Carl Icahn Unleashed: Wall Street's Richest Man Is On The Attack -- Just Ask Michael Dell - Forbes

Carl Icahn Unleashed: Wall Street's Richest Man Is On The Attack -- Just Ask Michael Dell - Forbes:

Forbes has a fascinating article on a fascinating man: Carl Icahn.

"He used to make runs at companies via junk bonds and other tools of leverage. Then he figured out how to use other people’s money via a hedge fund structure. Now, though, it’s all Carl–with a net worth that FORBES estimates at $20 billion (which makes him the richest Wall Streeter, edging out George Soros). He doesn’t need anyone’s help or approval anymore. And that now makes him very, very dangerous."

Want more on him?  Here is from Wikipedia:

 " Icahn was raised in Far Rockaway, Queens, New York City, where he attended Far Rockaway High School....began his career on Wall Street as a stockbroker in 1961. In 1968, he formed Icahn & Co., a securities firm that focused on risk arbitrage and options trading. In 1978, he began taking control of positions in individual companies.^[2] He has taken substantial or controlling positions in various corporations including RJR Nabisco, TWA, Texaco, Phillips Petroleum, Western Union, Gulf & Western, Viacom, Uniroyal, Dan River, Marshall Field's, E-II (Culligan and Samsonite), American Can, USX, Marvel Comics, Revlon, Imclone, Federal-Mogul, Fairmont Hotels, Blockbuster, Kerr-McGee, Time Warner, Motorola, and Herbalife."

Someone should make a movie!  

Related articles

• US billionaire Carl Icahn threatens Michael Dell's buyout dream
• A Bearded Carl Icahn Terrorizes Wall Street

Heinz CEO Johnson Would Get $200 Million in Post-Berkshire Exit - Yahoo! Finance

Heinz CEO Johnson Would Get $200 Million in Post-Berkshire Exit - Yahoo! Finance:

"H.J. Heinz Co. (HNZ) Chief Executive Officer Bill Johnson could receive more than $200 million should he exit after Warren Buffett's Berkshire Hathaway Inc. (BRK/A) and Jorge Paulo Lemann's 3G Capital Inc. buy the ketchup maker.

Johnson, 64, would get "Golden Parachute Compensation" including $56 million in cash, equity, bonuses and other benefits, the Pittsburgh-based company said in a regulatory filing. Other shares under Johnson's control are worth almost $100 million, while his vested deferred compensation account totals $57 million."

Related articles

• Heinz CEO entitled to $56 million golden parachute
• Heinz CEO entitled to $56 million golden parachute
• $56 million golden parachute awaits Heinz CEO, if fired

Vertical mergers: the "why" is not as clear as we thought

The "why" for vertical mergers just got more cloudy.  Vertical mergers are those that go up or down a firm's supply chain.  For instance buying your supplier or buying your customer.

The standard explanation for the "value added" by such a deal has been a reduction of transaction costs (negotiation, cost or reneging, etc) as well as control of a supply source and quality etc issues.  And they MAY still be the explanations, but they are at least drawn more into question by new findings from University of Chicago economists Hortacsu and Syverson  who examine where firms buy from and sell to (the flows of the article).  There finding?  More often than not even after a vertical acquisition the firm does not buy from nor sell to its new "relative".

From Bloomberg's BusinessClass article:

"If most vertically integrated companies aren’t supplying themselves, then why do they own production chains? It is harder to get a clear answer to this question from the data, but there are some clues to an explanation. Trying to understand why companies own production chains by looking at the way goods flow along the chain could be misleading. Instead, it might be the things we can’t see -- managerial oversight, marketing know-how, customer contacts, intellectual property, and other information- based capital -- that drive most vertical integration.

By integrating, companies can spread these types of capital over the production chain. Integrated firms appear to let the market and contracted suppliers handle most of the flow of tangible goods along the chain, while using control through ownership to apply the necessary intangible capital, which is by nature harder to write contracts over."

