rumors, on the theory that they may have been spread by stock munipulators.
Soros' confidence may itself prove an important shot in the arm for Lehman.
Meanwhile, today's Wall Street Journal, specifically the "Deals & Deal Makers" column, paints a doom-and-gloom portrait of Lehman's present situation, saying that it is likely the bank will report third quarter losses, "instead of the modest profit they previously expected."
The 3d quarter isn't over yet. I suspect Lehman itself is encouraging such reports, in order to lower the bar so that if it DOES have to report 3d quarter losses when the time comes, the street will regard the report as "old news."
Have I mentioned lately that nothing I say in this blog should be regarded by any rational person as investment counsel? If not: consider it mentioned!
Soros Fund Management has of late increased the size of its position in the investment bank Lehman Brothers. At the end of the first quarter of the year, SFM owned only 10,000 shares of Lehman. But by the end of the second quarter, June 30, it owned 9.47 million.
He is fishing in troubled waters. Lehman's shares have fallen by 75% so far this year as the credit crunch has played itself out. When Bear Stearns tanked in March and had to sell itself for the proverbial song, rumor had it that Lehman was 'next.'
Indeed, the SEC has reportedly investigated those rumors, on the theory that they may have been spread by stock munipulators.
Soros' confidence may itself prove an important shot in the arm for Lehman.
Meanwhile, today's Wall Street Journal, specifically the "Deals & Deal Makers" column, paints a doom-and-gloom portrait of Lehman's present situation, saying that it is likely the bank will report third quarter losses, "instead of the modest profit they previously expected."
The 3d quarter isn't over yet. I suspect Lehman itself is encouraging such reports, in order to lower the bar so that if it DOES have to report 3d quarter losses when the time comes, the street will regard the report as "old news."
Have I mentioned lately that nothing I say in this blog should be regarded by any rational person as investment counsel? If not: consider it mentioned!
Sunday, August 17, 2008
Soros and Petrobras
Billionaire George Soros is increasing his holdings in the commodities and mining areas.
In accord with this general move, he has purchased an $811 million stake in the Brazilian state controlled oil company Patrobras (more formally known as Petroleo Brasileiro SA).
The general move toward commodities is one in which Soros and the entities he controls have a lot of company. The usual "herd of independent minds" is thundering across that plain.
The move into Petrobras in particular may have been catalyzed by that company's announcement in November of the discovery of a rich new oil field.
Bloomberg is quoting Ricardo Kobayashi, an equity fund manager with UBS Pactual SA, in Rio de Janiero. "Petrobras has something that other oil companies don't have: oil -- lots of it and they're going to find more. If you can buy now and hang on, if you have the staying power, it's great."
But you might need a lot of patience, and deep pockets (although not necessarily pockets of Sorosian depth!) to have that staying power, because things are and will likely for some time remain rocky for Petrobras.
Its price on Brazil's stock exchange peaked at above 50 Reals back in the spring and has fallen to below 33 Reals since.
The contention of bullish and bearish influences upon Patrobras may be a fascinating saga in the making.
In accord with this general move, he has purchased an $811 million stake in the Brazilian state controlled oil company Patrobras (more formally known as Petroleo Brasileiro SA).
The general move toward commodities is one in which Soros and the entities he controls have a lot of company. The usual "herd of independent minds" is thundering across that plain.
The move into Petrobras in particular may have been catalyzed by that company's announcement in November of the discovery of a rich new oil field.
Bloomberg is quoting Ricardo Kobayashi, an equity fund manager with UBS Pactual SA, in Rio de Janiero. "Petrobras has something that other oil companies don't have: oil -- lots of it and they're going to find more. If you can buy now and hang on, if you have the staying power, it's great."
But you might need a lot of patience, and deep pockets (although not necessarily pockets of Sorosian depth!) to have that staying power, because things are and will likely for some time remain rocky for Petrobras.
Its price on Brazil's stock exchange peaked at above 50 Reals back in the spring and has fallen to below 33 Reals since.
The contention of bullish and bearish influences upon Patrobras may be a fascinating saga in the making.
Wednesday, August 13, 2008
Three Books, briefly
1. I wrote last week of a forthcoming book about the demise of Bear Stearns, BEAR TRAP, and about my efforts to obtain a review copy.
I'd like to report now that I have seen a copy, and that the book is something of a disappointment.
The opening paragraphs, in which the authors compare themselves to Shakespeare and Dreiser, should have been a tip-off. If you have a good story to tell, you can launch right into it and let it tell itself.
