Friday, February 22, 2008

MBIA Criticizes Bond-Insurer Plan -

One of the more interesting uses of restucturing (or possible restructuring). We discussed this in class today. Intereting application of different stakeholders having different incentives.

A couple of looks:

From Reuters:
"Bond insurer Ambac Financial Group Inc is in discussions to split itself up in a move aimed at ensuring that municipal bonds backed by the company retain high credit ratings...A deal could fall apart because of the complexities in such a move, said the report, quoting a source familiar with the situation.

A halving of Ambac would create one unit to insure municipal debt and one that would cover rapidly diminishing securities tied to mortgages in a structure that effectively would create a so-called "good bank" and "bad bank", the report said."

MBIA Criticizes Bond-Insurer Plan -
"The nation's largest bond insurer said it agrees with a spokesman for the New York insurance department who said Mr. Ackman's proposal would split the company and likely lead to a substantial downgrade for the structured side.

Splitting bond insurers into two sectors -- one focused on lower-risk municipal bonds and another to handle higher-risk collateralized debt obligations -- allows shareholders of the lower-risk holding company to benefit while holders of the CDOs suffer.

'Our preference, like the regulators, continues to be finding a solution that would be in the best interest of all policyholders,' MBIA said."

Wednesday, February 20, 2008 Worldwide Worldwide:
"Societe Generale SA, France's second-largest bank, failed to follow up 75 warnings on bets by Jerome Kerviel that led to a trading loss of 4.9 billion euros ($7.2 billion), independent board members concluded in a report."

75? wow.

Monday, February 18, 2008

Corporate governance gets more transparent worldwide -

Corporate governance gets more transparent worldwide -
"In what some call a worldwide corporate-governance movement, shareholders are pushing for stronger corporate-governance laws, teaming with investors from different countries....
'We've seen some dramatic changes,' says Stanley Dubiel, head of governance research at RiskMetrics Group, the largest U.S.-based proxy research firm, with offices in 50 countries. 'There's a strong desire on the part of many companies to attract capital from international investors...

[Later in the same article]

Dozens of countries are developing systems of watchdog corporate-governance and shareholder activism, with some modeling themselves after U.S. and United Kingdom governance practices or the Sarbanes-Oxley Act, the U.S. anti-fraud law passed after the Enron accounting scandal six years ago led to the demise of the company.

South Africa, Italy and Japan, for instance, have recently beefed up their corporate-governance codes to strengthen shareholders' oversight '"

Thursday, February 14, 2008

I did not know it possible?

One of the half dozen or so books I am either reading or ristening to is Almost America (From the Colonists to Clinton: a "What if" History of the US by Steve Tally. In it there is something I learned that will no doubt work its way into class that was surprising to me:

From P 187
"In the late 1800s, American business was caught up in a frenzy of mergers. Across the country, small local businesses were selling out to large national trusts--from 1897 to 1904, one third of the companies in the United States were absorbed into larger companies. Consumers were not the beneficiaries of these mergers, however: Prices on goods inceased as much as 400 percent after competition was knocked out."
Which deserves a "wow". Not because there was a large merger wave, I think most knew that, but the enormous size of the wave. Can that possible be correct? Maybe tomorrow I will look at inflation over that period. I am sure it will take about 30 seconds, but I am tired now. I will just update this here and not do a new entry.

Yahoo Plays the Field with News Corp.

Yet another twist in the Yahoo-Microsoft story:

Yahoo Plays the Field with News Corp.:
"News Corp. may be trying to cut in on the mating dance between Microsoft and Yahoo!, but it may only succeed in tightening the software maker's embrace.

Yahoo (YHOO) and News Corp. (NWS) are discussing a deal that would involve mixing Yahoo's businesses with News Corp. Internet properties, including the popular social network MySpace, according to newspapers and blogs including Silicon Alley Insider. As part of the complicated deal, News Corp. and a private equity firm would buy a significant piece of Yahoo, as much as 20%, allowing Yahoo to remain independent."

Tuesday, February 12, 2008

Fast Driving and Stock churning, is there a relationship?