Ironically we covered vertical mergers TODAY in class. Guess I better update my notes.

Icahn, a Deal-Maker With a Spotty Record - NYTimes.com

Image by Getty Images via @daylifeIcahn, a Deal-Maker With a Spotty Record - NYTimes.com:

We talk about Ichan in class a great deal. He is an interesting character. Probably most famous for launching many takeover (or supposed takeover attempts) and being rumored for greenmail, in my opinion his bigger role is monitoring firms' management and helping disseminate information on both managerial practices and apparent undervaluation. (indeed looking at a study of Q values of firms he owns ala Rene Stulz)

From the NY Times:

"Mr. Icahn’s own record as a deal-maker — either as a bidder or as a catalyst for a takeover — is spotty at best.....

Investors in Clorox appeared hopeful that Mr. Icahn will succeed this time, pushing shares in the company up 7.3 percent by midday to $73.51. Still, the price remains below Friday’s offer price, indicating some apparent skepticism"

and later:

"The unsolicited offer is a strategy Mr. Icahn has turned to time and again: 15 times since 1997, according to the data provider FactSet Shark Repellent. He most recently bid $1.9 billion for Mentor Graphics, with the aim of flushing out a potential bidder."

Related articles

• Carl Icahn makes $10.2B offer for Clorox (ctv.ca)
• Carl Icahn: I'll Buy Clorox! But I'm the Wrong Buyer (blogs.wsj.com)
• Icahn fights them on the bleaches (telegraph.co.uk)
• Carl Icahn: Yes, I Want to Buy Clorox. Really (blogs.wsj.com)

Vertical and horizontal deals

In class we talk often of the differences between vertical and horizontal mergers. This week's news will give much food for thought in class:


General Mills Set to Buy Yoplait Stake for $1.1 Billion - NYTimes.com:
From notes: "Reasons for vertical mergers include reduction of the transaction costs of negotiation."

This is a will become a classic example:

"A crucial aspect of the deal is that the agreement would resolve an outstanding dispute between Yoplait and General Mills, which has held the license to sell the brand in the United States since 1977.

With the licensing agreement up for renewal in 2012, and the two companies unable to come to terms, Yoplait had threatened to terminate the partnership, pushing General Mills to seek arbitration last year.

“This deal represents a solution,” a spokesman for PAI said."

Horizontal deals on the other hand are more regularly to combine operations in order to gain market share (pricing power) or when barriers to entry (Buffet's "Moats") make growth by other means prohibitively expensive due to high fixed costs.

This week's example is the AT&T-TMobile $39 billion deal.   Several class based things worth noting here.  Bondholders of acquiring firms can often lose in acquisitions.

Fitch (via BusinessWeek)  is already warning of a possible downgrade of AT&T debt:

"Fitch Ratings said Monday it has placed AT&T Inc.'s credit ratings on negative watch following the news that the wireless carrier plans to buy its smaller rival, T-Mobile USA, in a cash-and-stock deal valued at $39 billion....The ratings agency noted that much of the cash portion of the buyout will be financed with debt."

Because of increased market power (ie a wee bit closer to a monopoly) horizontal deals come under close scrutiny by regulators.  The rationale is that with increased size, comes increased power to raise prices.  This is brought forward in the  WSJ :

"The companies will have a tough road to prove to regulators that a combined AT&T-T-Mobile won’t have too much power to control wireless pricing."

