January 14, 2006
Relational Pursuit of Soverign Bank: Hedge Fund Activism Rebuffed
Hedge fund Relational yesterday stated that it would not attempt to replace the entire board of directors of Sovereign Bank but would only wage a proxy fight for two seats on the staggered board. Relational had been attempting to block Soverign's sale of 20% of its stock to Banco Santander Central Hispano arguing that the sale required a shareholder vote under NYSE rules. Sovergin intends to use the cash from the stock sale to fund the acquisition of another banks. The NYSE sided with Soverign (they should not have) and Relational announced that it would attempt to replace Soverign's entire board so as to fire the CEO (Sidhu) so as to block the stock sale. Sovereign has a staggered board, however, and other anti-takeover defenses. Relational's difficulties are a reminder that determined, protected boards can still hold out against hedge fund activism. The poison pill still stops takeovers of legal control (even though a "wolf pack" can get 30 percent or so); a staggered board still stops proxy contests for at least one year; and the business judgment rule still protects board decisions in court (if good lawyers have produced a proper record). Hedge funds attack with flash and thunder hoping their threats alone will cause boards to wilt; but It is a test of wills and a board with the will to defend, can.
January 13, 2006
Bidding for Guidant Continues
Guidant's board accepted Johnson & Johnson's raised offer of $68 a share despite Boston Scientific's higher offer of $72. Boston Scientific has raised its offer to $73 after announcing that it would not make money on its $72 offer until 2009. If J&J wants to compete it may have to make an offer close to the the $76 that it made last year and withdrew because of Guidant's product liability problems. J&J stock has been steadily falling since it announced the good news that Guidant had accepted its offer. On wonders how the J&J valuation analysts will justify the new higher values. Shareholders of Guidant will inevitably sue if Guidant accepts any J&J offer under Boston's $73. Perhaps the Judges will release J&J from all this.
Hedge Fund Investments Cool
As the new SEC hedge fund rules take effect evidence continues to emerge that hedge fund activity has slackened. Hedge fund returns are down, investor interest in funds is down and hedge funds are struggling to keep current investors from withdrawing their money. Today's WSJ reports that number of hedge funds that voluntarily report returns to trade databases is off 15%.
SEC May Sue Perry
The Securities and Exchange Commission has notified a New York hedge fund, Perry that the agency is considering an enforcement action against the fund's activities in the Mylan Laboratories takeover offer for King Pharmaceuticals. Perry bet on the deal by buying stock in King, the target. Another hedge fund led by Carl Icahn had stock in Mylan and sued the Mylan board to terminate the deal. Perry then bought stock in Perry in an effort to vote the shares in favor of the deal. Perry hedged its stock purchase in Mylan however so that Perry was not exposed to Mylan stock price fluctuations. Icahn then sued Perry, accusing Perry of illegal "vote buying" and the deal collapsed under the weight of all the litigation. Now the SEC is apparently accusing Perry of not fully disclosing the hedged position in Mylan in its section 13(d) filings. The moral of the story: vote buying has always been unpopular with regulatory authorities, even though some forms are not clearly illegal -- if you do it you had been disclose all the details.
January 10, 2006
The Fight Over Guidant
As everyone in the business community knows, Johnson and Johnson and Boston Scientific are in a bidding contest for Guidant. J&J has offered $21.5 billion and BS has offered $25 billion. The loser of the auction may be the winner. Guidant, stung last year by reports of defective products causing patient deaths, has seen its market share erode from 35 percent to 25 percent in one year and the erosion may continue. J&J has an opportunity graciously cede the field to BS, take a $625 million cash breakup fee and walk, and win.
Block Buster Accounting Rule Changes in the Works
The fight over expensing compensatory options was always a tempest in a teapot. It was the right thing to do and did not have the impact on firm stock values that high tech companies claimed it would. New changes on pension plan and health care costs, however, are the real deal; this is big. The FASB will first force firms to include the pension and health care costs in balance sheets, reducing shareholder equity, and second will force firms to use more accurate methods of valuing pension and health care obligations. Since many American corporations have older work forces and carry a substantial number of retirees in their health plans these developments will inevitable drop book value and shareholder equity ratios. Firms will look to be more leveraged. More accurate financial numbers are always good, but many companies, particularly the old line manufacturing companies that are already struggling, will take a substantial hit in their balance sheets.
SEC Delays in Implementing Rules
As reported in several earlier posts, the SEC has delayed imposing its internal controls audit rules on smaller publicly traded companies. Now the SEC has also delayed implementing is new rules on trading rules for the country's stock exchanges. I have been critical of the rules, which, among other things adopted a trade through rule for all electronic trading. This is a disturbing trend: The SEC passes controversial rules, underestimates their impact, and delays implementation while tinkering with interpretation. It is bad practice. Pass the rule with a near term, firm implementation date or reject it. Now passing a rule may be just another step towards full implementation that includes a reconsideration period.
The Debate Over Spin-Offs
The failure of the proposed Viacom split off to generate significant stock gains (and other similar recent failures) has some wondering whether the old established wisdom from academic studies still holds true. A decade old study by three Penn State professors from striking gains from 164 spin offs between 1965 and 1988. At issue is whether the gains exist under current market conditions. Investors now view many spin offs as radical restructurings generated by operating problems. Whether a restructuring will save an ailing business is subject to substantial doubt. It may be that share gains are more attributable to an increase in the likelihood that the split will make one or both of the resulting corporations a more attractive takeover target.
New SEC Action on Disclosure of Executive Compensation
The Wall Street Journal is reporting that SEC officials will soon propose substantial rules changes for the disclosure of executive compensation in proxy statements. Corporations will be required to give a total annual compensation figure for the five highest paid executives that includes salary, bonuses, options granted, restricted stock and perks. Corporations will also be required to detail golden parachute plans and the details of pension plans. This is a welcome (and long overdue) rule initiative. Those that claim senior executives deserve the high salaries for the value that they add to a company's operations have always hidden behind the obscure and convoluted way total executive compensation has been disclosed currently in public filings. If executives are worth what they are paid they should be able to defend honestly disclosed total pay packages.