Money Stuff

Tender Offers and CEO Searches

Also CDS, fishing accidents, smart contracts and bond market liquidity.


Last week Herbalife Ltd. announced a $600 million tender offer for its own stock with an odd twist, a contingent value right that will pay selling shareholders more if Herbalife goes private in the next two years. According to Herbalife's disclosure, it had been in talks to go private starting that ended earlier this month. It didn't want to go buy back $600 million worth of stock from shareholders without telling them about the talks, because if it then did end up going private, that would be awkward. So Herbalife not only disclosed the stalled talks, it also promised that if it goes private in the next two years, at a price higher than it pays in the tender offer, it will top up the tendering shareholders.

Ronald Barusch is critical of Herbalife's disclosure, which doesn't tell investors much about those talks. That is fine for shareholders who sell in the tender offer and get the CVR, but not so useful for everyone else:

But of course Herbalife shares trade every day on the New York Stock Exchange and the company has disclosure obligations to all investors and not just those accepting the tender offer. How are those investors supposed to evaluate the likelihood and pricing of a potential deal? ...

In my view it seems hard to argue that information on pricing, the identity of the prospective buyer and what caused the negotiations to “formally” break down earlier this month wouldn’t be required.

But there is another problem. The going-private talks, according to Herbalife, started in mid-November 2016, with information being exchanged "from mid-January to mid-May in 2017," and were "formally terminated on August 16, 2017." But Herbalife's new tender offer is not the only stock buyback it will do this year. Its board authorized a new $1.5 billion share repurchase program in February, as those going-private talks were heating up, and it had bought back $299.2 million worth of stock -- almost half what it's targeting in the current tender offer -- by July 31. It did all this without disclosing the ongoing going-private talks. 

It is strange that the terminated going-private talks are now so material to shareholders that Herbalife would not only disclose them but also promise to make selling shareholders whole, and yet when they were ongoing they weren't material enough to be worth mentioning to the shareholders who were selling Herbalife hundreds of millions of dollars worth of stock. "In light of the fact the Company has in the past had discussions with various parties regarding potential transactions that might lead to a Going Private Transaction, the Board determined it would be appropriate to provide shareholders with some protection in the event they sold shares in the Offer and within a two-year period following the commencement of the Offer, a Going Private Transaction was consummated, resulting in shareholders receiving a higher price per share than paid in the Offer," says Herbalife. But it didn't determine the same thing a month ago when it was buying back stock at lower prices.

Why start now? A tender offer is different from open-market repurchases, I guess. But consider that Herbalife's buybacks in the second quarter were at an average price of $67.06, that it bought almost $60 million worth of stock in July when the stock was trading in the $70s, and that it announced its tender offer last week shortly after the Chinese government had announced a crackdown on multilevel marketing companies and Herbalife's stock had fallen to $61.95. If Herbalife had wanted to buy back stock cheaply, it could have just kept buying back stock in the open market without dropping any significant hints about a potential going-private transaction. Instead it launched a tender offer and disclosed that a going-private transaction might be in the works, and the stock jumped back up, closing last week at $68.89. 

Corporate stock buybacks have multiple purposes. One purpose is to buy your own stock because you think it is a good investment. If that is your purpose, you should try not to overpay. But another, and sometimes opposite, purpose is to support your stock price. If that is your goal, then it doesn't always make sense to buy as efficiently as possible. Hinting about a takeover will push up your stock price and make it more expensive to buy, but that might actually be what you want.


In June, Uber Technologies Inc. ousted its chief executive officer, Travis Kalanick, and began searching for a replacement. The search quickly narrowed to three candidates: Jeffrey Immelt of General Electric Co., Meg Whitman of Hewlett Packard Enterprise Co., and someone else. (My own money was on the dark-horse fourth candidate, Travis Kalanick.) A month ago, Whitman took herself out of the race, leaving Immelt as the front-runner. Yesterday, Immelt took himself out of the race. That left ... Whitman

Despite repeatedly denying the prospect that she would take the job, Hewlett Packard Enterprise Co. CEO Meg Whitman is a board favorite after presenting her vision for the ride-hailing company to the group on Saturday, said two of the people, who asked not to be identified because the discussions are private.

"But matters changed quickly over the course of Sunday afternoon, as directors and Ms. Whitman could not agree on terms in which she would take over as chief executive." That left ... someone else! "Ultimately, the board decided on the third candidate."