This one really is not super surprising, but that said still very interesting.

Warning: Fast Driving May Lead to More Trading - New York Times:
"IF you get speeding tickets, watch out: The chances are good that you will also engage in possibly dangerous investing behavior, too. That is the implication of a new study that found that individuals who receive more speeding tickets tend to churn their portfolios.

The study, “Sensation Seeking, Overconfidence and Trading Activity,” has been accepted for publication by The Journal of Finance. The authors are Mark S. Grinblatt, a finance professor at the University of California, Los Angeles, and Matti Keloharju, a finance professor at the Helsinki School of Economics. A version is at"

Monday, February 11, 2008

Yahoo rejects Microsoft's offer, saying it is undervalued - Feb. 11, 2008

Yahoo rejects Microsoft's offer, saying it is undervalued - Feb. 11, 2008:
"Yahoo formally rejected Microsoft, saying the offer is not in the best interest of shareholders, but adding it is willing to look other options.

'The board believes that Microsoft (MSFT, Fortune 500)'s proposal substantially undervalues Yahoo (YHOO, Fortune 500), including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments,' said the statement."
Also in a story that has largely been overlooked in the talk of a tender offer, Yahoo does have posion pill already in place. From a Feb 1st Reuters article:

"In March 2001, Yahoo adopted a "stockholder rights plan" under which if anyone buys 15 percent or more of its stock -- aside from an agreed bid -- shareholders have the right to buy extra shares, according to a filing at the time.

"Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our Board of Directors, our rights plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors regarding that acquisition," according to a Yahoo filing from 2007."

Chavez and Expropriation

Last week in class we were speaking of increased risks associated with doing business internationally. Political risks, in particular the risk of expropriation, are particularly difficult to hedge.

One of the examples we used was that of Hugo Chavez. Of course he has provided enough examples single handedly to fill several class periods. Two that are in the news right now show the irrationality of expropriation.

First the case of Exxon from Money CNN.

"Chavez sent his military to the Venezuelan hinterlands last year...He seized that along with the assets of five other oil companies....Exxon's investment was worth at least $4 billion, but Chavez refused to pay market compensation...he justified his breaking of contracts as sovereign decisions and told investors they'd have to be satisfied with minority partnerships run by ideologically correct Chavista "managers."

Seeing themselves as powerless..., some of the companies caved. But not knew a precedent could be set and refused to appease.

In so doing, it put all petrotyrants on notice that their power extends only as far as their borders...If they want to cut themselves off from the world by changing the rules, then it's off to international arbitration with them.

Today, Chavez faces a potential penalty of $12 billion if the British, Netherlands and Netherlands Antilles courts rule Exxon's way, compensate it and declare damages. Exxon even got a U.S. court to freeze $315 million in Venezuelan cash here to ensure compliance."

But Chavez is nothing if not stubborn, so he is threatening to shut off oil shipments to the US (of course oil sold to another country could be resold to the US, but that is another story.)

Oh and as if to show he really did not care what world courts said, he is threatening milk producers (not the actual cows!)

Chavez warns Parmalat, Nestle that milk plants could be seized - International Herald Tribune: "
President Hugo Chavez warned that his government could expropriate some milk plants to confront shortages, singling out Italy-based Parmalat SpA and Swiss-based Nestle SA.

Chavez mentioned the two companies...,saying such companies sometimes 'pressure' Venezuelan farmers to obtain their milk for export."

Yahoo and Microsoft Update

Short version: It looks like Yahoo is going to say no. Will Microsoft go directly to shareholders? If so at what price? Worldwide:
"Yahoo! Inc., the Internet company that has failed to crack Google Inc.'s dominance of Web search, plans to reject a $44.6 billion takeover bid from Microsoft Corp., a person familiar with the situation said.

