Issues & Opinions

And so, it looks to be a done deal.

News Corp. Is Poised to Win Dow Jones
Murdoch Prevails
As Bancrofts Agree
To $5 Billion Buyout

Paying Fees Cinches Deal

By SARAH ELLISON and MATTHEW KARNITSCHNIG
August 1, 2007

A century of Bancroft-family ownership at Dow Jones & Co. is over.

Rupert Murdoch’s News Corp. sealed a $5 billion agreement to purchase the publisher of The Wall Street Journal after three months of drama in the controlling family and public debate about journalistic values.

All it took to nudge the matter across the finish line was agreement to allow the company to pay $30 million in fees for the Bancrofts’ advisors? Small beer, really, at least to Dow Jones & News Corp, though such a number would not be small to me, personally.

It was $30 million largely wasted, in retrospect, though the Bancrofts surely didn’t spend it knowing that it would be so. The deal approved today by both companies’ boards is functionally identical to the one initially offered.

And the $30 million didn’t buy guarantees of editorial independence or the continued absurdly high quality of the Wall Street Journal family of publications, either. My argument all along has been that Murdoch has no plans to tarnish the stellar reputation of the Journal, and I don’t expect to be proven wrong about that in the future. So the fee payment agreement really ends up being a sop to the Bancrofts, and apparently one final preference tendered to them that’s not available to the lowly holders of A shares. I doubt that the A holders will complain, and I’ve got no basis to do so, so good for the Bancrofts, happy trails, and all the rest.

And speaking of predictions, I, certainly not alone, have asserted all along that the outcome would likely be just this - Dow Jones selling to News Corp, at the original price. Big deal - predictions are cheap, and this one, particularly given the premium offered and the logic behind it, was the most obvious all along.

Consequence free prediction? True, in my case, which makes such predictions even cheaper. Have a look:

At any point from May 9 thru May 31, and quite notably as recently as yesterday, there was serious money to be made buying the stock on the presumption of a deal being completed.

Did I? No.

Do I wish I had? No.

Why? Because if the Bancrofts had somehow mustered the votes to block the deal, this stock would have been back in the 30s in a heartbeat, and that was a risk not sufficiently offset for me by the $9 or $10/share the market was leaving on the table.

Even though the very fact that the results of rejection would be a $1.5 billion haircut in martket value pretty much guaranteed that the deal had to be done. On the flip side, it could cause some minor pain to be among those short 3.8 million shares of DJ as of the report three weeks ago, I’m thinking.

From a WSJ dispatch of a couple minutes ago:

Key Bancroft Family Trust to Vote
Against News Corp. Bid for Dow Jones

The Denver branch of the Bancroft family, Dow Jones & Co.’s controlling shareholder, is to vote against accepting News Corp.’s $60 a share offer, putting pressure on News Corp. to raise its offer, according to a person familiar with the situation.

They think that the B shares held by the Bancrofts should receive a 10-20% premium, based on their supervoting powers.

This, of course, seems to ignore the 60%+ premium that’s already on the table. But that’s not really what’s happening. Like so much else in life, corporate buyouts are a study of relativity, and relative to the much-more-numerous A shares, the B shares have always hit above their weight in corporate decision making at Dow Jones. It seems that the Denver branch of the family is much less concerned with the silly notion that Murdoch is going to destroy a jewel of American journalism than they are with trying to ensure that the family continues to be rewarded far above its due.

I’m happy not to have a dog in this race, given my lack of position in DJ, and am reminded of a joke whose punchline ends with “We’re already settled that issue, now, we’re just dickering over price.”

John Mackey, CEO of Whole Foods Market, has some ’splainin to do. From the San Jose Mercury News, this was the headline:

Whole Deception: CEO of Whole Foods used fake name to hype stock on Yahoo message board

Along with some analysis and outraged opinionating (with which I take no issue), the Merc’s Vindu Goel points to a free WSJ link, so I will too:

Whole Foods Is Hot,
Wild Oats a Dud —
So Said ‘Rahodeb’

Then Again, Yahoo Poster
Was a Whole Foods Staffer,
The CEO to Be Precise

By DAVID KESMODEL and JOHN R. WILKE
July 12, 2007; Page A1

In January 2005, someone using the name “Rahodeb” went online to a Yahoo stock-market forum and posted this opinion: No company would want to buy Wild Oats Markets Inc., a natural-foods grocer, at its price then of about $8 a share.