Related articles

• AT&T T-Mobile merger: Why it's a bad deal for consumers. (slate.com)
• Fitch Ratings has placed the AT&T, Inc. (AT&T) ratings on Rating Watch Negative (jeffthoghts.wordpress.com)
• Why Media Companies Will Feel the Pinch if AT&T and T-Mobile Seal the Deal (adage.com)
• AT&T seen selling assets to get nod for mega deal (reuters.com)
• UPDATE 1-General Mills to pay $1.1 bln for Yoplait stake (reuters.com)
• France calls for job commitments after Yoplait deal (reuters.com)

The Merger Fund: The 'Poor Man's Hedge Fund'? - WSJ.com

The Merger Fund: The 'Poor Man's Hedge Fund'? - WSJ.com:

"If you really want to diversify, you need to spread your money across a variety of funds investing in different asset classes, managers and strategies, from bonds to absolute return strategies to, say, precious metals or covered call funds. The Merger Fund is completely specialized, and that's the appeal of the thing.

'We're all merger arbitrage,' says manager Roy Behrens. 'That's all we do here.'

That means they try to profit from shares involved in takeover deals. After all, deals are complex: Regulators can block them, boards and shareholders can revolt, rivals can jump into the fray. Merger arbitrage specialists comb the possibilities and the share prices for opportunities."

Interesting piece. Talks about correlation, arbitrage, diversification, market efficiency, and more.

Yahoo to close GeoCities, other services in revamp

Oops, that merger did not work out too well.

The Associated Press: Yahoo to close GeoCities, other services in revamp:

"Yahoo Inc. said Thursday it plans to close GeoCities, a Web site publishing and hosting service it bought in May 1999 at the height of the dot-com boom for around $3 billion in stock."

So the next time you decide to invest $3 billion for a stock with revenues of under $20 million (revenues, not earnings!), you might want to remember this one.

Oracle Agrees to Acquire Sun Microsystems - NYTimes.com

This week in my classes we are looking at the "Market for Corporate Control." The central part of which is the merger and acquisition market. Thus, I should be sending thank-you cards to Sun and Oracle for the following which will make class that much more interesting:

Oracle Agrees to Acquire Sun Microsystems - NYTimes.com:

"The Oracle Corporation, the technology information company, announced Monday that it would acquire a rival, Sun Microsystems, for $9.50 a share, or about $7.4 billion.

The agreement with Oracle came about two weeks after I.B.M. ended its talks with Sun. The Sun board balked at that deal after I.B.M. lowered its offer to $9.40 a share from $10. Still, Monday’s deal represented a 42 percent premium over Sun’s closing price of $6.69 on Friday."

Sun Microsystem CEO Jonathan Schwartz wrote the following about the deal:

"So today we take another step forward in our journey, but along a different path - by announcing that this weekend, our board of directors and I approved the acquisition of Sun Microsystems by the Oracle Corporation for $9.50/share in cash. All members of the board present at the meeting to review the transaction voted for it with enthusiasm, and the transaction stands to utterly transform the marketplace - bringing together two companies with a long history of working together to create a newly unified vision of the future....To me, this proposed acquisition totally redefines the industry,"

Delta-Northwest merger

The Delta-Northwest merger was approved this week. Some of you may remember that the Edward Bastian the president and CFO of the combined airline is an SBU graduate who was the keynote speaker at this spring's graduation. (now if he would only give BonaResponds some discounts!)

From BusinessWeek:

"In their Oct. 29 statement, DOJ antitrust lawyers offered not just their tacit approval, but they elaborated some of the benefits they anticipate from the enlarged Delta. The agency says the transaction “is likely to produce substantial and credible efficiencies that will benefit U.S. consumers and is not likely to substantially lessen competition.” Financially, a team of Delta and Northwest employees has been working feverishly for months to make this work. It’s an MBA student’s dream.

Among this deal’s likely advantages, according to DOJ:
• cost savings in airport operations, information technology, supply chain economics
• fleet optimization that will benefit consumers
• improved service made possible by combining under single ownership the complementary aspects of the airlines’ networks...."

What is less clear is how many of these benefits will be realized and why, short of existing competition, will any of the savings be passed on to consumers (BonaResponds discounts would be great PR! hint hint ;) ). Any company will price items as to what the market will bear, not on the costs of production.

