May 10, 2008
Wireless Deal Forms a New Blockbuster Company
On Wednesday, Sprint Nextel and Clearwire agreed to combine their wireless broadband businesses in a $14.5 billion deal to form a new communications company. The new company, which will be named Clearwire, will deploy the first nationwide mobile WiMax network. This is a major move in the wireless market.
May 8, 2008
The Government "Fix" of the Student Loan Mess
Congress has decided to "fix" the student loan mess by purchasing those student loans that it guarantees against default (technically the guarantee is only for 90% of the default). Direct government lending now accounts for only 22 percent or so of total student loans. The argument is that the purchase money will go to banks who can make more loans. There are multiple problems: 1) many lenders have left the market leaving only one -- the government chartered Salle Mae corporation. Salle Mae has close to 80 percent of the guaranteed federal loan market. Salle Mae is a) losing money and b) very poorly managed. If Salle Mae continues to struggle we will have another call for a federal bailout. and 2) underappreciated, greatly underappreciated, is the problem the federal government will have managing a complex loan portfolio. Guaranteeing loans is one thing, managing loans is another. My guess is that the government will outsource the loans and pay a management fee to a company that the government does not monitor. [E.g., Blackstone's job of handling the sub-prime loans picked up by the government in the government brokered Bear Stearns deal.] This is not a solution folks.
Plaintiff's Securities Lawsuits
Plaintiffs lawyers who have filed class action securities suits relating to the sub-prime loan crisis face Congressionally mandated higher pleading standards. The standards were a crude attempt by Congress to stop an acknowledge problem in the United States - an excess of securities class actions. But plaintiffs lawyers are also complaining about a recent Supreme Court case that establishes clearly what was or should have been the law for some time, that plaintiffs must prove causation -- the acts complained of caused damage. The press blames the Supreme Court for "higher" bars to recovery. In truth it is 1) a Congressional statute and 2) a long history of required causation that will test plaintiffs attorneys. I suspect that the press, gearing up for a political fight over court nominees, will slant its coverage of business litigation.
May 7, 2008
Yahoo's Deal with Google: A Takeover Defense?
Yahoo negotiated a strategic partnership with Google contingent on Yahoo staying independent (i.e. not selling to Microsoft). The deal lead Yang to demand a higher price, too high a price for Microsoft to pay. Shareholders of Yahoo can bring a derivative action on the deal. The argument: The deal is an anti-takeover device and subject to the "enhanced scrutiny" of the Unocal test. Evidence in support would be that the deal was with Google after the Microsoft bid and that Google was intent on blocking the bid. The problem: A target board can often meet the Unocal test requirements if it met and carefully considered the bid and had good arguments (that were not personal or quirky) for refusing to sell. Relief: The board would be personally liable for damages (which are huge and would test their D&O policy exclusions and limits). I doubt the court would order to Yahoo board to accept a lower price ($34) unaffected by the Google deal if Microsoft chooses to pay. The Court has the power to do so however.
Shell and BP "Retention Bonuses"
Shell and BP roiled their investors by announcing plans to pay huge, one-time ("one-off") "retention bonuses" to senior executives. They make no sense. A "one-off" retention bonus, once made, will not retain anybody once the bonus is paid. The bonus, to work, has to be paid over time and conditioned on someone staying over time. The Shell bonus is conditioned on staying until 2011, for example, but needs to be paid over time not "up-front." Even in a proper form (in pieces over time), the bonuses should be tied to performance and not unconditional once time in office is clocked in. They are an invitation to grant boondoggles.
Hedge Fund Investors Still Bullish
Despite selected academic studies showing hedge fund investors that the investments do not "beat the market," the hedge fund investors themselves disagree. The investors expect to put $200 billion in hedge funds this year and expect their funds to make 10% (with all funds to make 7%). The survey, conducted by the Deutsche Banks' hedge fund group, is of over 1,000 investors in 500 institutions, the largest in the industry.
May 6, 2008
"Say on Pay" a Bust?
