Merger Defenses and the Predators' Ball

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Happy April Fools' Day! April Fools' Day is terrible! I hope that all of the stories below are true! But probably some of them aren't! Also probably like 90 percent of what you read on the Internet today will be false! That's slightly more than the usual 80 percent! Be careful out there!

An oral history of Drexel Burnham Lambert.

Self-recommending. Leon Wagner, a former Drexel high-yield guy, on Drexel's famous Predators' Ball conference:

The so-called Predators' Ball,  which I always thought was a s----- name. … It just did not correctly reflect the substance and level of intellectual discourse that actually happened.

Don Engel, who helped organize the Predators' Ball:

The Polo Lounge was our headquarters. In the Polo Lounge—from Monday night, right through Saturday—every night, we were in the Polo Lounge, drinking Cristal. ...We stayed up until 4 or 4:30 and they served breakfast, and then we went to the conference.

G. Chris Andersen, former head of investment banking at Drexel, on the competition:

If you listen, you can hear them. They're out there in the weeds, they are crawling toward us. And there are lots of them. They're trying to get us. How are they going to get us? And somebody said, “Well, we've got to shoot ourselves in the foot.” And somebody else said, “No. We've got to cross our legs and shoot ourselves in both feet, because they're that far away.” And at the end of the day, when you look back at it, we crossed our legs and shot ourselves in both feet.

There will be no Simon/Macerich.

I've recently fallen into a sort of casual 1980s complacency of assuming that there's a thing called "putting a company in play," and that once a hostile takeover bid is launched it can end only in a deal, though not necessarily one involving the original bidder. Everything just works out, eventually, and takeover defenses are not about thwarting the desire of shareholders to sell, but just about letting the board negotiate the best possible deal. Nope though:

Macerich Co. rejected the “best and final” bid from Simon Property Group Inc., which promptly withdrew its $16.8 billion offer, ending for now the possible combination of rival mall operators in the U.S.

Macerich, in a letter to Simon Property Group, said the offer of $95.50 per share undervalued the company and its growth prospects. Simon said it was pulling the offer in light of Macerich’s decision “not to engage in discussions with Simon.”

Obviously shareholders disagree -- they value the company at $84.33, as of yesterday's close -- but that is too pat, the marginal price is not everyone's price, etc. It probably is the case that Simon thought it was getting Macerich cheap at its price, and that Macerich's board thought that too, and that it was able to persuade major shareholders of that, and that Macerich's very aggressive takeover defense was driven by its desire to do what was right for shareholders. But from the outside it is hard to distinguish that from entrenchment.

Some prop trading.

There is a draft European Commission proposal to ban proprietary trading by large European banks, and to force those banks to ring-fence other trading activities from their retail arms. But now "Latvia, current holder of the EU presidency, in its first full proposal to revise the draft law, wants to ditch the ban," focusing on ring-fencing instead, and "even then, trading would have to trigger a host of quantitative and qualitative criteria for identifying excessive risks before actual separation would take place." I confess that I don't really understand European government at a gut level. It feels like there's always stuff like this:

"Excessive risks are identified only after balancing the risks against the benefits to the real economy for market making," the document said.

What could that mean? Is it like, the social benefits of market-making need to be weighed against the risks of a banking crisis for each position in a bank's trading book? I guess this is how principles-based regulation goes, but I sometimes feel like Europe wants a debate from first principles on the virtues and vices of capitalism every time someone buys a pack of gum. Elsewhere Iceland is reconsidering fractional reserve banking.

Some spoofing.

Apparently Allston Trading LLC, a high-frequency trading firm that's been accused by competitor HTG Capital Partners of spoofing, is also under investigation by the Commodity Futures Trading Commission for "alleged market manipulation" (presumably spoofing). Here is a fascinating (but speculative) blog post suggesting that the spoofing here alleged here may have involved "self-match prevention," a feature of exchange matching engines that prevents firms from trading with themselves:

I imagine spoofing that makes use of Self-Match Prevention in its simplest form would look something like:

1. Market is 10.00/10.02 
2. Spoofer adds new sell order at 10.01
3. Victim follows spoofed order by adding a sell order of its own at 10.01
4. Spoofer sweeps the entire offer, relying on Self-Match Prevention to cancel its prior sell order

If true, the innovation here is "the use of a compliance tool in alleged market manipulation": Self-match prevention is designed to prevent abuses (like firms trading with themselves to manipulate the price), but in this structure it is used to create abuses (spoofing).

Oh HSBC.

Here's a Bloomberg News story whose sub-headings ("Manager Shouted," "'Gaping Hole'") are perfect. It describes a "critical, 1,000-page report" about HSBC Holdings Plc, and just from that phrase -- just from the number! -- you know that:

  1. The report was produced by a lawyer.
  2. The lawyer was not hired by the people who are paying him.

In this case the lawyer is Michael Cherkasky, a former prosecutor now running a compliance consultancy, who was installed by current prosecutors to monitor HSBC's compliance with sanctions and money-laundering rules after HSBC settled a previous round of sanctions-and-money-laundering violations for $1.9 billion in 2012. His report is not what you'd call glowing:

The report cites a litany of problems with the bank’s reforms and compliance procedures, finding that the pace of change is inadequate, said the people, who asked not to be named because the report isn’t public. In at least one instance, a bank manager shouted at an internal auditor who was critical of his work. In another example, the monitor discovered that documents justifying a decision to resolve a client alert were created after the fact although they were presented as being contemporaneous. 

So I mean look you probably want a culture where managers don't shout at internal auditors most of the time. But sometimes managers are right and internal auditors are obtuse and a little shouting is called for. (I guess document backdating is bad but it sort of depends on the gravity of the underlying thing?) I just can't quite imagine how a lawyerly 1,000-page catalog of every time voices were raised would really improve HSBC's compliance culture, though.

RadioShack lives!

Remember when RadioShack filed for bankruptcy and everyone was like "that was very, very expected"? Well:

A bankruptcy judge gave his blessing on Tuesday to a plan that would keep about 1,700 RadioShack stores open, saying he would approve the plan over a higher cash bid that would probably have liquidated the retailer but raised more money for its creditors.

Huh but isn't that ... wait how does bankruptcy work again? Here's more from Judge Brendan Shannon:

“The going-concern bid from Standard General is clearly economically superior to the liquidation bid even before taking into account the added and terribly important benefit of preserving over 7,000 jobs and saving a century-old American retailing icon,” Shannon said.

Yes but it is an icon that stands for "I can't believe that this store is still open." Now you can keep on disbelieving.

Me recently.

I tried to figure out the Patriarch Partners case, and I keep writing about bills to ban insider trading.

Things happen.

Bob Diamond's African banking business is having some troubles, though its "thesis is 100% intact." Jeffrey Gundlach is the bond king now. Point72 continues to do great. GoDaddy priced its IPO above the range, and Etsy set its range. The Consumer Financial Protection Bureau is targeted by "more than one lobbyist for every three people working at the three-year-old agency." Eurex Margin Call Said to Be Behind DuessHyp’s Collapse. Fixed Prices and Regulatory Discretion as Triggers for Contingent Capital Conversion: An Experimental Examination. Lloyds can buy back its cocos (previously). Ben Bernanke is still blogging. Job porn. Quantified e-mail. The new Bill Gross Investment Outlook. The world will only get weirder. Passover for Foodies.

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This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net