Archive for May 2007

Austan Goolsbee Is No Longer In Love With Warren Buffett

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warren buffett.jpgA long time ago NYT writer Austan Goolsbee had a thing for Warren Buffett, and for Berkshire Hathaway. In a “moment of weakness,” he bought one Class B share of BK. Oh, what a beautiful, moving, fulfilling day that was. One for the books, as they say. Why did he do it? Because he believed in Mr. Buffett and in Berkshire Hathaway, a “mutual fund but without the bad incentives.” Buffett was this great, wonderful man in Goolsbee’s life, who didn’t do things at the expense of shareholders. If one person, a God among plebes had the ability to beat the market, it was the beacon of light shining bright from Omaha. But you know how these things go: to shit.

Well, I still own that share, but it hasn’t worked out as well as I had hoped. My share has underperformed the S.& P. 500 since I have owned it. My colleagues have mocked me incessantly, but I have remained a closet romantic, hoping that Mr. Buffett would renew his secret formula and prove my colleagues wrong.

From there, it’s downhill, and fast. One minute you’re picking out curtains, the next it’s, “No, those in fact are not my underwear, and I’d be interested, thrilled even to know who they belong to.”

Then I found out that the 76-year-old Mr. Buffett had asked for applications from people wanting to become his successor. Many hundreds applied. So at the annual shareholders’ meeting in Omaha this month, he announced his new search strategy: rather than decide from old-style résumés and interviews, he planned to choose three or four top candidates and then give each $5 billion or so to manage and see how they do. The winner gets the job.
When I heard about this, the romance died. For all of Mr. Buffett’s reputation as the ultimate nonmutual fund, he may have just fallen into one of the biggest mutual fund traps of all — forgetting how incentives affect fund managers’ behavior.

Then it gets ugly. Really ugly. Don ugly.

On the show, Donald Trump would fire someone from the team that earned less money, whether $1 less or $1 million less. That gave the contestants an incentive to do crazy things for the camera. But it’s no way to pick an investment manager.
The whole benefit of Berkshire Hathaway was that Warren Buffett’s investment choices weren’t driven by the kinds of crass manager-level incentives that seem to pervade the mutual fund business. By announcing he intends to pick a manager through a contest, Mr. Buffett will have transformed the ultimate nonmutual fund into something very much like a mutual fund. It’s a move straight from the playbook of The Donald himself.

In a show of support, Carney even considered withdrawing his application for a second, to send a message to Buffett that this is not how you treat people you love. (But then he remembered his boyhood dream of living in Omaha and decided against it. Can’t really blame him, either).
‘The Apprentice: Omaha Edition,’ Starring Warren Buffett [NYT]

    The “Those Who Fail To Learn From History Award” goes to…

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    Home Depot shareholders, who rejected proposals to more closely regulate executive pay and split the CEO and chairman positions. The directors up for election, however, were approved by a landslide. From the Wall Street Journal:

    Chairman and Chief Executive Frank Blake said directors were each elected with at least 67% of the votes cast by shareholders, based on preliminary vote totals. Nine shareholder proposals were defeated, with the one getting the most support — an effort to require the board seek shareholder approval of extraordinary retirement benefits for executives in the future — garnering 44% of votes cast.

    Despite affirming the doom and gloom scenario for this year (the low end of a projected 4%-9% decline in earnings with flat sales), Home Depot insists that its fortunes will change any minute now (minus any more unseasonably cold Aprils). In fact, 5% sales growth and 10% earnings growth is just around the corner, according to management (waiting for the ink to dry on those retirement packages that don’t have to be approved). How will the company achieve such stellar growth after such a long period of stagnation? Blake responds:

    It’s gonna take money, a whole lotta spending money. It’s gonne take plenty of money, to do it right. It’s also gonna take time. A whole lot of precious time. It’s gonna take patience and time, to do it, to do it, to do it, to do it, to do it, to do it right.

    Blake didn’t give much detail here. In fact, the new proposition places Home Depot firmly in Phase 2 of the official Underpants Gnome business plan (Phase 1: Collect Underpants, Phase 2: [silence], Phase 3: Profit!).
    Home Depot Shareholders Elect Directors, Reject Pay Proposals [Wall Street Journal]

      • 24 May 2007 at 1:54 PM
      • Bancroft

      Murdoch To Throw In An Extra 5 For Dow Jones?

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      murdoch-770566.jpgOn Monday, Pali Research said Rupert Murdoch would “walk away” from his $5 billion bid for Dow Jones after not winning the support of the Bancroft family in a measly three weeks. Analyst Jeff Greenfield wrote in a note to clients, “We suspect News Corp. will officially announce the termination of its acquisition announcement over the course of the next couple of weeks and leave Dow Jones to fend for itself,” a conclusion he came to not by inside information or anything but just, you know, a feeling he got. All over in less than a month. Just like that.
      Today Deal Journal throws a wrench in the “Eh, I’m Bored With This, says Rupert” theory with a report by Citigroup analyst William Bird. According to Bird, there’s a 65% chance that Murdoch will raise his bid to $65 and it will be accepted. We’re pretty sick of this tale, as are, it would seem, many of you, but to anyone out there who hasn’t lost interest, tell us what you think. Or don’t. Carney’ll be around soon enough with a 10,000-word dissertation of his own.
      Could 65 be the Magic Number for Dow Jones? [Deal Journal]
      News Corp. May `Walk Away’ From Dow Jones, Pali Says [Bloomberg]

        • 24 May 2007 at 12:14 PM
        • M&A

        Upper Deck offers Ken Griffey Jr. rookie card for Jerry Koosman

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        From DealBook:

        Topps, the baseball card maker, said on Thursday that it has received a new, unsolicited offer from Upper Deck, as its rival hopes to best a rival bid by two private equity firms. Topps said that Upper Deck has offered $10.75 a share, which it will consider. The firms that Topps has already agreed to sell itself to for $9.75 a share — Madison Dearborn Partners and Tornante, an investment company run by Michael Eisner — have agreed to let the card company explore the offer.

