Money Stuff

Uber's Tender and GE's Activist

Also Carl's Jr.'s M&A tweeting, Puerto Rico's debt and a proxy-voting app.


SoftBank's planned tender offer for Uber Technologies Inc. shares might somehow turn into a two-sided tender offer:

Major Uber shareholders who hold more than 2m shares – a category that includes more than 30 investors — all have a right of first refusal over new investment deals. Some shareholders want to see the price first before making a decision on whether to buy or sell, according to sources close to the talks.

One thing those shareholders could do is waive their right of first refusal and tender into SoftBank's offer, if the price is high enough. Another thing they can do is waive the ROFR, not tender, and do nothing. Or they could exercise the ROFR and buy stock in the tender offer, cutting back SoftBank's purchases, if the clearing price for the tender is low enough. "The SoftBank-led coalition had expected Uber’s major shareholders would be potential sellers, rather than potential buyers, in the transaction, and would waive their rights of first refusal so that the tender offer could proceed," but perhaps not.

This seems like an ungainly way to run a tender offer, but it fits nicely with my general theory of Uber, which is that it is a large public company that happens to be, in some narrow technical sense, a private company. After all, this dynamic -- large shareholders can sell their shares if they're offered a high enough price, buy more shares if they think the price is too low, or just stand pat if they think the price is meh -- is exactly how normal public stock markets work. Stock markets are always two-sided auctions, and investors can be buyers or sellers depending on the price. Private companies tend not to work that way: Shareholders who think the price is too high often can't sell until an initial public offering, while those who think it's too low often can't buy more until the next funding round. Uber has found a way to run a two-sided auction for its stock without going public. It is not a continuous two-sided auction, as public stock markets are, but it's a start.

In other Uber news, here's a sort of weird interview with Liane Hornsey, Uber's head of human resources, about the company's efforts to become more friendly to women. For one thing, she is asked about a "Rooney Rule" to make sure that at least one woman is seriously interviewed for some jobs, and replies:

I’ve got to be honest, it’s going to be bloody hard when it comes to engineering. We’re starting where it’s easier, such as in my function, where there are more women. I’m really scratching my head about how the hell I do this in engineering, and I’m going to really have to try.

I am not sure that a message of "it's too hard to find any female engineers, but that's okay because we'll hire women in HR" is quite how you make Uber more appealing to women. But the other weird thing she says is this:

The second thing that we haven’t moved on very intentionally was the values. We have 14 cultural values, and Mr. Holder said, “Our people want you to review them.” Clearly the CEO is going to have a view on what the values of the company are going to be.

There is I think a disconnect between how corporate human resources officers think of values and how humans think of values. Companies often think of values as a set of marketing words that can be chosen freely by senior management and then put on a numbered list, which then become "the values." I, at least, think of a person's or organization's "values" as deeply ingrained half-unconscious motivating beliefs that are revealed in actions. A new chief executive officer might be able to change a company's values, but slowly, gradually, with great effort, by setting a good example and also probably by firing a lot of people with the bad old values and hiring people with the good new ones. If your company has a lot of sexual harassment, then one of its values is implicitly "we are cool with sexual harassment," even if that doesn't appear on any HR-approved list. And you cannot change that by putting out a list that says "we are not cool with sexual harassment." Once you get rid of the sexual harassment, you can say that, sure. But ultimately the values are facts, not descriptions.

GE and Trian.

General Electric Co. is giving a board seat to Trian Fund Management, the activist fund that owns about 0.77 percent of GE, and I was struck by this quote:

GE began serious discussions about giving Trian co-founder Ed Garden a board seat six months ago after it became clear company executives “couldn’t execute themselves out of that discussion,’’ one person familiar with the matter said Monday.

The traditional model of activist hedge funds is that they are competitors with, or alternatives to, management. An activist invests in a company, lays out its own vision for how the company should be run differently from how it is run now, and then competes with management to gain a majority of the shareholders' support. If the activist's vision is better, and if it owns a lot of the stock, then it will prevail: It will win or settle a proxy fight, get board seats, maybe replace the CEO, and generally change the company's direction. If not, it will limp away.

