No shock, really

Jun 21 2007

From an email alert, which provided easily 30 seconds’ headstart before everyone in the financial world also reported it:

NEWS ALERT from The Wall Street Journal

June 21, 2007

General Electric and Financial Times publisher Pearson said they have decided not to pursue a combination of CNBC, the Financial Times and Dow Jones. A possible bid by GE and Pearson was seen as a challenge to News Corp.’s $5 billion bid for Dow Jones, publisher of The Wall Street Journal. GE and Pearson said they continue to discuss cooperation agreements with GE between CNBC and the Financial Times Group.

For more information, see:
http://wsj.com/article/0,,SB118244257856443515,00.html?mod=djemalert

Somewhat inexplicably, the Dealbreaker Murdoch Meter remains at only 90%

Addendum – As referenced in yesterday’s post, Brad Greenspan, the “founder” of MySpace, tossed an offer over the transom, and it seems I’m hardly the only one to have ascribed grudge-based intent to his effort. In that Valleywag article just linked, they provided a further link for Greenspan’s letter to the Dow Jones Board. (included in the extended entry, since I expect the website on which it appears to disappear one day soon. I’d prefer to include a link to Edgar, but the letter’s not on file there)

After reading it, I had a flashback to October, 2001, and a hilariously nut-encrusted SEC filing from a company called TOKS. You can read the full filing at the Edgar site, but to save you the trouble of scrolling past all the boilerplate, I’ve included just a taste, below. Am I wrong to equate that to Greenspan’s “offer”? I think not, but what would you expect me to think?

                                         Filed by Toks Inc. Pursuant to Rule 425
                                            under the Securities Act of 1933 and
                                            deemed filed pursuant to Rule 14a-12
                                            under the Securities Exchange Act of
                                                                            1934

                                     Subject Company: AT&T WIRELESS SERVICES INC
                                     Commission File No. 333-67068

                                     Date: October 8, 2001



Toks  Announces  Proposal to Combine With  General  Motors  Corporation,  Hughes
Electronics  Corporation,  General  Electric  Company,  AT&T  Corporation,  AT&T
Wireless Services,  Inc., AOL Time Warner and Marriott International for a rough
estimate  of over $2  Trillion  or more in stock.  Including  assumption  of all
outstanding debts. There will be amendment of full value that will be calculated
by professional  accountants.  This is just an initial proposal. This is not the
whole  picture of. At the same time Toks Inc. will stick to its original plan to
issue its Class A Common Stock in heavy premium to the  shareholders of targeted
entities.

Combination  Would  Establish  Only Toks Inc. as the "Parent" of General  Motors
Corporation,  Hughes  Electronics  Corporation,  General Electric Company,  AT&T
Corporation,  AT&T  Wireless  Services,  Inc.,  AOL Tiime  Warner  and  Marriott
International,  Inc. as "Wholly" owned  subsidiaries.  This will compliment each
subsidiary under one "roof."

Synergies  Could Create Up To Additional  over $300 Billion in annual  revenues,
even after  liquidation  of assets or spinoffs  recommended  by  regulators  and
initiated  by  the  Company.  Also  a  business  plan  will  include  aggressive
expansions of Toks Inc. into other industry  sectors and its  subsidiaries.  The
potential to make Toks Inc. the largest U.S public entity. Or the largest public
entity in the world.  Expansion will cover all corners of the globe. Our Company
listing will cover different  exchanges around the globe to gain access to their
capital markets. This will include developing countries as well.
...
There's a fine line between "ambition" and "desperation." Toks Inc. is an 
"ambition" entity not a "desperate"  entity.  Meaning the Company  doesn't 
have to fight to convince a shareholder to tender his or her shares. The 
Company will take its securities to others if those we first seek rejected our 
offer.  The Company is not interested in wasting  resources to seek proxy 
votes.  The resources can be better spent to issue securities to those that want
them.


{entire filing, sic, ellipsis mine}
Read the rest of this entry »



Probably about time this happened

Jun 20 2007

From tomorrow morning’s WSJ: “Dow Jones Board Takes Over Talks On Firm’s Future

Notwithstanding the fact that the Bancroft family could squelch a deal with News Corp, if they were able still to muster a majority of their ownership minority to do so, the overall board is taking the correct approach here, it seems.

Dow Jones & Co.’s board, frustrated with the pace of the Bancroft family’s negotiations with News Corp., said it would take over talks on the future of the company. The move, coming after more than two weeks of little progress between the parties, increases the likelihood of a deal to enable Rupert Murdoch’s media giant to buy Dow Jones, the owner of The Wall Street Journal

Sure, the voting control of the Bancrofts (and, to a lesser extent, the Ottoways) can prevent a deal being done, or promote a deal that is less financially lucrative for the shareholders, but at some point, the slow pace of action becomes a problem for the full board. The Bancrofts have 25% of the board seats (4 of 16), and while the 4 directly elected class B directors are primarily responsible to the class B shareholders, their delays, however understandable in light of their responsibilities, can’t be allowed to stymie action by the full board.