        Topps is appeasing a couple of dissident board members who were previously worried that Topps wasn’t exploring the highest offer in agreeing to the PE bid. Other Topps board members are worried that Upper Deck may not be able to muster the financing for its most recent proposal.
        Upper Deck Enters Fray for Topps [DealBook]

          New Gravity Added to Conrad Black Trial

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          trump.jpgYesterday, in a Chicago courtroom, prosecutors trying to take down press guy Conrad Black for racketeering brought an email into evidence that they believe stacks the cards against Mr. Black, sent from him to Donald Trump, prior to Hollinger’s 2003 shareholders’ meeting:

          “Dear Donald”, began Lord Black. “Could I ask a rather esoteric favour?” He continued: “Some of the [investing] institutions are engaging in an insurrection and I plan on a forceful rebuttal… If you were able to make a cameo appearance and put in a supportive word, I’m sure it would have an impact.”

          Does this prove guilt? Who knows. What we do know: Black got this great idea from close personal friend Dennis Kozlowski, who brought in Ken Lay (may he rest in peace…if he’s really dead…) to speak on his behalf when things were getting dicey with Tyco shareholders. (Koz had ripped it off from Stalin, who tried a similar tactic on the Soviets with the glowing recommendation of colleague Adolf Hitler).
          Trial hears how Black played Trump card to mollify angry investors [The Guardian]
          [Apparently the Don obliged and gave such a beautiful account of Black’s “tremendous management” that Melania was offered a spot with Hollinger’s board of directors, though in what capacity we’re unsure.]

            Two new Belles of the Billionaire Ball

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            Footbinding[2].JPG The old Tang Dynasty (618-907) may have been responsible for starting the practice of foot binding, but the new Tang Dynasty, 3,828 retail outlets strong, is responsible for binding women’s feet in pure comfort.
            Tang Yu, the chairman of Belle International Holdings, and daughter Tang Ming Wai are the world’s latest paper billionaires, controlling 34% ($2.9bn worth) of the leading retailer of ladies footwear in China. Belle began trading yesterday on the Hong Kong exchange. Shares of the company shot up by almost a third, giving Belle a $8.6bn market cap and culminating an IPO process that was 500 times oversubscribed. The IPO brings the number of billionaires in the world closer to that 1,000 mark (from 946 last year).
            Even though gals are not as shoe crazy in China (they only purchase 2.3 pairs of shoes a year on the Mainlaind, opposed to the 7.3 pairs a year of furry, pointy or jellied abominations American girls “need”), Belle International does considerable business, offering 300-400 new styles a year in several brands commanding prices up to $260. Spending $260 for shoes in China has to be the equivalent of something insane in the US with the lower cost of everything over there.
            Tang Yu is seen as a visionary of sorts, or at least one of the first people who realized that Chinese women would not always be wearing tightly bound ropes and cloths on their feet, kidnapped into villages (most sandals are built in-house) or aborted. Eventually these women, sans deformed lower extremities, would need shoes. Tang got a late start into the shoe game, starting in 1981 at the age of 46. His daughter went to UT-Austin with a degree in business administration, proving that even Longhorns can be billionaires if they just move to China.
            Belle IPO Makes Tangs Billionaires [Forbes]

              • 24 May 2007 at 10:38 AM
              • Bancroft

              Bancroft Family Member Speaks

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              murdoch-Img211954581.jpgYesterday a Bancroft clan meeting took place in Boston to discuss various ennui of the whole News Corp. offer-shtick (Will scantily clad pictures of the genetically blessed Murdoch spawn, Lachlan, be included in the deal? Were Rupert and Colonel Sanders separated at birth?). What transpired? As is the norm for this as-exciting-as-backdating story, a whole lot of nothing. Some people (William Cox Jr., his four children, who together control 15% of the family’s total Class B shares) didn’t even show up, though it didn’t stop them from weighing in on the situation. Christopher Bancroft said that he opposes the sale to News Corp., fearing that it would threaten the Journal’s independence. Viewed as an “influential” member of the family, with his two siblings, Bancroft controls roughly one-third of the family’s stake in Dow Jones, and is also one of the company’s sixteen directors.
              Yesterday Bancroft said that he’s “open to any situation that benefits the Wall Street Journal and Dow Jones and its shareholders. At the moment, I don’t see anything that would do that.” He added that he has a “strong emotional connection to the paper” and doesn’t want to “pull the rug out” on the staff, who he feels responsible for. Bancroft said that he even sent replies to letters from fifty Journal reporters (it’s unclear if these were actual letters or email letters but the sentiment is duly noted).
              Meanwhile, there’s a bunch of unexpressed anger going on within the family. Some—mostly the younger Bancrofts—feel they haven’t truly been included in the decision making process. The youth vote also wants to explore the idea of a third-party investor, as the question as been raised regarding whether or not Dow Jones can survive on its own. And of course there’s the heated debate over who should’ve been covering “Pinch” Sulzberger when he stole home during the Bancroft-Sulzberger Kick-Ball Jamboree of ’89. But that’s been brewing for a while, and doesn’t really have much to do with News Corp.
              Key Dow Jones Holder Cites Opposition To Murdoch Bid [WSJ]