November 11, 2005
Red Zone LLC Puts Pressure on Six Flags
Posted by Jason R. Job
On November 8, 2005, Dan Snyder's, Red Zone LLC sent a letter to shareholders of Six Flags Inc. (NYSE: PKS) to convince shareholders to vote their shares to oust three non-independent directors from the board of Six Flags. Specifically, Red Zone hopes to oust Kieran Burke, the Chairman and CEO, James Dannhauser, the CFO, and Stanley Shuman, who the letter to shareholders states is "an investment banker who has a serious conflict in his dual role as board member and managing director of one of the company's financial advisors." (A copy of Red Zone's Letter to Shareholders can be found here).
For those of you, who are not up to date, basically, back in August, Red Zone initiated a tender offer to purchase 34.9% of the outstanding shares of Six Flags at $6.50 a share in order to unlock potential shareholder value. After Red Zone initiated the tender offer, Six Flags' Board instructed shareholders not to tender their shares because the Board was looking for potential buyers for the company.
During Six Flags' conference call on Tuesday, Burke responded to Red Zone's tender offer and urged shareholders to allow Six Flags to complete the process of selling the company. In the conference call, Burke said, "I am confident that we will have an attractive transaction to recommend to shareholders by the end of December."
In response, Red Zone's letter to shareholders noted:
"It has been two and a half months since the company began its "prompt and orderly" sales process and now management is saying that although some unknown number of "initial bids" have been received it will be at least another month before "final bids" are received and two more months before a decision is made on a possible sale. This timeline conveniently coincides with the deadline for shareholders to respond to our consent solicitation and effectively pushes any hope for a conclusion to the sale process into early 2006 when we believe Burke and Dannhauser could stand to gain an additional $10 million under their golden parachutes. Don't be misled by management's vague statements about its over-extended sales process. As the largest stockholder of Six Flags, we are skeptical that management's process will result in an attractive offer for your shares. In our view, the true purpose of the sales process is to stall and delay your vote on the performance of this board and management by creating high hopes among shareholders for as long as possible."
It certainly appears that Six Flags' Board is buying their time to cash in on the additional $10M in compensation. And, Red Zone has received some public backing from other shareholders. Last week, Diaco Investments LP, which owns about 9.8 percent of Six Flags stock, threw its support behind Red Zone, saying that it opposed a sale of the company.
On Wednesday of this week, Tigris Management issued a press release stating that it would vote its shares in favor of Red Zone's solicitation because:
Not voting for Red Zone means voting to retain the current management team of Six Flags. This is the same team that posted six straight years of operating losses, culminating with an equity-linked share offering that effectively diluted shareholders by a third; current management has been unable to stem the 90% decline in Six Flags' shares, to $3.49, until Daniel Snyder started buying the shares last year.
Tigris Management also noted it believed that Red Zone's track record would allow it to unlock potential shareholder value. Also, Tigris noted that it believed "that Six Flags shares can trade at $17.50 if the company is managed as effectively as comparable theme park operator Cedar Fair, L.P." Finally, Tigris believed "based on Red Zone's history of value creation, values in excess of $33 per share can be achieved." Shares of Six Flags currently trade at $7.32.
In response to Tigris' statement, Six Flags issued an additional press release, on Wednesday, which can be found here. In its press release, Six Flags noted that Tigris did not disclose any of its Six Flags shareholders nor is there any public information regarding Tigris' activities or assets. In response, Tigris amended its statement stating that Tigris' Managing Partner, "Murat Azizoglu, Ph.D., in a personal investment account. There are 4,000 shares in this account, which Dr. Azizoglu acquired on September 7, 2005, at a cost of $7.05 per share, as a potential long-term investment." It is also worth noting that Bill Gates has an 11.5% stake in Six Flags and last year said that he was dissatisfied with the current Board's performance.