And so, after what one might assume was a contentious discussion on the matter, the full board, of course including the Bancroft representatives, now has the helm:

Dow Jones Statement on Negotiations
June 20, 2007 5:06 p.m.
PRESS RELEASE: Dow Jones Issues Statement

NEW YORK, June 20, 2007 — Dow Jones & Company (NYSE:DJ) announced today that its Board of Directors and representatives of the Bancroft family have concluded that the best way to continue to evaluate the News Corporation proposal to acquire the Company would be for the Board of Directors to take the lead in addressing all aspects of the proposal and all other strategic alternatives, including remaining independent.

Accordingly, the Board of Directors, including representatives of the Bancroft family, will conduct further discussions with News Corporation relating to the proposal and will oversee the exploration of strategic alternatives. Representatives of the Bancroft family, which owns shares representing a majority of the Company’s voting power, reiterated that any transaction must include appropriate provisions with respect to journalistic and editorial independence and integrity.

Any acquisition will require the approval of the Board of Directors and shareholders owning a majority of the Company’s voting power. There can be no assurance that any transaction or other corporate action will result from the foregoing or that the Board of Directors or the members of the Bancroft family will support any specific proposal.

Source: Dow Jones via Prime Newswire

Or perhaps it wasn’t a contentious discussion at all? GE & Pearson have yet to make an offer, and may not ever do so. At least one other bidder has arrived on the scene, but the impact of that offer is less than clear:

But yesterday, another bidder, MySpace co-founder Brad Greenspan, sent a letter to the Dow Jones board seeking to pay $60 a share for a 25% noncontrolling stake in Dow Jones. Even if these factors don’t scuttle Mr. Murdoch’s plans, they could slow the process.

Slowing the process is the last thing the board would be likely to want – as the game goes on, speculation about outcomes puffs the stock, and stock that gets puffed can just as easily become unpuffed, with the board catching part of the grief for having allowed the process to spin out of control. Director liablity if the auction process collapses can’t be trivially ignored here.

Dow Jones’ stock closed today at $60.65, above Murdoch’s offer price, and while I won’t pretend to know why, it seems far more likely to have been due to an assumption of a GE/Pearson overbid than to Brad Greenspan’s offer of, essentially, an outside-funded stock buy back.

The outside purchase of a non-controlling 25% stake won’t reduce shares outstanding, and thus won’t increase EPS. It also won’t be a valid indication of the go-forward value of the company – it’s only worth $60 or more right now because that’s what Murdoch has offered and what others might offer. Greenspan’s offer does not much more than provide a 25% buffer for the Bancrofts’ voting bloc, and by the time it became fact, the voting will likely be over. From whom he proposes to purchase the stock is also a mystery, at present.

There’s another part of the story of Mr. Greenspan, laid out in the final paragraph of the continued-excellent WSJ coverage of the saga by Dennis Berman, Susan Pulliam, Sarah Ellison, et al:

Mr. Greenspan, who sent the letter to the Dow Jones board yesterday, is the former chairman and chief executive of Intermix Media Inc., the parent company of MySpace when it was created. After he left the company but still held a significant stake in it, MySpace was sold to News Corp. Mr. Greenspan sued, claiming the $580 million deal defrauded shareholders by undervaluing the asset. But in October 2006, a Los Angeles court rejected the legal challenge.

Grudge investing, if that’s what Greenspan’s offer happened to be, is not indicative of true market value. I can’t imagine the offer being taken seriously by the board as an alternative to Murdoch’s. Maybe he’s planning a public tender for the shares he desires? If so, I can’t imagine the market taking him up on it either, unless Murdoch takes his offer off the table. At which point, of course, Greenspan would be the happy buyer of stock overvalued by 40% or more.

Seen at the Dealbreaker: The Murdoch Meter.

My view of likely outcome still happens to agree with theirs.



Of course I don’t think Bloomberg got the idea from me

Jun 19 2007

As seen more than a month ago in a piece entited “Non-Campaigning“, I hypothesized:

Picture this: Bloomberg is a Republican in name only, and no, I’m not using that term in a derogatory fashion. Back when he was a Democrat, to the best of my knowledge, he could adequately have been described as a Democrat in name only, too.

He’s a capable politician, and a capable executive in charge of a large and complex polity. (Please ignore, for the purpose of this analysis, his nannyish actions on smoking and trans-fats, well-intentioned as I’m sure they were) These attributes seem far more interesting than some clap-on/clap-off political party affiliation. And as a result, the presumption that he would or should run in the race for the Republican presidential nomination strikes me as anything but a foregone conclusion.

