Beer, Diamonds, Unicorns and Moments
I confess that I didn't know that tobacco company Altria owns 27 percent of beer company SABMiller, a truly perfect synergy of low-level vice. But now they are at odds: Anheuser-Busch InBev has offered to buy SABMiller for about 42.15 pounds per share, Altria supports the deal, but SABMiller's board, "excluding the directors nominated by Altria Group Inc.," thinks that that proposal "very substantially undervalues SABMiller." The proposal is actually rather odd, as it offers a lower-priced cash-and-unlisted-stock alternative to Altria and BevCo, the two biggest SABMiller shareholders, that seems designed to be unattractive to other shareholders (who would just get the cash). So the fact that SABMiller's biggest shareholder supports the deal may not be that meaningful, insofar as it's getting a different deal from the regular shareholders.
I continue to find it a little unbelievable that anyone could think that an investment bank could have a conflict of interest in a merger negotiation just because it pitched the deal to one side and ended up working for the other. Investment banks will pitch a deal to anyone. I feel like the stereotype of investment bankers is that they're cold-hearted mercenaries who only look out for themselves; why would someone like that develop a lifelong loyalty to a company after spending an hour asking that company to hire him and getting turned down? But, as we discussed a while ago, that really is the theory in a lawsuit over Signet's acquisition of Zale. Steven Davidoff Solomon is as skeptical as I am:
Soliciting business is in the investment banker DNA. Just because bankers said something in one informal meeting, does that mean they nefariously planned wrongdoing during a three-month sale process?
To put it another way, it takes a lot to assume that a board and a team of bankers would be swayed just because a number was thrown out at a meeting before the bankers even knew there might be a deal.
But we live in an age of what I call “dumb liability” — if it looks smelly, the bank is likely to be liable, no matter the legal standard.
Earlier this week I wrote about the Supreme Court's decision not to review the Newman insider trading case, and Mark Cuban sent me an e-mail, which he also posted on his blog. (Cuban, of course, was involved in a long-running insider trading case with the Securities and Exchange Commission, which he won, and has been critical of insider trading enforcement.) Cuban argues that insider trading law should be more transparent: "No one knows what insider trading is," under current law (since there is no actual rule against it!), and the SEC won't answer questions or publish guidelines to help people understand it. Cuban:
Lawbreakers who have broken the law should know they have broken the law. I doubt that people at the end of a tippee chain know they have broken any laws or even have considered it. How could they?
I am of course sympathetic, though actually existing attempts to codify insider trading are sort of underwhelming. Speaking of which, here is an effort by two business school professors to define "material, nonpublic information" that I also find sort of underwhelming? The gist of the proposal is that corporate executives shouldn't be allowed to trade in the two months before the corporation issues an 8-K. I think that means that at most public companies, executives would never be allowed to trade. Which might be the right result, but how would they pay for their kids' college and stuff?
Elsewhere, the "insider trading on fantasy sports" thing turned out to be a nothing: The DraftKings employee who released DraftKings lineup data early and also made a lot of money on FanDuel "received the data at a time when it was no longer possible to change his FanDuel lineup to his advantage." But cross-company insider trading is a fun question of more general applicability: If you have specific nonpublic information about your company, and that information has predictive value about another company, can you trade the other company's stock? If you work at Dell, and you know that sales are collapsing because no one is buying computers any more, can you short Hewlett-Packard's stock? The "misappropriation theory" of insider trading does not seem to me to be obvious on this point, but I guess I wouldn't do it? Obviously not legal advice, but the Winans case -- in which a newspaper columnist who leaked his market-moving conclusions was convicted of insider trading -- seems ominous.
Twitter released the results of its company-saving Project Lightning yesterday and they are even more terrible than you probably expected. Here's Farhad Manjoo:
The company unveiled a long-awaited new feature aimed squarely at attracting people who now find Twitter too confusing to use. The feature, called Moments, attempts to transform Twitter’s chaotic timeline into a series of narratives that are easily navigated by people who aren’t indoctrinated into the service’s strange rituals.
"Every Moment should inspire viewers to want to share it," say Twitter's Moments guidelines. So here for instance is a Moment about last night's Astros-Yankees game. It's a picture of the Astros standing around on a tarp on the field, and then a Vine of batting practice, and then Alex Rodriguez walking out of the dugout, and then a tweet from an Astros broadcaster with a picture of the empty field, and then the Astros standing in a line, and it goes on, but I cannot. Why would you choose to learn about a baseball game this way? It is Snapchat crossed with the old Twitter Discover crossed with boredom crossed with confusion. It has no narrative. It is much harder to follow than actual Twitter.
Even worse is this Moment about the Nobel Prize in Physics. Twitter is a great place to go if you want to hear about the Nobel Prize in Physics! You can follow smart people who care about that sort of thing, or at least journalists, and read their tweets about the prize. And then you can follow what they link to, which is the most valuable part of Twitter. They might tweet links to the official announcement, or to the reports of the winners' discoveries, or to explanations of their work, or at least to news articles about the prize. But since Moments seems to be part of the universal internet drive to walled gardens, the Moment has only two links, and is mostly just pictures of the prize winners.
I understand the impetus for Twitter to attract new users who don't already like Twitter. But the thinking here seems to be:
- Some people don't like Twitter.
- Let us give them the opposite of Twitter.
I see the logic, but I don't buy it. If you want to attract people who don't like Twitter, why not just pivot to delivering pizzas, or building driverless cars? The opposite of semi-coherent jokes on the Internet is not semi-coherent pictures on the Internet. Moments strip out everything that Twitter users like about Twitter -- the jokes, the interaction, the links -- and replace it with something that no one could like about anything.