The board spent a week reviewing the $31-per-share unsolicited offer before deciding it was too low, and directors are likely to reject it tomorrow, said the person, who declined to be identified because the discussions aren't public. Yahoo wants at least $40, the Wall Street Journal reported yesterday."
From MarketWatch:
"Anticipating a rejection of its takeover bid by Yahoo Inc.'s board of directors on Monday, Microsoft Corp. is preparing to take its unsolicited $44.6 billion offer directly to shareholders....Microsoft...also has hired a team of proxy experts to prepare for a possible battle, the Financial Times reported in its online edition."
From the Financial Times:
"Microsoft is gearing up to take its bid to acquire Yahoo directly to the Silicon Valley company's shareholders after the expected rejection by the Yahoo board of the software group's $31-per-share offer....The moves pointed to the possible outbreak of a protracted and bloody takeover battle but they are seen in some quarters as opening shots in a negotiation of how much Yahoo is worth and what Microsoft should pay to win control."
From the BBC
"..if Jerry Yang and his fellow directors are shutting the door to Microsoft they will need to explain to their shareholders exactly what their alternative strategy is. Because it seems impossible that Yahoo can survive as an independent business - unless it manages to convince the regulators that an informal alliance with Google is no threat to competition, which seems unlike"
From the London Times online
"Yahoo! is seeking to restart merger talks with AOL as a means of defending itself against the $45 billion (£23 billion) hostile bid approach from Microsoft, The Times has learnt.

It is understood that Yahoo! and its team of advisers from Goldman Sachs and Lehman Brothers, the US investment banks, have spent the past week evaluating possible tie-ups with media and technology firms that would save it from being swallowed by Microsoft.

It is also understood that one option being explored is to restart merger talks with AOL, the online business owned by Time Warner. Tie-ups with groups such as Google or Disney are also being considered. "
And already shareholder groups are lining up looking to sell their shares. From Reuters:
" outspoken group of 100 current and former Yahoo employees that own 2.1 million shares and call themselves "Yahoo Plan B," said his group was prepared to negotiate separately with Microsoft or any other bidder. "We have no desire to see Yahoo! continue independently with the current board and management team in place.
I told you this was going to be interesting!

Saturday, February 09, 2008

Yahoo Considers Playing a Google Defense -

Some updates on the potential Yahoo takeover :

Yahoo Considers Playing a Google Defense -
"Yahoo Inc.'s board of directors discussed its options Friday in the face of Microsoft Corp.'s unsolicited offer to buy the Internet company...Yahoo has said its board would consider the Microsoft offer and any alternatives, including keeping Yahoo independent....

Among the options Yahoo directors discussed was the possibility of abandoning its own search-advertising system, which generates significantly less ad revenue for each consumer search, and using ads from Google in return for a majority share of the revenue. Such a deal could increase Yahoo's cash flow and give it more latitude to try to thwart the Microsoft approach.

But antitrust experts say even such a pact with Google would likely raise red flags, including an advertising-outsourcing pact with Google Inc., people familiar with the matter said."
From the Financial Times:
"The flurry of activity by investment bankers that started following Microsoft’s offer to acquire Yahoo! last Friday is now subsiding with the realization being that it is simply too large of a transaction for interested rival bidders to jump in, a source familiar with the process told dealReporter....A rival bidder would have to come in with a minimum of a USD 47bn offer with Microsoft likely coming back and topping the bid, which is leading many to pass, he added. It is understood that both IBM and HP have been presented with an opportunity to look at Yahoo! and decided not to move forward, citing size as one of the reasons for the lack of interest."
And Business Week looks at how if the deal is consummated, the two companies can be successful.
"If Yahoo goes for the deal, the lesson for Ballmer is clear. Be ruthless in forcing managers to work together. Don’t let one faction torpedo another by keeping alive competing brands. Pick the winners and move on. Is Yahoo ahead in getting its services ready for mobile phones, including those running Microsoft’s operating system? Go with it. Take a very hard look at Yahoo’s Panama advertising platform and whatever Microsoft’s got cooking. Probably only room for one platform going forward, as Ballmer already alluded to in an interview with the Wall Street Journal. Maybe there are a few areas where you keep two competitors running, say Hotmail and Yahoo’s email, but not many otherwise you’re wasting resources and failing to take advantage of the scale you’ve created."