Hardly a brilliant observation, if we’re being honest with each other.

However, tonight we’re told by tomorrow’s WSJ: “Bloomberg Move Fuels ’08 Buzz

New York Mayor Michael Bloomberg’s decision to leave the Republican Party fueled talk he might launch an independent bid for president later this year. It also underscored Republicans’ dim prospects for 2008, and pointed to broader concerns about both parties’ performance.

In a statement, the mayor again suggested he has no plans to run for president. He said he was merely matching his party registration with his nonpartisan policies, an apparent effort to distance himself from the rancor that has marked U.S. politics in recent years.

“A nonpartisan approach has worked wonders in New York,” he added. “Any successful elected executive knows that real results are more important than partisan battles and that good ideas should take precedence over rigid adherence to any particular political ideology. Working together, there’s no limit to what we can do.”

Golly, that sounds almost as good and exciting as it is utterly unworkable. While I wish Hizzoner well, just because something works in NYC doesn’t mean it will work everywhere else, let alone anywhere else. The differences between the largest interest groups in New York, however they might be arrayed on any given day, are trivial compared both to the number and the size of the differences when politics is taken out of the boroughs.

Bloomberg appears to be a smart, honest man. He also appears poorly versed in the exercise of complexity theory and strategy he would get in a far less homogenous society than that found in New York. He seems, almost, to be basing this Quixotic wish for universal harmony and nonpartisanship on an assumption that he can get all the players in any given melodrama together in a room, rhetorically bash some heads, and get on to the next task. The bully pulpit of the US Presidency, sad to say, isn’t nearly powerful enough to facilitate this.

Which is a relief, really – partisanship, for all the ugliness it engenders in its more extreme manifestations (e.g. since Nov 2000), is the way that diametrically opposed interests are resolved. Some things can be fought about and solved. Far more require that they be fought about, fought about some more, sulked over, rethought, fought about again, and either given up or won, depending on the partisan politics of the day. Partisanship, at a level hopefully less than that found today, is a necessary part of the process, all due respect to Mr. Bloomberg.

There’s another matter here, perhaps a big one: Nobody’s really going to spend a lot of time questioning Bloomberg’s intelligence, at least not if they value their time. However, his political judgment is open to serious question, including the possibility that he actually does harbor the absurd thought that the US is just like New York, just bigger. Specifically, have a look at the first item in today’s version of the WSJ Opinionjournal Best of the Web.

In that item, which James Taranto subtitled “Bloomberg’s Bigotry” (a characterization I think is overripe, and probably meant tongue-in-cheek), you’ll find an excerpt from a speech Bloomberg gave Monday at Google’s headquarters, as reported in today’s NY Sun.

Mr. Bloomberg’s freewheeling question-and-answer session was peppered with the kind of provocative, blunt talk that could appeal to some voters while alienating others. “It’s probably because of our bad educational system, but the percentage of people who believe in creationalism is really scary for a country that’s going to have to compete in a world where science and medicine require a better understanding,” he said in one such foray.

Mr. Taranto goes on to cite statistics indicating that 60% of Americans have beliefs which Bloomberg seems quite willing to deride. That’s bad politics, and not because he should be telling everyone what they want to hear. I’d hate for hime to simply tell people what they want to hear, not least because sometimes, what people want to hear is utter, drooling stupidity. The problem is that, much like he’s done in New York relative to trans-fats and smoking, he’s a fan of strong statements that issues of his choosing should be treated as “black and white”.

Totally aside from the fact that there’s no such thing as “creationalism“, and thus it can’t be a black and white issue (I know what he actually meant, and his slipped tongue matters not at all), it’s bad politics to go around telling people what they should believe. Doing so leads inexorably to (wait for it…) rank, frank, and virulent partisanship. It’s part of how we got to the sorry partisan state of current affairs.

And while I agree with his statement about creationism at its extremes, I don’t think it forms a good basis for either a campaign or a governing strategy. The complete separation of matters of science from matters of faith is also not a black and white issue, as examples from Taranto’s piece (for which, go read it) clearly illustrate.

So, Bloomberg’s now an Independent. Hooray for him! He’s out on the campaign trail (notwithstanding his specific claims not to be). Hooray for him! He’s speaking his mind, bluntly and forcefully, wowing crowds in Silicon Valley, in New York, and, well… I can’t think of anywhere else he’s wowed a crowd.

I’d expect that many people who’ve not already reached the state will soon come to agree with me: He’s an interesting guy, with some simultaneously excellent, business-like, and totally unworkable ideas. And would be hugely fun to watch in a campaign, right up to his first Ross Perot moment, when we’d all be able to watch his political future evaporate in a puff. And we’d all move on to the next train wreck.

He ain’t going to be running, I guess I’m saying.



Dow Jones, News Corp, the Bancrofts, GE, Pearson, and a still-likely outcome

Jun 18 2007

The News Corp pursuit of Dow Jones had gotten rather quiet, and then at the beginning of June, grew louder, with news that the Bancroft family had chosen to engage in discussions with Mr. Murdoch. Predictable concerns arose after that meeting, centered around the legacy of the paper, and the (absurd) possibility that Murdoch was willing both to buy it and to destroy that legacy. Nearly two weeks later, the Bancrofts put forth a plan to “safeguard The Wall Street Journal’s editorial independence”, and it wasn’t met with the wholehearted approval the Bancrofts might have hoped for.

Minor stalemate.

But the game remained afoot last week, with the Bancrofts “fine-tuning” their proposal. Earlier that same week (last Monday, June 11), came the news that “GE, Microsoft Discussed Buying Dow Jones“, including the fact that “…the two sides couldn’t reach an agreement…”.

Another minor stalemate.

Undaunted, however, GE remains in the game. Today we find that “GE and Pearson Discuss Joint Bid For Dow Jones“. All well and interesting, not least because GE, unlike Pearson, can actually afford such a transaction. Pearson, like GE, a fine company, and unlike GE, part owner of one of my other favorite periodicals, the Economist, doesn’t have anything like the financial muscle to overpay for Dow Jones, while Murdoch does.

Like Pearson, GE’s interest is strategic:

Both GE, which is based in Fairfield, Conn., and London-based Pearson have reason to fear a Murdoch-Dow Jones tie-up: News Corp.’s global presence would help The Wall Street Journal compete with the FT in Europe and Asia; and the Dow Jones imprimatur would be likely to help News Corp.’s planned Fox News business channel compete against CNBC.

Even with that in mind, I can’t assess how much either of them, let alone what I’d presume to be the “big brother” in the transaction, GE, might really care to dangle over the edge on a strategic acquisition. Specific to GE, their television broadcast business is a potentially transient asset, and might be better off sold than augmented by acquisition. And if GE should happen, for some reason, to bow out of the bidding, Pearson surely doesn’t seem able stay in on its own as a principal.

So, it seems, the end result of this recent surge of interest (or pretense to interest) in a Dow Jones acquisition might best be judged by likelihood that GE can find reason to remain within a consortium attempting to outbid Murdoch.

Before I hit the button to publish this entry, I’ll be going to check the newswires for any recent developments in the matter, the better to avoid unnecessary embarrassment. So if you’re reading this, that means I’ve failed to find any mention, so far, of new developments.

And here’s the thing – Murdoch’s offer of $60/share is not only a fair offer, it’s absurdly so, based not on the gleaming brand that is Dow Jones and the Wall Street Journal, but on that brand’s ability to generate revenue, earnings, and cash flow. While I can’t presume to speak for anyone but myself, I don’t know that anyone seriously expects Murdoch would do anything to harm that brand. Therefore, aside from intransigence, there’s no compelling argument that Murdoch’s made anything but a fine offer.

In a vacuum, GE can throw money around with the best of them. But GE never operates in a vacuum – it didn’t become the world’s second largest company (by market value) through misguided acquisitions. Outbidding someone who’s offering 40X earnings and 16X EBITDA might classify as misguided. Even with that in mind, GE could still get away with it, but for another lingering problem, highlighted last month (May 22) in a Breaking Views commentary, coincidentally published in that day’s WSJ.

General Electric’s planned sale of its plastics business to Saudi Basic Industries is a double-edge sword for the conglomerate. The $11.6 billion the division fetched is good news. After all, investors valued the unit at as little as $8 billion when they added up GE’s parts to come to a valuation for the whole shebang, according to Deutsche Bank. So the price GE achieved unlocked 45% more value for shareholders.

GE remains a well run company, an exemplar of the diversified-yet-flexible conglomerate. Too many transactions like the sale of GE Plastics to SABIC at a premium to their captive value within the GE conglomerate, however, and the flexibility to take a flyer on deals, which is precisely what a Dow Jones bid might represent, will disappear.

Breaking Views’ commentary is certainly better informed than my own, but by coincidence, they, too seemed to think that broadcast television might be good for GE to jettison:

Companies that trade at a discount to their parts are prime targets for activist investors. Mr. Immelt should consider spinning off businesses such as GE Money and NBC Universal, before uppity investors dictate a more-Draconian corporate strategy for him.

It’s quite unlikely that GE can both strategically acquire to protect its NBC assets and simultaneously consider selling them on to unlock value. The choice they make in that regard, or with regard to other, non-broadcast assets, will need to be intellectually consistent with whatever they choose to offer for Dow Jones. Conglomerates, like individual market participants, prefer to sell overvalued assets and purchase undervalued ones. Selling anything in the GE portfolio and buying Dow Jones at a price high enough to beat News Corp’s offer seems sure to violate that preference.

