WASHINGTON, Sept 14 (Reuters) - Activist hedge fund investor William Ackman said on Monday that credit rating agencies should face more liability for their actions.
"They won't be as profitable, but they'll be a lot more careful," Ackman, who founded Pershing Square Capital Management, said at a conference in Washington.
Ackman said the United States cannot pass meaningful financial reform without changing the way credit rating agencies do business, and reducing reliance on their ratings.
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I agree with Ackman that the credit rating agencies had a huge role in the financial crisis. Investors were relying on these agencies to accurately assess the products that they were investing in. However, I don't know if greater legal sanctions are the answer. Credit rating agencies should be punished, but this can be done by the market. The government needs to allow new credit rating agencies to emerge (currently Moody's and S&P have sanctioned monopolies). Free competition has the potential to force credit rating agencies to be more careful- for fear that if they are not accurate- their customers will have the ability to choose an agency that is.
Monday, September 14, 2009
Friday, September 11, 2009
Thursday, September 10, 2009
Video of Phillip Goldstein
This is an interesting clip of Phillip Goldstein addressing the changing perception of activist investors.
Wednesday, September 9, 2009
Kraft’s Hostile Bid for Cadbury
On Monday, Kraft Foods Inc. (NYSE: KFT) made an unsolicited $16.7 billion bid for British chocolate maker Cadbury PLC (NYSE: CBY). Cadbury stock jumped 41 percent on the news. The fact that Cadbury shares are now trading higher than Kraft’s offer indicates that the market anticipates that Kraft will increase its bid (though Kraft denies that it intends to do so) or that another company such as Nestle or Hershey will make a competing bid. It’s also possible that private equity or hedge funds will get involved in the action.
The situation is reminiscent of Hilton’s hostile bid for ITT Corp. in 1997. In that case, Hilton made an unsolicited offer of $6.5 billion in cash and stock for ITT, a company that owned Sheraton Hotels, among other assets. The $55 per share offer represented a 29% premium over the closing share price of ITT. On the news, ITT stock jumped to $58.50, indicating, as in the Kraft-Cadbury bid, that the market anticipated a sweeter bid or another company, such as Marriot, to enter the bidding war. One difference, however, is that in the case of ITT, many analysts indicated that Hilton’s was a low-ball offer and Hilton itself had said that it was willing to negotiate a better price. Kraft on the other hand doesn’t appear willing to negotiate a better offer, though of course this could simply be hard-ball negotiating tactics. Hilton ultimately increased its bid to $70 per share and won a federal court injunction against ITT as the company sought to employ defensive takeover strategies. Yet in the end, ITT was sold to the almost unknown Starwood Lodging for $82 per share (Starwood was able to pay such a high price thanks in part to its REIT tax-exempt status).
The question on everyone’s mind is whether Kraft will increase its bid or whether a so-called White Knight will enter the scene to save Cadbury from a Kraft takeover. Stay tuned as the action unfolds on SharePower - this promises to be an interesting battle for control of Cadbury.
The situation is reminiscent of Hilton’s hostile bid for ITT Corp. in 1997. In that case, Hilton made an unsolicited offer of $6.5 billion in cash and stock for ITT, a company that owned Sheraton Hotels, among other assets. The $55 per share offer represented a 29% premium over the closing share price of ITT. On the news, ITT stock jumped to $58.50, indicating, as in the Kraft-Cadbury bid, that the market anticipated a sweeter bid or another company, such as Marriot, to enter the bidding war. One difference, however, is that in the case of ITT, many analysts indicated that Hilton’s was a low-ball offer and Hilton itself had said that it was willing to negotiate a better price. Kraft on the other hand doesn’t appear willing to negotiate a better offer, though of course this could simply be hard-ball negotiating tactics. Hilton ultimately increased its bid to $70 per share and won a federal court injunction against ITT as the company sought to employ defensive takeover strategies. Yet in the end, ITT was sold to the almost unknown Starwood Lodging for $82 per share (Starwood was able to pay such a high price thanks in part to its REIT tax-exempt status).
The question on everyone’s mind is whether Kraft will increase its bid or whether a so-called White Knight will enter the scene to save Cadbury from a Kraft takeover. Stay tuned as the action unfolds on SharePower - this promises to be an interesting battle for control of Cadbury.
Tuesday, September 8, 2009
Activist Investing
So what happens when the board of directors does not look out for the Shareholder's best interests? Stock prices are suppressed (aka they are lower than they should be). For example, if the board of directors pays the CEO $100M a year, when he is only worth $5M per year- the company is worth $95M dollars less than it would be if the directors paid the CEO an appropriate salary. (Note: I only use the salary of a CEO as an example because it is relatively straight forward. In world of corporate governance, overpaying the CEO is a minor offense- the board of directors is capable of squandering much-much more than $95M).
This loss of $95M is reflected in the stock price. So instead of each share of stock being worth, say, $10 (as it would be if the CEO received a salary of $5M), the stock is only worth $8.
In a perfect world, this would not be a huge problem. We could simply recognize the board's error, vote out the old board, and replace them with a new board that would rectify the problem.
Now, here is the problem (well there are actually lots of problems- but here is the meta-problem); It is really expensive to vote out the incumbent board. There are lots of reasons for this (many of them having to do with corporate governance- which I will be the topic of many subsequent posts). Because it is so expensive- it is only worth attempting to replace the incumbent board if you own a significant portion of stock.
For example, it can cost tens of millions of dollars to even attempt to replace a board of directors. If you only own $1,000 shares of stock- each worth $8 ($8,000 in total) then you are obviously not going invest millions of dollars. Even if you are successful at ousting the incumbent board, and you raise stock prices to $10 a share- you have only earned $2,000.
