Levine on Wall Street: Mergers and McMuffins
Staples is buying Office Depot for $11 a share in cash and stock, completing a roll-up of indistinguishable (to me) office supply stores that began when Office Depot acquired OfficeMax in 2013. Activist hedge fund Starboard Value has been involved since the beginning, with stakes in both Office Depot and Staples, and has been pushing this deal hard. It also pushed Yahoo's Alibaba spin-off, so it's having a good year; here you can read a comparison of Starboard to Tom Brady, though I worry a little about what happens when it has no more office-supply worlds to conquer. Anyway, umm, antitrust? "Staples and Office Depot had tried merging only to be blocked by regulators in a 1997 lawsuit," but, man, remember 1997? In 1997 RadioShack was not a punch line. I feel like the rule for the 2015 economy should be that pretty much any merger of brick-and-mortar retailers is pro-competition, unless those retailers are dollar stores.
Elsewhere, here is Steven Davidoff Solomon on the lessons of the busted GFI/CME merger. It's pretty nutty, featuring a management team that was buying part of the business for itself, an exclusivity arrangement between that team and CME (despite interest from competitor BGC), and a special committee that recommended the (higher) BGC bid only to be overruled by the full board's recommendation in favor of the CME deal. The main lesson to me is that it is weird for a business like this -- a brokerage whose assets are its people, still run by its founder -- to be a public company subject to public-company rules. "There is no doubt that having built" GFI, Davidoff Somon writes, its chairman Michael Gooch "wants to sell the business as he wishes." Which seems fair enough, honestly, but he went public so it doesn't work that way any more.
How's Greece doing?
Oh not great:
“The Greek plan relies fully on the ECB,” said another eurozone official briefed on the talks. “The ECB will play hardball.”
That's about Greek proposals to raise 10 billion euros of "bridge financing" during bailout negotiations, but that requires ECB approval to raise a short-term debt ceiling, which in turn requires negotiations, and everyone has been reading up in their game theory textbooks and apparently hardball is the order of the day. Meanwhile apparently Greek taxi passengers are withdrawing their deposits from banks and hiding the cash under bathroom tiles, in their gardens, or in their air conditioners, and then telling their taxi drivers where they hid the money, which suggests a level of fiscal profligacy that might almost explain the current crisis.
How's Warren Buffett doing?
That's a dumb question, the answer is always "rich and jolly," but there is some folksy Warren Buffett news today so let's get to it. First, his broker at Citi, John Freund, is retiring after 44 years of executing trades for Berkshire Hathaway, and wouldn't it be funny if they replaced him with like an associate in his first year on the equities desk? "Hey, John is retiring, and we think you're ready for some clients of your own, so we'd like you to take over his. They're a good group. Folksy." Here's a story about Buffett's first cell phone call, from Freund:
According to him, it was around the mid ’90s the famously low-tech Mr. Buffett called to say he wanted to try out his new phone. “I thought he was calling to say, ‘where is the market going to open?’ or to rearrange an order,” Mr. Freund said. “And then you hear, ‘I’ll take an Egg McMuffin and a Coke to go.’ He was in a McDonald’s in the drive-thru lane.”
So ... Buffett clearly drove to McDonald's just for that story right? Like, he couldn't wait until before or after he ordered to call his broker? This is some performative folksiness.
Also, Buffett has a bet with Protégé partners that the S&P 500 will outperform a list of five undisclosed funds of hedge funds over ten years starting in 2008, and every year around this time we get an update on the bet. Everything is fine for Buffett, as it usually is: The S&P has returned 63.5 percent since the bet started in 2008; the hedge funds have returned 19.6 percent. (Berkshire Hathaway's stock, over which Buffett actually has some influence, has underperformed the S&P modestly over that period, though it's still way ahead of the funds of funds.) So if your broker is putting all your money in a diversified group of funds of funds (why?) and none of it in index funds, tell him to stop doing that. Tell him Warren Buffett said so. Then shout, "I’ll take an Egg McMuffin and a Coke to go." He'll get it.
You can get negative corporate bond yields now.
On Nestlé, for instance, and not even in Swiss francs; yields on its four-year euro bonds hit negative 0.008 percent yesterday. And Royal Dutch Shell had a bond trade negative last week. One immediate question here is: Why would anyone want eBonds? Negative yields on corporate bonds are not exactly a sign that investors are shunning them because they're too risky. Another question is: Shouldn't companies be issuing bonds at negative yields to build infrastructure? Or at least to invest in chocolate-making equipment? Shell's case is more complicated; borrowing money at negative rates to drill for oil right now might be a negative-net-present-value transaction (or maybe not!), but I feel like negative rates plus lots of idled rigs maybe present an opportunity to invest for the next boom. In any case, if you can borrow money at negative rates now, and you aren't, why not?
Speaking of energy booms.
Here is Izzy Kaminska on Michael Masters on the last energy boom, consistently fascinating. The thrust of the conversation is about the allocation of institutional capital -- what Masters calls "index speculators" -- to commodities, which "distorted the usual price discovery process":
“This was the first time that we saw large investment institutions allocate to what I would call the fruits of production rather than the means of production,” he said. “Historically, capital markets have been about the means of production not the fruits. But they looked at it as a pseudo currency. And constantly rolling over and synthetically holding commodities… it had never been seen before and had a significant effect on price formation and market structure.”
On the other hand, "it may have been speculation that inadvertently created the conditions that made alternative fuels and production technologies viable." Elsewhere, restructuring advisers are excited about the oil bust.
Say hello to Yahoo's active trade or business.
Back when we talked about Yahoo's spin-off of SpinCo, which was slated to include $40 billion worth of Alibaba shares and a "legacy, ancillary Yahoo business" to meet the "active trade or business" requirement for a tax-free spin-off, I was perhaps a little mean to that business. I called it Nameless ATB, because Yahoo didn't bother to disclose what it was. But now it has. It's Yahoo Small Business, which "provides easy-to-use, award-winning tools that make it easy for you to launch your online presence, build a thriving ecommerce business, and drive new customers with local marketing and promotions." Yahoo Small Business's Tumblr post (yes) on the spin-off is almost heartbreakingly optimistic, saying that "With this new opportunity, we can invest even more in our platform and chart our own course."
And look, yes, last time we talked about Nameless ATB, I predicted that it would be "small and despised," so that SpinCo management would not be tempted to invest in it, and would focus on efficiently monetizing the Alibaba shares, which are worth 100 times or so as much as Nameless ATB. (And so that it could be a harmless plaything in any eventual sale of SpinCo to anyone (Alibaba) who might have tax-efficient plans for those Alibaba shares.) But I take it all back and I hope that Yahoo Small Business will thrive under its new management. Though it will need a new name? SpinCo Small Business?
Elsewhere in Alibaba small-business news, LendingClub "will provide financing to U.S. small businesses buying from Chinese suppliers" on Alibaba.
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