At the Academy of Management’s annual conference in Philadelphia, Home Depot founder Kenneth Langone (pictured here with his scepter of lovemaking) was out to steal some of PE’s sunshine. Some of the more memorable quotes from his talk:
[PE] ain’t that complicated. We tend to mystify simple math.
People who invest in [PE guys], no one’s putting a gun to their head. They’re doing it to make a quick buck.
It’s kind of like sex – there’s nothing new about it.
[PE deals are a way to] get more juice out of a lemon.
Business Week’s story declines to mention whether Langone went on to say “PE guys bring home my money, take my money, give it to another man. Squeeze me PE baby, till the juice runs down my leg.”
Or even: “If there’s a bustle in your hedgerow, time to divest.”
The other speakers (the non-billionaires) were a bit more optimistic about private equity and what it does for companies, and have not delved as deeply into the mysteries of human sexuality as Kenneth Langone (reverse cowgirl deep, which granted doesn’t seem all that deep with modern equipment and training, but back in Langone’s day…).
The Joy of Private Equity [BusinessWeek]
Home Depot’s profit warnings yesterday didn’t do much to damage its share price–shares of Home Depot rose about 1% yesterday–probably because the company also indicated that it would be making a bigger than expected tender offer to buy back its own shares for somewhere between $39 and $44 per share. That’s the kind of “we’re looking out for our share price” action that analysts and investors like to see. It also helped that the company could explain away some of the lower earnings with the sale of its supply division for $10.3 billion, and everyone knew that this would hurt the numbers.
But the company also made noises about “weaker conditions in the housing markets” which some are saying helped push the dollar down against other currencies. The Wall Street Journal’s Market Beat blog noted that “the dollar also took a beating amid worry that weakness in the U.S. housing sector, which were renewed by Home Depot’s profit warning… The euro hit an all-time high of $1.3741, and the pound rose to a 26-year high of $2.0273. Europeans aren’t complaining, as the greenback’s pain is a gain for tourists from across the pond.”
In other words, investors think Home Depot’s got a good plan. But they think homes in general are screwed.
Four at Four: Bernanke + Subprime = Selloff [MarketBeat]
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]
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While it seems almost no-one is willing to defend ex-Home Depot CEO Bob Nardelli’s pay package, the criticisms of the pay package and his performance as CEO have certainly excited the business end of the internet. The latest is from Ken Lacroix, the D&O Diarist:
One question that needs to be asked is how much of what happened to Home Depot’s share price had to do with Nardelli and how much it had to do with where the share price was when Nardelli took over. As PointofLaw.com points out (here), Home Depot’s share price was already at stratospheric levels when Nardelli arrived.
But the more troublesome aspect of the criticisms about Home Depot’s share price is the clear implication that Nardelli would still have a job (although he would be $210 million poorer) if he had managed to get the share price to go up. It used to be the conventional wisdom that the market determined a company’s share price, not the CEO. Moreover, it has not been that long since corporate America faced a series of crises and scandals because too many CEOs seemed to think it was their job to engineer their company’s share price rather than to run their company. Corporate activists may be congratulating themselves for their “victory” at Home Depot, but they should be very careful about the lesson here. The danger, as pointed out on the ContrarianEdge blog (here) is that “the ousting of Bob Nardelli sent a wrong message to America’s CEOs : it taught them an incorrect lesson – manage the stock, not the company.”
Executive Pay, Shareholder Activism, and Board Duties [D&O Diary]
We’re not going to beat you over the head with defenses of gigantic CEO pay packages. Okay, we probably are. But not right now. We’ve done enough of it in the last couple of days. And we’re pretty sure you get the point by now that the populist outrage of CEO pay at public companies—combined with outsized criminal penalties for white collar criminal convictions, increasingly burdensome regulation and gigantic risks being shifted from the markets to chief executives and financial officers—is in all likelihood leading to a brain drain away from public markets toward private equity. And that this move itself leads to a shift in wealth away from private shareholders and the broader public to the wealthy few who can invest in private equity funds. You totally get all that already, right? Good.
