Thursday, June 17, 2010
As previously announced, AOL Inc. (the “Company”) has been exploring strategic alternatives for its Bebo, Inc. (“Bebo”) subsidiary including a sale or possible shutdown. The Company has completed this process and is today announcing the sale of substantially all the assets of Bebo to an affiliate of Criterion Capital Partners, LLC.
The Company currently anticipates that following this transaction it will treat the common stock of Bebo as worthless for U.S. income tax purposes. The Company’s current U.S. income tax basis in Bebo is approximately $750 million. As a result of the anticipated worthless stock deduction for the common stock of Bebo under U.S. income tax law, the Company expects to record a deferred tax asset and corresponding benefit to its U.S. income tax provision in the second quarter of 2010 in a range of $275 million to $325 million. The Company’s tax conclusion with respect to the common stock of Bebo is subject to examination by the U.S. Internal Revenue Service. Additionally, given the recent volatility in the Company’s stock price and disposition activity, the Company will be required under generally accepted accounting principles to test the goodwill of its sole reporting unit for impairment in the second quarter of 2010.
AOL/TimeWarner acquired Bebo for $852 million in March 2008. As part of the recent spin-off, AOL was holding Bebo on its books for the full value Now, it's written it down to zero. Ouch.
Although AOL hasn't disclosed the sale price, Bloomberg reports that AOL got only $10 million for Bebo.
Gillian Tett at the FT.com points to some early stage research by Hamid Mehran at the NY Fed that challenges whether it makes sense to compensate managers of banks/financial institutions with equity incentives. The problem stems from the typical capital structure of financial institutions vs other firms. Financial institutions tend to have 90-95% debt on their balance sheets while non-financial institutions have lower debt ratios - 60%. Given the high levels of leverage at financial institutions, Mehran and his co-authors argue that there is reason to believe that when bankers are compensated with equity they will chase riskier investments. All this suggests that equity-based compensation may not be a one-size-fits-all approach to inncentivizing managers. Mehran et al suggest tying compensation of banking executives to CDS spreads as a way of address the quality of their lending. Interesting. I'm looking forward to reading the paper.
Wednesday, June 16, 2010
The typical argument that one hears from managers seeking to beat back a hostile acquirer is that corporate culture is important to generating shareholder value and only by remaining independent can managers assure preservation of that culture. The experience of Zappos is a twist on that. (What's Zappos? Believe me if your students are using their laptops in class, I guarantee you at least one of them has made a shoe purchase at Zappos while you drone on about fiduciary duty this, fiduciary duty that...) In any event, Tony Hieh, CEO of Zappos, shares his story in the current issue of INC Magazine in the story Why I Sold Zappos. Under pressure from his VC backers to go public and change the corporate culture in ways that Hsieh felt would be bad for business, Hsieh sought refuge in a sale to Amazon. It's an interesting peek into the boardroom of a successful start-up and worth taking a look at.
You'll remember that state anti-takeover laws received a little bit of attention after Guhan Subramanian et al posted their paper, Is Delaware's Anti-takeover Statute Unconstitutional: Evidence from 1998-2008, asking the same question in the Spring. They suggested that it might not withstand a challenge as it currently stands. Stephen Bainbridge recently a posted his 1992 paper, Redirecting State Anti-takeover Laws at Proxy Contests, evaluating the constitutionality of state anti-takeover laws. His earlier paper concludes that these state laws should survive constitutional challenge.
Tuesday, June 15, 2010
A couple of people have (independently) asked me recently whether or not I thought the recent build-up in cash on corporate balance sheets suggested that a new merger wave is around the corner? Sadly, I think not.
We've had a number of "merger waves" in our history - late 1890s, the 1920s, the 1960s, the 1980s, and the more recent credit bubble wave. In all these waves of merger activity, businesses were riding stock market booms, credit was cheap, and boats were rising for everyone. A rising economy can cover a lot of sins so why in those circumstances shouldn't a manager seek to expand through an acquisition. But what's happening now is fundamentally different.
Firms are hoarding cash because they're still scared. It wasn't all that long ago that managers woke up to the realization that the lines of credit they used to fund payroll might not always be there. That's a scary thought. Even scarier, Europe has been teetering on the edge of economic collapse for months with no end in sight. Add to that an environmental catastrophe in the Gulf of Mexico that appears to have no end. In response, firms have been rightly putting away cash (BW 2009 on this question) Times are definitely uncertain.
Now, that doesn't mean that all that cash isn't burning a hole in someone's pocket and that we're not going to see opportunistic add-ons or consolidations. Of course, that's going to happen. There are always going to be those - like Andrew Carnegie - consolidate when targets are in distress. Though with acceptance of takeover defenses, the hostile tender offer and the market for corporate control are not quite what they used to be.
So while there will continue to be acquisition activity, what's not going to happen is that the "party" is not going to get started again anytime soon. Acquisition activity of that type tends to ride on the coat-tails of other good economic news. With a paucity of good news out there right now, there's no reason to think that acquisition activity will lead us out.
Sunday, June 13, 2010
So it looks like the Rams ownership situation is moving along. When last we checked, Stan Kroenke was trying to manage the cross-ownership restrictions that would prevent him from completing a purchase of the NFL's St. Louis Rams. At the time, the scuttle-butt was that he might transfer one of his conflicted interests to his wife. Multiple sources (here, here, and here) are now reporting that he will sell his interest in the NBA's Denver Nuggets to his 30 year old son, Josh in order to begin the process of removing the cross-ownership conflicts that prevent him from acquiring the Rams.
According to the Denver Post, NBA Commissioner David Stern has positive things to say about the move:
NBA commissioner David Stern said his league has not received anything official regarding Kroenke transferring ownership of the Nuggets to Kroenke's son. Stern said a transfer of ownership would have to be approved the NBA's board of governors.
"I know (Josh), I know the family — very smart business and basketball family," Stern said. "I know he's deeply involved in the basketball side of the (Nuggets') operations. I know he also worked (an internship) at the NBA and worked in a number of departments, seeing what the business of basketball is about."
A native of
"He's very business savvy," said Nuggets star Carmelo Anthony. "As an owner, it'll take some time for him to learn everything. But eventually, I think he'll become a great owner."
The fate of the NHL's Avalanche has yet to be announced, but I suppose it wouldn't be too wild a guess to assume that Josh Kroenke will get the Avalanche as well.