Today’s WSJ contains excerpts of an interview with Austan Goolsbee, the White House’s Chief Economic Advisor. It contains a shocker. Goolsbee reveals himself to be the ultimate government micro business planner. Noting that firms are holding, “hoarding,” cash rather than investing he worries about takeovers. Buyout artists will takeover firms and force the firms to give the money back to shareholders — gasp — rather than spent it on internal growth. Translation: Look for more anti-M&A government rules or rules against “hoarding.” The reason firms are holding cash is that returns on investments do not make sense — there is too much government regulatory and tax risk. Moreover, shareholders, if they get cash, do not hold it in mattresses — they are investors too. Shareholder level investment may even be preferable to firm level investment because shareholder have more options in a fluid economy. His statement that “past waves” of M&A do not lead to job growth is incredibility crude. Many waves of M&A are restructurings of unhealthy firms outside of bankruptcy; some jobs may be lost (and fewer than the loses that would be in bankruptcies perhaps) so that new jobs in better structured industries can be gained.
GM Stock Trading Smells Funny
Am I alone or are there others who believe that the GM stock trading after the IPO last Thursday smells funny. Whenever the stock drops close to the $33 offering price, sharp buying picks up. Any failure of the price to beat $33 will affect the green shoe option, arguments about using a traditional the method of underwriting, and arguments about bailout losses. There are many, too many, who have an interest in the stock price holding above $33 to contain my suspicion. Moreover, after the media splash that China would buy GM stock, we find out that China has decided to only take 1% of less of the offering. There is manipulation in the wind. This, of course, adds to my suspicion, that the government will do whatever it takes to make GM profitable — bailouts of pension plans, tax subsidies, product subsidies, are already on the table.
The Missed Opportunity in the GM IPO
GM has announced that it will up the base price range by $4 and sell 30% more shares in its IPO scheduled for tomorrow. The company’s struggle to find the right price and sell the right number of shares suggest a missed opportunity. The largest IPO should have been run as a reverse Dutch auction, not though a traditional underwriter syndicate using 35 investment banks and two lead underwriters. As I write this, GM and Morgan Stanley are huddled in a room trying to figure out the correct price and correct volume. A reverse Dutch auction, in which anyone can bid for any amount at any price, with the seller choosing the amount to sell based on the number is could sell at any given price (the lowest price accepted is everyone’ s price) would minimize the price uncertainty. given the size of the IPO it is highly likely that GM will “leave less cash on the table” in an auction than in a traditional underwriting. Moreover, all those in the American public who wanted to bid, could. At present the American public is largely shut out of the initial placement and must buy in the secondary markets from the initial purchasers. The public paid to carry the company, which became theirs, and anyone in the public should be able to buy shares in the company.
Selling QE2 to a Skeptical World
The G-20 summit found our financial officers attempting to sell Bernanke’s QE2 program to a very skeptical audience. The audience, officials of our major trading partners, took the “looks like a duck…” approach: QE2 is aimed at devaluing the dollar so that the United States can export more and pay off its international debt with inflated dollars. To them it look like the opening salvo in both a trade war and a currency war. Our public officials spent much of their time denying these intentions. “Inflation is low; we are only keeping long-term interest rates down to simulate our economy.” They, of course, convinced no-one, including those in the bond markets. Long term interest rates are floating upwards.
Who Saved GM?
There has been an amusing disagreement in the editorial pages over whether Steven Ratner (the car czar) or Rick Wagoner (the ex-CEO) are responsible for the operating profits showed by new GM. Ratner published a self-congratulatory book on how his team saved the company, in part by firing Wagoner, and Malcom Galdwell responded by saying the the operating changes put in play by the fired Wagoner are the current reason for the company’s operating profit. Ratner replied and other pundits have weighed in on both sides. Ratner’s major claim is stock price. Wagoner took over when old GM’s stock was $30 and was fired when the stock was at $0. Gladwell’s notes that Wagoner cut the saving deal with the union’s on wages and put in motion the new car line that are at the core of the new GM’s net operating profits. Ratner was “just a finanical engineer” aided by bankruptcy rules that enabled him to reduce debt payments dramatically. The government (Ratner) provided the bridge financing, accepted the debts of GMAC, and called the shots on management during the reorganization. The bankruptcy judge went along. The debate poses the very serious questions of whether a straight bankruptcy would have been better and whether, given the government controlled bankruptcy, Ratner made the optimal calls. One thing is for certain–the procedural protections of bankruptcy normally in place were totally suspended by all involved.
