Bank Plans and Unicorn Proms

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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Credit Suisse.

I am always a little amused by bank capital raising discussions because I feel like they always read like this:

The bank will sell 1.35 billion francs of stock to select shareholders and offer 4.7 billion francs of shares to existing investors in a rights offer as regulators in Switzerland prepare to demand the country’s largest banks hold larger capital buffers. The company “assumes” that Switzerland will raise its leverage ratio to 5 percent, Thiam told reporters.

Credit Suisse aims to return to investors 40 percent of the excess capital expected to reach 23 billion francs to 25 billion francs by 2020. The payout is low and will be seen as disappointing, according Nomura Holdings Inc. analysts led by Jon Peace.

Credit Suisse has decided that it should raise capital, so it will go ask shareholders to give it 6 billion francs. But it is a bank, and the attraction of banks for shareholders is the possibility of capital return, so in trying to raise 6 billion francs Credit Suisse has to talk about its plans to give back 10 billion francs to shareholders by 2020. There's an obvious sense to this -- the way to raise money from investors is to promise to give them back more money later -- but with banks it is so bluntly transactional. It's not like Credit Suisse is going to invest the 6 billion francs in something revolutionary. It's going to raise the 6 billion francs because it wants to have more capital, but it hopes to want less capital later and so will give some money back. 

Otherwise Credit Suisse plans "to reorganize the company along geographical lines, place the investment bank at the service of wealth management and hold an initial public offering of the Swiss business," as part of the continuing drive of European universal banks to become less universal.

Banks and private equity.

Here is the story of how JPMorgan "is working to finalize a deal to sell the majority of Highbridge Capital Management LLC’s private equity business to Highbridge Chief Executive Scott Kapnick and other members of his management team," though it will retain a minority share. This doesn't seem to be required by regulation, exactly -- Highbridge "largely invests the money of JPMorgan's clients" and thus is probably allowed by the Volcker Rule -- but the regulatory environment does seem to have encouraged it. "A major factor was the team’s desire to be lifted from the constraints of a large bank," and "the Commodity Futures Trading Commission is investigating why such a high proportion of Highbridge’s assets come from J.P. Morgan’s private-bank assets, and if that helped stabilize Highbridge during the financial crisis." 

One part of this story, then, is about modern bank regulation pushing activity out of carefully scrutinized banks and into less-scrutinized private firms, which perhaps makes that activity riskier ("lifted from the constraints," etc.), though on the other hand it might also put those risks on people who are better able to bear them (i.e. not those private-bank clients). Another part of the story is about how bank regulation can be good for bankers: This business, which JPMorgan acquired in 2004 and whose "assets under management ballooned from $7 billion in 2004 to a peak of $38 billion in 2007 as J.P. Morgan’s private bank sold Highbridge funds to its clients," is now being given back to the executives running it because it's too much of a pain to keep in the bank.

Elsewhere, here is a claim that Barclays has "a secret plan to place its high street operations under the temporary ownership of its investment banking arm," which seems not entirely consistent with the idea of ring-fencing investment banking from retail banking.

People are worried about unicorns.

Uber is a company with a $50 billion valuation that has raised more than $7 billion of outside financing, or about three times as much as was raised in the biggest U.S. initial public offering this year. Here is what its 39-year-old chief executive officer has to say about going public:

“We’re like eighth graders, we’re in junior high and someone is telling us that we need to go to the prom, and it’s just a little early,” Kalanick said. “Let us get into high school before we start talking about these sorts of things.”

Umm, cute? Like, bro, you are a giant multinational company that's raised billions of dollars of money from public investors like Fidelity and T. Rowe Price. I don't quite understand the pretense that Uber is just a lemonade stand.

