The following post comes to us from Arthur S. Long, partner in the Financial Institutions and Securities Regulation practice groups at Gibson, Dunn & Crutcher LLP, and is based on the introduction of a Gibson Dunn publication; the complete publication, including footnotes and charts, is available here.
Implementation of the derivatives market reforms contained in Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) may fairly be characterized as a herculean effort. The Commodity Futures Trading Commission (CFTC) has finalized dozens of new rules to implement Title VII’s provisions governing “swaps.” Although Title VII requires the Securities and Exchange Commission (SEC or Commission) to implement similar provisions for “security-based swaps” (SBSs), the SEC’s rulemaking process has lagged the CFTC’s.
Earlier this year, the SEC finalized two of its required rules: one (Final Regulation SBSR) governs the reporting of SBS information to registered security-based swap data repositories (SDRs) and related public dissemination requirements; the other covers the registration and duties of SDRs (SDR Registration Rule). Additionally, the SEC published a proposed rule to supplement Final Regulation SBSR that addresses, among other things, an implementation timeframe, the reporting of cleared SBSs and platform-executed SBSs, and rules relating to SDR fees (Proposed Regulation SBSR). Comments on Proposed Regulation SBSR must be submitted to the SEC by May 4, 2015.
“Trade” is a loaded word, at least if you’re Goldman Sachs .
The investment house appears to have banished the word from its earnings reports sometime around 2011. In prior years, Goldman regularly reported revenues from “trading.” It had an entire division it called Trading and Principal Investments. In 2010, “trading” was mentioned in the firm’s quarterly reports nine times.
Then “trading” vanished. Goldman broke up the Trading and Principal Investments division into two parts, one called Institutional Client Services and another called Investing and Lending. Instead of trading revenues, Goldman reported revenues from “client execution.”
Sometimes, though, it’s impossible to avoid the word. It showed up last week in a footnote to Goldman’s first-quarter earnings report. This was in a reference to the sale of Goldman’s metals warehouse business, Metro International Trade Services.
This has happened before. In April 2013, Goldman was forced to briefly readmit the exiled word because an amendment to a warrant agreement with Berkshire Hathaway included a pricing mechanic based on an average closing price over “10 trading days.”
Presumably, Goldman still calls the folks trading on its clients behalf “traders.” The phrase “client executioners” might sound a bit off.
Do companies set appropriately challenging goals in their incentive plans? How does a compensation committee determine whether management is recommending challenging goals? How important are earnings guidance and analyst expectations in goal setting? Are more challenging goals achieved as frequently as less challenging goals? How much are annual incentive payouts increased by the achievement of incentive goals? How does the stock market react to challenging goals?
It’s all in nice corporate-speak, but a recent letter from Larry Fink, the chairman and chief executive of BlackRock Inc., to public company CEOs seems to indicate that war is slowly but surely breaking out between two heavyweight classes of investors: activists and larger broad-based fund managers (or at least one of them). It looks like corporate managements could get caught in the middle.
As in any war, there is more than a little fog obfuscating the issues. Mr. Fink’s attack is directed against what he has called “short-termism.” He took aim at “the acute pressure, growing with every quarter, for companies to meet short-term financial goals at the expense of building long-term value.” He didn’t blame this entirely on activist investors, and he acknowledged that some do take a long-term view, but they were first on his list of causes.
But I think the most meaningful statement in the letter–and the declaration of war–is this sentence: “It is critical, however, to understand that corporate leaders’ duty of care and loyalty is not to every investor or trader who owns their companies’ shares at any moment in time, but to the company and its long-term owners.”
Huge money managers like BlackRock will likely be judged over the long term on their ability to maximize returns in their broad range of investments. Activist hedge funds, meanwhile, invest in a much more limited number of companies. They tend to first come up with ideas to enhance the value of an investment in the company, then buy shares with the objective of getting their ideas implemented.
Activists can produce a nifty profit for shareholders , but they sometimes push strategies that alter the fundamental nature of the investment for longer-term investors. Broad-broad based money managers tend to benefit more if the companies they invest in create and exploit successful investment opportunities, even if the market does not fully value them in the short term.
While framed as letter of support for management, Mr. Fink’s letter seems like a shot across the bow. It is a manifesto for “corporate leaders” to “engage with a company’s long-term providers of capital” and “resist the pressure of short-term shareholders to extract value.”
