Friday, May 16, 2008
As well as Microsoft's switchboard refusing to connect Icahn to Steve Ballmer, when the former called the latter recently. You can't write fiction this good.
The Bloomberg account reports,
"Icahn said in a letter to Yahoo's board yesterday that a combination with Microsoft ``is by far the most sensible path'' if the Internet company wants to take on Google Inc.
``The board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft,'' said Icahn, 72. ``I sincerely hope you heed the wishes of your shareholders and move expeditiously to negotiate a merger with Microsoft, thereby making a proxy fight unnecessary.'' "
On would have to admit, looking at the nearby, Yahoo-sourced price chart of the past week for Yahoo, Microsoft and the S&P500, that Icahn's move has gained nearly-instant credibility.
Notice how Yahoo's price rocketed upward on the news of Icahn's focus on the company and its board?
Icahn further commented, again, according to Bloomberg,
"Accepting Microsoft's offer is a better option than going it alone, Icahn said. The board ``completely botched'' negotiations with Microsoft, prompting some Yahoo shareholders to ask Icahn to step in, he said."
Looks like investors agree, looking at this 6-month Yahoo-sourced chart of the same companies and information.
Yahoo's price shot up upon news of the Microsoft offer, then plunged when it was taken off the table recently. Major institutional shareholders were livid, and said so publicly.
The Bloomberg piece describes Icahn's slate of directors,
"Icahn's board nominees include Mark Cuban, owner of the Dallas Mavericks basketball team, and Frank Biondi Jr., former chief executive officer of Viacom Inc. Icahn said he has sought regulatory clearance to buy as much as $2.5 billion in Yahoo stock, about 6.7 percent of the company's outstanding shares as of April 30.
Icahn also nominated himself for Yahoo's board, along with Keith Meister, principal executive officer of Icahn Enterprises Inc. The other nominees are Lucian Bebchuk, a professor at Harvard Law School; John Chapple, the former CEO of Nextel Partners Inc.; Adam Dell, managing general partner of Impact Venture Partners; Edward Meyer, CEO of Ocean Road Advisors Inc.; Brian Posner, former CEO of ClearBridge Advisors LLC; and Robert Shaye, co-CEO of New Line Cinema. "
There have been a handful of articles discussing how Microsoft is still in the driver's seat, has the advantage, may still not want to risk the acquisition, etc. And there's probably some truth to all of that.
Carl Icahn can't unilaterally make this happen, as he has with some other recent deals, like BEA-Oracle, or the Blockbuster situation.
But it's fair to say that if there's even a scintilla of interest remaining on Microsoft's part, which would, admittedly, probably be bad for those shareholders, you can bet Icahn's going to revive that and get more for himself and his new fellow Yahoo shareholders.
More and more, Icahn is my kind of guy, in terms of having the money and tenacity to push for the shareholder returns he believes are reasonable, usually stopping short of Eddie Lampert's mistake of thinking he can actually run the company.
Should be an interesting time until the Yahoo annual meeting. With any luck, Yang, Yahoo's co-founder, will be kicked out, and Yahoo shareholders will recover some of the lost return for which the inept Yang is responsible.
In its continuing quest to demonstrate that they can call on any CEO anywhere, thus to better position themselves against Fox's nascent Business Channel, the program had Donald Trump on an extensive telephone interview. It was one of those fawning pieces, where the co-anchors gushed about The Donald, and Trump kept blathering about whatever came into his self-absorbed mind.
On the subject of oil, Trump castigated President Bush and anyone else involved in US government regarding oil, contending that we needed a team of seasoned, hardened negotiators to just, and this isn't a quote, but a paraphrase,
'go over to the Gulf and tell them these prices won't fly. And negotiate with OPEC to just lower prices.'
I can't recall if Trump included himself in the group of people he saw doing this, but he did name a few names. He continued on declaring that the country just had to stand up to OPEC and get the price of oil down. Period.
Trump went on to declare that the US is in a recession. Nevermind economic indicators. The Donald just knows, you know?
The Squawkbox co-anchors 'oohed' and 'aahhed' at how forceful and plain-spoken The Donald was, and how effective he'd be as a President, but could never be elected.
About ten minutes later, Boone Pickens was also on a telephone interview with the program's co-anchors. Pickens has a good, perhaps special, relationship with Becky Quick, whom he has taken with, at CNBC's expense, on a recent Chinese business trip.
