Business Law Prof Blog

NYSE Merger

The Wall Street Journal today wondered, in a story by Ian McDonald, Aaraon Lucchetti, & Alostair Mac Donald, "Will the NYSE's Colossal Merger Help Investors?" It's the right question.  The NYSE Groups is attempting to merger with Euronext NV, itself the product of a merger of markets in Amsterdam, Paris, Lisbon and Brussels.  This simple answer is "they do not intend too buy may anyway by mistake."  NYSE is attempting to create a one stop trading market and will get there by merging with rivals and price cutting those rival it cannot merge with.  Eventually the NYSE hopes to become dominant and its prices will rise.  At issue is whether the barriers to market entry, once the NYSE becomes the dominant market, will be high or low.  If high, the NYSE is sitting pretty;  if low, the NYSE will find itself with new competitors.  The key to the barriers to entry will be the regulations of the SEC, which in the past and until recently, have favored the NYSE.  The NYSE has been a very effective political, lobbying organization with the SEC and Congress, protecting its position.  That is Grasso's claim to fame.   

Taxing Executive Compensation

Congress passed a tax law in the 80s that capped a firm's deduction for executive compensation at $1 million.  They all added an exception for performance based pay. Gretchen Morgenson's article in today's NYT is the result ("Big Bonuses Still Flo, Even if Bosses Miss Goals").  Companies has used the performance based pay exception very generously.  First, companies set very low goals (if stock price drops only 10 percent an executive makes another $2 million).  Second, companies use very loose definitions of performance (the many factor text) enabling a compensation committee to find some reason to grant a bonus.  The bonuses become routine -- a part of the salary.  And third, as in the case of Las Vegas Sands Corp., the committee awards bonuses without any pretense of considering the performance standards at all -- an extreme version of two. 

Congress needs to revisit the tax statute and tighten it up the performance pay exception.  The performance benchmarks that are acceptable need to be set ahead of time with a minimum of board discretion later.  I would also be in favor of a tax surcharge on an executives that recieve salary in any form (options and stock grants included) that is not deductible to the granting company.

Deloitte & Touche Approved Back-Dated Options??

Micrel Inc. granted compensatory options to executives and set the exercise price at the lowest stock price over a thirty day period after the approval of the grant.  They back-dated options.  The company claims that its auditor, Deloitte & Touche, approved the practice.  Many of the compensation schemes would not be done if not cleared by accountants and lawyers.  Those doing the clearing need to face penalties, apparently, to rediscover their professional standards and obligations.

Utility Company Mergers

It had to happen.  Congress repeals the Public Utility Holding Company Act of 1935 that prohibited large utility companies and utility companies are racing to merge.  Mirant Corporation, bankrupt in 2003, now owns 24 power generating plants in California and the Northeast.  Mirant is attempting a buyout of NRG Energy for $7.8 billion.  NRG , a New York company, has itself been buying up companies in Texas.  It is like the proverable fish eats fish eats fish diagram.  Some of the mergers are driven by cost savings and some by wishful thinking.

Paulson New Treasury Chief

The reporting of Paulson as the new Secretary of Treasury trumpets his ability to be a better "cheerleader" for the Bush economy.  I hope this is not the reason for his appointment.  Bush officials are dismayed that an economy with good growth and low unemployment is not showing well in the polls.  Bush's job approval ratings are low and specific polls are troubling: Consumer confidence polls are dropping and job expectations numbers are also down.  The concern of Americans is real and correct.  The pubic understands that the economy rests almost solely on the American consumer and the American consumer is running out of money (or has run out of money and is now running out of credit). We are in for a rough patch and the public knows it. I hope that Paulson will be less a cheerleader and more a sound strategist.

Three General Counsel Caught in the Options Back-Dating Scam

I posted earlier a remark that the options back-dating scam would often need the aid of lawyers.  Lawyers prepare the documents for compensation options grants and then prepare the disclosure documents for the SEC.  The heavy involvement of lawyers makes their claims of ignorance at bit too, well, deliberate.   So far 15 senior executives and directors have lost their jobs as the result of internal investigations of back dating-options.  Three of the 15 are general counsel.

Wal-Mart

Wal-Mart is the world’s biggest company by sales.  Its sales for fiscal year 2005 were over $312.4 billion.  Wal-Mart now has over 3,800 stores nationwide. In America there are more Wal-Mart employees (1.3 million) than high school teachers.   

The company’s competitive advantage is its sheer efficiency – it is a superbly run organization that sells products for less than anybody else can. 

Why is such a successful company, an employer of millions, so controversial?

    Several communities have voted to keep Wal-Mart stores out on the grounds that the stores destroy local shopkeepers.  Others claim that Wal-Mart pays parsimonious wages. The State of Maryland has passed legislation, aimed at specifically at Wal-Mart, that requires large, non-unionized retailers to spend a minimum amount on health-care benefits.  Banks are fighting Wal-Mart’s request to offer its own, inexpensive personal credit card.

The rhetoric gets heated. In the language of the street, Wal-Mart is a “modern day plantation” paying “slave wages.”

The “Wal-Mart effect” is the subject of three new books and a documentary film.  Two of the books and the film are harshly critical.  The title of the book by Anthony Bianco, The Bully of Bentonville: How the High Cost of Wal-Mart’s Everyday Low Prices is Hurting American, sets the tone of the criticism.  There is a high social cost to Wal-Mart’s low prices.   

Behind the charges, data is scarce.  Here is what we know to date.  A typical Wal-Mart store employs 150 to 350 people; the bigger “superstores”, which also sell groceries, employ 400 to 500.  The arrival of a store in a typical county destroys 180 to 270 retail jobs over what it employs.  A Wal-Mart associate does the job of 1.5 to 1.75 people at any rival. 

Yet a Wal-Mart attracts new retailers that take advantage of the increased customer traffic and the new retailers create new jobs.  The retailers set up across the street and put out “workers needed” signs.  Estimates of the average new job creation around a single new Wal-Mart store exceed the number of jobs destroyed by the store by close to 100.  In other words, there is a net gain in jobs, not a net loss.

Do Wal-Mart’s pay “slave wages”? A new study by David Neusmark and co-authors (Public Policy Institute of California) estimates that a Wal-Mart store reduces per worker retail wages by only about 1 percent. 

On the positive side, what Wal-Mart saves in efficiency, lower payrolls, it passes on to consumers in prices.  A Wal-Mart store in the area slashes one’s shopping bills, even if a shopper never shops there. 

Emek Basker, an economist, estimates that the price of goods such as toothpaste, shampoo, aspirin and laundry detergent fall by 7 to 13 percent in the five years after Wal-Mart’s arrival in a city.  The Economist, the world’s best news magazine, reports that superstores return 25 cents back for every dollar spent on groceries, a average savings of $450 a year for a family.  The numbers on other merchandise, clothing, are larger still. 

The numbers will not silence the critics.  They know consumers save at Wal-Mart and the total employment and wage numbers will not satisfy. 

Wal-Mart is a lightning rod for a diverse body of social critics.  Some are suspicious of the deeply religious, white Protestant culture of the company’s leadership.  Others dislike capitalism, the profit motive, and the regimen of financial efficiency.  Yet others fear size or the “not from around here” nature of the business.  There is an odd “do they really care about us” uneasiness about a business designed to give costumers’ exactly what they want at the lowest price.

Wal-Mart’s success has inevitably attracted social critics of American culture and economic system.  Wal-Mart is best, the most successful, at prospering in this system and therefore the most obvious target.  Wal-Mart will find no relief from such critics – until a better retailer comes along.