Big fund managers potentially have tremendous power in this battle. BlackRock and other fund managers control a lot of votes as directors run for reelection, and they’re generally present long before activists surface. Mr. Fink’s letter indicates that BlackRock has changed its proxy voting guidelines, and it wouldn’t be surprising to see it use its influence to, among other things, ask compensation committees to implement its views of how managers should act in long-term shareholders’ interests.
Take executive payouts resulting from a sale or cash distribution to shareholders. Even when management fights an activist pushing for such moves, executives generally profit through their equity compensation arrangements (or golden parachutes) if they lose. BlackRock and other fund managers could possibly use their clout to push to change these arrangements and prevent big management paydays that result from activist-style moves where, as Mr. Fink put it, “management has not articulated a clear long-term vision, strategic direction and credible metrics against which to assess performance.” Those kinds of compensation changes could really shake things up in future activist fights.
Executive searches and board nominating processes also present opportunities for big fund managers to make their mark.
Despite the measured words in Mr. Fink’s letter, there could be bloody battles ahead between different classes of investors that are looking for very different things. And corporate executives may end up in the line of fire.
Another public-company executive is heading back into private markets.
Nils Erdmann, the former Twitter Inc. head of investor relations, who had helped manage the company’s pre-IPO stock trading, will join Duncan Niederauer, the former NYSE chief executive, at San Francisco-based Battery East LLC.
Battery East launched last year to help companies to manage large sales of private shares before they go public. That market has been growing rapidly, as companies stay private longer and raise huge sums. But it is also growing haphazardly, as hedge funds, small investors, and employees scramble to jump onto the money parade. That has led to conflicts with companies and regulatory scrutiny. Participants estimate that the size of the pre-IPO secondary market is between $10 billion and $30 billion.
Battery East aims to smooth out pre-IPO liquidity by joining companies with large institutional investors—firms like BlackRock Inc., T. Rowe Price Group Inc., or Wellington Management—who are increasingly taking pre-IPO stakes.
These institutions have historically tended to focus on primary fundraisings, as have the big investment banks. Now, Battery East aims to compete with traditional banks by working with companies and these investment firms to facilitate so-called secondary sales of big slugs of stock, sometimes north of $100m, from employees and founders. The aim is to big investors more comfortable with doing secondary transactions by bringing them into a more organized, company-friendly process.
For investors, “it doesn’t really work if you’re doing this against the company’s wishes, or doing it secretly with employees,” said Mr. Niederauer. He joined the firm last year, after it was launched by Barrett Cohn, a former private wealth banker; Michael Sobel, a former BlackRock head trader; and Howard Caro, the former general counsel of Peter Thiel’s Founders Fund.
Now, Mr. Erdmann brings his experience from Twitter. Facebook Inc. shares were widely traded privately, forcing the company to flirt with the shareholder count limit that required them to file an IPO. But Twitter kept a lid on its trading by working closely with a small number of funds, which investors could buy into, that swept up any stock being sold by employees.
At Battery East, Mr. Erdmann says he will work with companies to replicate some of that process, and also to improve on it, in part by focusing on large investment firms as buyers of secondary shares. Prior to joining Twitter, Mr. Erdmann had lead investor relations at Pixar.
At Twitter, he said, they saw how “very chaotic, very misunderstood” secondary markets could be. “You heard stories of people going out and trying to go and get shares, and then finding buyers in the form of mysterious people,” he said. “That system doesn’t work well from a company’s perspective.”
Mr. Erdmann says companies need to get into the habit of pursuing big investors as pre-IPO shareholders, even if that means having to share more financials with them. “You have to think very carefully about the makeup of the composition you want in the investor base,” he said. “The goal should be to get institutional investors onto the company’s cap table” before an IPO.
Richard Kincaid was on vacation with his family in Mexico earlier this month when he got an email from Robert Katz, chief executive of Vail Resorts Inc. “I know you’re out of the country,” Mr. Katz wrote one of his longest-serving board members. “But I need to talk to you.”
Mr. Kincaid first thought maybe Vail was doing an M&A deal. But when the two men connected, the CEO wanted to discuss something else: Mr. Kincaid’s involvement in an activist fight at MGM Resorts International .
Two weeks earlier, Mr. Kincaid had joined a board slate put up by activist Jonathan Litt at the casino operator. That was ruffling some feathers on Vail’s board, Mr. Katz said, especially given that Vail and MGM share a lead independent director.
