Non-core acquisitions

Sometimes the management of a company will come under fire from its shareholders for a policy of "non-core acquisitions."

The idea is that a company should "stick to its knitting," should do what it does best. If a company has been successful in the past in the "core" area, then it has an edge there -- not just the initial success itself, but the institutional know-how built up over time, and the fact that suppliers and customers in that field have both presumably grown accustomed to its face.

There is another thought behind the complaint about "non-core acquisitions." This is the idea that "we, the stockholders don't pay you, the managers, to diversify our portfolios for us. We'll do that for ourselves."

Let's get back to the point at which we left the matter yesterday. Presumably, if I've just bought stock in Comcast, it is because I wanted some exposure in my portfolio to the risk-reward profile found historically in the type of business I know Comcast to be in. If I also want something safe (or something more risky but promising) in there, I'll also buy that. It impedes my ability to get the balance I want if the managers of the particular stocks involved are shifting their own profile.

Now we can move forward a step. I can't say I have much sympathy with this sort of complaint. After all, managers are also often criticized for failing to diversify. Suppose Blockbusters had stuck doggedly to its brick-and-mortar stores (its "core assets") and ignored the fact that the technology for movie-purchase was changing on them. They'd be defunct. But they did anticipate the change and diversify in time, doing "non-core" things in the process, which is why they're a tenable company today. Of course, along the way they made a few false steps, such as a deal with Enron but ... hey ... that's show biz.

My point then is simply that the core/non-core distinction is not itself very useful, and that when we find it being invoked, we should try to look more closely at what is really at stake.

Philosophy

Today is as fine a day as any for a broad statement about the glasses through which I view the world of proxy ballots, boardroom disputes, mergers and acquisitions, friendly or hostile -- the whole world of corporate control.

My view is simply that the shareholders of its company are the owners thereof, not in any overly-sophisticated, qualified, legalistic sense. But in the common sense plain-English meaning of ownership. Proxy fights are good things simply because they help remind the company management, their employees, of who they work for.

Managements tend to entrench themselves, to seek safety behind various procedural barriers. They like "staggered boards," for example. In this gambit, the shareholders are allowed to vote in or out only one-third of the boards at any one meeting. They justify this by talk of preserving continuity and experience, etc. But the empirical research shows that shareholders don't benefit from that continuity in any way that would show up in, say, the value of a company's stock.

http://www.researchmatters.harvard.edu/story.php?article_id=592

When challenged on their responsiveness to their shareholders, or lack thereof, incumbent boards and their apologists, the advocates of entrenchment, or of what one scholar calls "directorial primacy," like to say that if shareholders aren't happy with how the company is run, they can always sell the stock. They shouldn't have to, though, That's the point. They're owners, not renters.

If you live in a home with a leaky roof and you don't like it, you can move. The owner can then either fix the roof or find another tenant who'll tolerate the leak. Even if its your home, you might of course decide that fixing it is too much trouble, in which case you can sell.

But you, as owner of equity, also have the option of hiring a contractor who'll fix the roof. And if your contractor proves dilatory in doing this job, of firing him and hiring another.

What's a Poison Pill?

The term is employed so often in debates over corporate governance that we ought to be outfront here about just what it means.

A "poison pill" is a plan that increases the value of what existing shareholders are holding, when a potential acquirer accumulates more than a set amount of the equity.

Typically, such a by-law will provide that if one investor acquires more than, say, 10% of the company's equity, each of the other non-acquiring shareholders acquire the right to buy new stock at bargain prices. This dilutes the potential acquirer's holding, and requires that the acquirer pay more than it otherwise would in order to gain control of its target.

Company managements typically call them "shareholder rights plan," because that sounds better. Their effect upon most of the shareholders accorded these rights is probably negative, because if they deter potential acquirers from actually making such a move and passing the threshold they by definition lower the market demand for the stock.

Here's the URL for academic discussion of some of the issues that these provisions raise under Delaware law: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=659322

Sometimes the term "poison pill" is used more broadly for a range of anti-takeover measures. But I'll try to keep to the narrow, and thus the usefully specific, meaning of the term in my postings here. (Other measures with similar goals have equally colorful nicknames, like "shark repellent.")

Proxy Fights Are Fun! Let's Watch

The receipt of proxy materials in the mail is seldom an exciting event. Usually, a corporation tells you that they want to change some blah blah in their charter to bluh blah. You don't see how it makes any difference to you, so you throw it away. If that's the highpoint of your day, you need to get out more.

But if you're lucky, you might some day own shares in a stock that becomes the subject of a proxy fight, in which competing slates of would-be directors, or advocates and oponents of a particular resolution, are competing for your vote. Then you have a decision to make. A decision that may impact your household bottom line. If you are in such a context, then the receipt of materials might in fact be the highpoint of your day. Although it still might be a better idea to get out more.

Anyway: why shouldn't such fights become an event of aesthetic appreciation and enjoyment? A spectator sport, if you will? There's no reason they can't. So I've created this blog, and I'll try to comment on ongoing proxy disputes in corporate America in the manner of a ringside commentator. More like Howard Cosell than Dennis Miller, I hope.

We'll see.