When asked about oil prices and Trump's remarks, Pickens responded, again, this is a paraphrase,
'Yes, I heard Donald. And let me just say, I think he should probably stick to real estate. Because he doesn't understand how the oil business works. The Arabs have the oil, so they're going to dictate prices by how much oil they produce. That's just how it is, and no amount of talking is going to change that.'
I like Pickens a lot. While I may differ with some of his economic theories, as I did in this recent post, he clearly understands how the current oil market works. And he's committed himself, as he announced yesterday on CNBC, to actually building the beginnings of the vast wind farm about which he spoke in February.
Given a choice of whom to believe on the subject of oil prices, I'll take Pickens over Trump any day.
When he took over HP, Hurd had to finish making sense of the mess left by Carly Fiorina's acquisition of Compaq. The logical comparison for the firm at the time was Dell, the major direct PC seller.
Thursday, May 15, 2008
Thus, I am now subject to the operational mishaps of one of the nation's three largest banks. To wit, I recently received a 'letter,' i.e., mass-mailed notice/apology, which begins thusly,
"Dear Valued Customer,
We have learned that some information from certain Bank of America Check Cards may have been compromised. your Check Card number may have been part of this compromise. To ensure that your privacy is protected to the best of our ability we have taken the following steps.
Please know that Bank of America is working hard to keep your financial information secure.
Debit Card Services Executive"
I omitted the detailed middle of the letter, wherein instructions were provided for using the new card, reporting fraudulent use of the old card, and assuring me that BofA will be liable for all fraudulent charges due to their ineptitude. Except, of course, they didn't use that word. I did.
And notice their use of the word 'compromise.' Sounds innocent, doesn't it? Not 'loss,' 'theft,' or 'error.'
This letter is why I like to use what I call "Danforth's Rule." Years ago, a colleague of mine at Chase Manhattan Bank by that name first enunciated the principle thusly,
'Find the smallest bank in your town and open a DDA account there. Chances are, because they are small, they will treat your account, financial information and business much more carefully than the local branch of the largest bank in the area.'
This is why I strode into my town's branch of BofA yesterday morning. Looking for a platform officer, I waited more than ten minutes for one to manage to notice me and offer to help me.
I thereupon showed her the letter and asked for details of BofA's latest 'compromise.' She had no clue. The officer, one Ms. Gonzalez, had no idea to what event the letter referred.
I pointed out that, while I was not angry with her, it didn't look good that some national Debit Card executive down in Charlotte had flooded the bank's customers with this missive without bothering to give the local branches a 'heads up.'
Or coordinated with the branches, so that the letter, or a phone call, or any communication, would come from a local branch officer, rather than some unreachable, unknown name in some unmentioned location.
I explained to Ms. Gonzalez that this 'compromise' seemed, to me, to be a fairly serious breach of one of the most basic functions a bank undertakes- safeguarding my money.
What the letter meant, I went on, was that BofA had effectively left the door to the vault open one day, and let strangers wander in to take money. They promise they'll make good on any losses, but, still, you probably wouldn't want your assets safekept in a bank that lets strangers raid the bank vaults, would you?
Ms. Gonzalez agreed that this is a serious matter. I further noted that one of the smallest local banks around, of which I happened to have been a very satisfied customer years ago, had recently opened a branch in town. Did she want me to transfer my business there, or would she like to arrange a meeting between me, her and her branch manager?
She agreed to take my contact information, a copy of the letter(!), and respond to me with a time and date to meet.
For what it's worth, as I write this on Wednesday afternoon, that has not occurred.
Meanwhile, I read that last line in Mr. Rains' letter, and shake my head when I note that, having already released my DDA account information to strangers, now Ken Lewis' crack troops promise to do a better job, 'working hard to keep (my) financial information secure.'
Why do you suppose they chose not to work so hard before? Wasn't it worthwhile? Was it too expensive? Or just a nuisance?
Ken Lewis, BofA's CEO, has had a lot of challenges in the past year- buying a failing Countrywide Finance at probably too-high a price, experiencing serious capital markets losses, and, now, presiding over a consumer bank and IT function that can't even manage to properly execute one of banking's most fundamental functions- safekeeping customer deposits.
Not too impressive a job Ken's doing, is it?
Wednesday, May 14, 2008
The article opens by noting,
"In its sheer speed, Peloton's demise offers an illustration of the delicate relationships upon which the financial industry is built, and the breakneck pace at which they have been unraveling.
