Mergers and Crimes
Verizon filed its tender offer documents for AOL yesterday, or rather, Hanks Acquisition Sub, the Verizon subsidiary that will actually be buying AOL, filed them. That code name is of course a nod to "You've Got Mail," though the format for tender offer documents is fairly rigid and this one does not begin "You've Got Tender Offer!"
AOL also filed its recommendation that shareholders tender into the offer, which has some interesting tidbits. AOL chief executive officer Tim Armstrong "will receive a 'Founders’ Incentive Award' of restricted stock units ('Founder RSUs') with a value equal to 1.5% of the Company’s market value as of the consummation of the Merger," worth about $59 million, to I guess induce him to stay at the company? I am generally supportive of executive rewards in M&A as a way to align incentives and encourage executives to support value-enhancing sales, but I mean (1) Armstrong already owned a lot of stock and (2) it's AOL, come on, was he really going to defend its independence at all costs? The "Background of the Offer" section describes the initial Verizon approach as being for a joint venture in "which Verizon would contribute certain over-the-top ('OTT') video services, digital media assets and cash, and the Company would contribute platforms assets and certain brands assets"; "Verizon reiterated that they were not interested in acquiring the Company as a whole." But AOL seems to have been pretty eager to sell:
In January 2015, the Company’s management concluded, after exploring in detail the viability of a potential spinoff of its platforms assets and certain brands assets, that partnering with a company that could strategically enhance the Company’s brands, video and platforms businesses would potentially result in greater value to the Company’s stockholders than separating the Company’s platforms assets and certain brands assets from the remaining businesses of the Company.
I quoted that section mostly so you could enjoy the soothing wash of jargon as much as I did. Anyway AOL wanted to sell and wheedled Verizon into buying the whole thing. It also found some other suitors, who did not go far: Company A signed a confidentiality agreement on April 8 and dropped out on April 10, Company B signed a confi on March 9 and was out by mid-April, and Company C (a private equity firm; DealBook thinks it's General Atlantic) signed a confi on March 7, "conducted limited preliminary diligence" on certain AOL assets, and ultimately put in a bid to buy them in May that was rejected in favor of the Verizon bid.
Elsewhere in merger news, yesterday's Charter deal will result in "one of the biggest high-yield debt offerings ever," with as much as $27.3 billion in new junk debt to pay for Charter's purchases of Time Warner Cable and Bright House Networks. That's not counting Time Warner's existing debt, which is expected to roll over and remain investment grade. The Charter deal is also a relief for Charter's M&A advisers, who thought they'd lost the deal to Comcast last year, and for Time Warner's advisers, who thought they'd lost the Comcast deal to antitrust regulators. Though I guess there's some antitrust risk on this deal too, though Charter isn't too worried, saying "We’re a very different company to Comcast, and this is a very different transaction." And here is another profile of John C. Malone, the billionaire behind Charter, who is widely viewed as a cable-business genius but who is also, in certain narrower circles, revered as one of the greatest financial engineers of the last century. The profile is more about the cable stuff.
So many crimes! Starting, obviously, with FIFA, accused by U.S. prosecutors of "corruption that is rampant, systemic, and deep-rooted both abroad and here in the United States." Nine FIFA officials and five other executives were charged with racketeering, with four (plus two corporations) already pleading guilty. The U.S. charges concern kickbacks for media and marketing rights, but meanwhile in Switzerland "it is suspected that irregularities occurred in the allocation of the FIFA World Cups of 2018 and 2022." Huh! One possible lesson here is: Don't commission a former U.S. Attorney to do an investigation of bribery and then basically bin his report; that is bad U.S.-Attorney karma and will come back to haunt you.
Meanwhile in London, Tom Hayes's Libor manipulation trial started yesterday and this isn't exactly legal advice but probably don't say stuff like this in recorded interviews with criminal investigators?
"I mean I probably deserve to be sitting here because, you know, I made concerted efforts to influence Libor," Hayes said in a Feb. 1, 2013, interview.
"The point is you’re greedy," Hayes said in a 2013 interview with U.K. investigators that Chawla played for the jury. "You want every little bit of money you can get because" that’s your performance metric, he said.
One of my strong beliefs about financial crime is that the words "greed" and "greedy" have no analytical value. In a fraud case -- where the accusation is that someone made money -- saying that he wanted to make money is just a superfluous appeal to jurors' emotions, a way to deny the humanity of the bankster whose fate they're deciding. "His motive was a simple one: greed," said the prosecutor, annoyingly. But Hayes agreed, and on tape! Not helpful.