Deal Heavyweights on the Future of M&A - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

Wouldn't you have loved to be there for this one?
Deal Heavyweights on the Future of M&A - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times:

"The panelists — Stephen Friedman, the retired chairman of Goldman Sachs and the current Chairman of the Federal Reserve Bank of New York; Martin Lipton, the founding partner of the law firm Wachtell, Lipton, Rosen & Katz; and Joseph Rice III, the founder and chairman of private equity firm Clayton Dubilier & Rice — took turns discussing the challenges and opportunities ahead, as well as reflecting on the current economic crisis."

Will give one look in:

"Mr. Friedman spoke at length about the current crisis, which he described as the greatest financial panic since the Great Depression. Part of the problem, he said, was that “people will play the way you pay them,” meaning that the incentive structures that were in place encouraged bad lending and faulty business practices. He said he blamed the banks, consumers and the rating agencies for playing a part in the financial debacle"

While the Panel discussion was on mergers and acquisitions (which have slowed dramatically and will likely remain slow--except in cases of consolidations and saving firms from bankruptcy), some key points in it carry forward to all parts of this meltdown. For instance Friedman's comments that "incentive structures that were in place encouraged bad lending and faulty business practices."

I think everyone knew (and some even understood) that incentives were in place to encourage risk taking. The problem was that many, myself included, gave the banks too much credit. We all failed to understood that the banks (both Investment banks and Commercial Banks) did not fully understand what they were getting into, and the banks did not have controls (offsetting positions) in place, and seemingly (see Greenspan's comments of yesterday) had never stress tested their models with data that considered data out of the recent good economic times. This blatant error has to fall on the shoulders of the Boards of Directors, the management, regulators, and dare I say auditors/analysts/rating agencies.

Without being adequately prepared, when the worst came (call it a black swan, call it a perfect storm, call it the worse case scenario), all of a sudden we had meltdown. (Now if you really want to consider the worse, what happens now if a natural disaster hits. Earthquake hits California, etc.)

This is why SIMM (our student managed real money portfolio) argued so long, and unfortunately unsuccessfully, to be allowed to hedge with derivatives and take short positions last semester.

Debating the CBS-CNET Deal - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

Debating the CBS-CNET Deal - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

"CBS’s $11.50-per-share deal for CNET seems expensive by at least two measures. Its 45 percent premium is unusually high, and Mr. Bazinet of Citi calculates that the price is 18 times CNET’s projected 2008 Ebitda, above the multiples recently paid for Bankrate (12 times Ebitda) and WebMD (14 times)....And on the question of price, CBS said it believes that the deal will have an internal rate of return of 13 percent and will not have any effect on its dividend, which it just increased last quarter."

Given the weeks and weeks we spend on valuation and is close cousin capital budgeting, I thought my students might like to see some of the things are actually used ;)

Icahn Is Said to Weigh a Proxy Fight at Yahoo - New York Times

Maybe it is not over? Icahn is reported to own 50 million shares (over $1 Billion worth).

Icahn Is Said to Weigh a Proxy Fight at Yahoo - New York Times:

"Carl C. Icahn, the billionaire investor and activist shareholder, is considering a proxy fight for seats on the Yahoo board in hopes of pushing the company to restart talks to sell itself to Microsoft, people who have held discussions with him said on Tuesday"

Supposedly Microsoft is not interested.

"He has also inquired at Microsoft, through various friends, whether he could help bring that company back to the negotiating table, these people said. He has received little encouragement, these people said, because Microsoft has insisted that it has “moved on.”"

The stock is up quite a bit on the news, so it's either idle speculation or there may be something there.

Higher Offer by Microsoft Brings Yahoo to Table - New York Times

Higher Offer by Microsoft Brings Yahoo to Table - New York Times:

"According to the people involved in the talks, Microsoft suggested it was willing to pay more than $33 a share. Yahoo is still holding out for at least $37 a share, these people said. These people were not authorized to speak publicly because the negotiations were confidential."