There is a widespread weakness in the hedge-fund business: Highflying managers sometimes fail to fully factor in broader risks, such as what happens when troubled banks pull back the borrowed money many funds need to make their investments. Peloton was particularly susceptible because it borrowed heavily to boost returns. For every dollar of client money, Peloton had borrowed at least another nine dollars to buy some bonds.
"If you run out of money, you can't stay in the game," notes Chris Jones of Key Asset Management Ltd., a hedge-fund management firm and early Peloton investor.
Mr. Beller, who personally lost about $60 million in investments, believes Peloton failed not because it made the wrong investments but because his bankers didn't stick with him when the prices of those investments were temporarily out of whack, according to people familiar with the fund. Among investors that lost money are New York investment firm BlackRock Inc., Swiss private bank Lombard Odier Darier Hentsch & Cie. and United Kingdom asset-management firm Man Group PLC."
So in just these few paragraphs, we learn some important facts about Peloton that are probably key reasons for its failure.
First, it was highly leveraged. Second, it would appear that Beller and his colleagues failed to realize how crucial the risk management culture and functions were at Goldman that were now lacking at their startup. Third, Beller is still angry at others, not himself, over the failure.
Failing to acknowledge what the term 'mark to market' means, he feels he should have been given more time and leeway to overcome the realities of borrowing short and holding complex, illiquid instruments long. Finally, some of the 'right' clients invested, which probably assured Beller and his partners that they were invincible.
Other elements in the article seem to point to Beller's lack of attention to detail, such as this one,
"His wife, fellow Goldman alumnus Jennifer Moses, is a policy adviser to U.K. Prime Minister Gordon Brown. In London, the Bellers were better known for the time a Goldman assistant stole more than £4 million, or $7.8 million at today's rates, from their account and that of another Goldman banker.
The episode became fodder for British media, which focused on the opulent lifestyle of expatriate U.S. bankers."
Would you feel comfortable letting someone who, himself, was bilked out of about $8MM by an underling, take responsibility for custody and management of your money?
Started in late 2005, Peloton used its Goldman connections to quickly attract seed investment from the lead partner's former employer, as well as necessary brokerage services. The Journal piece goes on to report,
"By that fall, Peloton's assets totaled $1 billion. Traders met weekly in what they called the "chill out" room, decorated in Moroccan-inspired red and orange colors and low-slung couches, at Peloton's London office. Mr. Grant joined by video link from Santa Barbara, Calif., where he had moved around the time of the fund's launch.
Mr. Beller's intense demeanor sometimes caused friction. He berated secretaries, and poor-performing traders kept quiet in meetings to avoid being humiliated by him, according to people familiar with the situation. Maxwell Trautman, a founding partner, quit in January 2006 after personality conflicts and differing views about strategy with Mr. Beller."
At this point, I briefly stopped reading and thought about some small company environments in which I've worked. The signs of brewing trouble seemed, to me, to be growing: one partner decamps to another country, now unavailable for in-person consultation; Beller's irritability and personality begin to cause problems among the staff; so much so that one of the founding partners quits only months after the launch.
By 2006, Peloton had moved into betting heavily on various mortgage-related securities. According to the article,
"Some investors weren't happy with the shift into mortgage securities. Several withdrew money, including Key Asset Management and Goldman's asset-management arm. In August, Goldman's prime-brokerage unit sharply increased the amount of collateral Peloton had to put up for short-term loans.
The move infuriated Mr. Beller, according to people familiar with the situation.
He berated some investors who decamped, questioning why they would forgo Peloton's gains, which by November 2007 had reached a stunning 87.6%, largely on the bearish housing bet. In late January, Peloton won two awards at a black-tie ceremony hosted by trade publication EuroHedge. Some attendees gasped when Peloton's returns were announced.
At the same time, the relationship between Messrs. Beller and Grant soured, according to people familiar with the situation. Mr. Beller increasingly took credit for the ABS Fund's success -- he accepted the January awards alone -- while the Multistrategy Fund was still struggling. The two discussed a potential split."
Now we have a portrait of the leading partner in denial as customers depart and yet another partner seeks to end his association with him. As the mortgage securities debacle deepened, the situation at Peloton also began to deteriorate,
"In mid-February, Messrs. Beller's and Grant's investments took a hit when Swiss bank UBS AG said it had marked down the value of highly rated mortgage securities similar to those that Peloton held.
