Tags: LBOs, M&A, MacAndrews and Forbes, Revlon, Ron Perelman, SEC
If you’re a director of a public company with a controlling shareholder, and that shareholder wants to buy out the rest of the shares, you have a problem. On the one hand, you have fiduciary responsibilities to your non-controlling shareholders to get them the best possible deal. On the other hand: you have a controlling shareholder! He’s controlling! He has inside knowledge that no outside bidder or shareholder can match. He can do stuff like fire you, or make it impossible for you to sell to a higher bidder, or generally make life unpleasant if you reject his bid. He’s got a distinct advantage in negotiating against you, his employee.
Courts and lawyers try to minimize this problem through arid procedural stuff – lots of disclosure and independent directors and majority-of-the-minority votes and “entire fairness” review – but it’s actually just a real problem. You can read about the pending Dole buyout, where founder/CEO/40% shareholder David Murdock wants to buy back his company at an inglorious 18% premium and is carefully following1 all those arid procedural rules, and ask yourself: who cares? Are shareholders really in the same negotiating position as they would be if they were selling an un-controlled company to an outside bidder? Mehhhhh.
But that’s boring and instead you should read today’s astonishing SEC order stemming from the approach to this problem taken by the board of Revlon, a company that at this point is probably more famous for making merger law than cosmetics.2 In 2009, Revlon’s 61% shareholder, Ron Perelman vehicle MacAndrews & Forbes, wanted to buy out the rest of Revlon in a moderately convoluted way.3 So M&F and Revlon negotiated a merger, but that ran aground when Revlon’s M&A banker, Barclays Capital, told Revlon that its fairness committee had said no dice: Read more »
Tags: Danny Kuo, insider-trading, SEC, Victor Dosti, Whittier Trust
If you’ve been really closely following the SAC-Diamondback-expert-network-etc.-etc. insider trading investigations you might be able to keep the players straight but it’s beyond me. I have a hard enough time keeping one list of their prison sentences. The SEC’s new case against Whittier Trust and Victor Dosti really ought to come with a flowchart:
During at least 2008, a Dell employee (the “Dell Insider”) passed material nonpublic information regarding Dell to Sandeep Goyal (“Goyal”), an analyst at a New York-based investment adviser who had previously worked at Dell. … Goyal, in turn, passed this material nonpublic information to Jesse Tortora (“Tortora”), who at the time was an analyst at the investment adviser firm Diamondback Capital Management, LLC (“Diamondback”). … Tortora, who was a member of a group of hedge fund analysts who regularly shared material nonpublic information regarding technology companies, passed the material nonpublic information that he received from Goyal to other members of the group, including [Whittier Trust employee Danny] Kuo. … Shortly after receiving the Dell inside information from Tortora, Kuo communicated the information to Dosti.
Oh what the heck here’s a flowchart:
I guess that wasn’t so hard. Read more »
Tags: floating NAVs, money market funds, money market mutual funds, SEC
I dunno, you want to get excited about the new proposed money market fund rules? You can if you want. To get a sense of the stakes involved, consider the email I got from a reader today worrying that the SEC may wind up “killing say the market for receivables conduit financing in an attempt to ensure that the precise conditions of September 2008 are never replicated.” So: fair, but also, like, farewell receivables conduit financing market, I hardly knew ye. I did not know ye at all, is what I’m trying to say.1
The new rules basically require money market funds to tell you their net asset value, instead of the current rule of not telling you their net asset value, which again is sort of a funny thing to get upset about. In the olden days you could just say your NAV was $1.00 as long as it was at least $0.995; if it fell below that you’d “break the buck” and have to freak out and have massive redemptions and forced sell-offs and so forth. Under the basis-point rounding of the new rules, you’d break the buck at below $0.99995 of NAV and I guess the idea is who has the energy to freak out there, it’s like a basis point man, whatever. Binaries create faster death spirals than continuums. The SEC says: Read more »
Tags: FaceBook, infinite loops, IPOs, NASDAQ, SEC, Zynga
Remember when Facebook IPOed last May and it was a mess? Today the SEC released its amusing order fining Nasdaq $10 million for the mess and explaining what happened. Some computers were having a stressful day at work and so they decided to give up and hide out in the nap room, is the gist of it. I feel like I’d get along with those computers.
What started the mess is that Nasdaq opens the trading of a newly IPO’ed stock with an opening cross where it compiles quotes for a while and then crosses them in one big opening cross before continuous trading starts. And it uses the following process to do the opening cross:
- 1 Get a bunch of orders over a ~20 minute period before trading starts
- 2 Use a program called the IPO Cross Application to calculate the clearing price and shares crossed based on those orders, which takes a few milliseconds
- 3 Check if any of the orders were cancelled during those milliseconds
- 4 If they were, delete those orders and Goto 2
Did you spot the problem?1 Nasdaq’s systems engineers did not, even after the IPO Cross Application had been running on an infinite loop for twenty minutes. The SEC caught it, though, reading their order, I was worried that they’d fallen prey to it as well: Read more »
Tags: accounting, fraud, SEC
A criticism of the SEC that you’ll sometimes hear is that it’s mostly a bunch of lawyers, and two things that are broadly true of lawyers as a class is that they are good at close readings of dense texts and terrified of math. This means, some might say, that the agency is ill-equipped to regulate the high-tech quantitative world of modern finance. So it’s obscurely pleasing to read that the SEC’s office of quantitative research is rolling out a new program that applies high-tech quantitative methods to, basically, close reading of dense texts:
An initial step in the SEC’s new effort [to crack down on accounting fraud] is software that analyzes the “management’s discussion and analysis” section of annual reports where executives detail a company’s performance and prospects.
Officials say certain word choices appear to reveal warning signs of earnings manipulation, and tests to determine if the analysis would have detected previous accounting frauds “look very promising,” said Harvey Westbrook, head of the SEC’s office of quantitative research.
Companies that bend or break accounting rules tend to play a “word shell game,” said Craig Lewis, the SEC’s chief economist and head of the division developing the model. Such companies try to “deflect attention from a core problem by talking a lot more about a benign” issue than their competitors, while “underreporting important risks.”
It’s also pleasing to hear that a CFO’s guilty conscience over his earnings manipulation seeps directly into his prose. Though the article is a little light on the details of the SEC’s earnings-manipulation model, which I guess makes sense, since “companies and their lawyers are expected to respond to the crackdown by trying to outsmart the agency’s computers,” which I would really like to see.1 That could be a mixed bag; the Journal hints that it might result in easier-to-read but more grandiose filings:2 Read more »