Will it work? Who knows, but the article does include this forecast:

"But a deal was still far from certain. A person involved in the discussions said the chances of a friendly deal being reached were “still no better than 50-50.”"

Delta, Northwest Post Losses As Fuel Costs Rise

One of the more popular things we have been doing in class this past year has been to allow each group to pick at least one of their own cases. Thus we will be looking at the Delta-Northwest merger. So in light of this, some required reading for my classes.

Delta, Northwest Post Losses As Fuel Costs Rise:

"Delta Chief Financial Officer Edward Bastian said that the airline has moved quickly to address higher fuel prices by cutting U.S. capacity and controlling costs. Those steps offset more than 50% of the fuel-price impact.

'However, we clearly need to do more,' he added, noting that the merger with Northwest will eventually generate more than $1 billion in annual savings and revenue gains.

Delta Chief Executive Richard Anderson and his counterpart at Northwest, Doug Steenland, both said during conference calls Wednesday that the estimate on synergies is likely to go higher.

Tech Beat Microsoft and Yahoo Russian Roulette - BusinessWeek

Game theory is always one of the more mathematical modeled issues, so when you get a chance to see an easy one, you grap it, here is just such an analysis:

Tech Beat Microsoft and Yahoo Russian Roulette - BusinessWeek:

"Yahoo and Microsoft have also done their best to increase the others cost and risk of delaying. This month, Microsoft set a three week deadline, set to expire April 26, for Yahoo to begin negotiating. Otherwise, Ballmer would move ahead with plans for a proxy fight, including nominating a new Yahoo board of directors likely to approve an even lower Microsoft bid. The move is intended to make Yahoo shareholders more nervous about waiting for a better bid, and thus more likely to either push for the deal or sell their stock in anticipation of a lower bid, weakening the company’s financial position. “I think Microsoft is wise in trying a first-and-final strategy,” says Robert Hansen, senior associate dean at Dartmouth’s Tuck School of Business who studies game theories applications in business. “That’s a good strategy, if the target believes you are committed to it.”"

Justice Dept. Approves XM Merger With Sirius - New York Times

Whatever happened to ____? You know those stories that just seem to drag on and on and on....this may take the cake. The XM Sirius Merger is once again back in the news for the third straight semester!

Justice Dept. Approves XM Merger With Sirius - New York Times: "

"The Justice Department gave approval...to the merger of two rival radio networks, XM and Sirius, a marriage that would create a de facto monopoly in satellite services now used by more than 17 million subscribers....The Justice Department’s antitrust division announced...it approved the merger after determining that prices were not likely to rise, in part because of competition from other program sources, like high-definition radio as well as iPods and other MP3 players that can be connected to home or car audio systems."

But lest you think you have heard the end of it, this still has to be approved by the Federal Communications and it seems like it is still far from a done deal:

"F.C.C. officials have offered conflicting signs on whether the commission would approve the merger.

The commission’s chairman, Kevin J. Martin, was quoted last week as saying that “I haven’t figured out what I think we should do on it yet.”"

This serves as a good reminder why horizontal deals can be difficult to get approved. This deal was first announced back in February of 2007.

Yahoo Considers Playing a Google Defense - WSJ.com

Some updates on the potential Yahoo takeover :

Yahoo Considers Playing a Google Defense - WSJ.com:

"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."

SSRN-Do Buyouts (Still) Create Value? by Shourun Guo, Edith Hotchkiss, Weihong Song

I do not have time to really comment on this one, but I did find it very interesting. I'll try to add some to this later, but at least I can point it out and quote the abstract.