GM IPO
The US Treasury invested $50 billion for 61 % of the new GM in 2009. In next month’s IPO, Treasury will sell enough shares to reduce its holdings to 43%. The sales price, $26 to $29 a share, will lock in a loss of $4 to $5.5 billion on the sale. Once the figures came out, the publicity around the sale, once trumpeted as a triumph of the bailout decision, became a bit more muted. Moreover, we have discovered that the government will give another $45 billion in tax breaks to the new GM, allowing the company “carry-forward” tax loses denied other similiarly situated companies. This reminds one of the “we paid off our government loans” argument made by a now departed CEO of new GM who failed to mention that the money to pay off the loans also came from the government. There is also, of course, the subsidy to the GM’s new Volt ($6,000 a car) and the benefit of shearing off from new GM and the bailing out GMAC (Ally), a major player in the mortgage loan crisis. The government’s painful efforts to label the GM “bridge loan facility” (“it’s not a bailout”) a success are sapping the government’s financial credibility.
Hands Loses Suit Against Citi
After a three week trial, the jury took only five hours (just enough time to get fed) to decide against Terr Firma, a private equity firm, and in favor of Citigroup, his investment banker. I was a show trial that featured two of the country’s best business trial lawyers and an old fashioned claim — fraud. Terra Firma claimed that Citi defrauded him when its investment banking head, David Wormsley, told Hand, the head of the fund, that Terra Firma had to bid high for a target, EMI. to avoid a competitive bid from Cerberus. Terra Firma acquired EMI in 2007 only to book huge losses when the international credit crisis hit a year later. Citi denied the charge and prevailed at trial. The case put much to light: 1) Citi’s ties to both clients and 2) the huge role reputation plays in the industry. When the EMI deal stalled, both the investment branch at Citi and Hand believed that their firm reputations were at stake were they not to close. Once Hand closed and lost his shirt, his personal reputation took a back seat to getting out of a crushingly bad deal. All agree that Terra Firma, suing its own investment bank, had blotted its copy book for financing in future deals. We shall see if the conventional wisdom is correct when a new Hand deal opportunity emerges and there is money on the table.
363 Sales in Bankruptcy
One of the casualties of the 2009 bailouts is United States bankruptcy law in Chapter 11. Chapter 11 provides a complex procedure for the reorganization of bankrupt companies. Once reorganized, the companies emerge as continuing operating businesses. An emergency short-circuit of the reorganization procedures is contained in section 363 of the Chapter. The section permits a bankruptcy judge to approve the sale of the company (or a major part of the company) to an outside bidder, with the proceeds of the sale distributed to claimants in a Chapter 7 style liquidation distribution. The government used the section in both auto bailouts, to sell Chrysler to itself, Fiat and the unions and to sell GM to itself, Canada, the unions and the secured creditors. In the Chapter 11 for Lehman Brothers, Barclay bought Leman’s United States broker-dealer subsidiary in a 363 sale. The risk, of course, it that a 363 sale, made in a rush, can under-value company assets. In a huge suit over the Lehman Brothers sale to Barclays, what is left of Lehman is now arguing exactly that — that Barclays got a steal, literally. The year following the Lehman sale, Barclays booked a $4.2 billion gain on the deal, a deal that was supposed to be a “wash” of assets and liabilities. The eventual outcome of the case will be notable not only on the facts of the deal but also on whether 363 sales should be so widely used in distress situations involving major american companies.
The Harvard MBA Oath
Harvard MBA students created an Oath and induced more than 4,000 people in 300 business schools to sign it. It was a crock: Each signers promises ” to act with utmost integrity…[and] will safeguard the interests of my shareholders, co-workers, customers and the society in which we operate.” The problem is obvious. How does the oath fit in with the shareholder primacy principle that shapes the fiduciary obligation of corporate managers in the United States? The principle has legal sting and a strong ethical basis as well, all apparently unknown to Harvard students. Well…. the drafters of this feel good nonsence have quietly changed the language to omit “co-workers” and “society,” major changes and all unexplained. Do Harvard students no longer care about society and workers? I hear that the language has quietly “evolved.” You bet, it was simplistic and embarrassing for Harvard students to be peddling in the first place and they have 4,000 sucker signers.
Fraudulent Transfer Allegations in LBOs
One could be excused from thinking a few years ago that fraudulent transfer attacks on LBOs had all but gone the way of the dinosaur. The use of “solvency opinions” by reputable analysts to support the deal price and the strong incentive of the LBO buyer group to insure the solvency of the surviving entity would seem to protect deals from fraudulent transfers attacks when a company deal does fail after an LBO deal. Now we hear that such a claim has surfaced in the Tribune Company Chapter 11 proceeding. A special examiner’s report concludes that there is evidence for concluding that the second stage of the buyout is vulnerable to a fraudulent tranfer claim. The buyout itself was wacky. Sam Zell concocted an Employee Stock Ownership Plan buyer, threw in a bit of cash, and took a 15 year option on 40% of the company. The deal was a stretch from the start and the employees in the ESOP should have rejected it. In any event, if the claim prevails, the company in bankruptcy will clawback the cash paid to the previous owners, including Chandler family. The case signals a rebirth for the previously discredited fraudulent transfer allegation in LBOs.
Financial Watch 