And therefore, I doubt GE will do it. So News Corp still seems likely to win the race.


Addendum – 10:00PM, Jun 18 – In a story from tomorrow morning’s WSJ, several interesting things, including the statement that cost synergies between WSJ & FT would only be about $50 million, as of the last look taken at the matter “several years ago”. Given the greater need for Pearson to generate a return on any DJ investment than for Murdoch, the article also highlights the obvious, which hadn’t occurred to me: The 700 editorial staff of the WSJ + the 500 editorial staff of the FT = too many staffers. Which raises the concern about mass layoffs, and the presumption (simple-mindedly ignoring obviously overlapping remits) that editorial quality would drop as a result.

So it’s not just GE who faces a potential impediment based on market expectations.

“I think most shareholders probably would have preferred a decision by Marjorie Scardino (ed: Pearson’s CEO) to concentrate on what they are good at, which is education, and dispose of some marginal interests,” says Ted Scott, a portfolio manager at F&C Asset Management PLC, which owns £136 million ($268.6 million) in Pearson shares, according to filings.

“It may come [as] a bit of a surprise that they may want to defend their investment in the FT.”

If she goes ahead with a bid and fails, that poses risks for Mrs. Scardino, a former journalist from Texas who was knighted by Queen Elizabeth II in 2002. Private-equity firms, which covet Pearson because the company could easily be broken up and sold off, would likely try to take advantage of the turmoil.



What’s wrong with this story?

Jun 18 2007

Subject? Supreme Court rulings. Found in today’s news, a story about the several decisions just handed down by our benign judicial overlords. The first two cases on which they ruled are interesting, but not part of the current exercise.

The case in question, Brendlin v. California, is covered in a Washington Post story entitled “Supreme Court Rules in Favor of Car Passengers”. The heart of the case?

The court decided that when police stop a vehicle, passengers are “seized” within the meaning of the Fourth Amendment and — like drivers — can dispute the legality of a search.

The ruling overturned a California Supreme Court decision in the case of Bruce Edward Brendlin, who was arrested on parole violation and drug charges after a November 2001 traffic stop in Yuba City, Calif. Brendlin, who subsequently was sentenced to four years in prison, appealed his conviction on the grounds that the drug evidence should have been suppressed because the traffic stop amounted to “an unlawful seizure of his person,” according to today’s ruling.

Although the state acknowledged that police “had no adequate justification” to stop the car, in which Brendlin was a passenger in the front seat, it argued that he was not “seized” and thus could not challenge the government’s action under the Fourth Amendment’s search and seizure protections. Government lawyers also argued that Brendlin could not claim that the evidence against him was tainted by an unconstitutional stop, according to the ruling.

California, in this case, was clearly and deeply wrong, and it’s good, if unsurprising, to find the Supremes coming down unanimously in Brendlin’s favor.

So, what’s wrong with the story, you might ask? Well, not so much the story as the storyline – The WaPo story didn’t cover this angle, but in the Wall Street Journal version of the story (subscription), I found this nugget:

The American Civil Liberties Union and the NAACP backed Mr. Brendlin, arguing that a ruling in the state’s favor would encourage police to conduct arbitrary traffic stops to target passengers, especially minorities, who lack the same rights as drivers.

Left unspoken is the irrelevant fact of Mr Brendlin’s minority status, but I’ll assume he’s black. He could have been chartreuse without having any impact at all on this case, for all it would have mattered.

So Brendlin got the precisely correct result from the Court, for what I think hope are the right reasons, including the prima facie absurdity of California’s position on the case. But the underlying theme, when the NAACP’s and ACLU’s involvement, their raison d’etre in this case, seems to indicate that absent some racial grievance, the alternative result would have occurred.

I have zero concern about the involvement of those two august organizations in providing Brendlin the legal and financial support in his battle, and good for them. Couching this as an issue that only or primarily resonates for minorities? That, I think, is a problem.



Signs of a top in private equity?

Jun 14 2007

There’s nothing unique these days about finding someone who questions the belief that private equity is soon to replace all public equity markets. So that’s not what this item is about. I profess no opinion on whether there’s a private equity bubble, or whether that bubble, if it even existed, is about to pop.

This is much more mundane.

Blackstone is of course in the middle of a slow strip-tease with the market, effected via periodic updates to its S-1 filing with the SEC. The latest of these, in combination with some recent press in yesterday’s WSJ, entitled “How Blackstone’s Chief Became $7 Billion Man“, is enough to open some eyes about Stephen Schwarzman, Blackstone’s other principals, and private equity generally.

First, the numbers, from the WSJ article just mentioned:

Later this month, the giant buyout firm intends to go public, offering many investors their first opportunity to share the kill. If there was ever a doubt about what investors will be buying, a Securities and Exchange Commission filing Monday cleared that up: Mr. Schwarzman utterly dominates the firm. He stands to pocket as much as $677.2 million, and will retain a 23% stake in Blackstone, likely to be worth more than $7.5 billion.