Friday, February 08, 2008

NY professor sees junk bond defaults at 4.64 percent: report | Reuters

It is not every day that the Altman Z score is in the news, so when I saw that it was today I figured it had to be mentioned.

NY professor sees junk bond defaults at 4.64 percent: report | Reuters:
"A New York University professor is projecting that high-yield 'junk' bonds will default at a rate of 4.64 percent this year, the highest since 2003, The Wall Street Journal reported on Wednesday. "
Don't remember what the Altman Z score is? You have much company. If past classes are to be a guide, it is one of the most easily forgotten ratios that we cover.

The Altman-Z score is a ratio, or more correctly a model based off of several ratios each being given different weights, that is used to predict bankruptcy.

For a better description see this article from about predicting bankruptcies.
One look-in:

"In 1966 Altman selected a sample of 66 corporations....Altman calculated 22 common financial ratios for all 66 corporations. (For the bankrupt firms, he used the financial statements issued one year prior to bankruptcy.) His goal was to choose a small number of those ratios that could best distinguish between a bankrupt firm and a healthy one.

To make his selection Altman used the statistical technique of multiple discriminant analysis. This approach shows which characteristics in which proportions can best be used for determining to which of several categories a subject belongs: bankrupt versus nonbankrupt, rich versus poor, young versus old, and so on.""

What does the Z-score look like? There are different versions out there, but essentially they based the score off of a combination of profitability (EBIT/Total Assets), revenue (Sales/Total assets), Liquidity (Working capital/Total assets), leverage (either Times interest earned or other similar measure). Some versions also include volatility of earnings as well.

Both the Exceluser article and this article from Value Based Management list the formula.

Of course any model has its limitations as this article from Business Week on credit scores (which are similar to Z scores in spirit) mentions.

Tuesday, February 05, 2008

How 'cash' at companies became risky - MarketWatch

There is cash and then there is cash:

How 'cash' at companies became risky - MarketWatch:
" strange as this may sound, Bristol-Myers Squibb was the latest company to do the equivalent of taking a charge against cash when it announced a $275 million impairment of debt investments that held such things as surprise! subprime and home-equity loans.

Companies don't really take charges against cash, of course, but investments that double as cash might as well be cash. Auction-rate securities, as these arcane investments are called, were deemed so safe that they sat on the balance sheet not far from Treasurys in a near-cash category called 'marketable securities.'

Until a few years ago, before a change in accounting rules, Bristol-Myers accounted for auction-rate securities as actual cash. They are so much like cash that they yield just a fraction of a percent above cash and, as Bristol-Myers regulatory filings say, can 'be liquidated for cash at a short notice.'"

Thanks to Mark P for sending this article to me.

Monday, February 04, 2008

Google Works to Torpedo Microsoft Bid for Yahoo - New York Times

Anyone want to write a case on this one? I'm in, should be fun.

From the NY Times: Google Works to Torpedo Microsoft Bid for Yahoo - New York Times:
"Publicly, Google came out against the deal, contending in a statement that the pairing, proposed by Microsoft on Friday in the form of a hostile offer, would pose threats to competition that need to be examined by policy makers around the world.

Privately, Google, seeing the potential deal as a direct attack, went much further. Its chief executive, Eric E. Schmidt, placed a call to Yahoo’s chief, Jerry Yang, offering the company’s help in fending off Microsoft,"
and if that is not enough, they are supposedly lobbying regulators as well. Gee, could they be scared? I think I would be if I were them. Sure Google might be ahead now by a bunch, but things change fast and not in a linear fashion.
"Google’s lobbyists in Washington have also begun plotting how it might present a case against the transaction to lawmakers, people briefed on the company’s plans said. Google could benefit by simply prolonging a regulatory review until after the next president takes office."
All we need is a lawsuit and most of the "so you are in play, how can you fend yourself off" lecture will play out before our eyes which is even more of a reason we should write it into a case study. Contact me if interested.

Saturday, February 02, 2008

Microsoft Makes Its Yahoo! Play -

As Paul Harvey would say, "If you care, you have already seen the news" but since I want to use it in class, I will mention it here as well.