This all comes to light as a direct result of the Federal Trade Commission’s attempts to derail, on antitrust grounds, the proposed purchase of Wild Oats Markets by Whole Foods. Much ink has been spilled supporting either the company or the FTC, and the arguments tend to revolve around the definition of the relevant market in which the two should be measured for dominance.

I have no opinion on the matter, and don’t frankly care if they get a deal done, remain independent and separate, or both declare Chapter 7 tomorrow.

I do find interesting, however, the fact that the CEO of a non-trivial public company thinks, or thought, that posting anonymously on Yahoo boards was legal, proper, or even marginally sane.

Internet sockpuppets are a disgusting phenomenon, even when financial markets aren’t their targets. Pretense to have support for a stock, a company, or an opinion, lacking an actual instance of support, is offensive. It’s made worse, in the case of Whole Foods, by the fact that for much of the period in which Mackey was sockpuppeting the stock, it had no need of any support, having been a steady gainer up until the end of 2005.

Mr. Mackey declined to be interviewed. But he soon posted on the company Web site, saying that the FTC was quoting Rahodeb “to embarrass both me and Whole Foods.” He also said: “I posted on Yahoo! under a pseudonym because I had fun doing it. Many people post on bulletin boards using pseudonyms.” He said that “I never intended any of those postings to be identified with me.”

Mr. Mackey’s post continued: “The views articulated by rahodeb sometimes represent what I actually believed and sometimes they didn’t. Sometimes I simply played ‘devil’s advocate’ for the sheer fun of arguing. Anyone who knows me realizes that I frequently do this in person, too.”

Let’s see - he’s been the CEO since he founded the company, and was the CEO for the two months that I owned the stock after its IPO, late last century. (I was jammed into the IPO by my broker, because that’s the way things were done in the early 1990s - I didn’t like the stock, don’t particularly like the company, and have minimal tolerance for sanctimonious vegans in any event).

Sometime in the last 27 years, it should have been made clear to him, perhaps by either his general counsel or his yogi, that CEOs of public companies get their “sheer fun” by playing Pebble Beach or Augusta National, or by throwing themselves into philanthropic ventures, or by any number of other things that are both legal and not likely to bring the humiliation associated with letting the public markets know, definitively, that you’re a nincompoop.

Here are just a few examples of other actions he could have taken, all potentially embarrassing to some degree, but which would have been less embarrassing than what he’s done:

• Have his phone number identified on Deborah Palfrey’s call logs
• Have a voicemail rant against his daughter made public
• Throw a lavish birthday party for his wife
• Post on a Yahoo message board under his real name

None of the above would necessarily indicate good temperament, and three of them could exhibit potential for moral or ethical lapses, but none of them is an explicit indication of stupidity.

For about eight years until last August, the company confirms, Mr. Mackey posted numerous messages on Yahoo Finance stock forums as Rahodeb. It’s an anagram of Deborah, Mr. Mackey’s wife’s name. Rahodeb cheered Whole Foods’ financial results, trumpeted his gains on the stock and bashed Wild Oats. Rahodeb even defended Mr. Mackey’s haircut when another user poked fun at a photo in the annual report. “I like Mackey’s haircut,” Rahodeb said. “I think he looks cute!”

What Mackey actually did? Yeah, it’s an indication of stupidity, arrogance, and, as seen above, no small amount of immaturity. Arrogance, the markets can handle. Stupidity and immaturity? Less so. We like to at least believe our corporate titans are smarter than their average counter-person.

The WSJ piece is from the issue to be delivered later this morning, so the market hasn’t yet reacted to his grave mistake. It doesn’t take Fellini to hazard a guess that by this time next week, he’s going to be the ex-CEO of Whole Foods Markets, and the FTC is likely to be no longer needed to watchdog the alleged consumer interest in keeping Wild Oats out of Whole Foods’ clutches.

This looks like a business-mortal error on Mackey’s part. But it should provide good theater, for at least a short time.

Or so it would appear - the consortium whose apparent (to me, anyway, and perhaps to me alone) grotesque overbid for Sallie Mae made news back in April may have found a pretense for reasoned re-examination.

Why? As reported at CNNMoney, “Sallie Mae says planned buyout may fail“.

Jul. 11, 2007 (AFX International Focus) –

WASHINGTON (AP) - The planned $25 billion buyout of SLM Corp. could be in jeopardy as the investors that agreed to buy the nation’s largest student lender, commonly known as Sallie Mae, say congressional legislation could kill the deal.