Peloton had $750 million in cash and believed its funding from banks was secure. That provided a level of comfort to Messrs. Beller and Grant that Peloton could cover banker demands, known as margin calls, to put up more collateral as the value of its investments fell."
Shortly thereafter, another day's pressure on the instruments shrunk their value to levels that consumed the remaining cash Peloton had in margin calls, and still more collateral was required. The end of the fund came shortly thereafter.
The Journal piece concludes with Beller's rather glamorous version of how the fund finally died,
"The next day, lenders seized Peloton's assets, bringing a chaotic end to the fund. Mr. Beller later likened the situation to the final scene in Quentin Tarantino's movie "Reservoir Dogs," when several actors, guns trained on each other, simultaneously blow each other away."
It's as if Beller saw the entire Peloton enterprise as a gilded joyride in someone else's car, isn't it? He and his partners managed billions in assets, recklessly pyramided investors' capital with excessive amounts of borrowed money, and managed it all with inadequate risk controls.
In the end, it sounds like just another typical end to a too-young, too-brash, too-wealthy asset manager from a name investment bank.
Makes you wonder why firms like Blackrock and Goldman continue to trust these types of newly-minted hedge fund whiz kids, doesn't it?
Tuesday, May 13, 2008
Sadly affirming the financial supermarket strategy first pioneered by James Robinson at American Express, then lifted by his capital markets hire, Sandy Weill, and ported to Travelers/Citibank, Pandit plans to take several years to get the overly-diverse financial conglomerate on the move in terms of shareholder returns.
Maybe Pandit's drinking whatever his chairman, Bob Rubin's been having, because it takes a lot of chutzpah for a CEO to tell shareholders,
"This will take time."
Apparently, rather than split the sprawling, hapless banking giant into reasonable pieces, such as institutional, consumer, and asset management, in its simplest description, Pandit intends to
"finally merge it all,"
to allegedly finish what Sandy Weill started back in 1998.
Do you know of any other sector in which the rationale for such a major merger is even still valid ten years later, without any changes?
It seems to me that Pandit is demanding, even challenging, his shareholders to stay put and wait a few years to see whether, untested as he is, the former finance professor can actually bring about profitable growth and consistently superior shareholder value at the financial utility.
If it were true that the bank were capable of being fixed to run, as is, intact, yielding consistently superior returns, but it would take some years, then I guess that's one alternative. But in the interim, shouldn't Pandit forgo any significant compensation, since he isn't planning on enriching his shareholders during the time period?
I'm thinking that he would be stripped of all deferred compensation, paid about $350K/year in cash, and, beginning in the year he forecasts improved, superior total returns, deferred stock grants could be paid to him.
If I were a shareholder, though, and heard Pandit's promise of years before a recovery of the bank, I'd just sell my shares and wait for some consistently superior total returns before plunging back in.
Heck, that's what my selection approach does anyway. I don't invest in 'turnarounds.' I only bet on superior operating businesses.
As I noted in this post, regarding GE, if shareholders dumped Citigroup stock now in droves, the price would plunge, actually making it easier for Pandit to earn superior returns in the near future. Provided he actually delivered the promised operating improvements.
Still, it's a pretty galling thing for Citigroup's shareholders to be told to just sit tight, as they have for, what, seven years? And maybe...maybe...this untried CEO will suddenly deliver some better returns than these poor souls could have been getting for the past seven years simply by selling Citi and buying the S&P500 Index.
Monday, May 12, 2008
During this segment, the audio of the investors was played as he finished asking questions of Immelt and received a reply, including Immelt's contention that the investor had now taken enough of everyone's time.
As I watched O'Reilly retrace some of the same ground he covered in his discussion with me last month, which can be seen in this post, I considered the irony of the situation.
Bill O'Reilly clearly wanted to cover the GE annual meeting and, if possible, capture an unhappy investor closely questioning Immelt, and then interview the investor. This makes sense.
But, then again, it sort of doesn't. Because, as I wrote in this recent post,
"Mr. Effron's email provides at least one answer to Mr. O'Reilly's question of me about GE's equity,
"Who would own this stupid stock? Who would buy it?
People who think like Mr. Effron.
The remaining shareholders would seem to have motivations, valuation and performance criteria similar to those of Mr. Effron.