Microsoft Makes Its Yahoo! Play -
"Microsoft, the world's biggest software company, is set to grow even bigger: it has offered to buy search engine Yahoo! for $44.6 billion, in a bid to rival Google and take a bigger slice of the online services market.

Microsoft (nasdaq: MSFT - news - people ) is offering $31 for every Yahoo! (nasdaq: YHOO - news - people ) share, or a whopping 62% premium to the search engine's closing price on January 31. Shares in Yahoo! shot up 58.5%, or $11.22, to $30.40, in pre-market trading on Friday."
From NY Times:
"Microsoft’s $44.6 billion bid for Yahoo, pushed by Mr. Ballmer, was hostile. And during a conference call Friday with analysts and in a subsequent interview, he never once uttered the word “Google,” referring to the Internet search giant that has humbled Microsoft only as “the leader” in the online world....Microsoft’s bid for Yahoo is thus a tacit, and difficult, admission that the company did not get its online business right. The bid also represents a sharp departure from Microsoft’s well-thumbed playbook of building new businesses on its own."

Friday, February 01, 2008

Why do firms hold so much cash?

Why do U.S. firms hold so much more cash than they used to? by Bates, Kahle, and Stulz.

Short version: firms are holding more cash now than they used to. This runs counter to theory that would suggest that as transaction costs decrease and hedging opportunities increase, cash holdings would decrease. Interestingly the increased cash holding does not appear related to agency cost explanations.

Longer Version: Bates, Kahle, and Stulz look at the surprising fact that firms hold more cash than they did 20 years ago. In what is even more surprising, this increased cash holding does not appear to be caused by agency costs.

In the words of the authors:

"[We] investigate how the cash holdings of U.S. firms have evolved since 1980 and whether this evolution can be explained by changes in known determinants of cash holdings. We find that there is a secular increase in the cash holdings of the typical firm from 1980-2006....the average cash-to-assets ratio (the cash ratio) has increased by 0.46% per year. Another way to see this evolution is that the average cash ratio more than doubles over our sample period, from 10.5% in 1980 to 23.2% in 2006....In the absence of agency problems, improvements in information and financial technology since the early 1980s should have led to a reduction in corporate cash holdings."

and later

"...Foley, Hartzell, Titman, and Twite (2007) show that one reason for the cash buildup is that U.S. firms had profits trapped abroad that would have been taxed had they been repatriated. In our sample, we find that firms with no foreign income also experience a secular increase in the cash ratio."

In what may be seen as the surprise of the paper, the authors look at several proxies for agency costs but do not find there to be a relationship. In the least surprising finding, they report that the increase is most concentrated in firms that do not pay dividends.

So why the increase? It seems that much of it is attributed to increases in business risk. Again from the paper:

"It is well-known that idiosyncratic risk increased over much of our sample period (see Campbell, Lettau, Malkiel, Xu, 2001). When we divide the industries in our sample into quintiles according to the increase in idiosyncratic cash flow volatility, we find that the average cash ratio increases by less than 50% for firms in the industries that experience the smallest increase in risk but by almost 300% for firms in the industries that experience the greatest increase in risk"

Another REALLY important finding of the paper is that common measures of leverage may not be good indicators of debt levels once cash is accounted for:

"...the net debt ratio (defined as debt minus cash, divided by book assets), a
common measure of leverage for practitioners, exhibits a sharp secular decrease; most of this decrease in net debt is explained by the increase in cash holdings. The fall in net debt is so dramatic that average net debt for U.S. firms is negative in each of the last three years of the sample (2004, 2005, and 2006). Consequently, using net debt leads to dramatically different conclusions about both the current level of leverage in U.S. firms and the evolution of leverage over the last twenty-five years."

Good stuff! Will DEFINITELY be used in class! Read it in its entirety here.


Bates, Thomas W., Kahle, Kathleen M. and Stulz, René M., "Why Do U.S. Firms Hold so Much More Cash than They Used to?" (October 2007). Fisher College of Business Working Paper No. 2007-03-006 Available at SSRN: