Proxy Fights and Mystery Trusts
Yesterday Bill Ackman won his proxy contest at Automatic Data Processing Inc., though he won somewhat less comprehensively than he would have liked, insofar as none of his nominees were actually elected to the board. Still a win though, according to Ackman:
The company has tried to characterize this as a major win for the company. It's actually a major win for the shareholders.
Ackman's point here is, first of all, that correctly counted he got a lot of votes, an accounting debate that I do not particularly want to get into. ("I lost by one shareholder," he said, but that was the biggest shareholder: "Had Vanguard voted for me, it would have been too close to call." Sadly they count votes by shares, not shareholders.) But, second, his point is that he has already forced the company to make changes in order to win over shareholders, and that he remains a large shareholder with significant influence at ADP:
The press is very focused on, they think of an election like a presidential election. This is very different. In a presidential election, the person who loses has no influence going forward. In an activist campaign, even if the shareholder activist loses if you will, I continue to be a shareholder of the company. The company has committed to make a significant number of changes and improvements on the business. And we get to monitor their progress and in nine months from now, we can put another slate of directors if we choose to.
ADP Chief Executive Officer Carlos Rodriguez vehemently disagrees with this assessment:
“Frankly, what Pershing Square and Bill Ackman have to say are a very small part of the pressure on my day-to-day life,” Mr. Rodriguez said. “Yes, this battle’s over. We won.”
But Ackman is not wrong in general. Winning a proxy fight and getting a board seat is one way for an activist to change the direction of a company, but forcing management to be more shareholder-friendly in order to fend off a proxy fight can also be a win. But this sort of victory can be hard to score. Is ADP doing shareholder-friendly things because Ackman forced its hand, as he claims? (My Bloomberg Gadfly colleague Brooke Sutherland says yes, noting that "Ackman's deep-dive research ... has drawn more attention to opportunities for technological advancement and margin expansion," and that "management will be held more accountable" to pursue those opportunities.) Or was ADP already doing those things and is Ackman just taking credit for them, as ADP claims? "His business model requires him being able to take credit," said Rodriguez recently. "If ADP performs in the next five years the way it’s performed over the last five years, he’s going to look like a genius."
Of course that is another, more objective sense in which Ackman has already won. As he says:
What our investors want us to do is make them money. We've made them money so far in our investment in ADP.
Ackman bought his ADP stock for about $97.30 per share; it closed yesterday at $112.75 (up 1.3 percent on the day). One useful question is: Is Ackman right? Do his investors want him to make them money? Obviously yes. Certainly losing a proxy fight and making money on the stock is better than winning a proxy fight and losing money on the stock.
But consider a hypothetical world in which Ackman consistently picked good companies, launched proxy fights, lost them, had no influence on management, and nonetheless made a lot of money for his investors because the companies were good anyway. This would be bad for his reputation as a fearsome activist, and for his ability to go on television to point out what is wrong with companies. But it would be good for his investors. Would they be happy? Sure, yeah, probably. But they'd be a little worried too. The job of a hedge fund manager is not just to buy stocks that go up. The job is to add some alpha, to tell a story, to have some repeatable intellectual process that reassures investors that the manager is doing something to earn his paycheck. "We keep buying companies that we think are mismanaged but we make a lot of money because we're wrong and they're well-managed" is not the most soothing story of investing acumen, even if it works.
How rich is Wilbur Ross?
I would be perfectly happy if half of financial journalism consisted of reporting that rich people aren't as rich as they say they are. (A classic: My now-Bloomberg-View colleague Tim O'Brien's examination of Donald Trump's overstated wealth, which got O'Brien hilariously sued.) This Forbes examination of Wilbur Ross's finances is a particularly delightful example of the genre, in part because Ross's alleged overstatement of his wealth seems to be mostly Forbes's fault: The Forbes reporter who initially put Ross on the Forbes 400 rich list in 2004 seems to have credited Ross not only with his own wealth, but with all the investor money in his funds. And Ross seems not to have corrected him:
"I just spoke to Ross," the reporter wrote. "He's one of the easiest new guys I've put on [The Forbes 400] in a while. Very low-key, said he didn't really want to be on, but at the same time wasn't going to fight success. He says he doesn't want to juice up his numbers at all."
"I told him we're going to start him at $1 billion," added the reporter, who no longer works at Forbes. "And he said 'Yep, fine, thank you.'"
Why does no one ever say that to me? Of course when you read that you can understand where Ross was coming from. If a stranger ever calls you up and says "we're going to start you at $1 billion," the only possible response is "yep, fine, thank you."
According to Forbes, "Ross strung us along," and kept appearing as a billionaire on the Forbes 400 until he was nominated to be Donald Trump's Secretary of Commerce, at which point he had to disclose his assets:
His former colleagues saw the moment of reckoning coming as soon as he accepted a Cabinet role. "It was surprising because he would have to reveal to the world that he wasn't a billionaire," one ex-employee said. "I was surprised that he would take that risk."