Sallie Mae disputes that. The takeover deal, one of the largest private buyouts ever, is led by private-equity firm J.C. Flowers & Co. At issue are the two sides’ interpretation of their acquisition agreement, signed in April, under which significant negative developments can nullify the deal.

On entry into this absurd offer to buy the company, the buying group was already aware of the coming significant reduction in federal subsidies for student loans, and surely had to also be aware of the firestorm that arrived just after their offer became public, the investigation by New York’s AG Andrew Cuomo, and the fact that other states were starting to pile on.

Subsequent events, nominally triggered by Blackstone’s IPO (or not - see addendum below), have shone bright lights on private equity, threatening (though not guaranteeing) meaningful changes in taxation for the dealmakers. Given the enormous competition for PE deals in the past year, the PE firms have reportedly been forced to reduce expectations for IRR on deals, down from the mid-30s to the mid-teens. Such is the curse (for PE) and the benefit (for sellers) of an imbalance between supply and demand for buyouts. With margin expectations squeezed, and with financing costs and covenants sure to keep getting tougher, the marginal deals are easy candidates for a skeptical review.

I have no way of knowing, of course, but this looks like an excellent excuse for a case of buyer’s remorse to set in, and best that it does so before having actually written the checks.

Sallie Mae said Wednesday it had been informed by the investors’ group, which also includes Bank of America Corp. and JPMorgan Chase & Co., that the investors believe that legislative proposals pending in Congress ‘could result in a failure of the conditions to the closing of the merger to be satisfied.’
Reston, Va.-based Sallie Mae said it ’strongly disagrees with this assertion, intends to proceed toward the closing of the merger transaction as rapidly as possible, and will take all steps to protect shareholders’ interests.’

If the deal were to fall through, the acquisition agreement provides for a $900 million breakup fee payable by either side under certain conditions.

(both excerpts edited to remove reams of tickers; emphasis mine)

Of course, Sallie Mae would dispute the potential deal-killing effect of the mooted evaporation of 25% or more of the buyers’ profit, due to a change in the tax regime. What else would they be expected to say?

The market took the threat seriously, however, shaving more than 14% off the price of SLM before the normal close of trading:

I’ll leave it to the imagination of the reader to guess what time the announcement occurred.

While the stock recovered several lost dollars in the aftermarket session, market actors seem clearly to think there’s something to the concern of the putative buyers.

And, given a reasonable, if not dispositive, assumption that the take-private offer was stupid-high, unjustified by any rational thought process, and likely to have succeeded at a much lower premium, the $900 million breakup fee might be the cheapest lesson the buyers ever learned, should they choose to pay the tuition.

If all it takes to get into that class is to say, “Hey, wait a minute - how many potentially life-threatening deal points are we willing to concede here? And on an unrelated matter, what’s Congress up to these days?”, then so much the better.

---

Addendum - Good grief. Now that I’ve already written the story, based primarily on a Marketwatch headline that wasn’t specific about which Congressional action had gotten the buyers’ chests all bowed out, I see the full story at WSJ, and I find that the largest part of the issue is the reductions in federal subsidies.

The CNNMoney story, likewise, focused on the subsidy cuts, but because I tend not to take AP stories nearly as seriously as I do those in the WSJ, I presumed, incorrectly, that it had to be more than just subsidy cuts, because those were widely public before the deal was announced, and even mentioned in my April story on the matter.

Given the credence I place on the Journal, and the fact that its story, linked above, contains nothing related to private equity taxation as a causative in this current unpleasantness, I’ve got two things to add:

• If it’s not one of the causes, it should be, for Flowers’ sake
• Also, if the prime driver here is the subsidy cuts, that $900 million breakup fee is going to quickly go from hypothetical and conditional to cast in concrete - it’s a lame, lame excuse.

---

Addendum - July 12 Whew! I still jumped the gun, but retrospectively, I can retract my partial retraction, just above. In an article this morning, entitled “Under Fire, is Private Equity Trying to Duck Out?”, the Journal included the potentially constricted debt markets and the new taxation proposals as additional rationale for the quibbling. Flowers et al, then, seem still to be within sniffing distance of a chance to make an arguably bad deal less bad.

I bring you David Gross of San Francisco, who not only:

…asked his bosses for a radical pay cut, enough so he wouldn’t have to pay taxes to support the war.

but

In any event, his employer turned him down and he quit.

