"There has been galloping concentration in virtually every area of the media industry.... It's hard to argue we need more." -- Senator Byron Dorgan (D-N.D.) On the surface, Deere (DE) shareholders just got an unbelievable offer. For a limited time only -- through May 30 -- TRC Capital says it will buy up to 2.25 million shares of the farm-equipment company at $42.25 apiece. Trouble is, TRC's bid is actually 5% less than Deere's May 14 closing price of $44.50.
TRC has been busy. Over the past few years, the Toronto company has launched similar offers for shares in Alcan (AL) Maytag (MYG), TRW (TRW) and Unocal (UCL) to name just a few. The twist? TRC makes so-called mini-tender proposals. Critics say the aim is to fool shareholders into forking over their shares at below-market prices, thinking the offer carries a premium that is typical in a full-fledged takeover bid. "The whole idea seems to be to catch people unawares," says William Houlihan, chief deputy director of the Illinois Securities Dept.
With more than 50 offers, TRC is the king of the mini-tender. The offers are perfectly legal. The proposals fall short of the 5% ownership threshold of a full-fledged tender offer -- hence the term mini-tender -- so the buyers need not comply with Securities & Exchange Commission requirements. In fact, they don't even have to file with the SEC. The SEC and the Canadian Securities Administration declined comment.
Since TRC explicitly says its price is below market value, it cannot be accused of deception by regulators, though regulators and companies still warn against tendering shares. Lorne Albaum, TRC's CEO, declined comment. But TRC's steady stream of come-ons suggests that the tactic is paying off for someone. In what may prove to be a case of throwing good money after bad, speculators have been buying up stock of companies that are facing huge court claims for asbestos-related illnesses. Shares of Crown Holdings (CCK), W.R. Grace (GRA), and USG (USG) have climbed 30%, 75%, and 118%, respectively, since Apr. 23.
The speculators are betting that Washington politicians will broker a plan to cap the companies' liability -- in exchange for payments of $90 billion to $138 billion into a fund for victims, survivors, and their lawyers. Senate Judiciary Chairman Orrin Hatch (R-Utah) is set to file a bill before Memorial Day.
But Charles Gabriel, a Washington analyst for Prudential Securities (PRU), believes any deal will collapse before becoming law. Labor -- and some trial lawyers -- will angle for more money, plus a government backstop for the trust. And, as the election cycle heats up, Democrats will balk at allowing a Bush victory on tort-reform. That could leave the speculators wishing they had someone to sue. The legend of Woodward and Bernstein might just be eclipsed at the Washington Post Co. with the emergence of Grayer and Rosen.
Who? Jonathan Grayer is the CEO and Andy Rosen is the president of Post-owned Kaplan, the test-prep and educational service outfit that is closing in on and could overtake the Washington Post newspaper as the biggest revenue-generating unit at the company.
At the May 8 annual meeting, Post CEO Donald Graham spent a lot of time boasting about Kaplan's 21% revenue increase in the first quarter. Graham told shareholders: "The Kaplan number is so big it leaves everyone else in the shade." Kaplan's revenues are projected to reach $770 million this year, while the newspaper revenue will hit $868 million, according to Merrill Lynch (MER). The Post, with annual revenue of more than $2.5 billion, also owns Newsweek magazine, television stations, and cable systems.
Graham's late mother, Katharine, certainly couldn't have imagined that her company would one day be as much about education as it is about journalism. When she snapped up Kaplan in 1984, it had $36 million in sales. The ink-stained wretches at the Post shouldn't feel too put out by this new star. Kaplan's revenues are a good hedge against advertising downturns that can squeeze newspapers. John Rogers Jr., a veteran mutual-fund manager and CEO of Chicago's Ariel Capital Management, is noted not just for his funds' generally superior performance but also for his penchant for eating at McDonald's (MCD) As it happens, just this April, Rogers was nominated as one of three new members of the Golden Arches' board.
But get this: Earlier this year, as Rogers was being recruited, his firm was dumping its entire McDonald's holding. Ariel had built up the stake through last year's second half -- reaching more than 4 million shares, then worth nearly $65 million, by Dec. 31. Rogers, who still loves the food, told fund shareholders in an Apr. 30 letter that he had soured on the company because its expected growth rate had fallen into the single digits, well below the 12% to 15% he looks for.
Did McDonald's management take issue? "They perfectly understood," says Rogers. A McDonald's spokeswoman says: "We think he's going to be a great addition." When shareholders meet on May 22, they'll get to decide whether the selection of Rogers gives them indigestion. The stock market crash of October, 1987, has confounded market theorists for years. It was too big to be explained by traditional concepts of market volatility. Using theories that also predict the frequency of severe earthquakes, however, seemed to work. A market fluctuation of any given amount (say, 5%) turns out to be eight times as likely as a swing twice as big (10%). In other words, viewing minor variations can help predict how likely a big swing is. But no one knew why the theory worked.
Now, researchers from Massachusetts Institute of Technology and Boston University, writing in the May 15 issue of Nature, say market concentration is the culprit. The roughly 500 biggest traders, such as mutual funds, are so huge that they determine the movement of the entire market. It takes only a slight majority leaning the same way to make markets reel or fly, says MIT researcher Xavier Gabaix.
This better understanding of how markets fluctuate might make traders less likely to be caught unawares. "Unfortunately," says Gabaix, "we can't tell whether the next move will be down -- or up."