By the way, according to my math, that would make him a “More than $8 billion man”, contrary to the WSJ headline, but that’s neither here nor there. Also neither here nor there, for the purposes of my small commentary on the matter, is the number of zeroes after any of the numbers just cited. Witness the subtitle to the article: “Schwarzman Says He’s Worth Every Penny”.

And not that my opinion on it matters a whit, I believe him. He’s worth whatever are the results of his efforts so far, from 1985 to today, as evidenced by the fact he continues to control Blackstone, a successful enterprise. If the markets decide to take him and Blackstone up on their offer of 10% of the entity for about $4.7 billion, then the fact that he ends up controlling a $7.5 billion stake is subject to the arithmetic and judgment of the market, not some specious claim on his part that he’s magically worth any given number. So the numbers don’t concern me, not in the least. Bully for him, and may his success continue, notwithstanding the other part of the subtitle to the story “$400 for Stone Crabs”. Populist rhetoric, and pretending to give a care how much Schwarzman spends on his meals, is of no interest to me, though the headline writer and authors of the WSJ piece seem to feel differently.

Here’s the part that’s troubling: The risk factors on page 32 of the amended S1 (see Edgar) are not, to steal from one of Google’s license agreement pages, “The usual yadayada”. They’re quite real, including the cost of the leverage Blackstone and other PE houses use, but most importantly including the proposals presently afoot to radically change the taxation of private equity’s carried interest in its investments. No less a luminary than Robert Rubin has come out in favor of ordinary income treatment for carried interest (via Daniel Primack @peHub).

Add to that the unique structure of the deal (from the S-1/A), which dispenses with the difficulties of having to be responsive to public equity holders:

Unlike the holders of common stock in a corporation, our common unitholders will have only limited voting rights and will have no right to elect our general partner or its directors, which will be elected by our founders (the State Investment Company will not have voting rights in respect of any of its common units).

Or, as the WSJ says:

Mr. Schwarzman intends to run it without instituting such traditional corporate-governance restrictions as having a majority of independent directors, according to an offering document.

And here’s the other part that’s troubling: In the WSJ piece, there were several non-money related matters on which Schwarzman comes off looking like a goofball who’s in love with himself and everything he does. Not very Buffett-like at all. They include:

When he pursues deals as the chief executive of Blackstone Group, he says, he wants to “inflict pain” on and “kill off” his rivals.

Over the course of several conversations earlier this year, Mr. Schwarzman said he views each deal as a contest to the death. His intended message to the market: Blackstone will get what it wants at the price it wants to pay. Mr. Schwarzman likes battles to play out quickly. “I want war — not a series of skirmishes,” he said of his philosophy. “I always think about what will kill off the other bidder.”

“I didn’t get to be successful by letting people hurt Blackstone or me,” he said. “I have no first-strike capability. I never choose to go into battle first. But I won’t back down.” Mr. Schwarzman declined to talk specifically about Blackstone’s business. SEC rules impose a “quiet period” before a public offering.

Well, thank goodness for the SEC, because by that point, Schwarzman had already said way too much. The brashness and bravado is not really all that shocking, seen in the light of his 60th birthday bash, earlier this year:

…an extravagant affair at New York’s Park Avenue Armory…

Mr. Schwarzman had no qualms about stage managing the accolades. When Blackstone colleagues prepared a video tribute, he sought to squelch any roasting, asking his peers not to poke fun at him.

Judging by the lavishness of his birthday bash, which was extensively chronicled in the press, he isn’t particularly concerned about being seen as ostentatious. The Armory’s entrance hung with banners painted to replicate Mr. Schwarzman’s sprawling Park Avenue apartment. A brass band and children clad in military uniforms ushered in guests. A huge portrait of Mr. Schwarzman, which usually hangs in his living room, was shipped in for the occasion.

The affair was emceed by comedian Martin Short. Rod Stewart performed. Composer Marvin Hamlisch did a number from “A Chorus Line.” Singer Patti LaBelle led the Abyssinian Baptist Church choir in a tune about Mr. Schwarzman. Attendees included Colin Powell and New York Mayor Michael Bloomberg.

But here’s the thing – it’s unseemly, and utterly unnecessary for Schwarzman to revel so deeply in his self-image. Not only doesn’t Warren Buffett do it, Bill Gates doesn’t do it either. Larry Ellison? Well, he does it, but who wants to be like Ellison?

David Bonderman, co-founder of TPG, summarized it well:

“When Steve Schwarzman’s biography with all the dollar signs is posted on the Web site” when Blackstone becomes a public company, he said, “none of us will like the furor that results — and that’s even if you like Rod Stewart.”

Schwarzman and his firm are exceedingly competent, particularly in an era of easy money and low rates, and deserve all the wealth they’ve created for themselves. But in a world where writers, at the WSJ and elsewhere, consider it good copy to fulminate on the wretched excess that comes from having far more money that one could ever spend, wisdom might dictate a bit more quiet enjoyment of one’s well earned riches, and a fewer martial metaphors for describing one’s business dealings.

Lumberjacks and populists always like to take their axes to the biggest of trees, because they make the most noise when they fall. It’s not at all inconceivable to think that some day, perhaps some day soon, Mr. Schwarzman could come to regret the public image he’s portrayed for himself, particularly since he hasn’t seemed to have needed such a public image in the past 21+ highly successful years.

Addendum – Whoops. At WSJ’s Deal Blog, two items posted late today:

Congress Puts a Chill in Blackstone’s IPO

Congress has finally lowered the hammer on the private-equity industry. And it’s hitting Blackstone Group in the head.

Sens. Max Baucus and Charles Grassley, the ranking Democrat and Republican on the Finance Committee, introduced a bill today that would eliminate favorable tax treatment for the private-equity firm, which is planning to go public later this month.

…and this:

Jesse Jackson Cries Foul Over Blackstone IPO

Jesse Jackson is not impressed with Stephen Schwarzman’s new-found wealth. What Jackson is more focused on is the list of underwriters for the $4.7 billion IPO of Schwarzman’s firm, The Blackstone Group. In an interview with Deal Journal, Jackson says the share sale unfairly shortchanges minority-owned firms.

“We’re going to protest this pattern of exclusion,” Jackson says. He calls it “Wall Street apartheid.”

Jesse Jackson’s opinion on any matter is a good counter-indication of rational thought, and he’s the second biggest race-hustler in the US. His opinions on Blackstone are beneath immaterial, and will be ignored by all right-thinking people. However, Mr. Schwarzman has invited such baseless attacks, whether he planned to or not.



When activist investors go “Harrumph!”

Jun 13 2007

Earlier today, stories were making the rounds that a large holder of the stock of Ceridian, William Ackman of Pershing Square Capital Management, is agitating for alternatives to the proposed take-private acquisition of the company at $36/share. As seen in this Reuters story, he thinks the offer’s a low-ball:

(Reuters) – A large shareholder of Ceridian Corp. (CEN.N: Quote, Profile , Research) said it does not support the sale of the company to a consortium of buyers as the price offered was low.

In a regulatory filing, William Ackman’s Pershing Square Capital Management, which owns almost 15 percent of the company, said the $36 per share offer is suboptimal for Ceridian stockholders and it intends to pursue one or more value-maximizing alternatives.

Ceridian last month agreed to be bought by private equity firm Thomas H. Lee Partners (THL.UL: Quote, Profile , Research) and insurance company Fidelity National Financial Inc. (FNF.N: Quote, Profile , Research) for $5.3 billion in cash or $36 per share.

Short article, quoted in its entirety

And what are these other “more value-maximizing alternatives”, one might ask? The Wall Street Journal (among surely many other sources), has some fuller details on that, in a story also from today, entitled “Ackman to Explore Alternatives to Ceridian Bid“:

In the letter to shareholders filed with the Securities and Exchange Commission, Mr. Ackman said he has found interest in the human-resources and transaction-outsourcing company from a variety of strategic and private-equity buyers.

“In our view, the value-maximizing course of action is the pursuit of one or a combination of the following alternatives: a sale of the entire company at a higher price; a sale or separation of one or both of the company’s main operating units; and/or a recapitalization, dividend or self-tender transaction where significant value can be returned to stockholders, whether in combination with a broader transaction or otherwise,” Mr. Ackman said in the letter.

Mr. Ackman argued that Ceridian, which posted $1.6 billion in revenue last year and net income of $174 million, isn’t valued fully by Thomas H. Lee and Fidelity.

Right off the bat, it’s hard to complain about his desire for a higher price – he’d want that almost no matter what the first offer from TH Lee & FNF was. His preferred price? Infinity plus one, I’m certain.

Back here on Planet Earth, however, reality plays out a bit differently. Ackman is in the middle of a proxy fight with Ceridian, and he thinks that colored the Ceridian board’s decision to recommend acceptance of the only offer that’s so far been disclosed (with all due respect to Ackman’s assertion that there are other strategic and private equity buyers with interest).

“We do not support the sale of the company at this low price. It appears to us that the current deal is an ill-suited response to our proxy contest and is suboptimal for Ceridian stockholders,” the letter said.

So bring out the other deals, Mr. Ackman.

