August 22, 2008
OBAMA and the Ohio Mandatory Sick Days Citizen Initiative
Governor Strickland's failure to head off a citizen's initiative on mandatory sick days for Ohio workers will put Obama in a bind. If the initiative passes a citizen's vote, Ohio businesses with over 25 employees must give their employees a significant number of paid sick days, whether they are sick or not. Ohio business makes the point that it would disadvantage Ohio businesses in their competition with businesses from other states--their costs would be higher. They all note that it would discourage new businesses from locating in Ohio. The Governor, a Democrat with a labor voting base, was conflicted on what to do -- he knows that Ohio business representatives have a legitimate point. Initially he attempted to negotiate a "middle ground"; he failed. Now he has fallen on his sword -- publicly opposing the initiative. What will Obama do? He also has a labor voting base, many of whom will turn out to vote in favor of the initiative, does he also oppose the initiative? Probably not, but this would pit him up against Governor Strickland, the leading state Democrat. McCain will oppose it, no doubt, and it will help turn out his supporters. Obama is in a pickle here -- and its a swing state to boot.
Ohio Democrats and DHL
If the democratic leadership of Ohio is fully intent on saving Ohio jobs by convincing DHL to continue to use its Wilmington hub for air freight and not just doing political grandstanding, the governor, Lt. governor, and attorney general ought to ask Congress for an emergency repeal of the statute that prohibits DHL from owning operating an air freight company. Then DHL could buy 100 percent of ABX and ASTAIR and stay in Wilmington and the jobs would stay in Wilmington. DHL would not have to contract out its air freight business to anyone, much less UPS. This would make more sense than castigating DHL and threatening to sue them in frivolous "side-show" lawsuits. Oh, I forgot, the Democrats in Ohio do not want foreigners to own Ohio based companies. My bad.
August 20, 2008
Ohio and DHL: A CaseStudy in Why Ohio Is Losing Business
The political leaders of Ohio met yesterday in Wilmington to plan on how to stop a deal between DHL and UPS that would effectively close a local air freight facility that employs 8,000 people. In the run up to the meeting Ohio officials have 1) pleaded with DHL not to do the deal ("come see beautiful Ohio"), they have threatened state based antitrust ligation (Attorney General Rogers has issued a "hold documents" letter), and they have attempted (through official letters) to get others, the federal government and the EU, to sue on antitrust grounds. If one wonders why Ohio has slipped from an economic powerhouse to an economic also ran -- this classic Ohio response provides strong evidence of an answer.
How did we get into this mess? And what are these efforts going to accomplish? Are we helping Wilmington? Each question is answered in turn below.
The history of DHL's ownership of the Wilmington Air Park: In 2002 there were three big players in the domestic air freight market: the United States Post Office, FedEx, and UPS, each with close to a third of the market. A fourth player, Airborne Express, based in Seattle, was struggling to break into the market. Prospects were marginal; It had just laid off 2,000 workers. DHL, owned by the German Post Office, was a successful worldwide air freight carrier and wanted a part of the North American domestic market. How to get in? Obvious -- buy the struggling fourth place carrier, invest billions in upgrades and compete with the big three. So DHL bid for and bought Airborne Express over the objections of protectionists who did not want a Germany company buying an American company. A rider to a spending bill, sponsored by the infamous Senator Ted Stevens, prohibited any foreign controlled company from receiving any federal contracts. Immediately, FedEx and UPS challenged the acquisition arguing that other federal legislation prohibiting a foreign company from operating a commercial domestic air service in the United States. So DHL carved out the Airborne Express air freight service, ABX Air, and sold a controlling interest in its own domestic air freight service, ASTAIR, to domestic investors. DHL was left with airport hubs and truck pick-up and delivery services in the United States. But it could not fly packages; it needed to contract with someone to fly its packages. It contracted with ABX Air and ASTAIR to fly packages from its newly refurbished hub in Wilmington Ohio, moving jobs from a smaller hub in northern Kentucky. Local officials were ecstatic and gave the new airport some $40 million in tax brakes and expenditure subsidies. And DHL put $1.3 billion in cash into its North American operations. The operation lost money. At its high point it only had a nine percent market share as the big three continued to dominate. As loses grew for the next five years it faced a choice: get out of the domestic market or streamline costs. It has decided to streamline costs. First it considered having ASTAIR (it owns 49%) buy ABX Air to consolidate the two operations and get more control over air freight costs. ABX Air resisted successfully. Second, it decided to try a different air freight service -- UPS. This means that ABX Air and ASTAIR will lose their major client, DHL.