So now we’ll bring you the other side. Greg Easterbrook does the math that shows exactly why people are so outraged at pay packages like ex-Home Depot chief Bob Nardelli’s.
Combining regular income, stock options, pension and a golden parachute, Nardelli received $274 million for six years of work. That’s $34,250 an hour. That’s about 3,000 times the hourly wage of a Home Depot worker. That’s $275,000 per day – five times as much per day as the typical American family earns in a year. Good management is of value to a company’s shareholders: skilled corporate officers should be well paid. But there’s a difference between “well paid” and something akin to looting. Why isn’t Nardelli’s $274 million, taken from the shareholders, simply viewed as embezzlement? Home Depot stock fell from $43 to $41 under his Nardelli’s tenure, a 21 percent drop when calculated for inflation. The CEO cannot control a company’s stock price, and excessive emphasis on stock price creates a temptation to cook the books. But it’s absurd to think that shareholders can get hosed under a CEO’s watch, and for that the CEO deserves $274 million. The Home Depot board offered Nardelli the terms that led to the $274 million. Boards of directors have a self-interest in overpaying CEOs, because many board members are themselves CEOs who know their own pay will rise if other CEOs’ pay rises. With Nardelli’s $274 million, CEO overpay has reached runaway levels. What the Home Depot board did was perfectly legal, and that in itself is a scandal. What the Home Depot board did was perfectly legal, and that in itself is a scandal. The word for what many public-company CEOs and their boards are up to should be: embezzlement.
TMQ’s Nightmare: Overpaid CEO Hosts Senator on Corporate Jet [ESPN.com]
We’re hardly in a position to make a big deal out of a blogging typo. As you well know, we make more than our share. It’s more or less in the nature of the beast: when you throw a dozen or so posts a day up on the interwebs, a couple are going to land funny.
But a strange error on Gawker this afternoon saw those kids using the word ‘defenestration’ as a synonym for, well, the waxing of one’s nether regions. They quickly corrected it after the error was pointed out on the etymology blog Wordhumper and in their comments section. (Well, kind of. They corrected it to “deforestation” which, true, is another “d” word but still doesn’t seem to be the one they are looking for.)
By coincidence we were once again writing something about Gretchen Morgenson’s Gasket Blower column when this typo was brought to our attention. And it made us pause for a moment, to reflect on how different the column would read if only ‘defenestration’ meant what the Gawkerites thought it did.
From Gret-Gret, sort of.
The surprising Brazillian waxing yesterday of Robert L. Nardelli, head of Home Depot and one of the nation’s most imperious and highly paid chief executives, was a victory for shareholders hoping to force corporate directors to be more accountable on the increasingly incendiary issue of executive pay.
We’re pretty sure if shareholder activists started tearing out the short-hairs of corporate executives that would indeed get their attention.
While Gret-Gret more or less blew a gasket over Bob Nardelli‘s exit from Home Depot–she describes it as a “watershed,” a “warning shot,” a “defenestration,” as an end to “arrogance”–slightly more sober reflection on the meaning of it all is going on across the interwebs.
Ted Frank at PointofLaw.com points out that when Nardelli took the Home Depot job, he had to leave behind millions of dollar GE stock options. What’s more, anyone who bought or held onto the stock after Nardelli was hired in 2000 knew or should have known about Nardelli’s severance package.
Economic theory teaches us that when a rare commodity with uncertain future value like an MVP shortstop or GE executive is subject to an auction, the winner of the auction will probably be the party that most overvalues the commodity: the concept of bidders’ remorse. And perhaps Home Depot overpaid for the privilege of hiring Nardelli. (Press coverage is sneering that the Home Depot stock price dropped during Nardelli’s reign, but, aside from omitting dividend payments, that drop reflects much more how bubbly Home Depot stock was in 2000, when it had a 46 P/E ratio. Nardelli doubled Home Depot profits; improved shareholder returns by repurchasing 10% of outstanding stock; quintupled dividends; increased the net profit margin; and the stock has been very profitable for those who bought it in late 2002.)