But another model is that activist hedge funds are monitors of, or checks on, management, that they're almost a shadow board of directors. An activist invests in a company, gives it a stern warning that it had better execute, and then crosses its arms, raises its eyebrows, and watches the managers closely to make sure they behave. If management slips up, the activist sighs heavily, more in disappointment than in anger, and jumps on the board to help fix things. 

This approach does not strictly require a compelling vision for strategic change, or even a big percentage stake in the company. What it requires is the ability to convince other shareholders (or to convince the board that you can convince other shareholders) that the activist is a better representative of their interests than the board is, that it has the skills and incentives to hold managers to account and make sure that they execute. It is an activism of governance rather than of strategy, focused on making management do what it's supposed to do rather than changing what it's doing.

M&A Twitter.

Yesterday the Twitter account of fast-food chain Carl's Jr. spent a lot of time tweeting that Inc. should buy the company, in a publicity effort whose point probably eludes me. It's stuff like this:

The chain "is hoping a Twitter publicity stunt aimed at the e-commerce giant will create some buzz for a brand that has stopped using ads of bikini-clad models eating its burgers," reports Bloomberg News, but ... how ... does that work? Like, are there people who decide to buy burgers based on Twitter jokes about M&A synergies? I guess there are people who decide to buy burgers based on bikini-clad models, so you can't really put anything past anyone, but still this campaign seems unusually niche. "I have seen sad corporate thirst on Twitter before," tweeted Kevin Roose. "I have not seen sad corporate M&A thirst." "This is why they keep M&A processes so secretive," tweeted Erin Griffith: "The pitchbooks are just 100 pages of begging and bad photoshops."

Carl's Jr. is not a public company. Obviously this would be a lot funnier if it was. Twitter is a brave new world of securities disclosure, and people like Elon Musk use it to disclose (or half-disclose) market-moving news in ways that probably make their lawyers uneasy. (Bloomberg LP is developing a global breaking news network for the Twitter service.) But what about, not news, but ... begging? Jocular pretend begging? Jocular pretend but-not-really-pretend-if-you-do-want-to-buy-us begging? I hope Wendy's will spend today tweeting that Apple should buy it; what would the stock do?

Puerto Rico.

It can be useful to distinguish money from stuff, since much of economic life consists of evaluating tradeoffs between the two. Typically, if you spend a lot of money on stuff, you will have less money, but you will have more stuff. There are advantages to this: Perhaps the stuff is exactly the stuff you need. But there are also disadvantages: Money gives you a lot more flexibility to buy different stuff in the future, if your needs change.

So here is a headline saying that "Puerto Rico’s $74 Billion Burden Left It Helpless When Maria Hit." Certainly being $74 billion in debt made it difficult for Puerto Rico to respond to Hurricane Maria: Having more money (or more borrowing capacity) would have allowed it to spend more on services, repairs, etc. to respond to the hurricane. But what you would expect in normal circumstances is that that $74 billion would have paid for stuff -- that it might have built a robust infrastructure that might be able to withstand the hurricane. What is upsetting is that it didn't:

“The decades-long failure to provide much-needed maintenance to key infrastructure in Puerto Rico means that the electric grid, principal roads, and water treatment and distribution plants were in an already weakened state,” Sergio Marxuach, policy director for the Center for a New Economy, a San Juan nonprofit. “As a result, the already devastating power of the storms was magnified.”

That's not a problem of debt: The debt ought to have paid for that maintenance. It's a problem of mis-allocation:

While Puerto Rico’s political leaders almost doubled the debt since 2006, proceeds were often used to keep the bureaucracy afloat, paper over deficits or finance projects that did little to pull the economy from recession.

But then it became a problem of debt too:

After investors stopped buying the U.S. territory’s bonds, agencies warned that the electricity and water systems were falling into decay. Investments in roads, schools, utilities and other public projects slid to $906 million last year from $2.4 billion in 2012, according to the Government Development Bank.

Borrowing $74 billion and spending it productively can be good. Borrowing $74 billion and having nothing to show for it is particularly devastating.