“He said, ‘The rest of the board isn’t going to like this,’ and I said, ‘I don’t work for the rest of the board,’” Mr. Kincaid said in an interview Friday after The Wall Street Journal detailed the dustup.
Five days later, Mr. Kincaid resigned from Vail’s board. “It’s a terrific company, but I’m not going to be pushed out simply because they don’t think it’s a good idea to be involved with an activist,” he said.
A Vail Resorts spokeswoman declined to comment on confidential board discussions. “We take very seriously the governance guidelines for our board of directors, which are there to protect the interests of Vail Resorts shareholders,” she said in an email.
The brouhaha hints at a challenge for activist investors like Mr. Litt. Hoping to win votes from other investors, activists are increasingly recruiting corporate veterans like Mr. Kincaid, who was CEO of Equity Office Properties Trust, the commercial landlord founded by real-estate mogul Sam Zell.
But that pedigree comes with corporate roots and relationships that may be strained by a decision to align with an activist.
Mr. Kincaid said he is selective when signing onto activist campaigns and looked closely at Mr. Litt’s plan for MGM to separate its casino properties into a real-estate investment trust. Mr. Kincaid had worked in REITs since the early 1990s and recently oversaw such a spinoff at Rayonier Inc., where he is chairman.
He said Mr. Litt’s plan at MGM made sense to him. And shareholders had welcomed it, bidding the stock up 16% in the few days after Mr. Litt went public. That his involvement sparked a backlash among Vail’s directors came as a surprise, he said.
“God forbid I aligned myself with a value-enhancing proposal that shareholders are embracing.” Mr. Kincaid said. “What am I doing that’s anti-shareholder here?”
Since shepherding the sale of Equity Office to Blackstone Group LP in 2007, Mr. Kincaid has made the rounds as a corporate director. In addition to Vail, the 53-year-old sits on the boards of Rayonier and Strategic Hotels & Resorts Inc., and has been discussed as a potential candidate at Macerich Cos., the mall owner where Mr. Litt is also seeking board seats.
He has also pursued a series of what he calls “bucket list” activities: starting a foundation that uses documentary films to shed light on social problems; launching an online crowd-funding platform to raise money for scholarships; and releasing several adult contemporary music tracks.
Both companies took pains to describe the changes as an extension of their 2009 partnership that has evolved as the search landscape has changed, but many analysts looked at it as a move toward extricating themselves from one another.
The latest iteration of that “partnership” makes it that much more arms-length. Now Yahoo can display its own search results and ads for 49% of searches on desktops, as well as on all searches for smartphones and tablets. Microsoft will continue to provide results and ads for the majority of desktop ads for the remainder of the companies’ 10-year pact, which expires in 2020.
Originally when the pact was struck in 2009, Microsoft agreed to provide Yahoo with all search results on computers, controlling the technology underpinning searches across both companies’ sprawling universe of websites. Yahoo, in turn, handled sales of search ads for both companies.
MoneyBeat readers might remember Microsoft’s pursuit of Yahoo that preceded the pact. Microsoft’s search-partnership with Yahoo came after the company failed to buy Yahoo in 2008. In early Jan. 2008, Microsoft made an unsolicited bid of $31 a share, or $44.6 billion, for Yahoo, and ultimately raised the offer to $33 before taking it off the table.
Yahoo, then with CEO and founder Jerry Yang has seen four other individuals take the helm and leave since then, still remains in the middle of deal speculation under Chief Executive Marissa Mayer. Activist-investing firm Starboard Value LP has been pushing for a “major overhaul” at Yahoo Inc. Starboard has criticized Yahoo’s recent history of acquisitions and has pushed the company to explore a tie-up with online-ad rival AOL.
Ms. Mayer has been vocal about her opposition to such a tie-up with AOL.
Yahoo’s market cap currently stands at $41.5 billion, roughly 7% below where Microsoft’s bid came in nearly seven years ago. Its stock price of $44.31 has nearly tripled under the rein of Ms. Mayer, who took the helm in July 2012. Much of that gain has come from Yahoo’s stake in Alibaba Group Holding Ltd.
Yahoo reaped more than $5 billion from Alibaba’s record-setting IPO last fall, in addition to its sale of $7.6 billion in shares of the Chinese e-commerce company in 2012. In late March, Yahoo said ti woudl buy back #2 billion of its own shares with additional proceeds from the Alibaba IPO.
Shares of Alibaba are up more than 20% from the company’s $68 billion IPO price, valuing the Chinese Internet firm at more than $200 billion.