SSRN-Do Buyouts (Still) Create Value? by Shourun Guo, Edith Hotchkiss, Weihong Song:

"For a sample of 176 buyouts completed between 1990 and 2006, we show that these deals are somewhat more conservatively priced and lower levered than their predecessors from the 1980s, but that the deals still impose substantial default risk on the firms. For 89 of these LBOs with post-buyout data available, we find that gains in operating performance are either comparable to or exceed those observed for benchmark firms matched on industry and pre-buyout characteristics....Returns to either pre- or post-buyout capital invested are significantly positive for the sample overall, and are positive for all outcome groups except those ending in a distressed restructuring. Returns to post-buyout capital are greater when the deal is financed with a greater proportion of bank financing, or when there is more than one private equity sponsor involved in the deal, consistent with increased monitoring by these providers of capital."

CEO's words haunt Whole Foods deal

TheDeal.com - CEO's words haunt Whole Foods deal:

"Court documents released Tuesday, June 19, capture Whole Foods Market Inc.'s CEO John Mackey urging his board to snap up rival Wild Oats Markets Inc. to eliminate any threat from a rival natural foods company.... The FTC's complaint states that 'Mackey bluntly advised his board of directors of the purpose of this acquisition: 'By buying [Wild Oats] we will … avoid nasty price wars...."

Uh, oh. This one is not going to make the deal easier to defend. But it may not be a deal breaker yet either. Of course, price wars will be eliminated (and prices will likely rise--this idea that market power reduces price competition is fairly well established (see Pragar and Hannan 1998), BUT it does not mean there is not enough competition for Whole Foods and Wild Oats to be merged. Stay tuned.

BTW speaking of horizontal mergers and the difficulty of being approved, XM and Sirius were back in the news recently. Another one that I would have let go.

SSRN-Earnings Forecast Performance and Financial Analyst Turnover During Mergers by Joanna Wu, Amy Zang

SSRN-Earnings Forecast Performance and Financial Analyst Turnover During Mergers by Joanna Wu, Amy Zang:

Super short version: Following mergers, turnover is likely to be a non-linear function of job performance. Specifically, following mergers both poor and good performers are more likely to leave.

Longer version:

Wu and Zang examine analyst turnover and

"...document a U-shaped relation between earnings forecast accuracy and analyst turnover surrounding mergers, i.e., top forecast performers also experience high turnover. We study mergers in the financial industry from 1994 to 2004 when significant consolidation within the industry created considerable analyst turnover. We document that even with the myriad of factors impacting analyst turnover during mergers, analyst performance in forecasting accounting earnings is by far the most influential."

A few interesting tidbits from the paper:

1. Consistent with predictions (and previous studies) analysts who perform poorly are replaced more often.

2. However, unlike previous research, the authors also document higher turnover for good analysts (good predictors of future earnings) following mergers

Why? As the authors state:

"A worker’s productivity is a function of various factors, one of which is his/her firm-specific human capital that reflects the skills and knowledge peculiar to the firm (Parsons, 1972), or a particular combination of various skills that the firm especially values (Lazear, 2003). Mergers likely destroy part of the firm-specific human capital for the financial analysts involved, which combined with some of the other merger-related factors such as culture clashes as discussed later, lead to potential reduction in productivity"

In less formal language: the analyst had done well historically as a result of many factors, suddenly had these factors shaken up in the merger. This shakeup makes it more likely for the analyst to leave. (Of course the fact that the analyst has a good track record also means (s)he has more job alternatives which would also lead to higher turnover.)

This alone is interesting. Then consider further implications of of mergers on the overall labor market. For instance:

"[The] findings speak to the literature on how mergers impact the labor force. Existing studies on top executive turnovers following mergers have tied target CEO turnover to poor target performance and support the disciplinary role of corporate takeovers (e.g., Martin and McConnell, 1991). Our evidence suggests that mergers likely also lead to a brain drain in the broader workforce."

Which deserves a WOW!


Cite: Wu, Joanna Shuang and Zang, Amy Y., "Earnings Forecast Performance and Financial Analyst Turnover During Mergers" (March 2007). Simon School Working Paper No. FR07-01 Available at SSRN: http://ssrn.com/abstract=973750