2. A more interesting read by far, Joe Nocera's GOOD GUYS & BAD GUYS. The bulk of this book is a "best of" collection of articles and columns going back to the 1980s. The new material generally updates or seeks to draw connections amongst the collected material.
Some oil-industry history: In 1982, when T. Boone Pickens, founder of Mesa Petroleum, offered to buy a much larger company, Cities Service Company, which was more generally known by the name Citgo, the target company responded by offering to buy Mesa. High drama played out in the suites of southern Manhattan for weeks as the two fish struggled to see who would swallow whom.
Neither offer ever actually closed, but the upshot of it was that Pickens made his name as a wheeler-dealer on a very big scale, and Citgo was put "in play" in the markets. By the end of that decade, it had been sold (through steps I won't relate here) to the nation of Venezuela.
Anyway, Joe Nocera got a journalistic coup out of this intense bidding war. He was there, in the hotel suite with Pickens and his brains trust, through the thick of it, and it became the October 1982 cover story for Texas Monthly. That chapter makes a very compelling read and a great jumpstart to this book.
3. Or consider Roger Lowenstein's latest, While America Aged, about (as the lengthy subtitle aptly says), "how pension debts ruined General Motors, stopped the NYC subways, Bankruptcy San Diego, and Loom as the Next Financial Crisis."
The "devil's pack" that too many managements have struck with too many unions over the years in the US is: labor peace in return for unfunded pension promises. The managers who strike this deal may be either private, quasi-public, or fully public. The bargain is the same. It is the sort of bargain that a credit-card addict makes with himself. "I'll save my cash and soothe my spending impulses at the same time by using the plastic."
One neat detail from the San Diego case study: In October 2001, that city's chief of human relations, Cathy Lexin, expressed her growing unease about the pension's earnings numbers vis-à-vis its liabilities in a very eloquent way in an email she sent to the assistant city auditor. The subject line of the email read: EEEK.
I'd like to report now that I have seen a copy, and that the book is something of a disappointment.
The opening paragraphs, in which the authors compare themselves to Shakespeare and Dreiser, should have been a tip-off. If you have a good story to tell, you can launch right into it and let it tell itself.
2. A more interesting read by far, Joe Nocera's GOOD GUYS & BAD GUYS. The bulk of this book is a "best of" collection of articles and columns going back to the 1980s. The new material generally updates or seeks to draw connections amongst the collected material.
Some oil-industry history: In 1982, when T. Boone Pickens, founder of Mesa Petroleum, offered to buy a much larger company, Cities Service Company, which was more generally known by the name Citgo, the target company responded by offering to buy Mesa. High drama played out in the suites of southern Manhattan for weeks as the two fish struggled to see who would swallow whom.
Neither offer ever actually closed, but the upshot of it was that Pickens made his name as a wheeler-dealer on a very big scale, and Citgo was put "in play" in the markets. By the end of that decade, it had been sold (through steps I won't relate here) to the nation of Venezuela.
Anyway, Joe Nocera got a journalistic coup out of this intense bidding war. He was there, in the hotel suite with Pickens and his brains trust, through the thick of it, and it became the October 1982 cover story for Texas Monthly. That chapter makes a very compelling read and a great jumpstart to this book.
3. Or consider Roger Lowenstein's latest, While America Aged, about (as the lengthy subtitle aptly says), "how pension debts ruined General Motors, stopped the NYC subways, Bankruptcy San Diego, and Loom as the Next Financial Crisis."
The "devil's pack" that too many managements have struck with too many unions over the years in the US is: labor peace in return for unfunded pension promises. The managers who strike this deal may be either private, quasi-public, or fully public. The bargain is the same. It is the sort of bargain that a credit-card addict makes with himself. "I'll save my cash and soothe my spending impulses at the same time by using the plastic."
One neat detail from the San Diego case study: In October 2001, that city's chief of human relations, Cathy Lexin, expressed her growing unease about the pension's earnings numbers vis-à-vis its liabilities in a very eloquent way in an email she sent to the assistant city auditor. The subject line of the email read: EEEK.
Tuesday, August 12, 2008
Biogen Idec
In a filing with the SEC yesterday, Carl Icahn and associated entities said that they've increased their stake in the biopharm company Biogen Idec from 4.3% to 6%.
Biogen, a Cambridge, Mass. based concern, (NASD: BIIB) has a market value of close to $15 billion, and employs more than 4,000 people.
Two months ago, Icahn tried to get three nominees on the Biogen board, and as regular readers of this blog know, they were defeated.
But Icahn is nothing if not persistent, and that he has responded to defeat not by liquidating his stake but by increasing it is characteristic.
There is also the little matter of the price chart. The price of a share of BIIB was above $57 when Icahn's slate lost that election. It's below $51 now. What has changed?
This has changed: there have been two occurrences of a fatal brain disease, progressive multifocal leukoencephalopathy (PML), among patients receiving a Biogen producr, Tysabri. Tysabri has been linked with PML before, and these new occurrences could spook doctors into keeping their patients off the stuff.
If that happens, it could be a misfortune all around. Tysabri is reportedly very effective in improving the quality of life of people with both multiple sclerosis and Crohn's disease which is why it was allowed back on to the market despite a previous round of PML reports in 2005.
Both of the two new Tysabri-taking PML patients were warned that an increased risk of that disease was a side effect of this drug.
Risk/reward. Reward/risk. It isn't just business. It's life. Though one must always hope that the researchers in the field will press on toward improving the terms of such trade-offs.
Biogen, a Cambridge, Mass. based concern, (NASD: BIIB) has a market value of close to $15 billion, and employs more than 4,000 people.
Two months ago, Icahn tried to get three nominees on the Biogen board, and as regular readers of this blog know, they were defeated.
But Icahn is nothing if not persistent, and that he has responded to defeat not by liquidating his stake but by increasing it is characteristic.
There is also the little matter of the price chart. The price of a share of BIIB was above $57 when Icahn's slate lost that election. It's below $51 now. What has changed?
This has changed: there have been two occurrences of a fatal brain disease, progressive multifocal leukoencephalopathy (PML), among patients receiving a Biogen producr, Tysabri. Tysabri has been linked with PML before, and these new occurrences could spook doctors into keeping their patients off the stuff.
If that happens, it could be a misfortune all around. Tysabri is reportedly very effective in improving the quality of life of people with both multiple sclerosis and Crohn's disease which is why it was allowed back on to the market despite a previous round of PML reports in 2005.
Both of the two new Tysabri-taking PML patients were warned that an increased risk of that disease was a side effect of this drug.
Risk/reward. Reward/risk. It isn't just business. It's life. Though one must always hope that the researchers in the field will press on toward improving the terms of such trade-offs.
Monday, August 11, 2008
Bronco Drilling: Death of a Deal
On Friday, Bronco Drilling and Allis-Chalmers Energy announced that they've abandoned their plans to merge "in light of clear indications that Bronco stockholders would not adopt the merger agreement."
I discussed the dynamics of this deal on Tuesday, August 4. The price did seem low, and stockholder resistence understandable.
The special shareholders' meeting that had been scheduled for August 14 to vote on the merger has now accordingly been cancelled.
Here are three items from the death of the deal:
* July 30, 2008: Proxy Governance Inc., an independent proxy advisory firm, issues a report recommending opposition to the merger. "We do not support this proposal because - in the context of share price appreciation for peers in the period since the announcement - it does not appear to offer a meaningful takeover premium, and because the share price itself - which is currently at a premium to the proposed merger consideration - seems to bolster the arguments of large shareholders that the deal undervalues the company."
* August 5, 2008, FBR Capital Markets issues a report speaking of the "strong underlying land rig market," which should allow Bronco as an independent company to outperform the valuation the dealmakers had attached to it. They expressed their "expectation that fewer than 50% of BRNC's shareholders will vote for the ALY merger agreement. Such a rejection of the current deal should allow the market to recognize the value of BRNC that has been capped by the under-priced ALY offer."
* Same day, Jefferies & Company, Inc. is heard from, another report, "Given the dramatic improvement in land rig fundamentals this year, we generally agree with the dissenting shareholders that the ALY transaction undervalues the Company."
We will see more of this. Companies trying to sell themselves at fire sale prices, only to find that the shareholders rebel, saying: "Hold on until conditions for deals improve, and get us the better price that'll be available then!"
I discussed the dynamics of this deal on Tuesday, August 4. The price did seem low, and stockholder resistence understandable.
The special shareholders' meeting that had been scheduled for August 14 to vote on the merger has now accordingly been cancelled.
Here are three items from the death of the deal:
* July 30, 2008: Proxy Governance Inc., an independent proxy advisory firm, issues a report recommending opposition to the merger. "We do not support this proposal because - in the context of share price appreciation for peers in the period since the announcement - it does not appear to offer a meaningful takeover premium, and because the share price itself - which is currently at a premium to the proposed merger consideration - seems to bolster the arguments of large shareholders that the deal undervalues the company."
* August 5, 2008, FBR Capital Markets issues a report speaking of the "strong underlying land rig market," which should allow Bronco as an independent company to outperform the valuation the dealmakers had attached to it. They expressed their "expectation that fewer than 50% of BRNC's shareholders will vote for the ALY merger agreement. Such a rejection of the current deal should allow the market to recognize the value of BRNC that has been capped by the under-priced ALY offer."
* Same day, Jefferies & Company, Inc. is heard from, another report, "Given the dramatic improvement in land rig fundamentals this year, we generally agree with the dissenting shareholders that the ALY transaction undervalues the Company."
We will see more of this. Companies trying to sell themselves at fire sale prices, only to find that the shareholders rebel, saying: "Hold on until conditions for deals improve, and get us the better price that'll be available then!"
Sunday, August 10, 2008
CME/Nymex
The proposed CME/Nymex deal continues to roll happily along.
Personally, I'm surprised at how easily this is going. But I've said that before.
What I ought to add today is that Cataldo Capozza now says he won't seek an injunction against the upcoming votes.
Mr. Capozza is an original member and thus a stockholder in Nymex who believes that exchange is worth a good deal more than the CME is paying. But of course that belief isn't enough to get an injunction.
He had apparently planned to seek an injunction on the basis that the CME wasn't making adequate disclosures in its proxy materials. But in Friday's statement he congratulates CME on its latest disclosures, which clear this hurdle.
The latest disclosures don't seem like much of a ticking timebomb to me. They include the following: "In the summer of 2007, representatives of one potential acquiror indicated to the management of NYMEX Holdings that, subject to approval of such acquiror’s board of directors, the acquiror might be interested in acquiring NYMEX Holdings for cash and stock with a combined value of $142 per share of NYMEX Holdings’ common stock, based on then-current stock prices. However, no bid was ever received."
Fine. But what's on the table is what's on the table.
"At the conclusion of the meetings on January 24, 2008, Mr. Schaeffer and Dr. Newsome concluded that further attempts to negotiate price terms would create a significant risk that a deal would not be struck. At the Board meeting the next day, Mr. Schaeffer and Dr. Newsome explained their opinion to the Board and recommended that the Board not engage in further attempts to negotiate price at that time."
And so forth.
Mr. Capozza seems resigned (and I'm reading between the lines a bit here) to the likelihood that the deal will be approved by the voters and will close. What is more explicit in his statement is his contingency plan: "If the shareholders approve the sale, we will seek damages to compensate the shareholders for billions of dollars NYMEX management left on the table."
That might prove interesting. But in the meantime the consolidation of exchanges will have rolled forward.
Personally, I'm surprised at how easily this is going. But I've said that before.
What I ought to add today is that Cataldo Capozza now says he won't seek an injunction against the upcoming votes.
Mr. Capozza is an original member and thus a stockholder in Nymex who believes that exchange is worth a good deal more than the CME is paying. But of course that belief isn't enough to get an injunction.
He had apparently planned to seek an injunction on the basis that the CME wasn't making adequate disclosures in its proxy materials. But in Friday's statement he congratulates CME on its latest disclosures, which clear this hurdle.
The latest disclosures don't seem like much of a ticking timebomb to me. They include the following: "In the summer of 2007, representatives of one potential acquiror indicated to the management of NYMEX Holdings that, subject to approval of such acquiror’s board of directors, the acquiror might be interested in acquiring NYMEX Holdings for cash and stock with a combined value of $142 per share of NYMEX Holdings’ common stock, based on then-current stock prices. However, no bid was ever received."
Fine. But what's on the table is what's on the table.
"At the conclusion of the meetings on January 24, 2008, Mr. Schaeffer and Dr. Newsome concluded that further attempts to negotiate price terms would create a significant risk that a deal would not be struck. At the Board meeting the next day, Mr. Schaeffer and Dr. Newsome explained their opinion to the Board and recommended that the Board not engage in further attempts to negotiate price at that time."
And so forth.
Mr. Capozza seems resigned (and I'm reading between the lines a bit here) to the likelihood that the deal will be approved by the voters and will close. What is more explicit in his statement is his contingency plan: "If the shareholders approve the sale, we will seek damages to compensate the shareholders for billions of dollars NYMEX management left on the table."
That might prove interesting. But in the meantime the consolidation of exchanges will have rolled forward.
Wednesday, August 6, 2008
The Big Bad Bear Book
The collapse of Bear Stearns in March of this year has produced innumerable journalistic takes and re-takes.
Now it has entered a new stage, getting its very own book, BEAR TRAP: THE FALL OF BEAR STEARNS AND THE PANIC OF 2008, by an individual still known only as Anonymous.
The publisher, BrickTower, says that Anonymous will reveal his/her name when the formal publication date rolls around, at the start of the fourth week of September.
The anonymity and the accompanying guessing game is a standard bit of publisher's hype of course. It is designed to assure us that the book is the work of a real insider, the Mark Felt of the Bear Stearns meltdown.
But of course it seems unlikely anyone at BrickTower had to meet Anonymous in a parking garage.
At any rate, I've contacted BrickTower and requested a review copy. The name of the publisher is itself news to me, certainly it isn't like Wiley, a go-to name for biz books. Still, if a copy arrives, I'll happily tell you all about it.
Now it has entered a new stage, getting its very own book, BEAR TRAP: THE FALL OF BEAR STEARNS AND THE PANIC OF 2008, by an individual still known only as Anonymous.
The publisher, BrickTower, says that Anonymous will reveal his/her name when the formal publication date rolls around, at the start of the fourth week of September.
The anonymity and the accompanying guessing game is a standard bit of publisher's hype of course. It is designed to assure us that the book is the work of a real insider, the Mark Felt of the Bear Stearns meltdown.
But of course it seems unlikely anyone at BrickTower had to meet Anonymous in a parking garage.
At any rate, I've contacted BrickTower and requested a review copy. The name of the publisher is itself news to me, certainly it isn't like Wiley, a go-to name for biz books. Still, if a copy arrives, I'll happily tell you all about it.
Tuesday, August 5, 2008
Daimler and the locusts
Share prices of the German auto company Daimler have risen more than 4% in recent days, apparently on the strength of rumors that an unspecified hedge fund is building up a position in the company.
The magazine, Focus, citing a supervisory board member, said that it has confirmed the rumors that Daimler is "in the sight of the foreign hedge fund."
A spokeswoman for the company, responding to the magazine story yesterday, said the company has no indication that any hedge fund is interested.
The rumors seem to have gotten more specific since that statement. This morning, the newspaper Sueddeutsche Zeitung is reporting that the Swedish investment fund Cevian Capitalis buying up shares.
The meaning of the labels can be slippery, especially since the laws vary from one country to another, but Cevian seems from the description on its website to be more of a private equity fund than a hedge fund. Still, if it is buying a large chunk of Daimler, it probably wants to shake things up. That website refers to its strategy of "active ownership."
The terminological distinction is important because German politicians have taken to denouncing foreign hedge funds as "locusts." Maybe a foreign (but European) PE fund seems less threatening.
At a maximum (and I'm engaging in nothing more than blue-skies speculation here folks) this sort of news can put a company "in play" as an acquisition target. I doubt Cevian would want to acquire such a "big fish" outright, but there are other companies in the world that would want Daimler.
The magazine, Focus, citing a supervisory board member, said that it has confirmed the rumors that Daimler is "in the sight of the foreign hedge fund."
A spokeswoman for the company, responding to the magazine story yesterday, said the company has no indication that any hedge fund is interested.
The rumors seem to have gotten more specific since that statement. This morning, the newspaper Sueddeutsche Zeitung is reporting that the Swedish investment fund Cevian Capitalis buying up shares.
The meaning of the labels can be slippery, especially since the laws vary from one country to another, but Cevian seems from the description on its website to be more of a private equity fund than a hedge fund. Still, if it is buying a large chunk of Daimler, it probably wants to shake things up. That website refers to its strategy of "active ownership."
The terminological distinction is important because German politicians have taken to denouncing foreign hedge funds as "locusts." Maybe a foreign (but European) PE fund seems less threatening.
At a maximum (and I'm engaging in nothing more than blue-skies speculation here folks) this sort of news can put a company "in play" as an acquisition target. I doubt Cevian would want to acquire such a "big fish" outright, but there are other companies in the world that would want Daimler.
Monday, August 4, 2008
Bronco Drilling
Allis-Chalmers Energy has entered into a contract to buy Bronco Drilling, an oil and natural gas drill rig supplier.