Investors were feeling poorly Friday. Bristol-Myers Squibb was one of the few stocks with a prescription for that.
The pharmaceutical giant said it halted a phase-three clinical trial for Opdivo in patients with a form of advanced lung cancer due to an improvement in overall survival rates. A study to treat a different form of lung cancer with Opdivo was also stopped in January, and Bristol-Myers received approval for that indication just seven weeks later.
For now, the news puts Bristol-Myers ahead of Merck, Roche, and AstraZeneca, who are developing similar drugs. Since cancer treatments command high prices, the stakes are high: Morningstar expects the immuno-oncology market will grow beyond $33 billion in annual sales by 2022. Because first-mover cancer drugs tend to have a competitive advantage, it expects Opdivo will generate $12.2 billion in annual sales by then.
That could give Bristol-Myers’ long-sluggish top line a jolt. More immediately, investors were happy to find at least one big stock rising Friday.
For an investor, being proved right when others turn out to be wrong can build your confidence. It also should shake it.
That is one lesson from the eye-catching performance of the Wasatch-Hoisington U.S. Treasury Fund. This portfolio, which holds the longest-term, riskiest Treasury debt, was up 32.6% in 2014 and has gained an average of 8.7% annually for the past decade.
For much of that time, nearly every economic forecaster and bond investor in the country was betting that interest rates had to go up. Van Hoisington, manager of the Wasatch mutual fund and chief executive of Hoisington Investment Management in Austin, Texas, bet that rates would go down. And he still thinks they will—but he is testing and retesting his assumptions.
As well he should.
Being on a hot streak is one of the most dangerous things that can happen to a professional or individual investor.
Now that the S&P 500 has risen 226% since March 2009, including dividends, stock investors also should worry about how being proved right can undermine their ability to imagine being wrong.
Once the performance of an asset exceeds your expectations, “the position becomes an anecdote,” says Michael Ervolini, chief executive of Cabot Research, a Boston-based firm that helps professional investors analyze their decisions. “And the point of the anecdote is that you know exactly what you’re doing.”
Just think of how the people who owned gold back in 2011 and 2012 insisted that it had nowhere to go but up. Based on emails I received back then, with gold $1,400 to nearly $1,900 an ounce, those who were most vehement that it was on its way to $5,000 were those who had bought it for $1,000 or less. The more money they had already made on gold, the more certain they were that it was on its way to the moon. (Gold traded around $1,200 this week.)
Or think of the folks who bought Internet stocks in 1999 and doubled or tripled their money in no time. Plenty of them were convinced, by early 2000, that nothing else was worth owning. Within 12 to 18 months, many of them had lost 90% or more.
No wonder the economist and investment strategist Peter Bernstein, who died in 2009, was fond of saying “the riskiest moment is when you are right.”
In much of life, doing things right over and over again is a sign of skill; expert musicians, for instance, rarely hit a wrong note. And the skill of one professional musician doesn’t make it harder for the others to be equally expert.
But in the financial markets, where so many investors are highly skilled, their actions cancel each other out as they quickly bid up the prices of any bargains—paradoxically making luck the main factor that distinguishes one investor from another.
And a streak of being right can make anyone forget how important luck is in determining the outcome.
Research led by psychologist Ellen Langer, now at Harvard University, shows that when people who predict the tosses of a coin are told they got eight out of their first 10 flips correct, they conclude that they are significantly better than average at calling heads or tails—and that they could get well over half their guesses right if the coin were tossed another 100 times.
Prof. Langer called these incorrect beliefs “the illusion of control.”
If, however, people either get most of their early guesses wrong or win and lose in a random pattern, they don’t believe they have any special gift for calling heads or tails; nor do they remember being correct more often than they were.
Guarding against the illusion of control takes constant vigilance. The longer you’ve been right, the harder it gets.
“We have a meeting every week in which we discuss every write-up we can find on the argument that rates are going up so we know the other side of the coin,” Mr. Hoisington says. “So far, we think the weight of the evidence is still on our side.”
“Our confidence level rarely goes above 60%,” he adds. “We have to pay attention, because we’ll be at the top—in a negative sense—if rates go up.”
Only three out of 992 other U.S. taxable bond funds are more sensitive to changes in interest rates than Mr. Hoisington’s, according to the investment-research firm Morningstar. Based on a measure called “duration,” the Wasatch-Hoisington fund is likely to lose 20.5% of its net asset value if rates rise by one percentage point.