Today, Six Flags sent a letter to shareholders, again urging shareholders to wait until the Board can complete the sale of Six Flags. A copy of the letter can be found here. Six Flags' Board reminds its shareholders that Red Zone is attempting to gain control of Six Flags without paying full value for the company. Six Flags desires that its shareholders wait until the potential sale process of Six Flags is completed, and if they have signed the "white card" in favor of Red Zone's plan to vote out the non-independent directors, then the shareholders can fill out a new "blue card" to revoke the votes in favor of Red Zone.
The activity between Red Zone and Six Flags shows the hostility that can occur when a large shareholder or shareholders come in and attempt to throw out the old board of directors to make changes in a company. Unfortunately, for the targeted board of directors of Six Flags, the voting requirements allow shareholders to remove them from the Board. Ultimately, as long as Red Zone LLC and other shareholders provide enough votes to oust the targeted members of the Board, then that is what will happen. However, Six Flags' Board will attempt to find a potential purchaser and perform a merger which will not allow its common shareholders to vote. Thus, allowing it to sell the company without funds like Red Zone to stop the merger.
Anyways, it will be interesting to see what happens, but either way, it is a great example of how private equity can influence public companies.
In full disclosure, I do not own any shares of Six Flags, Inc. Also, my comments are not intended to be a recommendation to buy or sell shares of Six Flags.
Hedge Funds and OfficeMax
K Capital, a hedge fund, owns 8.6 percent of OfficeMax and is leading a "non-group" of other hedge funds that hopes to force the existing management of OfficeMax is sell the company. K Capital has already won the right to put an additional independent director on the board. OfficeMax's operating margins trail, by a significant percent, those of its competitors, Office Depot and Staples. It is yet another example of "event driven" or "activist" hedge funds attempting to shape up, from the outside, poorly-performing incumbant managers.
Managers do not like this kind of outside pressure and will find ways of pushing back politically. I have no doubt that calls for hobbling regulation of hedge funds are actively supported by main street. Look also for anti- "fast money" amendments to state corporate codes. For an example of a provision in place see Ohio Gen. Corp. Law Sec. 1701.01(CC)(disabling short term shareholders from voting in control share acquistions).
November 10, 2005
Proposed Executive Compensation Legislation
Posted by Bill Sjostrom
In a press conference this afternoon, Congressman Frank will announce “The Protection Against Executive Compensation Abuse Act." The act will "address the problem of runaway executive compensation by requiring greater disclosure of executive compensation to shareholders." Click here for the press release.
It will be interesting to see the details of this legislation and whether it goes anywhere. The press release implies the legislation is built on the old adage that “sunshine is the best disinfectant.” Sunshine has worked in this area—it forced Dick Grasso to resign and cost Jack Welch access to corporate apartments, jets and Red Sox tickets. As this post speculates, it also got Robert Iger an expanded “for cause” provision in his employment agreement. Executive comp, however, already receives a ton of sunshine. The SEC requires extensive periodic disclosure concerning it, including the filing of many of the underlying documents. All these documents are publicly available at sec.gov. For example, the retirement agreement that caused the flap for Welch in 2001 was filed with the SEC in 1996, and here’s a link to Iger’s employment agreement if you want to read it for yourself.
My view is that sufficient information concerning executive compensation is currently disclosed by public companies. The problem is the way the information is aggregated. The SEC’s website has extremely rudimentary search capabilities and an unfriendly organizational system. As a result, finding a particular document is like searching for the proverbial needle in a haystack, especially for someone with no familiarity with which type of SEC filings may contain the particular document. I am very familar with the SEC filing system and ideally would have linked to the Jack Welch agreement referenced above, but I'm not willing to invest the unnecessarily large amount of time I presume it would take me to find the document. Googlizing the site would greatly reduce information costs and hence enhance the sunshine effect. A related approach is to require the companies themselves to better aggregate the information. Specifically, as suggested by Jeffrey Gordon in this paper, the SEC could "require proxy disclosure of a Compensation Discussion and Analysis statement . . . which collects and summarize all compensation elements for each senior executive, providing bottom line analysis.”