Elsewhere in Puerto Rico, John Paulson's bets on luxury resorts there "are looking increasingly unlucky, especially after the storm." And: "New York Fed President Sent Puerto Rico a Jet Filled With Cash." And elsewhere in sovereign debt, here is "The Coming Need for a Standstill in Venezuela" by Lee Buchheit and Mitu Gulati. 

Retail voters.

You know how yesterday we talked about how it is perfectly rational for individual retail investors not to vote on proxy proposals at the companies they own, because proxy voting is kind of a pain and their votes are unlikely to matter? Well here's a press release from OpenInvest about an iPhone app for proxy voting:

"Shareholders directly and indirectly own nearly 80 percent of U.S. equities, which means CEOs work for us," said Joshua Levin, co-founder and chief strategy officer, OpenInvest. "Until now, however, it has been virtually impossible to use this power. By unleashing the world's first digital democracy, we're putting the economy's most important decisions - whether to pollute or sustain the planet, whether to discriminate or diversify - at the fingertips of its rightful owners: you and me."

I still think that rational ignorance is probably the way to go for most shareholders, but I suppose there are people who get a sort of political-hobbyist pleasure out of buying stocks and then voting for environmental or diversity measures. 

Elsewhere in apps: "Robinhood, trading app for millennials, still betting on stocks over bitcoin."

People are worried that people aren't worried enough.

This is usually a section about how the VIX -- roughly, the option-implied volatility of the S&P 500 Index for the next month -- is low, but let's expand it a bit to include the fact that option-implied correlation is also low:

The one month implied correlation for the 50 largest U.S. stocks last week plumbed an all-time low, according to Credit Suisse’s equity derivatives strategy team. Last week’s reading of 9% is far below the 44% average  stretching back to 1996.

A low VIX (in theory) predicts that stocks won't move very much in the next month, though in practice people often treat a low VIX as an indication of "complacency," and worry that stocks will surprise everyone by moving very much indeed. A low implied correlation (in theory) predicts that stocks will move independently of each other in the next month. "'Investors expect the upcoming earnings season to drive dispersion and alpha, with zero macro risk being priced in,' said Mandy Xu, an equity derivatives strategist at Credit Suisse." There does not seem to be a complacency-equivalent worry in correlation; no one is going around saying "option-implied correlation is low, which means that really stocks will all move together due to big macro risks."

People are worried about stock buybacks.

Here's Ralph Nader on "the monster of economic waste -- over $7 trillion of dictated stock buybacks since 2003 by the self-enriching CEOs of large corporations":

What could competent management have done with this treasure trove of shareholder money which came originally from consumer purchases? They could have invested more in research and development, in productive plant and equipment, in raising worker pay (and thereby consumer demand), in shoring up shaky pension fund reserves, or increasing dividends to shareholders.

I will never understand the argument that stock buybacks are evil because they take money away from dividends, but it does seem to be popular.

Things happen.

"Kobe Steel Ltd. unleashed an industrial scandal that reverberated across [Japan] after saying its staff falsified data related to strength and durability of some aluminum and copper products used in aircraft, cars and potentially a space rocket." Bitcoin suffers mystery flash crash on popular cryptocurrency index. Bill Gross of Janus blames Fed for 'fake markets.' Cryan Is Losing Support of Top Deutsche Bank Owners. HelloFresh plans initial public offering. UK watchdog drops inquiry into former Barclays executive Richard Boath. European CLO volumes on course for post-crisis record. Trump Allies Fear His Corker Feud Is Putting the GOP Tax Plan at Risk. Google, Facebook and Twitter Scramble to Hold Washington at Bay. Resolution Regimes for Central Clearing Parties. "Closely won union elections lead to significant bond value losses, especially when firms approach bankruptcy, have underfunded pension plans, and operate in non-RTW law states." Is Gold Really a Good Hedge? Escaped poodle on tarmac delays flights at Japanese airport. New essay explains why Generation X feels 'bone-deep, almost hallucinatory panic about money.' "Old National Brewing Company, based in Williamston, Michigan, has launched what’s almost certainly the first beer named by a neural network: The Fine Stranger, a New England Double Dry-Hopped Saison." "In June the company introduced a series of online workshops, including videos on how to use a tape measure and how to hide cords."

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