In New Jersey, the Securities and Exchange Commission and federal prosecutors brought charges against three guys accused of a series of penny-stock manipulation schemes that sound absolutely charming:
The SEC alleges that Adam S. Gottbetter orchestrated promotional campaigns that touted the prospects of microcap companies and enticed investors to buy their stock at inflated prices so he and his cohorts could sell shares they controlled and reap massive profits. Gottbetter enlisted Mitchell G. Adam and K. David Stevenson to help him in the last of three schemes he conducted in a six-year period. They repeatedly cautioned each other about the dangers of missteps that might draw law enforcement attention to the scheme, such as failing to keep secret the identities of Adam and Stevenson. The three rehearsed stories they would tell if ever questioned by law enforcement. During one meeting in New York City, Gottbetter complained about the difficulties of stock manipulation but conceded that robbing a bank was the only other way to make so much money so quickly.
Robbing a bank is actually a terrible way to make money, this is legal advice. Gottbetter pled guilty and was sentenced to 18 months in prison yesterday, which is probably a lot better than he'd do for bank robbery. Anyway as part of his schemes Gottbetter "recruited a stock promoter and trader" to do some manipulative trading, and then pulled the trader out of retirement for one last score:
In the second scheme, in the spring of 2013, Gottbetter recruited the Trader to come out of retirement to engage in the same manipulative trading and promotional activities as he had executed in the KYUS scheme, this time to inflate the stock price of Dynastar Holdings, Inc. ("DYNA"), a company that holds itself out as a social media and direct marketing business.
In Texas, the state employees' pension fund stopped doing business with Credit Suisse last year because it had "a policy against hiring firms convicted of felonies," but now that basically all the big banks have been convicted of felonies, it has tossed that policy. Welcome back Credit Suisse! We've talked before about how charging all the banks with crimes de-stigmatizes those crimes, and I won't belabor the point.
In New York, the Dewey & LeBoeuf trial started yesterday, with three former employees "accused of using accounting gimmicks to defraud its lenders" as the law firm collapsed. And in Greenwich, or rather not in Greenwich, Iftikar Ahmed (previously) seems to be on the lam.
One problem in corporate governance is that better governance just pushes principal-agent problems back one level: If corporate managers are responsive to shareholders, all that means is that they are responsive to the professional money managers who intermediate between the corporations and the actual humans whose savings are invested in those corporations. And governance fights tend to be waged between corporate managers who like power, and activist investors who like power, so you wouldn't expect either of them to want to give up power to the little people whose savings are ultimately at issue. (Carl Icahn, among others, gets a pass here, since he's basically playing with his own money.) Anyway here is Steven Davidoff Solomon on corporate governance at Mario Gabelli's Gamco Investors. Apparently it's not very good.
Bill Gross ladies and gentlemen:
I’ve never been much of an art aficionado myself, having settled for framing some All American Rockwells neatly clipped from old Saturday Evening Post covers. There was a time though when a well-publicized Rockwell came to auction and Sue and I expressed some interest. Ever since, we’ve been on the art house’s mailing lists and I must admit, it’s fun to browse through the Picassos, Rothkos, and whatever else currently frenzies modern collectors. I’m no expert though, and if I begin to pretend that I am, Sue puts me in my place because she’s the artist in the family. She likes to paint replicas of some of the famous pieces, using an overhead projector to copy the outlines and then just sort of fill in the spaces. “Why spend $20 million?” she’d say – “I can paint that one for $75”, and I must admit that one fabulous Picasso with signature “Sue”, heads the fireplace mantle in our bedroom.
That's by way of explaining his "short of a lifetime" trade on German bunds, I think, which was "well-timed but not necessarily well-executed."
London bonus league table. There are a lot of dividends and buybacks. Martin Wolf on "too much finance." The mysterious decline in the number of US public companies, and The Epicurean Dealmaker's thoughts on the mystery. "Is their credibility questioned right after raising $500 million and missing earnings as big as they missed out of the gate? Yes." Greece and Ukraine. WJC, LLC. China wants the yuan to be included in the IMF Special Drawing Rights basket. Runs versus Lemons: Information Disclosure and Fiscal Capacity. Do central banks need capital? Algo art. Snapchat will sell ads or something. Uber but for the chopper to the Hamptons. This Perfect Chrome Extension Replaces 'Millennials' With 'Snake People.' (Also "Great Recession" with "Time of Shedding and Cold Rocks.") Don't humblebrag. Breadstick crostini. "The character was somewhere between Keith Richards and a scarecrow." A billion dollars is more than a million dollars.
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