Update: Click here for an LA Times story with some details on the bill. As the title implies it mostly calls for additional disclosure but it also contains this little tidbit:
Provide all details about how much executives earn in cash, incentives and perks each year, and submit the packages for shareholder approval.
Upadate 2: This post at the corporate counsel blog has a link to the bill.
November 9, 2005
Debate on Hedge Fund Regulation
Oil Execs draw heat from Congress: Will it keep our homes warm?
The CEOs of several large oil producers are on Capitol Hill today for hearings before joint Congressional Committees to discuss the price of crude oil, gasoline and protecting the American Consumer. The CEOs are called to defend their companies’ record 3Q profits in the face of higher consumer gas prices. Some members of Congress are calling for a windfall profit tax, while others wish to urge Oil companies to give some profits directly to consumers to help pay for higher energy costs.
The industry has defended the record profits by pointing to years of weak earnings while energy prices languished. Energy production and development would suffer if Congress taxed away the industry's incentives.
The executives were expected to explain what they view as the factors leading to recent success, while comparing their profits to those of other industries which are even greater.
The market for crude opened lower for a second session on expected news of increasing inventories. However, no mention was made of whether Congress intends to discuss eliminating the federal subsidies it provides to the oil industry, which seems like a logical step in approaching the oil industry’s use of its profits. For more on today’s hearings, click here.
Pershing Square to McDonald's: Spin Off Restaurants
Today, Steven Gray at the Wall Street Journal is reporting that Pershing Square Capital Management proposed to McDonald's a plan to increase shareholder value, which was ultimately rejected by McDonald's management. Pershing Square, which owns a 4.9% stake in McDonald's, proposed to McDonald's management a plan where McDonald's would IPO about a 65% interest in its company owned restraunts.
Next week, Pershing is hosting a conference with several hedge-fund and institutional investors to discuss potential options for McDonald's real estate. (McDonald's owns approximately 37-percent of the land on which its restraunts sit). After which, William Ackman, managing partner of Pershing Square, said Pershing will publicly present a new, revised proposal to McDonald's.
Wall Street Journal Report can be found here. (subscription required after next week).
Reuters discussion of the article can be found here.
[Jason R. Job]
In full disclosure, I personally own shares of McDonalds in a retirement account. Also, I am not recommending the purchase or sale of the stock.
Linens n’ Things Going Private
A group led by private equity firm Apollo Management struck a deal yesterday to take Linens 'n Things Inc. private. The group has agreed to pay Linens n’ Things shareholders $28 per share in cash or a total of $1.3 billion. This reflects a rather paltry six percent premium over the company’s pre-deal share price. The company has not faired well of late as Wal-Mart and Target have been expanding their home decor offerings. It recently reported a 94 percent drop in third-quarter profit on weak back-to-school demand.
Linens n’ Things stock initially traded up at $27.00 per share but then fell back after analysts focused in on contingencies contained in the deal which decrease the likelihood of it actually closing. Story . . .
November 8, 2005
NYSE Spin on Shareholder Primacy
The NYSE has answered critics of its proposal to go public. Users of the exchange, traders, worry that a for-profit NYSE will be obliged to do what other for- profit companies do, maximize shareholder profits. This means that the NYSE can (perhaps owes a duty to shareholders to) rise trading fees and streamline the trading system to save costs. The Exchange has a powerful market position with pricing control and will be obliged price accordingly. When the CBOE and the Merc went public, exchanges with much less market power, they raised trading fees. The Exchange also will have to evaluate whether its physical floor trading system is optimal.
What will the Exchange do?? The NYSE's chief economist, Paul Bennett, has answered with promises -- the Exchange will keep specialists and redundant computer systems as checks once it goes public. How can he possibly make such claims? At issue is whether the Exchange can make more profits without specialists than with them. If so, the board of a for-profit company has a fiduciary duty to shareholders to eliminate the specialist system in favor of a computerized trading system.