His financial disclosures showed $700 million in assets, he told Forbes that that ignored $2 billion he had previously transferred to family trusts, Forbes asked Commerce about that, and Commerce responded that "Contrary to the report in Forbes, there was no major asset transfer to a trust in the period between the election and Secretary Ross's confirmation."
Elsewhere, Gary Cohn is not troubled that he is an officer of 22 Bermuda-based companies that he's never heard of:
"I found out about them in the newspaper," Cohn explained in our Speakeasy interview. "Goldman Sachs had them. Because I worked at Goldman Sachs, in the division I was running at the time, I became an officer of those companies by the mere position I had. I didn't have money in them."
Again, I sympathize. I have not read the "Paradise Papers," and I assume that I am not an officer of any Bermuda companies, but if I am I will be mildly tickled. That is just a sign of a certain sort of worldly success these days.
And in other offshore news, here is "How Business Titans, Pop Stars and Royals Hide Their Wealth," with notable names including Jim Simons and Queen Elizabeth II. I wonder if she is an officer of any Bermuda companies.
As I've said before, I try not to spend too much time analyzing proposed changes to tax law since it is so unlikely that any particular change will ultimately become law. But I cannot resist this report that the House of Representatives' tax bill would eliminate the estate tax while preserving the basis step-up on death. This means that if you buy stuff for $1 million, and it appreciates to $10 million in your lifetime, and then you die, not only do your heirs not have to pay estate taxes on the $10 million, but if they then sell the stuff for $10 million they don't have to pay capital-gains taxes on the appreciation. Any appreciation in the assets' prices during your lifetime goes to your heirs completely tax-free.
This is I have to say sort of an odd tax system on first principles. If you work for a living and make a million dollars, you will be taxed at fairly high rates. (The top rate for ordinary income will remain 39.6 percent.) If you don't need to work, and make your money by investing, you will be taxed at lower rates. (The top rate for capital gains is 20 percent.) But if you inherit your money, you won't be taxed at all.
When we last talked about the estate tax, I criticized Wilbur Ross's complaint that "It's bad enough that you have to die, you shouldn't be fined for doing so":
Of course we should fine people for dying! You tax -- or fine -- behavior that you want to discourage. Taxing a thing reduces the amount of that thing. "The power to tax is the power to destroy." If we are going to get serious about defeating death, the first thing to do is to tax it heavily.
That was a little bit facetious, but only a little bit. For one thing, there is some empirical evidence that the estate tax really does disincentivize death. For another thing, the alternative to taxing death -- a thing we want less of -- is pretty much taxing work -- a thing we want more of -- and so raising taxes on working people in order to lower taxes on dying people seems like an inefficient tradeoff. But also, of course, the estate tax isn't really a tax on dying; it is a tax on inheritance. Encouraging work increases an economy's output; discouraging work decreases it. But encouraging inheritance can't increase output; it's not like there is an untapped supply of rich childless uncles who will be put to productive use if only the estate tax is repealed.
Elsewhere in wealth, here is a fun story about how rich people get a better class of debt collectors (Oxford-educated, well-dressed, dashing) than everyone else.
Quantopian, which had "the early lead in an emerging area of do-it-yourself quant trading," has been struggling, losing about 3 percent "in the four months since it began trading on June 1":
The challenges so far suggest that recruiting and training mechanical engineers, nuclear scientists and other amateurs around the globe to be quantitative traders may be more difficult than some had expected. While some of Quantopian’s traders generated profits, many of these algorithms had limits to how much money could be invested with them, the people said.
Quantopian is "actively making refinements" and "investing in the internal infrastructure of the company." And: "Quantopian’s community of algorithm authors, which like many quants face a problem of dealing with too much data, will be given new tools to 'clean' their data, or cleanse it for inaccuracies, the company said."
Now, I don't really know why Quantopian is struggling. But there are hints in the article that suggest something like this stylized story: The work of finding predictive patterns in financial data, while not exactly easy, can be done by amateurs, if they are the right sorts of amateurs. The skill set is about finding patterns in data, or about building computer systems that can learn to spot patterns on their own, not about anything specifically finance-y. Data scientists trained in other fields -- physics, linguistics, internet ad sales -- can be successful at it, and Quantopian is right to try to harness their skills to the financial markets.
On the other hand there are some specifically finance-y skill sets -- things that actually require knowing something about the financial world -- that matter if you are trying to turn these patterns into real-world success. You need to scrub your data to make sure it's accurate. You need to appropriately size your strategies to market capacity and liquidity. Quant hedge funds aren't just in the business of thinking up artificial-intelligence algorithms to spot signals. They are also in the business of buying and cleaning data sets, and of employing traders (or trading algorithms) that can efficiently implement their trades.
Elsewhere in quant utopias: "Jim Simons, the founder of Renaissance Technologies, urged Robert Mercer to step down from his role as co-chief executive officer over concerns that his backing of Breitbart News was hurting morale at the world’s most profitable hedge fund."