Among his other alternatives, he’s listed “a sale or separation of one or both of the company’s main operating units”. This is his apparent basis for the statement, also from the WSJ article (or, alternately, from this other Reuters piece):

Mr. Ackman argued that Ceridian, which posted $1.6 billion in revenue last year and net income of $174 million, isn’t valued fully by Thomas H. Lee and Fidelity.

A less than stellar company, in a less than stellar industry, has received a buyout offer at more than 30X earnings (and no, those aren’t depressed earnings – they’re the highest in the last 5 years, though not guaranteed to stay that high), and Ackman thinks he’s being bamboozled? That’s what happens when one commits oneself to a battle not worth fighting, I think.

Splitting the company up and selling the pieces? In a normal company, in a normal industry, that would be a good default practice. It’s been a while since I did so, but several years ago I had reason to become deeply enmeshed in the Ceridian financial statements. Mind you, things could have changed, and I apologize for pulling the numbers below from memory and not caring enough to go read all the latest financials at Edgar, but back in 2005, there were two distinct parts of the business: HR Services and Comdata, a stored value card processing company. Comdata was by far the smaller part of the business (less than 20% of revenue), but was responsible for almost 100% of the company’s combined cash flow.

There were several reasons for that anomaly at the time, and to my knowledge, none of them have changed. Comdata was the simpler of the two businesses, since it was unconcerned with the potentially touchy issues related to capturing and calculating the information required to produce employee pay checks, deductions, benefit statements, and so forth. The HR and payroll side of the business, by contrast, was built with a wild string of acquisitions, virtually none of which was ever integrated into a coherent service offering. As a Ceridian customer, for instance, the choice of back-end payroll system which produces your company’s checks or direct deposits is a direct function of the part of the country you’re in, and what company in that part of the country Ceridian purchased. If there’s a stupider way to grow a company by acquisition, other than taking $100 bills and setting them alight, I don’t know what it would be.

And so, the HR and payroll part of the Ceridian business is a complete piece of junk, held together by spit and bailing wire. As a standalone business, in its present state, it might be worth zero, on a good day. Comdata, standalone, isn’t worth anything close to the $5.3 billion presently being offered for the entire company.

Admittedly, my information on the company is potentially outdated. Back in mid-2005, the stock was grossly overvalued in the low 20s, so much so that no thinking private equity firm would touch it. The present senior management team hasn’t been in place even 9 months yet, and could not possibly have repaired all the damage done by the previous inept acquisition-happy crew. Based on my take on the company, I wonder whether Mr. Ackman, and the other shareholders whose interests he represents, wouldn’t be far better served to take the money and run, as fast as possible, to some other investment. Like 6 month CDs.

It might be time to quit harrumphing, take gains that won’t, in this skeptic’s view, be available again any time soon, and get the heck out of Dodge.



Easily amused by routine corporate finance

Jun 7 2007

Or so the financial world would seem.

Today’s WSJ piece, “IBM’s Under-the-Wire Tax Break“, while apparently trying to be rational and even-handed, still managed to give the impression that Big Blue scored a coup, unavailable to anyone else.

The Internal Revenue Service moved to shut a corporate tax loophole last week, just two days after International Business Machines Corp. used it to save an estimated $1.6 billion, according to a person familiar with the transaction.

Was IBM the first to have thought about or entered into such a transaction? Of course not. So why the interest in their supposed windfall?

Because, shortly thereafter, the IRS acted:

On May 31, the IRS announced plans to issue regulations making companies pay U.S. taxes when they buy back their stock, even if the shares are purchased by an international subsidiary. It said the planned ban on the practice would take effect that day, even though the regulations won’t be finalized for some time.

So I guess that makes the transaction interesting. But it’s not as though IBM did anything even remotely shady.

Mr. Rosenbloom (ed: David Rosenbloom, a tax attorney with Caplin & Drysdale in Washington) said that it is possible that the IRS could challenge IBM’s structure on the grounds that it didn’t serve any business purpose except reducing taxes. However, other attorneys noted that the IRS had previously asked for comments about such transactions, indicating it accepted them.

All no big deal, then, and if the IRS hadn’t acted, nobody in the financial press would have given the transaction even a second glance.

And then it hit me – the problem wasn’t the story, since the story’s both interesting and completely fact-based, as I expect from the Journal. It was the choice of headline. A better one might have been:

“Embarrassed, IRS Trots Out New Tax Law Interpretation”



Yet another massive buyout deal

Jun 4 2007

It seems that the excitement never ends.

This just in – “HCP to buy Slough Estates USA for $2.9 billion“. They’re buying it from Segro, a UK-based…uh, a UK-based something or other. From the name, I’d guess that Slough, the subsidiary being sold, has something to do with cosmetic surgery, dead skin, marshy bogs, or a sense of deep despair.

Hey, wait a minute. I’ve never heard of any of the three parties in this deal. Not to seem provincial, but what a waste of a press release.

Please forget I even mentioned it.