Twitter Earnings and Merger Lawsuits

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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Twitter earnings.

There's a concept called "Gell-Mann amnesia," in which you trust journalism generally despite regularly finding that a lot of journalism about your own field is wrong. I feel like I have a similar problem with corporate capitalism and Twitter. Generally speaking the modern American public corporation strikes me as a pretty successful way of organizing economic behavior, but then every three months Twitter does an earnings call and promises investors that it will ruin its service to attract users whose defining characteristic is that they don't like Twitter, and I yearn for the days of medieval guilds. It's a bummer. Yesterday Twitter released earnings, and showed disappointing user growth. Here's a roundup of analyst reactions, including from Ben Schachter at Macquarie:

The bottom line for TWTR is that after nine years of its existence, my mother still doesn’t understand what it means to “hashtag” something, but she does understand what it means to “like” something. 

But why is it so important for Twitter that it attract that Macquarie analyst's mother? Why can't she be happy with Facebook? The earnings call with interim CEO Jack Dorsey -- which apparently went great despite driving down the stock price -- included this:

Jack mentions human curation of tweets, talking it up. Any forced curation for stream would really anger power users, with no guarantee that it would attract others.

And there is this:

“What shocked the stock after hours is that despite all of the product improvements, people were less active now than they were seven months ago,” said Richard Greenfield, an analyst with BTIG Research. “Engagement is falling despite all of the changes they made.”

It seems pretty obvious that if you turn Twitter into Facebook, it will not be as successful as Facebook, because Facebook is already Facebook. And if you turn Twitter into Facebook, it won't be Twitter, and Twitter is good. But its laser focus on pleasing the people who don't like or understand Twitter is not a great sign.

I think Matt Yglesias would be a good permanent CEO for Twitter; here's his plan for the company from last month. Also last month "Ivan the K," the self-proclaimed "Vice Chairman of Finance Twitter," had a list of good (and still unanswered) questions for Twitter, including:

Who is more important to Twitter management’s present strategy: current users or potential users? Many current users have the impression that the Twitter executives who decide on product enhancement priorities are not in touch with the user experience (e.g., “New Tweets”button). How do Dick and Jack evaluate the company’s level of user satisfaction beyond engagement metrics? Do you have a user beta test community?

Also last month I proposed mutualizing Twitter

Barclays.

The other company without a permanent CEO that just announced earnings is Barclays, which seems to be getting what it bargained for when it fired Antony Jenkins and gave the reins to chairman John McFarlane. Earnings were pretty good, capital was good, risk-weighted assets were down, and McFarlane seems excited "to accelerate the execution of the strategy" and "deliver better returns for shareholders." "Flat dividend guidance is slightly disappointing, but understandable in the context of a faster non-core run-down strategy, which is likely to be well received," said Citigroup analysts. It really does seem like the global regulatory goal of making banking more boring has been internalized by shareholders, who seem to love reductions in trading businesses. One possible model is that modern regulation has made those businesses less profitable for shareholders; a less likely but more fun model is that those businesses were always about employee rather than shareholder value.

The merger litigation scam.

I don't get outraged particularly easily, but I still remember learning about merger litigation as a young lawyer almost a decade ago and being shocked at the purity of its cynicism. Here's how it usually works:

  1. A company agrees to a merger, pending shareholder approval.
  2. A law firm sues, saying that the board didn't approve the merger in good faith and that it's unfair to shareholders.
  3. The company agrees to add a few sentences of extra disclosure to the proxy statement for the shareholder vote.
  4. The company pays the law firm a few hundred thousand dollars. (The shareholders get nothing.)
  5. The deal magically immunizes the company and its directors and everyone else involved from any future lawsuits if they actually didn't agree to the merger in good faith.

This is a profitable, and therefore growing, racket: "In 2014, shareholders filed suits challenging 93% of corporate mergers, up from 44% in 2007." It is good for directors, who get immunized from real lawsuits, and good for lawyers, who get paid, but for shareholders it is at best ridiculous and at worst harmful. Anyway here's the story of Fordham law professor Sean Griffith, who has decided that this must stop and has started going to court hearings to object to these settlements. Good for him.

The lure of gold.

There's a general sort of cognitive bias where you're really good at one thing -- say "long-short value-oriented" or event-driven investing -- and so you decide that you're really good at everything, or at least at every variety of investing, so you expand your investing universe into places where you have less expertise and end up doing worse. But in recent years it seems like there's been a version of this bias specifically for gold: Like, you get rich investing in equities, and you become seduced not only by your own success but also by the lure of hard money, and next thing you know you're railing against the Fed and long tons of gold as gold is dropping. Here's David Einhorn's version of that story:

“Monetary policy and regulations have combined like a failed chemistry experiment to create a potentially destructive force that should not exist outside of fiction,” Einhorn, 46, said in April at Grant’s Interest Rate Conference in New York. “This adds to the ultimate attraction of holding gold instead of green.”

Gold is down about 9 percent since then. In other hedge fund news, Mako Investment Managers' Pelagus Capital Fund looked better in 2012 than it does now.

People are worried about stock buybacks.

I suppose that is a rather glib way to refer to broader worries about short-termism, underinvestment in research, managing for immediate shareholder returns rather than sustainability, etc., but here we are. Here is Andy Haldane's speech, given in May but posted online yesterday, titled "Who owns a company?" That "might seem like a simple question with a simple answer," he says, admitting that the standard answer -- "shareholders" -- is "corporate finance 101." But actually, he argues, it's more complicated than that. Of course it is, though? Honestly what are they teaching in corporate finance 101 these days? I feel like the standard view in corporate law has for a long time been that shareholders don't really "own" corporations. Lynn Stout's "The Shareholder Value Myth" has a good summary of the evidence; here's a similar argument from Waheed Hussain. A corporation is a nexus of contracts; no one "owns" it. People give it money in exchange for certain rights and expectations and residual fiduciary duties; different claimants have different rights but none have simple "ownership." That doesn't give you any answers about buybacks or short-termism or anything else, but it at least helps you ask the right questions. 

Elsewhere, Victor Fleischer is critical of Hillary Clinton's opposition to buybacks and short-termism:

I’m skeptical of this line of argument. Shareholders who receive cash from share buybacks typically reinvest in other companies, thus making the overall allocation of economic resources more efficient. Some companies should be split up. Investors should not be myopic, but movements in the stock price relative to industry peers provide a useful way to monitor and evaluate the performance of top executives.

People are worried about bond market liquidity.

I wrote a little more about bond liquidity worries yesterday. But the good news is that investors are considerably less concerned about evaporating bond market liquidity now than they were in May. Perhaps that's just the liquidity illusion though.

Things happen.

"If there's ever been an exploited worker," says Phil Gramm, it was former AT&T CEO Ed Whitacre, who received a $158.5 million retirement package. The JPMorgan hacking conspiracy seems to run through Florida State. Jessica Pressler on Henry Blodget. Rent-to-own is back. Adam Davidson on moral hazard. Jack Lew: "Puerto Rico needs an orderly process to restructure its unsustainable liabilities." The Athens stock market will reopen soon. Congrats or condolences about your CFA exam. Felix Salmon is mad about the new Four Seasons. Giant Slip 'n' Slide. Ice Cream Truck Driver Arrested After Screaming At Children In His Underwear While On Drugs. Tindog. Robot sports.

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(Corrects spelling of Mako Investment Managers' name in fourth item.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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