The lucrative trade in alicorns, which rested on this widespread belief in the unicorn’s power, reached its peak in the Renaissance amid a widespread fear among nobility of being poisoned by their rivals. They lined their cups with pieces of alicorn and placed whole horns on the table, believing that they would sweat in the presence of poison. (Think of the alicorn as Uber, for not dying of poison.)
Chen also cites Dan Savage for an alternative definition of a "unicorn" as "the rare bisexual woman who is game to join a straight couple in a no-strings-attached threesome." I have previously mentioned the Unicorn Replacer Chrome extension, which replaces the word "unicorn" with the phrase "pre-IPO startup valued at $1 billion or more"; a fun modification would be an extension that randomly replaces the word "unicorn" with either the phrase "pre-IPO startup valued at $1 billion or more" or the phrase "rare bisexual woman who is game to join a straight couple in a no-strings-attached threesome."
The point here is that "unicorn" is just a cutesy way to say "rare desired thing" and you should stop using it to refer to big tech companies, which are not rare. But that is just one man's opinion.
Elsewhere here is an essay by Chamath Palihapitiya about venture capital, arguing that what was formerly an industry of "eccentric, quirky outcasts of traditional society who themselves were entrepreneurs" has been replaced by "a conformist but pedigreed group who are largely risk averse and driven more by FOMO than by passion or vision." This fits reasonably well with my half-baked theory that public markets are now for return of capital to shareholders, private markets are the new public markets, and angels or pre-seed rounds or whatever are the new venture capital. (Palihapitiya says of VCs that "They have decided that ideas are too risky and leave this work to incubators or angels.") If you just think of venture capital funds as mutual funds, this all makes more sense.
People are worried about stock buybacks.
One reason that people worry about stock buybacks is that they think buybacks encourage short-term thinking and discourage innovation: Public companies, they worry, are just in the business of returning cash to shareholders rather than building cool new things. I think that there is some truth to that, but see the previous item: The innovation is happening in the pre-seed rounds or whatever, and I guess at Google, so the ecosystem overall is fine even if lots of public companies are mostly cash-out plays. (This is also a theory of Valeant, by the way.)
But there is a more subversive theory of stock buybacks in which they are not primarily about returning capital to investors, but are rather about transferring value from the investors to executives. Here is The Economist's Buttonwood column on that theory, which it calls "The share buyback mirage." Citing Research Affiliates, Buttonwood finds $696 billion of buybacks in the U.S. last year, versus $1.2 trillion of new issuance, and $454 billion of net dilution, most of it from executive stock options. "It is robbing Peter to pay the CEO," says Buttonwood:
Wealth is transferred from shareholders to executives, helping to explain why executive rewards have far outpaced economic growth or shareholder returns. And Research Affiliates makes another point; companies often accompany buy-backs with debt issuance. In 2014, US companies issued a net $693 billion of debt; almost the same as the gross buyback total. Investors are ending up owning a smaller portion of a more highly-indebted company; more of the cashflows generated by such groups will be absorbed by banks and bondholders.
People are worried about bond market liquidity.
Martin Wolf is worried about bond market liquidity:
Market liquidity is likely to disappear when one needs it most. Building our hopes on its durability is risky.
This is far from the conventional wisdom.
I feel like there is some evidence that that is precisely the conventional wisdom, but actually Wolf is saying something more interesting than the usual worries:
If liquidity is such a fickle friend, should we hanker after it at all? Would it not be better if investors understood that the assets they own might not be liquid in all circumstances and made investment decisions on that assumption? I would suggest that markets characterised more by longer-term commitments, and less by hopes of finding “greater fools” willing to buy at all times, might be better for most of us.
But in fact the worries about bond market liquidity are closely related to the increasing dominance of large buy-and-hold-ish mutual funds who buy big chunks of new bond issues and then hold them. Those asset managers are doing precisely what Wolf calls for. It's just that they're funded by investors who have a right to daily liquidity, and so the funds are subject to redemption risk that might force them to sell. Arguing that individual mutual fund investors should be unable to withdraw their money when times get tough -- or at least should be subject to "swing pricing" that would penalize them for doing so -- is more controversial than saying that we should make long-term investing decisions rather than looking for greater fools.
This seems right on though:
Complaints about the impact of bank regulation should be ignored. The difficulty with the complaint is that in the run up to the global financial crisis, few worried about a possible disappearance of market liquidity. But it vanished when most needed, even though none of those onerous regulations then existed. Thus, the absence of regulation exacerbated the liquidity boom and subsequent bust.
Today's New York Fed liquidity installment is about "Changes in the Returns to Market Making":
We show estimated returns to market making to be at historically low levels—a finding that seems inconsistent with market analysts’ argument that higher capital requirements have reduced market liquidity. The picture that emerges from our analysis is of a change in the risk-sharing arrangement among trading institutions. We uncover a compression in expected returns to market making in the corporate bond market, where dealers remain the predominant market makers, as well as the equity market, where dealers are less important. The compression of market making returns may be tied to competitive pressures, with high-frequency trading competition being important in the equity market.
The idea in bonds seems to be that if dealers are providing less liquidity, it's not because they are more regulated, but because they are getting paid less for doing so. (Dan Davies argued something similar a while back.) Of course they may be getting paid less because they are taking on less risk. Or they may just not be getting paid less: The Fed uses a volatility-based proxy for market-maker returns; when it looks at actual dealer trading revenue, it finds that it "has been very close to pre-crisis levels," and with a higher Sharpe ratio.
Anyway the other point in that Fed post is that returns to high-frequency market making in equities are historically low, which I guess you should keep in mind the next time someone tells you that high-frequency trading firms are stealing billions of dollars from ordinary investors.
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