But, with a very few exceptions not relevant to this discussion, no one was forced to be a Home Depot shareholder. Someone could anticipate that large sums of shareholder money would eventually be paid to Nardelli on the back end when he was first hired. If one disapproved of the pay package Nardelli was destined to receive, there was a very easy solution: divest the stock, and invest in another company that did not bid on former GE executives to become their CEOs. (Of course, then one would have missed the huge profits in the run-up on Boeing stock.) Investors who think that GE experience created magical CEO abilities worth a premium in the marketplace were free to invest in Home Depot. Home Depot stock went up over 20% in December 2000, the month that Nardelli was hired: it would have been easy to sell the stock if one disapproved of the generous employment contract while the market basked in the glow of the hiring. No one paid Nardelli a dime who didn’t agree in advance to pay him that dime.
Vitaliy Katsenelson writes on his Contrarian’s Edge blog that the likely lessons of Nardelli’s departure for CEOs won’t be Gret-Gret’s favored lessons.
The ousting of Bob Nardelli sent a wrong message to American CEOs: it taught them an incorrect lesson – manage the stock, not the company.
As Herb Greenberg mentioned in his column, if Home Depot’s (HD) stock went up while he was in charge he would still have a job, though he’d be $210 million poorer.
Bob Nardelli was a terrible stock promoter (not his job), but he did a terrific job managing the company (his job). As I mentioned in the past, from the time Nardelli took over Home Depot in 2000, Home Depot’s earnings have grown at an amazing clip of 20% a year, revenues over 15%, net margins have increased and return on capital went up every single year. The stock has not gone anywhere during his leadership because it was grossly overpriced in 2000.
And, of course, it is this reluctance to become a huckster for a company’s stock that has led many managers to decide that maybe they’d fair better as a private concern.
Nardelli’s severance [PointofLaw.com]
Blame Home Depot’s Board, Not Nardelli [Contrarian's Edge]
Okay. Now that we’ve recovered a bit from our shock at reading that former Home Depot CEO BOb Nardelli was getting $210 million on his way out the door, we’ve got something a bit more substantial to say about it than the obligatory mouth wide open gasp. And here it is: Nardelli’s exit will probably have the effect of increasing CEO compensation, at least marginally.
Although there will be some temporary populist (it’s the word of the day!) outrage, the impression that Nardelli was forced out so suddenly from Home Depot after a long tenure there–
he was one of the founding partners (We were totally wrong on this. No excuses.)–should only increase the fears of would be chief executives about their job security. (If Home Depot can throw Nardelli overboard so quickly, no one is safe!”) Which means that boards seeking to lure chief executives away from their current positions to lead a company–Nardelli came to Home Depot after coming very close to becoming CEO of GE–will need to make even larger promises of severance if things don’t work out. This is more true of companies with troubled prospects—who arguably need the very best leadership—since running these companies is far riskier than running a bright, shining market star. So expect to see more huge exit packages handed over to CEOs who have lead troubled companies, and more populist outrage over CEO compensation. And, of course, more opportunities for private equity companies that don’t have to deal with pesky shareholders and can afford to pay a CEO for what they are worth.
Until yesterday, it seemed that the practice of backdating stock options was something that mostly went on at tech companies during the boom years. But Home Depot now ways it was a routine practice for 19 years. Which kind of makes you wonder: is this really a scandal, or was it just a very typical corporate accounting practice meant to increase compensation without hitting the cash position of the companies?
Home Depot, the home improvement retailer, said yesterday that an internal investigation found that for 19 years the company “routinely” backdated option grants to benefit employees and had unrecorded expenses of about $200 million related to its grant practices.
The investigation found no evidence of intentional wrongdoing by company managers or its board, but it discovered several errors in how the company handled option grants dating back to 1981, Home Depot said in a statement.
On a side note, we’ve heard that the backdating scandal has many companies so fearful that they are refusing to sign any agreements containing the words “dated as of”–regardless of whether options grants are involved.
Home Depot Backdated Many Options [Bloomberg via New York Times]