Issues & Opinions

Where to start?

The short-selling ban that is in place from yesterday through October 2 (or later) is an abomination. Not only is it bad policy in an absolute sense, it’s made worse by the cynical hypocrisy of those who begged for it to be put into place.

It’s one thing for an amiable boob like Patrick Byrne to whine about short-sellers and how they’re killing his company. I’m willing to give Byrne some small measure of benefit of the doubt, since finance isn’t his claim to fame. But when the chairmen of the Federal Reserve and the SEC, along with the former CEO of Goldman Sachs, now Treasury Secretary, start whining out of the same hymn book, they’re not serious, not believable, and are clearly playing to the idiots in the audience.

Short selling, the act of selling shares you don’t own, with the expectation that you’ll be able to buy them back later at a price equal to or lower than the price at which you sold the. Simple, really. And it’s got nothing to do with wanting to harm the company whose shares you’ve sold short. It’s simply an expression of opinion that the shares are overvalued, for one reason or another.

Selling short, then spreading false rumors against a company is an offense for which one can be pursued in a court of law. Funny thing, though – not selling short, then spreading false rumors against a company is also an offense for which one can be pursued in a court of law. If you do the verbal algebra, it becomes clear that selling short has nothing to do with the illegality of false rumors. And the law recognizes this – selling short is, in anything approaching sane regulatory times, not illegal at all.

Selling short can occur for many reasons, in many different contexts. Everyone I’ve read focuses on bets that a stock might or should go down. I’ll go you one better. For instance, to take a random example, let’s just say that the Investment Banking group in Goldman Sachs’ Chicago office were doing a public offering of stock for a client.

Such offerings typically include an underwriter’s option for an additional 15% of the shares being offered as “the green shoe”, to cover overallocations. Since an investment bank typically has no interest, and certainly has no requirement, to be an owner of stock in the companies for which it provides underwriting, if an offering looks successful, and the demand is high enough to make exercising their option for the “green shoe”, the normal action an investment bank takes is to sell short a number of shares equal to the amount of the green shoe, knowing that they’ll be able to replace those shares with the additional 15% for overallocation. If the stock has run up in the aftermath of the offering, better still – they can sell stock that’s more expensive than the offering price, knowing full well that they can replace it at the offering price. But at a minimum, they already know the price at which they can buy the stock in the future, so this isn’t a bet that the stock will go down.

Treasury Secretary Hank Paulson, having been the head of investment banking for Goldman Sachs’ Midwest Region (1983-1988), then managing partner of the Chicago office, followed by co-head of IB for the entire firm, can safely be presumed to know all of this.

Neither SEC Chairman Cox and Fed Chairman Bernanke has any experience in capital markets, but neither of them can assert ignorance of the role that short selling plays in the market.

And who’s been calling loudest for limitations on short selling? The investment banks, solvent and formerly-solvent:

Lehman:

Lehman executives complain that they have been singled out by hedge fund investors that are short selling — or betting against — their stock, and Mr. Fuld has called senior executives at competitor banks demanding that their employees stop criticizing Lehman.

Morgan Stanley:

The mood was far different at Morgan Stanley, which lobbied vigorously for the ban on short selling. The bank’s shares shot up 21 percent, to $27.21, on Friday. Analysts said the reprieve might be only temporary, though, because the firm’s business model still requires a big balance sheet and core base of deposits for financing.

Goldman Sachs:

…the SEC is this afternoon holding a meeting to “determine if they need to take further steps to curtail what both Mac and [Goldman Sachs CEO Lloyd] Blankfein characterize as improper short selling that is really causing damage to the share price of Morgan Stanley and Goldman Sachs.” Blankfein also spoke with Cox to complain of short selling of their stock, as did New York senators Chuck Schumer and Hillary Clinton, according to Gasparino’s sources.

And so on. Fannie Mae, Freddie Mac, Bear Stearns, AIG, and a host of others, all now functionally dead as public companies, claimed loudly, with much gesticulation, that short sellers, not their crappy business models or abysmal risk management, were the reason for the drops in their stock prices.

New York’s AG Andrew Cuomo:

Likening such traders to “looters after a hurricane,” New York Attorney General Andrew Cuomo Thursday said his office is investigating “a significant number” of complaints about improper short selling in shares of Lehman Bros., AIG, Morgan Stanley, Goldman Sachs and other financial stocks.

Cuomo said his investigation would use the New York state Martin Act, which subjects violators to criminal as well as civil penalties, to combat the illegal practices.

“The markets need to be stabilized,” Cuomo said. “And one way to bring about such stability is to root out and deter short-selling that is based on the spread of false information.”

Sorry, Spanky – you left one class of people out: Weather forecasters before a hurricane. Deter short selling based on the spread of false information? Sure – go ahead, although there are already laws in place to do that, so knock yourself out enforcing them, with my blessing and encouragement. Disallow short selling itself, as though there’s no valid reason for a non-rumor-spreading trader to do? Utterly stupid. And impressive only to the self interested (the banks) or ill-educated (all other non-bankers who’ve complained about short selling).