Snap Inc. reported disappointing earnings yesterday and announced that it will bin millions of Spectacles while also changing its product to make it easier to use and maybe a little more Facebook-like:
“There is a strong likelihood that the redesign of our application will be disruptive to our business in the short term, and we don’t yet know how the behavior of our community will change when they begin to use our updated application,” Chief Executive Officer Evan Spiegel said Tuesday in his prepared remarks to investors. “We’re willing to take that risk for what we believe are substantial long-term benefits to our business.”
If you are a public company whose public shareholders don't get to vote, I guess you should rub it in like that every quarter. "We're going to do stuff you don't like, for what we believe are substantial long-term benefits to our business" is just another way to say "hahahaha we have your money and you can't fire us." Of course Spiegel might be right. Disempowering public shareholders really does let managers focus on the long-term health of their business, without having to worry about investor reaction. It might give Snap just the flexibility that it needs to turn things around. On the other hand, if the managers' long-term plans are terrible, there is nothing that shareholders can do about that either. There is, I think, no general solution to the "short-termism" debate. Sometimes managers want what is best for their companies in the long term, and know how to achieve it, and short-term-oriented public shareholders just get in their way. Other times the shareholders are right that the companies need to be saved from the managers.
Blockchain blockchain blockchain.
The big global banks have, over the past few centuries, done a lot of bad things, but you know one thing that seems never to happen? Banks don't just delete your money. They may open up fake accounts or mess up mortgage relief or expose your email address to hackers, and they may invest in garbage and become insolvent and require a bailout or an FDIC takeover, but you just never really hear about a bank sheepishly admitting "oh yeah we just deleted $280 million of checking accounts, sorry, nothing to be done about it."
Meanwhile that is just the basic activity of cryptocurrency: If you are reading a news story about bitcoin or Ethereum or dogecoin or whatever, odds are good that the story is about how some exchange or wallet or project has just caused a bunch of currency to vanish. Here's the latest:
There's a lot of hair-pulling among Ethereum alt-coin hoarders today – after a programming blunder in Parity's wallet software let one person bin $280m of the digital currency belonging to scores of strangers, probably permanently.
Parity, which was set up by Ethereum core developer Gavin Woods, admitted today that a user calling themselves devops199 had "accidentally" triggered a bug in its multi-signature wallets that hold Ethereum coins. As a result, wallets created after July 20 are now locked down and inaccessible, quite possibly permanently, thus nuking $90m of Woods' own savings.
Oh well! People often talk about blockchain technology as a way to make things -- payments, securities ownership ledgers, etc. -- more secure. But actually existing blockchain applications in the wild -- the actual cryptocurrency systems that are used to store millions of dollars' worth of value -- have a security record that would cause any regular bank to shut down in disgrace.
Elsewhere, here is Izabella Kaminska on the environmental costs of bitcoin's massive energy use.
People are worried about unicorns.
Here is Farhad Manjoo worrying that "as the world’s moneyed dictators, oligarchs and other characters look for more places to park their billions, mountains more will be coming to Silicon Valley," and that it is hypocritical of idealistic tech firms to accept this money. I have to say: That's a good reason to go public! If you are a private company and Saudi Arabia is a big investor, then you are to some extent associated with Saudi Arabia's policies. If you are a public company and Saudi Arabia buys a big block of your stock, then you can shrug and say "well, we don't control our shareholders."
Elsewhere, Uber Technologies Inc. has acquired a more upscale set of platitudes:
We celebrate differences. We stand apart from the average. We ensure people of diverse backgrounds feel welcome. We encourage different opinions and approaches to be heard, and then we come together and build.
We do the right thing. Period.
Et cetera. These new platitudes replace former CEO Travis Kalanick's bro-ier platitudes, which included "champion's mind-set," "superpumped," "always be hustlin'," "meritocracy and toe-stepping," and "principled confrontation."
A good project would be to start a database of business platitudes; give customers some sliders they can manipulate to set their risk preferences, industry, age, tolerance for legal gray areas, etc.; and then spit out a set of platitudes optimized for them. So if you indicate that you are a mature high-profile company with fairly low risk tolerances, you will get back "we do the right thing" and "we celebrate differences." If you indicate that you are a start-up currently housed in a dorm with no legal or human resources functions and no desire to add them, then you will get back "move fast and break things" and "toe-stepping."
Fed’s New Regulatory Point Man: Everything Is on the Table. Deutsche Bank chief hints at thousands of job losses. This Bank CEO Is Learning to Code. PDVSA Credit Default Swaps Hit Record as Time Runs Out to Pay. US urged to impose full embargo on Venezuelan oil. Credit Trades Du Jour: Exotic, ‘Nonlinear’ and Private. JPMorgan Judge Upends $1.1 Million Whistle-Blower Verdict. Mattress Company Shutters Web Publication, Pivots to Print. Private-equity ping-pong. Stephen Hawking: Humans will turn Earth into a giant ball of fire by 2600. The Air Force Wants Fighter Jets With Lasers. Hidden Valley Ranch keg.
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