The claims are arguably irresponsible and could stimulate litigation once the company is formed (either the claims are breached and sued on (reliance by interested parties) or followed and sued on (breach of duty to make profits)). A for-profit company is obliged to cut costs to maximize revenue and use its pricing power; Bennett cannot make promises that cannot be delivered on by a board of directors of a for profit company. The most he should say is "We will do whatever is in the best interests of the new for-profit company (ie to make money)."
Bennett's promises remind me of the old Ford v Dodge Motor Company case in Michigan. Henry Ford refused to pay a dividend to shareholders because two of his larger shareholders were using the dividends to capitalize a new car company, Doge Motor. Ford testified in court that he wanted to give away the company's profits to the workers instead. His testimony so outraged the judge that it is became the one time a court ordered a public company to pay a dividend.
Guidant Lawsuit a Loser
Guidant Corporation has brought suit against Johnson & Johnson to force J & J to close on an executed merger agreement. Since the signing of the agreement, Guidant has been sued or investigated (or both) by several federal agencies and numerous state attorneys general for the failure of its heart defibrillators and pacemakers. Guidant recently reported dismal third quarter earnings, a 57 percent drop from those reported in the same quarter last year.
Guidant's hopes rest on a 2001 decisions of Vice Chancellor Strine in the Delaware Court of Chancery, Tyson Foods. In the case Strine ordered a deal to close, despite announced reservations ("I am confessedly torn about the correct outcome....") Reading the opinion one is struck by a strong whiff of simple, old fashioned buyer's remorse. Tyson Foods inked the deal and then, soon thereafter, had second thoughts and wanted out. The financial troubles of the seller, IBP were a convenient excuse.
There is no buyer's remorse in the J&J/Guidant deal. J&J signed and watched with horror as the claims against Guidant started pouring in and up. J&J had unwittingly bought itself a bees nest of litigation. The Tyson Foods decision, odd in its own right, is easily distinguishable from this deal.
November 7, 2005
Publicly Owned Stock Exchanges: An Unexpected Consequence -- A User Backlash
A consequence of stock exchanges "going public," that is, changing from member owned organizations to organizations owned by public stockholders, is that the exchanges must now maximize shareholder wealth. This means that the exchanges should charge users, traders, what the market will bear. Users, especially the large institutional traders, have awoken to the fact that exchanges that are monopolies may charge monopolisitic prices, all to the benefit of shareholders and to the detriment of customers (traders). Article Traders are now, for the first time, seriously worried about the competitive position of the historically powerful exchanges, and may do something about it. This may lead to a serious attempt to curtain the historic monopolies of the traditional exchanges. Several big users of the NYSE have, for example, bought shares in the Philadelphia Stock Exchange, a currently insignificant rival, to prepare to grow the Philly exchange if necessary to compete with the NYSE. Ahh....the worm turns.
Samuel Alito: A "Pro-Business" Justice?
Reporters, both supportive and critical, looking for an angle on the nomination of Judge Alito to the Supreme Court have claimed that he is "pro-business." The most high profile story was on page one of the Wall Street Journal (11/1/2005) -- Jess Bravin & Jeanne Cummings, "Nominee's Record Show Backing of Business Interests, Contracts." To some this is a positive; to others this is a negative. Both supporters and detractors are wrong.
Support for the stories is found in selected cases decided by Alito among the 700 opinions written by the Judge during his 15 years on the federal bench. Those opinion in which he decided in favor of a business firm against a non-business party are featured and dissected. What the stories reveal, however, is a Judge that decides cases based on a careful, almost dull, parsing of legal rules and doctrines. The cases cited do not reveal a pro-business bias or a pro-"little people" bias either. They demonstrate a judge wedded to the notion that courts apply exiting rules and rarely make new ones.
In an important sense, this approach is pro-business, not because businesses are more likely to win, but because businesses thrive when legal uncertainty is controlled and minimized. Legal certainty enhances business planning and reduces business risk, encouraging capital investment. It is the predictability he will add to Supreme Court business opinions that is pro-business.