And that, my friends, is what makes markets. Different views of and valuations for the same instrument.
In this case, we're fortunate to have one of those, in Mr. O'Reilly's words, 'stupid enough to own this stock' actually tell us why he does."
It's one of those Holmesian cases of the dog that did not bark. Only, in this case, it's the investor who was absent.
The investor who was sanguine and realistic enough to have already sold and moved onto better investment opportunities.
So, while I appreciate Bill O'Reilly's desire to deliver good television by interviewing a disgruntled institutional shareholder, I also see that it is very much beside the point.
Further, the institutional fund manager then mumbled something about hoping that the board or shareholders would eventually move Immelt and GE to act in some way that would improve the value of the stock.
I like Bill O'Reilly and I fully understand his reason for covering the GE story on his new program. As I mentioned in this earlier post, he had a trifecta on this topic,
"However, from reading my blog, one of the program's producers, and O'Reilly, further realized that Immelt has continued GE's involvement in Iranian projects while shareholders have lost money, due to GE's dismal total return performance. Meanwhile, as I noted in yesterday's post, and prior, linked posts, Immelt has been wildly overpaid for destroying so many hundreds of millions of dollars of GE shareholder value since he took over the CEO spot from Jack Welch in September, 2001."
How much better can a news story be? A well-known US company, GE, continues to do business which supports the building of the infrastructure of a country, Iran, which is actively engaged in killing American servicemen in Iraq, while the company's total returns languish and the CEO is paid over $120MM since assuming the job in 2001.
But the investment angle of the story, as represented by Mr. O'Reilly's institutional manager/guest last night, now focuses on the wrong point.
The wonderful thing about our American economic system and environment is that you don't have to own GE! Or any other underperforming asset!
There are thousands of investing options available to both institutional and retail investors alike.
Rather than wait, like those poor souls anticipating Godot's arrival, for the seemingly-always-coming 'corporate governance' solution, investors are better off to just sell what they don't like and buy something else.
Look at Ed Lampert. He got fed up with Sears and decided to improve it. When Lampert surfaced last week, he was full of excuses about how Sears' continuing dismal performance is the economy's fault, and he was sure, in time, when that was doing better, so, too, would his newest headache.
Do you think Ed Lampert now wishes he'd avoided the Sears mess and just stuck with conventional hedge fund investing, instead of crossing the line into operating management of his holdings?
Honestly, the more I watch and listen to people hectoring company CEOs and their boards to 'improve governance,' the more I am convinced you should just vote your shares in the market by selling them.
After all, modern American corporations were devised mainly for the companies to attract capital, not in order to provide investors with additional instruments which would also allow them maximal voices in the operation of the firms seeking capital from the investing public.
If our modern publicly-held corporate model were so highly-evolved and optimal, why would private equity firms exist?
Isn't this the non-barking dog? Private equity?
Obviously some investors are sufficiently trusting of private equity managers such that they hand over large sums of money with less apparent influence on management than they would have in a publicly-listed firm.
Doesn't this suggest that there are more good investment opportunities than there are good CEOs and boards? That it's easier to sell your shares in a company which has potentially good positions, but bad management, and find a better pairing of business opportunity and management?
I thought about this on Friday, when I read a piece in the Wall Street Journal concerning Vikram Pandit's impending moves, or lack thereof, with the bloated, overly-complex and -diversified Citigroup. Rather than hope the inexperienced and untested CEO manages to pull a rabbit out of his hat at Citigroup, why not just sell the stock and buy equity in a company that is better-positioned in its sector, with better, proven management?
There are so many opportunities for investment in the American economy that there's simply no reason to hold onto a problematic equity and either hope, yet again, that this year will bring change for the better, or, worse, lobby for 'management change' or 'board action.'
It probably makes more sense to trust the senior management and board of the firm in which you invest to do a great job with the assets under their control than to invest in a company which you think could, or wish would, do better than it has with the company's assets, and then try to change the management and/or board's behavior.
I'm not Bill O'Reilly, nor one of his producers. So I don't know as much about what makes good television as he and his record-audience-producing staff do. But if it were me? The guest I'd have had on his GE-related segment Thursday night would have been someone who sold GE on or before last month's disappointing announcement of the firm's quarterly profits.
Why did he sell? How long had he waited? What did he buy with the proceeds of his GE equity sale?
That's an investor I'd find interesting and credible.