On the other hand, I don't have a problem with Kalanick's desire to wait a few years on Uber's initial public offering. If the company can raise all the money it needs without dealing with securities filings, activists and short-sellers, why should it go public? Uber's venture capital investors, on the other hand, who rely on initial public offerings to get liquidity, might see things differently. Bill Gurley of Benchmark Capital, an Uber board member, spoke at the same WSJDLive conference as Kalanick, and said that Silicon Valley  has "got to go back to looking at the IPO as the objective." Gurley brought his own cute metaphor:

The valuation of a private company means nothing unless investors can get their money back through an IPO or sale, Mr. Gurley said. He compared the scenario to a star college football quarterback who, on NFL draft day, says he doesn’t want the scrutiny of playing in front of an audience every Sunday.

“Liquidity is the only real measure,” Mr. Gurley said. “All these private valuations are fake. They’re all on paper.”

Go to the prom, you hot unicorn quarterback! Here's Gurley on startup burn rates. Elsewhere in IPOs, here is Fortune on First Data, the biggest U.S. IPO this year, which wants "to offer ice cream parlors, hairdressers, and every manner of small merchant the high-tech analytical tools that until now have benefited only the likes of Walmart and McDonald’s." And Ferrari priced its IPO yesterday at $52 a share, the top of the range, for a $9.8 billion valuation. 

Tibco.

We've talked a little about Tibco before, and I have to say that I cannot write about it without cringing the whole time. This is a deal in which Tibco agreed to sell itself to Vista Equity Partners for $24 a share, or a $4.3 billion enterprise value. But that $4.3 billion number was based on an inaccurate share count spreadsheet, prepared by Tibco and its financial advisers at Goldman Sachs, which double-counted 4.3 million shares ("once as unvested restricted shares and again as outstanding common shares"). After Tibco and Vista announced the deal, they figured out the mistake, but went forward with the deal at $24 anyway, though it actually came to only a $4.2 billion enterprise value.

Shareholders, of course, sued. The error is ... at least embarrassing! But the question is whether it cost Tibco's shareholders $100 million. If everyone kind of did the deal with a $24 number in their heads, then knowing the exact share count might not have changed anything important. (A Vista executive testified that, when he learned of the error, he felt "pleasure," but that doesn't mean he'd have paid more if he knew about it earlier.) But if Vista decided it had $4.3 billion to spend, and based its $24 price on that, and then found out that $24 only came to $4.2 billion, then yeah, the error pretty directly cost shareholders money. Yesterday a Delaware judge declined to dismiss the lawsuit against Goldman Sachs, and from his opinion it does sound like the mistake cost shareholders: Vista's investment committee "approved a proposal to acquire TIBCO for up to the maximum aggregate value that would allow Vista to achieve its hurdle rate. That amount was $4.237 billion of equity value, which represented a $4.305 billion enterprise value." And it more or less paid that maximum, or thought it did, until the error was discovered.

That's bad! There are separate, and obviously important, legal issues about whether investment banks should be liable to shareholders for mistakes like this; the judge dismissed a professional malpractice claim but allowed the case to go forward on an unwieldy theory that Goldman aided and abetted the directors' breach of their duty of care (though he dismissed the case against the directors themselves). Disclosure: I used to work at Goldman Sachs, and also for Goldman's law firm in this case for that matter, and I feel for them.

Perella Weinberg.

Here is the story of how Perella Weinberg Partners and some of its former restructuring bankers are suing each other because the former bankers were planning to leave to start their own firm, and Perella Weinberg fired them, and the fired bankers tried to recruit some other Perella Weinberg bankers, and that violated their employment agreements, and everyone is super mad at everyone else. "They intended to damage PWP by decimating the restructuring group and eliminating PWP’s ability to compete in the restructuring business for an uncertain period of time," is how Perella Weinberg puts it; Perella Weinberg also claims that one of the departing employees "essentially said that because the goal was for the entire restructuring team to leave, the poaching would not violate the firm’s employment contracts because the boutique investment bank would no longer have a restructuring team." That is one way of looking at it? I don't know, I am sort of unimpressed by non-compete and non-solicitation agreements. In a people business like banking, it seems odd not to let people work where they want. But this case does seem to be amusingly vicious:

Lisa Solbakken, a lawyer for Ducera and the defendants, said in a statement: “PWP’s suit is prophylactic nonsense that it hopes will distract from Joe Perella’s perfidy. We look forward to taking Mr. Perella’s testimony under oath and exposing the hypocrisy that’s come to mark his firm.”