The Yale Endowment
Ben Stein has written an amusing two columns in the NYT on the Yale endowment. In his first column Mr. Stein, a Yale Law School graduate, noted that the widely successful Yale endowment had made an over 9 percent return last year (the market lost 15) and was worth somewhere in the neighborhood of $16 billion.Article He also mentioned the healthy salary of the endowment director, David F. Swensen, a salary ten to fifteen times that of the President of the School. He wondered why any alum would contribute to such a fund -- contributions would only be a "drop in the bucket." Well, the Yale public relations machine struck back and in Sunday's NYT Stein capitulated ...
He recanted, noted his memories at Yale, the importance of his education, and that "loyalties transcend economic theory." He also noted that Swensen was "if anything, underpaid." He ended by saying "I'll keep giving to Yale, and with a full heart..."
Too bad. The argument is that our major universities are running hedge funds with contributors' money. The hedge funds are dominating the universities' planning priorities and corrupting their function -- not unlike like big time football programs. The money should be spent, principal and all, on the universities' educational functions and mission. It should not be hoarded to grow over time with its income dribbled out into the operating budget. These multi-billion dollar endowments that are managed to grow in perpetuity, rivaling the gross domestic product of third world countries are an embarrassment. In this regard, the Yale Music School has used its new 100 million dollar grant to simply waive student tuition.
The educational function of universities is being corrputed by professional athletic programs, by long-lived research partnerships with private industry, and now by internal hedge funds. At some point teaching undergraduates will be just a nuisance.
Why did Mr. Stein change his tune? The Yale network of alumni, which is a very valuable one, has its own enforcement mechanism.
Diversified Companies: A False Hope
A new study by David S. Scharfstein, a finance professor at the Harvard Business School (copy) studies the performance history of conglomerate companies. He found that managers of conglomerates mis-allocate capital resources, investing in all their divisions when some should be favored and others starved. He calls the phenomena intra-firm "socialism." His study supports earlier studies that have found that conglomerates under-perform the stock market over time. The studies support the recent efforts of management to divide companies to unlock shareholder value. E.g., Cendent.
Activist Shareholders Appear to Have Killed VNU/IMS Deal
Posted by Bill Sjostrom
In May of this year, VNU NV, a Dutch information and media company, announced it was acquiring U.S.-based health care data provider IMS Health Inc. for 5.8 billion euros (approximately $7 billion) in cash and stock. VNU’s CEO described the deal as follows: “It is a perfect fit of two strong and related marketing information companies. The strong strategic logic to the deal is compelling and there are meaningful synergies that will allow us to accelerate earnings.” Many VNU shareholders, however, do not agree.
VNU shareholder approval is required to close the deal. However, shareholders representing 48% of VNU shares, including Templeton Global Advisors, Fidelity Investments and Knight Vinke Asset Management, have informed VNU that they will vote against it. VNU thus assumes it will be unable to get the necessary shareholder approval and therefore has been in talks with IMS to mutually terminate the deal. According to the W$J, in exchange for agreeing to a termination, IMS is “asking VNU for a payment of tens of millions of dollars to cover expenses incurred arranging the acquisition and damage to the company's reputation for backing out of the deal.” VNU is not keen on this given it can walk from the deal without paying a termination fee if it fails to get the requisite shareholder approval. VNU, however, would rather avoid putting the deal to a vote “because it would be embarrassing for a company's acquisition plan to be rejected by its own shareholders.” But isn’t the cat already out of the bag? It doesn’t seem to me that a formal shareholder rejection would add to the embarrassment. VNU should suck it up and save the eight figures.
Click here for a Reuters article.
Guidant to Sue J&J for Specific Performance
In a press release this morning, Guidant (GDT) has announced that it will file a lawsuit today against J&J (JNJ) seeking specific performance of the merger agreement, i.e., a court order that J&J close the acquisition. As discussed in earlier posts (here, here, here and here), J&J has sought to negotiate a lower price for Guidant following a Guidant product recall, government investigation and lawsuits, claiming these developments constitute a "material adverse effect" allowing J&J to pull out of the deal. Under the merger agreement, the deal was to have closed Friday.