Which, I guess, good for him, standing up for his convictions that way and all. Left unanswered, at least for now, is whether federal taxes are levied on the wages of “guests of the Federal Government”. Why would I be curious about that? Because

Gross, 38, now works on a contract basis, and last year he refused to pay self-employment taxes.

All by itself, that doesn’t distinguish him from a lot of people. The AP story notes that between 8 and 10 thousand people fail to pay their taxes for reasons similar to those of Gross. Contained in the story, at a meta-level, is the fact that this particular non-Rhodes Scholar allowed the AP to write a story about him evading taxes. Nothing like calling out the IRS by name to get them to leave you alone. Posing in two pre-mug shots for the story? A priceless addition, though I’m sure the Feds could already have found him whenever and wherever they needed to.

Of course, these days, he won’t end up becoming a guest of the Federal Government:

Unlike the days when Thoreau was sent to prison in a tax protest against the Mexican-American War, modern war tax protesters rarely go to prison, according to tax resisters. The IRS may take their money from wages and bank accounts - with penalties and interest - after sending a series of letters.

“They’re very polite, which makes it a little boring,” said Rosa Packard of Greenwich, a longtime anti-war tax protester.

But if he thinks he is going to avoid collection of his taxes owed, by hook or by crook, after having trumpeted his resistance on a national newswire, he’s perhaps not smart enough to be gainfully employed, as a contractor or otherwise.

Will his protest, and others like his, have the desired effect? As James Taranto said in the OpinionJournal piece where I first saw this story, “Something tells us the economy will survive.”

Addendum - Mr. Gross expands on his and his fellow protesters’ thoughts and methods, with emphasis on the actual question I posed:

A frequent challenge to conscientious tax resisters whose resistance leads to fines and penalties is “won’t the government just end up with more in the end?”

The Ghandi quote that follows the snippet above is interesting and informative, if not completely dispositive.

Unlike Mr. Gross’ first commenter Ken (bottom), I have no desire to see Gross locked up, and wish him the best in what I consider to be a Quixotic quest, even though I disagree with it.

Found in today’s PE Week Wire email {sic}:

Gulfstream International Group, a Florida-based passenger flight operator, is to listed on the New York Stock Exchange. The company is looking to raise $14.05 million by selling 1 million shares with an estimated price range between $11 and $13 a share, according to a prospectus filed with the SEC. Weatherly Group backed Gulfstream in March 2006. http://www.twgco.com

The arithmetic there is compelling. But only because of imprecision in editorial form - their S1 filing is a tad more precise, as such things tend to be, and makes clear that they hope to raise $14.95 million via 1,150,000 shares sold at $13.00.

Additional imprecision, or at least confusion, appeared in the fact that the Weatherly Group, at least the one at the link provided in the story, is a recruiting firm, apparently unrelated to the Weatherly Group LLC, which actually invested in the company back in 2006.

It’s easy to pick nits, and so I do - PE Week Wire is always a good read, though its staff occasionally seems to get a bit fancy free during daily creation. Well worth a slot in the day’s email in any event, and signup is available here.

As a side matter, this looks like it’s a strange deal. Witness, from the red herring:

We were formed by Taglich Brothers Inc. and Weatherly Group LLC exclusively for the purpose of effecting the acquisition of Gulfstream and the Academy. In March 2006, we acquired approximately 89% of G-Air, which owned approximately 95% of Gulfstream at that time, and 100% of the Academy, which held the remaining 5% of Gulfstream. Subsequently, we acquired the remaining 11% of G-Air, which has been merged with and into our wholly-owned subsidiary, GIA.

Since 1999, Taglich Brothers and Weatherly Group have jointly pursued the sourcing and sponsoring of management buyouts of small private companies. The acquisition of Gulfstream and the Academy was their fourth such transaction. Thomas A. McFall, the Chairman of our board of directors, is an affiliate of Weatherly Group and Douglas E. Hailey, a director, is an affiliate of both Taglich Brothers and Weatherly Group.

I don’t know why, but I always prefer to see at least the pretense of arms-length between companies selling stock and their underwriters. It’s an affliction of mine, even though I know that the standard “arms-length” is typified by arms that would make a dwarf feel well-endowed.

So I was amused to see the name of the firm to which the company had assigned the underwriting role. Microcap or not, this one seems like a bit of a turd.