I mean, he has a name. It's Dara Khosrowshahi, the CEO of Expedia Inc., who "hadn’t been named publicly as a finalist during a CEO search that was plagued by leaks, boardroom infighting and a lawsuit involving two directors," and who has perhaps a lower public profile than Immelt and Whitman. I guess that will change? He will be joining a company whose board seems to be split among people who wanted Whitman, people who wanted Immelt, and people who said they wanted Immelt but really wanted Kalanick:

Benchmark, Uber’s largest venture capital backer, was a fan of Whitman. But Kalanick wanted someone willing to bring him back as a partner, something she was unlikely to do, people familiar with the matter said. Kalanick threw his weight behind GE’s Immelt, who was a serious contender but failed to win sufficient support from the board.

Plus, you know, there's all the other stuff. Uber is being sued by Alphabet Inc. for allegedly stealing Waymo's self-driving car technology; "Khosrowshahi has experience jousting with Alphabet’s Google," which I guess helps? And "Mr Khosrowshahi will also be charged with reshaping Uber’s internal culture, which has been described by former employees as toxic and sexist." "How much of an impact Mr. Khosrowshahi can have on Uber is uncertain."

Why do it? "What CEO worth their salt is going to want to come into a board like that, that's so dysfunctional?" Khosrowshahi will be leaving behind a ton of money at Expedia, though presumably for three tons of money at Uber, if all goes well. But I assume it's not just about the money. If you want to be the CEO of Uber, presumably it is because you like the CEO game, and want to play it at the hardest possible difficulty setting. 

Noble CDS.

Noble Group Ltd. had a credit facility that came due in June, and it asked its banks to extend the maturity for four months until October, and they agreed, averting a default on its debt. Or ... not averting a default? What is a default, anyway? Certainly there was no default under the terms of the credit facility, because the banks agreed to extend it. But what if you had bought credit-default swaps on Noble? Arguably extending the maturity of a credit line, because the company is in financial trouble, is the sort of debt restructuring that CDS are meant to protect against. On the other hand sometimes companies and their banks agree to modify the terms of their debt, and if those agreements are voluntary then what business are they of CDS holders?

In any case, people who bought Noble CDS think that there was a default, and people who sold Noble CDS think that there was no default, and so they went to the International Swaps and Derivatives Association's Determinations Committee to ask for a ruling. The committee punted, deciding "that it currently does not have sufficient information that is public or that can be made public to determine the Restructuring Credit Event DC Question one way or the other," in part because no one sent it a copy of the amended credit facility. This is not great:

In the absence of a ruling from ISDA, banks and funds that have bought or sold Noble CDS are essentially flying blind, with no precedent to follow, except how the market operated pre-2009.

“It’s like the whole last 10 years of market development have been put to one side,” said Nigel Dickinson, a derivatives lawyer at Norton Rose Fulbright.

The ISDA Determinations Committee was asked to try again. The ISDA Credit Derivatives Definitions define a "Restructuring" credit event, which triggers CDS, to include "a postponment or other deferral" of payments in a debt instrument "in a form that binds all holders" of that instrument, unless it "does not directly or indirectly result from a deterioration in the creditworthiness or financial condition of the" issuer. Did Noble's extension bind all holders of its credit facility, and result from a deterioration in its creditworthiness? I suppose you'd want to read the documents to find out.

We have talked a few times about the incentives of CDS: If you have bought CDS on a company, you want it to default, and you might even be willing to offer it attractive financing in exchange for concocting a brief default that triggers CDS. If you have sold CDS on a company, you want it not to default, and you might even be willing to offer it attractive financing in exchange for delaying a default. But you have to know which is which! If you agree to extend a maturity date in order to avoid a default, you don't want that extension to end up being a default itself.

Jes Staley.

Here is a profile of Jes Staley, the chief executive officer of Barclays Plc, that begins with a story about a fishing accident on the open ocean. Staley's friend was injured, and Staley held him down while someone else stitched him back together, mopping up the blood afterwards. It is a metaphor for the job of a bank CEO, or something. There is also an anecdote about one of my favorite bank management topics, the importance of office space:

In 2004, when he engineered JPMorgan’s $1.3 billion investment in the hedge fund Highbridge Capital as a way to increase returns for the bank’s ultrawealthy investors, he preserved the Highbridge team’s generous compensation terms and even prevented members of the bank’s internal real estate division from visiting Highbridge’s luxurious midtown Manhattan offices, fearing that they would alienate the Highbridge staff by insisting on cheaper space.

They couldn't even look at the office space! It would hurt their eyes.