Why are we in the mess? DHL should have been able to run its own air freight operation. It was competing with vertically integrated companies and could not itself be vertically integrated. Our federal statutes are at fault. When it tried partial integration with the ASTAIR purchase of ABX Air, ABX resisted with local support. We have hobbled a German company attempting to compete with the big three American companies. And in Ohio, we tied ourselves to the German companies prospects to boot.
Ohio Officials Response: They want DHL to continue to use ABX Air and ASTAIR, not UPS. and keep the jobs in Ohio. UPS would move the jobs 150 miles south to Kentucky. It is raw self-interest. But what do the officials do about the fact that DHL is losing money in its North American operations. Our response, as noting in some of the comments: 1) Denial -- DHL is really making money; 2) Blame DHL management -- better DHL management could use Ohio vendors and make money; 3) Claim monopolization -- DHL is really trying to fix prices higher with UPS, a major competitor. All three responses are silly. 1) is false and 2) is likely false given DHLs success elsewhere and their problems with American protectionist statutes -- even if true would be up to DHL shareholders to correct, not the government. 3) is hysterical. First, this is consumer protection not job protection (the officials are using a "side show" theory) and, second, monopolization pricing only works if two competitors can control prices, which they cannot -- they do not have the market share. FedEx and the Post Office will eat their lunch if they raise prices. So we appeal to the EU to attack the deal, arguing that competition in the EU will be affected. You have got to be kidding -- this is a domestic market dispute.
What message to do the Ohio officials send to business investors? Ohio is the roach motel; we offer sweet smelling bait but once in you cannot leave even if you are losing money (we will starve you). If you attempt to restructure operations we will insult you and vilify you and sue you, using whatever bogus theories we can drum up in front of homer judges. Best advice to business looking to establish new facilities. Locate somewhere else. Our officials are seeking a short term political advantage (even if they do not block the deal they will have raised enough cane to ingratiate themselves to local voters) and sacrificing our long term economic health.
What should we be doing? 1) Accept the economic realities of the deal. Move to retrain local workers, provide benefits during the retraining, and bring in new local business. 2) Advertise an open business climate in Ohio that has low business taxes and gives businesses operational flexibility to respond to the demands of the market. And 3) resist statutes that stop foreign direct investment in the United States.
August 19, 2008
Hedge Fund Activity In a Bidder
On my final exam last semester the students were asked to advise a hedge fund that has purchased shares of a bidder in a control acquisition of a third party target. The hedge fund wants leverage to break up the deal. A current contest matches the problem. Harbinger Capital Management holds 16 percent of Cleveland Cliffs, an Ohio company, and wants Cleveland to abort a stock for stock acquisition of Alpha National Resources ($8.06 billion). Harbinger has a long position in Cleveland either in hopes that Cleveland itself will be bought (and the Alpha acquisition will diminish deal prospects) or that Cleveland's stock, which fell 3 to 5 percent on the deal announcement, will bounce back if the deal is aborted. I am betting on the former incentive rather than the later. In any event, Harbinger is threatening to buy more shares in order to hold a blocking position in the shareholder vote required under Ohio law for the majority share acquisition. Two-thirds of Cleveland's voting shares must ratify the stock for stock acquisition. The catch, Harbinger's acquisition of additional stock is hostile and could trigger three Ohio anti-takeover statutes -- the Control Share Act, the Business Combination Act, and the Control Bid Statute. Moreover, Cleveland could adopt a poison pill and hide behind the Ohio constituency statute. I suspect that Harbinger will ask other shareholders to vote no on the Alpha deal and it may even try a proxy solicitation to block the deal. The threatened stock purchase may just be an initial public notice to other shareholders that it believes a no on the deal would maximize share value.
Delaware Supreme Court On Shareholder ByLaws
The Delaware Supreme Court has issued it opinion on shareholder sponsored bylaws in response to a certified question from the SEC. The certification procedure is slick, allowing the SEC, when applying its inappropriate under "state law" exclusion in letter rulings on SEC Rule 14a-8 shareholder resolutions, to ask the Delaware court for an opinion on what state law in fact is. The opinion, CA v AFSCME, is a mixed bag. the opinion limits shareholder initiated bylaw amendments to those that are "process-creating." Any substantive decisional directions must be contained in amendments to the certificate of incorporation, which requires initiating resolutions by a board of directors. The line between process and decisional is elusive, however, and the Delaware court appears to define "process-creating" narrowly. In the case, a board's decision to reimbuse shareholders for proxy expenses cannot be controlled by a blanket rule in favor of reimbursement. What of a "presumption" in favor of reimbursement if insurgent shareholders get over 15 percent of the vote? Is this process or substantive?