The Greenlight Capital funds, run by hedge fund manager David Einhorn, returned 4.3 percent in the third quarter of 2013, bringing the funds’ year-to-date net return to 11.8 percent, according to a letter to investors seen by Reuters…The letter said that “virtually every long position” that the firm had was profitable in the third quarter, and that it added a “medium-sized long position” in Osram Licht AG . [Reuters]
If you’re an activist investor your job is to (1) think of an idea for how to make a company’s stock go up, (2) buy stock in the company, (3) convince them to do your idea, and (4) sell high. Step 3 tends to involve lots of attention-seeking – it’s easier to wear a company down into doing your idea if they’re constantly hearing about it from other shareholders and reporters and stuff – but steps 1 and 2, importantly, don’t.1 If you tell everyone about your great idea for Apple to issue GO-UPS,2 then they’ll all realize that Apple will certainly do it and unlock tens of billions of dollars of value, so they’ll bid up the stock before you can buy it and you’ll lose the opportunity to benefit from all those gains. That may be a bad example but just work with me here.
There’s another way of putting that, which is: if you secretly conceive of an idea to make Apple a better company, and then secretly buy up a bunch of Apple stock, and then announce to the world “surprise! I have 12% of Apple’s stock, and a brilliant idea that starts with a thematically appropriate lowercase i!,” and the stock goes up, and you make a lot of money – isn’t that unfair? You got to buy stock at the low, pre-publication-of-your-idea price; the people who sold to you were bamboozled into selling out too low because they didn’t know about your great idea. It almost “smacks of insider trading.”
Or something. I may not be doing this theory justice because I think it’s silly: that great idea is your idea; why shouldn’t you be able to make money off of it? (And why should anyone else?) The money is your incentive to come up with the idea in the first place, and do the hard ego-stroking work of pitching it to CNBC and the target company; if you had to share it with free-riders why would you take on the responsibility? We talked about this a little last year when there were vague rumors that the SEC was buying into it, and that they might require investors to disclose 5% stakes within 1 day of acquiring them (instead of the current 10 days), and include synthetic share ownership in computing the 5%, in order to make it harder for activists to secretly accumulate shares. I have not heard much about that proposal since, though I hesitate to assign any causality.
If David Einhorn Pulled The Same Stunt On GE That He Pulled On Apple You Can Bet He’d Be Receiving A Western Union Telegram From Grandpa Welch Telling Him To ‘Knock It Off’By Bess Levin
Former General Electric CEO Jack Welch says Apple deserves better than the treatment it’s getting from David Einhorn, the hedge-fund manager pressuring the iPhone maker to cough up dividends. “Look, these guys are after a quick hit. I’d blow him off,” he told CNBC’s “Closing Bell.” “I’d give Einhorn the back of my hand.” Welch said he had the same kind of problem with activist investors while heading GE. “They’d come after us, ‘What are you going to do with all that cash?’ Well, we’re going to do a smart thing! Trust us!” Welch said. [CNBC, related, related]
To get a sense of how old and long-drawn-out the SEC’s insider trading lawsuit against Mark Cuban is, consider this: the company in which he allegedly insider traded was Mamma.com. The .com was right there in the name. Future generations – hell, present generations – will indiscriminately add “.com” to the end of words to create an old-timey feel, the way we doeth with “-eth.”1
Actually it happened in 2004, and I don’t even need the “allegedly”: there’s no dispute that Cuban insider traded. Everyone agrees that:
- Mamma.com was planning to sell some stock in a PIPE offering which would, inevitably, drive down its stock price;
- Mamma.com’s CEO called Cuban and told him about the planned PIPE offering in advance, hoping to get Cuban to buy more stock;
- Cuban instead sold the stock he already had, prior to the public announcement of the PIPE deal; and
- Then the PIPE was announced and the stock dropped.
So he had material nonpublic information, and he traded on it, and he avoided losses by doing so. INSIDER TRADING. The only debate is whether he insider traded illegally, which, as I often find myself reminding people, is a separate question. The SEC’s lawsuit2 turns not on the facts above, but on whether Cuban agreed not to trade before learning the inside information. Here the evidence is less clear, but there’s enough evidence that he did for the SEC to survive summary judgment today and take the case to trial. Here is that evidence:3 Read more »
So David Einhorn won his lawsuit against Apple today, which means that Apple will be forced by a court order to issue $236 billion of “iPref” 4% perpetual preferred stock next week, which I currently see bid at 4.06% in the gray market for $10 million lots.
Hahaha no of course it doesn’t mean that. It means nothing! Except that everyone is kind of peeved. There are some things you could say against Calpers corporate-governance guru Anne Simpson’s position on Apple/Einhorn, but she’s not wrong about this:
“I came off the call deeply puzzled,” Anne Simpson, the pension fund’s director of global governance, told DealBook in an interview after [yesterday's Einhorn] call [pitching iPrefs]. “He finished off by saying you should vote against Proposal 2 to send a message, but he’s in court trying to prevent Proposal 2 from going ahead.”
Right? Read more »
I used to work on sort of a cats-and-dogs capital markets desk, which occasionally meant that spivvy companies without great access to the equity and bond markets, or industry bankers who were a bit too clever for their own good, came to me and asked “hey, what if we issued preferred stock?”1 I cannot recall that ever working out well. “Preferred stock” is a thing that exists in corporate finance textbooks, and occasionally solves for quirky corporate finance equations (“can we structure this investment as debt only it isn’t debt …”), but its practical uses tend to be limited to:
- private companies, private investments in public companies, joint ventures, VC investments, and other non-publicly-traded things;
- convertible preferred stock, which is not really the same thing at all;
- convertible preferred’s weird Warren-Buffett-and-TARP cousin, “preferred stock with warrants”; and
- a couple of sectors that are really into leverage, capital-structure engineering, and retail financing – meaning mostly banks, insurance companies and REITs.
So David Einhorn’s too-clever-for-his-own-good “iPrefs” deck brought back fond memories: why not convince a tech company that the next level of financial-engineering innovation is to issue preferred stock? And, since the phrase “preferred stock” does still kind of conjure up turn-of-the-last-century financial markets and/or cheesy cologne, why not rebrand it as “iPrefs”? There is something … something very investment-banker-y about taking an absolutely standard financial product, giving it a different name, and calling it an innovation. Of course I love it.
The only thing I love more than the name is the ambition. Read more »
So there’s this fight over what Apple should do with its money and I think it boils down to:
- Lots of people think that Apple is undervalued,
- Some of those people say: “so, since the market undervalues you, a dollar in your hands is valued less than a dollar in shareholders’ hands, and since you have Just. So. Many. Dollars. in your hands, why not give some back to shareholders, like in the form of colossal dividends, or even more amusingly in the form of tens or hundreds of billions of dollars of preferred stock?”
- Others say: “no, the market’s valuation is irrelevant, you should stealthily keep investing your zillions of dollars into building wrist computers or whatever, and one day your stock will catch up.”
If these arguments sound familiar that’s because they are; you can pretty much always find an activist who thinks that a company should return cash to shareholders feuding with a management who thinks they should be investing that cash in growing the business. And they’re endless because they’re tough to adjudicate: everyone is sort of talking their own book. There is a pile of money, and some people say “we should have the money,” and others say “no we should have the money,” and, y’know, duh they’d say that. Are return-the-cash activist shareholders just greedy short-termers destroying long-term value? Are managers who prefer to invest the cash just blinkered empire-builders who don’t care about the welfare of the people actually funding their wrist-computer adventures?
I dunno. Here are some hypotheses: Read more »