Now also is the ideal time for stock investors to think about whether they, too, are prepared to be wrong. U.S. stocks lost 41.8%, counting dividends, between September 2008 and March 2009. Before you buy more, make sure you are comfortable with the risk of losing roughly half of what you already have.
The two banks, which announced a $3.7 billion cash-and-stock deal on Aug. 29, 2012, said that they would extend their merger agreement to Oct. 31 from April 30 to allow for more time to gain regulatory approval.
That’s 963 days since the merger was announced, making it the longest-pending deal by a landslide. The announced-merger between Sysco and U.S. Foods, the nation’s two largest food distributors, has had the second-longest wait time at 494 days.
In the U.S., only four other deals that have not closed for 1,000 days or more post announcement, according to Dealogic, and three of the four were ultimately withdrawn. Of those four, only NRG Energy Inc.'s acquisition of certain assets of Cajun Electric Power Cooperative ultimate closed after an extended 1,000 day closing period.
All four deals with wait-times of 1,000 days or more involved utility companies, which like the banking industry as of late, is heavily regulated.
Even among the largest transactions, it’s rare that closing periods last more than even one year. The 10-largest deals announced since 2009 all closed within a year, and some of those within six months.
Earlier this month, the banks said the Federal Reserve informed Buffalo, N.Y.- based M&T Bank that it wouldn’t make a decision on its merger application before April 30. The banks had hoped the merger would close by May 1. The banks now expect the Federal Reserve to make a decision by Sept 30. Hudson City Chief Executive Denis Salamone said in a release that the company still believes the deal is attractive.
Hudson City and M&T first reached a merger agreement on Aug. 29, 2012. The deal hit its first snag in early 2013, when M&T learned that the Federal Reserve had concerns about the M&T ’s anti-money-laundering procedures. The central bank ordered improvements and invested millions of dollars to implement them.
When the deal was announced, it was dubbed a coup for M&T’s chairman and chief executive, Robert Wilmers, then a septuagenarian and now an octogenarian. It marked his 21st deal over three decades as he built M&T. The deal received praise from investor Warren Buffett, whose Berkshire Hathaway Inc. then owned about 6% of the lender.
Since the announcement, shares of both banks have bounced around, as investors have grown concerned that the deal could fall apart. Yet, M&T’s shares are up more than 35%, and Hudson City’s shares are up nearly 30%.
It’s a rough day for the markets.
The Dow Jones Industrial Average and S&P 500 are having their worst sessions in three weeks as fears mount over the possibility of a Greek exit from the eurozone and a higher U.S. dollar continues to weigh on profits.
Across the pond, major European bourses ended down about 2%. And the German 10-year bond yield is at a record low as investors pull out of stocks, seeking safe-haven assets.
Among the companies delivering the biggest blow to the Dow 30 are American Express Co. and 3M Co. The two are collectively shaving 50 points off the blue-chip index, which was down as many as 283.4 points at its session low. American Express reported a rise in quarterly profit that beat analyst expectations. But a higher dollar hurt profits abroad. As was the case in the fourth quarter, first-quarter profits for multinationals generating sizable revenues overseas are anticipated to take a hit due to the rising greenback.
Growth-sensitive stocks are the laggards. Techs, consumer discretionary names and financials are all underperforming, showing investors are taking risk off the table. Apple Inc. is off 0.7%. While it is not the worst-performing component of the S&P 500, its weighting is so large – at 3.9% – that it is acting as a big drag on the index. The Nasdaq Composite, in which Apple holds a 9.7% weighting, is faring worse than the other major indexes.
If the S&P 500 closes Friday with a loss of 1% or more, it will mark the first 1% decline for the large-cap index since March 25.
Sometimes it’s hard to tell whether initiatives from the financial sector are Freudian slips or just an admission of the obvious. On a day when the Eurozone was thrown into fresh turmoil by another round of Grexit worries, Deutsche Bank issued a press release about its Summary Index of Relevant Economic News (SIREN) for tracking the economies of countries sharing the euro.
Woot-woot! The eurozone patient’s vital signs are off the charts. At one point on Friday, Germans could get just 0.05% by lending their own government money for 10 years or 250 times as much in Greece which, for now at least, shares the same currency.
It’s at times like these that traders hope for the best but prepare for the worst in their inboxes. Here’s wishing Deutsche’s customers a memo about a High-yield European Liquidity Program rather than, say, a Defaulting Economy Action Directive.