Great, great.

People are worried about stock buybacks.

Here is Harvard Law professor Mark Roe on "short-termism," which isn't quite the same as stock buybacks but is pretty close:

Investors’ obsession with short-term returns, according to the new conventional wisdom, compels corporate boards of directors and managers to seek impressive quarterly earnings at the expense of strong long-term investments. Research and development suffers, as does long-term investment in plant and equipment. Similarly, short-term thinking leads major companies to buy back their stock, thereby sapping them of the cash they need for future investments.

None of this is good news for the economy – at least, it wouldn’t be, if it were real. Upon closer inspection, the supposed negative consequences of investor short-termism appear not to be happening at all.

He argues that big mutual funds "have maintained 12-15-month holding periods for stocks for decades," that "neither R&D nor overall investment is declining," and that buybacks can be efficient because "cash should leave old-line firms with weak futures and end up where it can be deployed more effectively, benefiting the economy as a whole." He blames the criticism of short-termism on the desire to protect "those with a stake in the status quo – including blue-collar workers with high wages, well-paid CEOs and senior managers, and directors with prestigious positions – from rapid change." I suppose it's fair to say that the biggest critics of short-term thinking tend to be corporate chief executive officers, though on the other hand corporate CEOs also tend to be among the biggest fans of buybacks.

Elsewhere, "United Technologies Corp. is shelving plans to make large acquisitions as Chief Executive Officer Gregory Hayes directs cash toward $16 billion of stock buybacks through 2017." And: "Is shareholder activism a triumph for director primacy?"

People are worried about bond market liquidity.

You can find a lot of them right now in the 12th-floor auditorium at the New York Fed, which is throwing a conference today and yesterday on "The Evolving Structure of the U.S. Treasury Market." Here are the welcoming remarks from New York Fed President William Dudley, a speech by Fed Governor Jerome Powell, and a keynote address from Securities and Exchange Commission Chair Mary Jo White. White's speech seems to have gotten the most attention; the rough summary is that she calls for a lot of equity-market regulation (circuit breakers, limit up/limit down, registration of high-frequency traders, better data) to be applied to Treasury trading, since Treasuries now trade kind of like equities. I feel like it is not entirely unfair to say that a lot of people are worried about the Treasury market because it increasingly resembles the equity markets, and that a lot of people find the SEC's regulation of the equity markets a not entirely unmixed success. 

Me yesterday.

I wrote about Credit Agricole's sanctions violations. Elsewhere, here is the story of the prosecutor who helped discover them.

Things happen.

The Best Business Schools. Saudis Risk Draining Financial Assets in 5 Years, IMF Says. Hedge Fund Assets Decline by Biggest Amount Since Financial Crisis. EU Regulators Require That Starbucks, Fiat Pay Back Millions of Euros in Unpaid Taxes. U.S. Prosecutor Probing Daily Fantasy-Sports Business. Banks Facing Tough Times Pull Out Visa ... Shares. Bob Rubin will not be Bernie Sanders's Treasury Secretary. Obama taps Lisa Fairfax and Hester Peirce to serve on U.S. SEC. Kristi Culpepper on the Puerto Rico "superbond." Pimco Sues Brazil’s Petrobras for Fraud. Breaking free of the triple coincidence in international finance. Election arbitrage. Corporate America can learn from Chicago Cubs. Jonathan Franzen loves "Hey, Soul Sister." Three percent of investment bankers wish they were dentists. "Does anyone cry at standing desks?" 

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

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

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