Applauded only by the greedy & ignorant? Must be a great plan, then. I’ll take all this addle-pated nonsense about “gangs of people getting together to sell shares of a stock” seriously when several things also happen:

• The same idiots decide to go after “gangs of people getting together to buy shares of a stock” (Cramer – I’m looking at you and everyone like you).
• Someone explains to me the difference between a short seller selling a share of stock and an actual holder of the stock selling a share of stock. The market neither knows nor cares.
• Which raises the question of what’s next? Disallowing down-ticks entirely? Disallowing any sale of the stocks of the protected 799 alleged-financial companies? Even by widows and orphans who actually hold shares? What is this, the Hotel California?

“Issue Two” (please read that to yourself in John McGlaughlin’s voice, for best effect)
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(The excitable investors, that is, not Pakistanis in general)

Clues can be found in a Marketwatch article from yesterday evening:

EMERGING MARKETS REPORT
Investors riot in Pakistan as market tumbles

Benchmark down for 15th straight session; loses 27.5% this year so far
By Polya Lesova, MarketWatch

NEW YORK (MarketWatch) — Popular anger over tumbling equity prices erupted in Pakistan on Thursday, underscoring the difficulties regulators face in attempting to prop up falling markets as turbulence in many of the world’s financial markets continues unabated.

The turmoil in Pakistan comes at a time when several emerging markets are considering market stabilization measures, while regulators in the United States are moving to limit short selling and speculation in the oil market.

Regulators in China have signaled their intention to stabilize the local market, which became the worst performer among global markets this week. India has suspended futures trading in several commodities.
In Pakistan on Thursday, more than 200 protestors attacked the Karachi Stock Exchange, the country’s main equity market, and demanded a temporary closure of the market to curb further drops in share prices, the BBC reported.

Smaller protests took place in Islamabad and Lahore.

[continues]

For reasons not so easy to articulate, I find it breathtaking that such a reaction makes any sense at all to these aggrieved investors.

What, I ask myself, is the logical conclusion they’d expect here? To be offered their money back? By whom? With or without smoke-stains and cinders?

Are the investors in emerging Asian markets really so unsophisticated (Albania comes to mind, among others) that they’ll buy anything, at any price? I suppose so – this has happened throughout history, in Asia, the US, and elsewhere. But in the majority of those other cases that come to mind, when it all goes wrong, the populace doesn’t seem to automatically think that all can be made better by burning buildings down, do they?

Not only are such reactions destructive (to property and to society in general), they’re also of no use in resolving the problem.

Some folks, I suppose, should be completely protected from themselves, and prohibited from taking actions they might later regret. Much the same, I further suppose, as special needs kids are sometimes not allowed out of the house without a styrofoam-lined helmet.

Such paternalism would be troubling to those of us who feel able to take responsibility for our own actions, but, by definition, we’re also not the sort of people who’d think burning down the stock exchange (which, really, is just a building, and had no effect on the stupid prices people were willing to stupidly pay for securities, right?) was a great idea. The Pakistani authorities’ “styrofoam helmet” for the markets includes circuit breakers to dampen price volatility, short-selling limitations, and a “market stabilization fund”. Much the same set of tools has been used by other governments over the years, with little beneficial result.

The connection made in the original article to US commodity (primarily oil) markets and allegations of skullduggery in shorting of financial behemoths such as Fannie Mae, Freddie Mac, Lehman, et al is apt, though the differences between the two situations are meaningful. When you add in the other bugbear, the rapidly deflating asset (real estate) bubble, within the US, the focus is on systemic risk (in the financial behemoths) and pure political grandstanding (regarding the oil futures markets and residential real estate), but surely, a minimal number of buildings will be burnt to express disappointment.

The point the two situations have in common is the ultimate futility of efforts to game the market excessively, from either the regulators’ or the speculators’ side of the table. Market stabilization fund? Ask George Soros what he thinks of the efficacy of such devices.

Market volatility curbs? They are a band-aid solution, i.e. no solution at all. If the limits are hit on a given day (particularly down days), the selling frenzy can just as easily be pent-up until the next day. And the day after. In cases where limits on asset price increases would be helpful to halt bubbles of speculative excess (tech stocks in the 1990s, real estate more recently), the proper method isn’t price movement limitations, but instead should be monetary, in the form of interest rates and margin requirements.

Where does it all end? Not in violence, and not in wanton destruction of real property. Too many more gimmicks, such as stimulus checks designed to gull the electorate into thinking all’s well, or handouts to flagrantly uncreditworthy home buyers, and the road to the end of this mess gets steeper and more slippery. Oddly enough, that monetary hammer mentioned above, in the form of interest rates, can play a big part in solving the current woes, though it won’t solve them quickly.

Devaluation of the dollar is the flip side of cheap credit, and while dollar devaluation is a subject for another day, reducing speculative excesses by making money more expensive to deploy in speculation, whether it be in commodities, real estate, or the financial markets seems likely to be the only path out of the current unpleasantness.

If that turns out to be the case, many will feel the pinch. Fortunately, the stoics who make up a lot of the American population, sophisticated or not, seem more likely to suck it up, endure the pinch, and exit the other side better off than they are today. An optimist would further hope that this was all done without the government stupidly taxing the starch out of the economy, but if the government does so, perhaps the government after them will repair the damage, and reap the delayed benefits.

Regardless of government policies, the flame-throwing non-sophisticates of the Pakistani markets may not fare better nearly as soon.

Based on the events of Friday afternoon, I’m reminded of the only phrase I can recall from Nancy Reagan’s tenure as First Lady: “Just say no”.

About an hour before Wall Street closed for the week, I got a call from an old friend who’s an equity analyst for an east coast hedge fund. He wanted to know whether it was possible that there was any truth to the rumor he’d heard about a merger in the waste industry.

That merger? Republic Services and Allied Waste Industries.

While it turns out that I should have just said no, that I had no idea, and moved on to other matters, I first told him that I’d heard no such rumor. Not that all, or any, rumors run through me before they’re generally available to the rest of the populace, mind you, but I do have some experience in the waste industry, including some related to M&A activity. So his question wasn’t out of place, my specific ignorance of this rumor notwithstanding.

I thought about it for a bit, and then, while allowing that of course anything’s possible, told him that this was highly unlikely, for a lot of reasons. For instance, have a look at these two track records:

---

One of those two report cards is decidedly not like the other, yet this is billed as a “merger of equals”. Hey – we’re in the 21st Century – so we’ve got to say whatever makes the kids feel good about themselves, I guess. Everyone gets a trophy! I realize, of course, that they’re roughly equal in market cap, with Allied being the bigger of the two by several hundred million dollars, but that market cap was smaller than RSG’s before the rumor of a deal leaked out, and with good reason.

Feel free to have a look for yourself – RSG has outperformed most of the waste industry by a noticeable margin in the last five years.
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But it doesn’t. From a WSJ email, dispatched this evening to my inbox, this story:

NEWS ALERT
from The Wall Street Journal

Sept. 17, 2007

William Lerach is set to plead guilty to one count of conspiracy in the criminal case involving the noted securities lawyer’s former firm, now called Milberg Weiss LLP. The plea agreement, which calls for a one to two year prison term, could be announced as soon as Tuesday.

I’m all for protecting the common man, the common investor, and I’m nothing if not both of those things. However, while Milberg Weiss (…Bershad Hynes & Lerach) LLP has always claimed that their seldom-seemly, and often seedy, pursuit of class action lawsuits, against any company whose stock price took a noteworthy downturn, was for the public good, I’ve never been able to agree.

Not in my stance as a champion of the unfettered right of public companies to run roughshod over their investors, either. Because I have no such stance. Instead, my dim view of him and all who practice his kind of law is justified by standard tactics he and his partners (current and former) have used in pursuit of specious claims. Think “greenmail”, ala Carl Icahn and Boone Pickens in the 1980s – make life tough enough for someone, even someone who’s got no basis for having to defend their actions, and they’ll pay you to go away.

As referred to in an Los Angeles Business Journal article of Sep 3, 2007, Lerach is an “economic terrorist”, and I don’t think that’s too tough a characterization of him. As the article says:

Lerach, of course, did not invent but did perfect the securities class action lawsuit. In that scheme, most any company that sustained a stock drop, even if it had nothing to do with anything of consequence, often found itself the recipient of allegations of fraud in a Lerach-engineered lawsuit. Likewise, companies that announced most anything negative could get the same kind of lawsuit – often within hours of the announcement.

Lerach then pounded the company, using the discovery process to find some little scrap somewhere in some underling’s file drawer that “proved” the company knew that bad news could develop.

In other words, this guy, and all lawyers like him, specialized in swooping in any time there was even a flimsy pretext for doing so. I mean, there’s no way a stock could drop without malfeasance and lying on the part of management, right?

Well, no – that’s wrong. But Lerach, et al, after having put their lawsuit’s stake in the ground, would then embark on forced discovery at their target companies, essentially fishing around for a reason to justify their lawsuit.

And one doesn’t have to be a big-business apologist to find that sort of thing to be outside the bounds of fair and reasonable play.

Over the years, I’ve been the recipient of at least 50 securities class action solicitations. I received one just the other day, “In re CARDINAL HEALTH, INC. SECURITIES LITIGATION“. And while I almost never take the time to participate in these paper chases, I’ve always paid particular attention to any such action which has either “Lerach Coughlin Stoia Geller Rudman & Robbins LLP” or any of the many versions of “Milberg Weiss +/-Bershad +/-Hynes +/-Lerach LLP” listed as the attorneys looking out for my “best interests”.

Because they don’t, they haven’t, and investors are simply a raw material for them and their business process. And I throw their solicitations away as soon as possible, to avoid stinking the house up.

His former partner Bershad has already pled, and if the news report is correct, Lerach’s getting ready to do the same. It’s not the Christian thing to say, but I’m not much of a Christian anyway, so I’ll hope that Milberg, Weiss, and all the rest be following them to the pokey soon after.

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.

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.

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}
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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.

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.

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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.

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.