Therefore, we generally must rely institutions that have access to large amounts of capital to discipline boards that do not adhere to shareholder interest (at least for the time being). (Note: hostile takeovers can serve a similar function- more on hostile takeovers in another post).
These institutions often take the form of hedge funds- which we deem activist hedge funds (or activist invstors).
Their investment strategy is to buy a large stake in a company with a suppressed stock price due to the waste of the board of directors, then replace the board with their own (alternatively they can discipline the existing board). In turn, the company's price rises (thanks to the reduction of wasteful activities- like overpaying the CEO) to reach its full potential, and the activist hedge fund realizes a profit.
This loss of $95M is reflected in the stock price. So instead of each share of stock being worth, say, $10 (as it would be if the CEO received a salary of $5M), the stock is only worth $8.
In a perfect world, this would not be a huge problem. We could simply recognize the board's error, vote out the old board, and replace them with a new board that would rectify the problem.
Now, here is the problem (well there are actually lots of problems- but here is the meta-problem); It is really expensive to vote out the incumbent board. There are lots of reasons for this (many of them having to do with corporate governance- which I will be the topic of many subsequent posts). Because it is so expensive- it is only worth attempting to replace the incumbent board if you own a significant portion of stock.
For example, it can cost tens of millions of dollars to even attempt to replace a board of directors. If you only own $1,000 shares of stock- each worth $8 ($8,000 in total) then you are obviously not going invest millions of dollars. Even if you are successful at ousting the incumbent board, and you raise stock prices to $10 a share- you have only earned $2,000.
Therefore, we generally must rely institutions that have access to large amounts of capital to discipline boards that do not adhere to shareholder interest (at least for the time being). (Note: hostile takeovers can serve a similar function- more on hostile takeovers in another post).
These institutions often take the form of hedge funds- which we deem activist hedge funds (or activist invstors).
Their investment strategy is to buy a large stake in a company with a suppressed stock price due to the waste of the board of directors, then replace the board with their own (alternatively they can discipline the existing board). In turn, the company's price rises (thanks to the reduction of wasteful activities- like overpaying the CEO) to reach its full potential, and the activist hedge fund realizes a profit.
The Basics
Before we get into activist investing and corporate governance, we need to understand the basic structure of a corporation.
So- corporations can be broken down into two types. Private and public. Private companies are companies that are NOT listed on a stock exchange, and public companies ARE listed on a stock exchange (there are some details here that I am glossing over- but nothing important for our purposes). Some examples of a stock exchange are: New York Stock Exchange (NYSE), NASDAQ, etc...
In terms of activist investing, and corporate governance- we don't have to worry to much about private companies- our focus is public companies.
Public companies are interesting because a substantial portion of them are owned by us- regular people. If you own stock in a company, then you own a piece of that company. In fact, approximately 40% of any given company is owned by individual investors (the other 60% is owned by institutions- for example- pension funds, hedge funds, mutual funds, etc...).
While investors (both individual and institutional) own these corporations, they don't run their day to day operations.
Investors (which are also known as Shareholders) vote for a board of directors, and those directors run the corporation. Every year, shareholders have the right to vote for board members.
It is the board members responsibility to hire the CEO (or fire the CEO), set compensation for managers, and perform lots of other important functions that we will talk about in later posts.
The board members are supposed to represent OUR interests- and that usually means- they are supposed to make us money. They are our employees. However, sometimes, the board looks out for their own interests. Or, sometimes, they are just incompetent.
This is where activist investing can come into play.
So- corporations can be broken down into two types. Private and public. Private companies are companies that are NOT listed on a stock exchange, and public companies ARE listed on a stock exchange (there are some details here that I am glossing over- but nothing important for our purposes). Some examples of a stock exchange are: New York Stock Exchange (NYSE), NASDAQ, etc...
In terms of activist investing, and corporate governance- we don't have to worry to much about private companies- our focus is public companies.
Public companies are interesting because a substantial portion of them are owned by us- regular people. If you own stock in a company, then you own a piece of that company. In fact, approximately 40% of any given company is owned by individual investors (the other 60% is owned by institutions- for example- pension funds, hedge funds, mutual funds, etc...).
While investors (both individual and institutional) own these corporations, they don't run their day to day operations.
Investors (which are also known as Shareholders) vote for a board of directors, and those directors run the corporation. Every year, shareholders have the right to vote for board members.
It is the board members responsibility to hire the CEO (or fire the CEO), set compensation for managers, and perform lots of other important functions that we will talk about in later posts.
The board members are supposed to represent OUR interests- and that usually means- they are supposed to make us money. They are our employees. However, sometimes, the board looks out for their own interests. Or, sometimes, they are just incompetent.
This is where activist investing can come into play.
Our First Post
Welcome to the SharePower Blog! My name is Lee Drucker, I am a third year JD/MBA student at NYU. Also, writing on this blog is Eric Diamond, a 3L at NYU School of Law. If we are lucky, we also may have guest posts from time to time.
We are both passionate about activist investing, and the world of corporate governance- and that is what we are going to write about here. Don't worry- it is not as boring as its sounds. We hope to expose you to a world of hostile takeovers, multi-billion dollar gambles, outsized egos, and global-economy-shifting transactions- basically we are going to give you a behind the scenes look at the game of world domination (financially speaking).
If you don't know what activist investing or corporate governance is-stick around-we plan on explaining all the details as we go.
We are both passionate about activist investing, and the world of corporate governance- and that is what we are going to write about here. Don't worry- it is not as boring as its sounds. We hope to expose you to a world of hostile takeovers, multi-billion dollar gambles, outsized egos, and global-economy-shifting transactions- basically we are going to give you a behind the scenes look at the game of world domination (financially speaking).
If you don't know what activist investing or corporate governance is-stick around-we plan on explaining all the details as we go.
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