Staley's two big problems these days are that he tried to find out the identity of a whistle-blower who sent the board a mean letter about one of his subordinates, and that he did ... something ... involving Aceco, a Brazilian company founded by his brother-in-law. I confess that I have never understood the Aceco problem and still don't, but I do now understand the whistle-blower thing a bit better. It involves a banker who worked with Staley at JPMorgan Chase & Co., and who, while "under duress from a divorce," "was taking prescription medicine ... that affected his behavior when mixed with alcohol." Apparently his "speech was altered as he gave a report" to Jamie Dimon, which is not a great look. He left JPMorgan, and Staley eventually hired him at Barclays, but someone sent a letter to Barclays's board about his "behavior during his rough spell at JPMorgan." Staley thought that was a low blow and set out to identify the whistle-blower, including by having his security team ask "the United States Postal Service for assistance through video footage." You are really not supposed to do that! It defeats the purpose of whistleblowing! I have been rather harsh about it in the past. But I guess in context it does demonstrate a certain charming loyalty.

Blockchain blockchain blockchain.

Here's the story of an ethereum smart contract that was thwarted because it expected some letters to be lowercase and they turned out to be uppercase. The benefits of immutable code! Smart contracts are called "smart" because they interpret and execute themselves, whereas dumb contracts are interpreted and executed by humans. The problem is that smart contracts are way, way dumber than humans.

People are worried about bond market liquidity.

Here's Janet Yellen on bond market liquidity worries:

Market liquidity for corporate bonds remains robust overall, and the healthy condition of the market is apparent in low bid-ask spreads and the large volume of corporate bond issuance in recent years. That said, liquidity conditions are clearly evolving. Large dealers appear to devote less of their balance sheets to holding inventories of securities to facilitate trades and instead increasingly facilitate trades by directly matching buyers and sellers. In addition, algorithmic traders and institutional investors are a larger presence in various markets than previously, and the willingness of these institutions to support liquidity in stressful conditions is uncertain. While no single factor appears to be the predominant cause of the evolution of market liquidity, some regulations may be affecting market liquidity somewhat. There may be benefits to simplifying aspects of the Volcker rule, which limits proprietary trading by banking firms, and to reviewing the interaction of the enhanced supplementary leverage ratio with risk-based capital requirements. At the same time, the new regulatory framework overall has made dealers more resilient to shocks, and, in the past, distress at dealers following adverse shocks has been an important factor driving market illiquidity. As a result, any adjustments to the regulatory framework should be modest and preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years.

That's from a speech Yellen gave on Friday at Jackson Hole, in which she gave generally positive reviews to the post-crisis regulatory environment in the U.S.: "The events of the crisis demanded action, needed reforms were implemented, and these reforms have made the system safer." That is not an especially popular position politically, and "by broadly defending the sweeping financial rules put in place in the past decade, Federal Reserve Chair Janet Yellen distanced herself on Friday from the anti-regulatory rhetoric of the man who will decide whether to replace her, President Donald Trump."

In other Trump news, here's a story about economic policymaking:

Trump replied: "No, I'll sign it, but it's not what I've asked for the last six months." He turned to Kelly: "So, John, I want you to know, this is my view. I want tariffs. And I want someone to bring me some tariffs."

Things happen.

In a Blast From a Financial Crisis Past, Synthetic CDOs Are Back. Tapping Your Home Equity for Cash Is Big Again. Gilead to Buy Kite for $11.9 Billion in Cancer Drug Megadeal. How Easily Can Creditors Reach Venezuelan Oil Receivables? Ferc urged to prop up illiquid natural gas indexes. Wall St’s top bankers sell own groups’ shares as Trump rally reverses. What Markets Think About the Looming Debt Ceiling Showdown. Large Companies Oppose Idea for Taxing Foreign Profits. Wall Street Vets From Dalio to Gundlach Warn on Emerging Markets. Improving the 30-Year Fixed-Rate Mortgage. "Match [Floyd Mayweather Jr.] against one of those wavy inflatable tube men they set up on the curb outside car dealerships and he will give the inflatable tube man two or three early rounds, wait out the last drops of the wavy inflatable tube man’s stamina and every last wisp of risk, and then land enough straight right hands to claim the fight at some point after the ninth round and probably after the final bell." "A South Korean court has fined a man for spreading a rumor online that rapper and businessman Dr. Dre was to marry the widow of a former South Korean President." "Garfinkel said she rinsed the salad dressing off the frog and noticed the amphibian appeared to be in poor health." Young people fear doorbells

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