Bronco shareholders will get $200 million in cash and 16.85 million shares of ALY's common stock if the deal goes through as planned.
Wexford Capital, which owns close to 13% of the issued and outstanding common stock of Bronco, thinks this is too cheap. On July 29, Wexford partner Arthur Amron, wrote the board of directors of Bronco to explain his own and his colleagues' reasoning.
The history behind this letter makes it of especial interest to me. For as it happens, Wexford created Bronco, in June 2001. Four years later, it kicked its baby out of the nest, into the world, with an IPO at $17 a share.
The IPO price of 2005 was $17 a share??? As it happens, that's about how shares are valued according to the Allis-Chalmers proposal. Anybody who stocked up on equity at the IPO price and now accepts the ALY offer is accepting a nominal value change of just about nothing, and of course a real value change well in the negative numbers, since the 2008 dollar isn't the 2005 dollar.
Glass Lewis, on the other hand, recommends that shareholders vote for the proposed merger, which they think will "create a diversified international oilfield service provider, as well as generate substantial synergies. In addition, our contribution analysis suggests that the financial terms of the agreement are fair for the Company and its shareholders.”
Bronco shareholders will get $200 million in cash and 16.85 million shares of ALY's common stock if the deal goes through as planned.
Wexford Capital, which owns close to 13% of the issued and outstanding common stock of Bronco, thinks this is too cheap. On July 29, Wexford partner Arthur Amron, wrote the board of directors of Bronco to explain his own and his colleagues' reasoning.
The history behind this letter makes it of especial interest to me. For as it happens, Wexford created Bronco, in June 2001. Four years later, it kicked its baby out of the nest, into the world, with an IPO at $17 a share.
The IPO price of 2005 was $17 a share??? As it happens, that's about how shares are valued according to the Allis-Chalmers proposal. Anybody who stocked up on equity at the IPO price and now accepts the ALY offer is accepting a nominal value change of just about nothing, and of course a real value change well in the negative numbers, since the 2008 dollar isn't the 2005 dollar.
Glass Lewis, on the other hand, recommends that shareholders vote for the proposed merger, which they think will "create a diversified international oilfield service provider, as well as generate substantial synergies. In addition, our contribution analysis suggests that the financial terms of the agreement are fair for the Company and its shareholders.”
Sunday, August 3, 2008
CME Buying Nymex: Advisory firms & politicians approve
Two leading proxy advisory firms have recommended the CME Group shareholders for in favor of the acquisition of the New York Mercantile Exchange at the shareholders' meeting August 18.
"Consolidation among exchange operators continues to be a viable growth strategy. The transaction will result in a more competitive exchange, offers NYMEX Holdings shareholders a financially fair consideration and is expected to be accretive to earnings for the surviving shareholders of CME Group," is how Glass Lewis put the key point.
This has never really become the political football it might have. There is a lot of talk in the halls of Congress these days about speculators and institutional investing and how forces at work through the commodities exchanges may be driving the price of crude oil and/or the price of gasoline higher than the underlying supply and demand considerations would warrant.
If there's any truth to that theory at all, the Nymex is key. And exchange consolidation could easily be portrayed, by a politician looking for a point to make, as a way of easing the least productive or rational or consumer-friendly forms of speculation out there. [I'm not making such a point, mind you, only commenting on what some hypothetical demagogue might be able to put together in this line].
But our politicians seem to be smiling rather benignly upon the CME/Nymex nuptials.
Get these mergers and acquisitions done while the gettin' is good. The climate may turn.
"Consolidation among exchange operators continues to be a viable growth strategy. The transaction will result in a more competitive exchange, offers NYMEX Holdings shareholders a financially fair consideration and is expected to be accretive to earnings for the surviving shareholders of CME Group," is how Glass Lewis put the key point.
This has never really become the political football it might have. There is a lot of talk in the halls of Congress these days about speculators and institutional investing and how forces at work through the commodities exchanges may be driving the price of crude oil and/or the price of gasoline higher than the underlying supply and demand considerations would warrant.
If there's any truth to that theory at all, the Nymex is key. And exchange consolidation could easily be portrayed, by a politician looking for a point to make, as a way of easing the least productive or rational or consumer-friendly forms of speculation out there. [I'm not making such a point, mind you, only commenting on what some hypothetical demagogue might be able to put together in this line].
But our politicians seem to be smiling rather benignly upon the CME/Nymex nuptials.
Get these mergers and acquisitions done while the gettin' is good. The climate may turn.
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