Pundits have spent years, years, trying to get a shareholder vote on executive pay packages. Be careful what you wish for. First, shareholders have voted for some time on parts of executive pay packages (most option programs) and overwhelmingly supported them. Second, a no vote on a complex pay package carries much noise -- it is on performance, the details of the package? Third, as is in evidence in the Aflac vote on Monday in which 93 percent of the shareholders voted to ratify a $12 million pay package, shareholder routinely will vote yes. Yes votes make shareholder derivative suits harder to win.
Google used a carrot and a stick to meddle in the Microsoft bid for Yahoo. It state that it would fight the deal on anti-trust grounds and then cut a contingent deal with Yahoo to share valuable technology if Yahoo did not sell to Google. The technology deal emboldened Yang, the CEO of Yahoo, to ask Microsoft for $37 a share -- a price Ballmer would not pay. Now the press is all over the failed deal -- did Ballmer or Yang look more foolish??? Google looked smart.
May 5, 2008
Yahoo Successfully Blocks Microsoft Offer
Microsoft has withdrawn its offer for Yahoo. The Yahoo board demanded $37 a share and Microsoft only offered in the low 30s. The Yahoo board demand is cheeky considering that the Microsoft offer came on the heels of a four year low stock price of $20 a share. Look for Yahoo stock to drift down and for Yahoo shareholders to be left wondering whether or not they have missed the boat.
May 4, 2008
Ohio Has Elected a Buffoon as Its State Attorney General
Marc Dann is Ohio's Attorney General and he is a buffoon. We elected him on his populist rants and an anti-Republican vote stemming from corruption in then Governor Taft's office. He became the darling of the national media because he was the "next Spitzer" - the controversial ex-State Attorney General in New York who took on major played in the New York financial community. [Spitzer did a good job as Attorney General and then, as governor of New York, resigned over revelations that he hired expensive sex workers.] But, in some ways, Dann is not Spitzer -- Spitzer is smart. Dann's rants began to show an indiscriminate attack on anything to do with business and an appalling lack of economic sense. Anything successful in business was bad and deserving of attack. He ,for example, wanted to grandstand by going after out-of-state investment banks for the sub-prime mess (who securitized mortgage loans, a process he did not understand) -- the "big fish" when, as a state official, he should go after in-state mortgage brokers who misled in-state borrowers. He ranted about federal anti-trust enforcement, again without economic training or sophistication. A State Attorney General has to know who to got after -- he has limited resources and many potential targets. Good judgment is key -- Spitzer had it, at least in his prosecution targets, Dann does not. In any event, Dann is now in trouble for personal sexual indiscretion and for the sexual indiscretion of his top staff. His office atmosphere was incredibly crass and crude. He refuses to resign. Great. Unfortunately, being a buffoon or a bore is not grounds for impeachment.
The Markets and Sup-prime
The markets are correcting. Distress financial buyers of sub-prime mortgages from banks are getting distress prices and willing to work with borrowers to forgive loan terms to keep them in their houses. The market is clearing. The major problem is with borrowers who refused to return phone calls. Folks, the vast majority of the American population is financially illiterate -- it got us into this crisis and is now retarding getting us out.
Sup-prime and Governmnet Rationale Creep
An increase in mortgage defaults in the sup-prime market have hurt the country's financial institutions and, according to the press, hurt cities as abandoned housed devalue neighborhoods. Government, angry over abuse by mortgage brokerage agents of borrowers, has put programs in place to help "good" borrowers. "Good" borrowers were those misled by brokers into buying homes they could not afford. What happened. We have found that our programs of support are unused because there are not enough "good" borrowers so government creep sets in. That is, we now will help the "speculative" borrowers who knew they were buying risky homes and betting on increasing house prices to bail them out. Why help "speculative" borrowers? Because the government programs have support from the financial community and cities who want homes occupied and we would be better off if the speculative borrowers were bailed out -- government rationale creep. Sound familiar? Check out many, many other social engineering programs.