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DealBook Column: ‘Shareholder Democracy’ Can Mask Abuses

February 26, 2013 by Leave a Comment

David Einhorn, founder of the hedge fund Greenlight Capital.Carlo Allegri/ReutersDavid Einhorn, founder of the hedge fund Greenlight Capital.

Martin Lipton, one of the nation’s top corporate lawyers, was dismayed.

Having watched David Einhorn, the activist investor, go to battle with Apple in the last two weeks to push it to distribute some of its $137 billion cash hoard to shareholders, Mr. Lipton had seen enough. Mr. Einhorn, he thought, had gone too far.

A longtime counselor to the Fortune 500 as one of the founding partners of Wachtell, Lipton, Rosen Katz, he sat down and wrote a scathing memo to his clients on his view that “shareholder democracy” has run amok.

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“The activist-hedge-fund attack on Apple — in which one of the most successful, long-term-visionary companies of all time is being told by a money manager that Apple is doing things all wrong and should focus on short-term return of cash — is a clarion call for effective action to deal with the misuse of shareholder power,” he wrote. The memo was entitled, “Bite the Apple; Poison the Apple; Paralyze the Company; Wreck the Economy.”

Martin Lipton, founding partner of Wachtell, Lipton, Rosen and Katz.Keith Bedford/ReutersMartin Lipton, founding partner of Wachtell, Lipton, Rosen and Katz.

Mr. Lipton said that long-term shareholders in public companies are being undermined “by a gaggle of activist hedge funds who troll through S.E.C. filings looking for opportunities to demand a change in a company’s strategy or portfolio that will create a short-term profit without regard to the impact on the company’s long-term prospects.”

While “shareholder democracy” may be a good sound bite, Mr. Lipton has a point worth considering.

It increasingly appears that the rise of “shareholder democracy” is leading, in some cases, to a perverse game in which so-called activist investors take to the media to pump or dump stocks in hopes of creating a fleeting rise or fall in a company’s stock price. The battle over Apple is just one minor example. Carl Icahn’s investment in Herbalife, betting against William Ackman’s accusation that the company is a “pyramid scheme,” is another.

That’s not to say that shareholder democracy is a bad thing. Shareholders have successfully and properly brought pressure to bear on underperforming companies, pushed out entrenched directors and, in some cases, pressed for operational changes to address health and the environment.

At a time when investors are calling for managements and directors to think more about the long term, this latest breed of activism is also multiplying. But are these activists interested in the long term?

According to Leo E. Strine Jr., the chief judge of the Delaware Court of Chancery, the answer is usually obvious: no.

“Many activist investors hold their stock for a very short period of time and may have the potential to reap profits based on short-term trading strategies that arbitrage corporate policies,” he wrote in a widely circulated essay for the American Bar Association. Near the beginning of his essay he asked: “Why should we expect corporations to chart a sound long-term course of economic growth, if the so-called investors who determine the fate of their managers do not themselves act or think with the long term in mind?”

The academic literature provides a mixed and inconclusive assessment of the true effect of activism on shareholder value over the long-term.

In fairness, it must be said that not all activist investors are created equal and not all of their investments should be considered in the same way. Nelson Peltz, once called a corporate raider, fought his way onto the board of Heinz in 2006. He is still on the board and approved the sale of the company to Berkshire Hathaway and 3G Capital just weeks ago.

Daniel Loeb, the founder of Third Point Management, similarly fought his way onto the board of Yahoo after exposing its former chief executive, Scott Thomson, for lying on his résumé. He is now a board member and helped recruit Marissa Mayer to be chief executive. Whether he likes it or not, Mr. Loeb is a long-term shareholder in Yahoo. Just weeks ago, however, he announced that he had made an investment in Herbalife that his peer, Mr. Ackman, is betting against. Part of Mr. Loeb’s bet was simply a short-term gamble; he has since sold some of his investment, taking profits off the table.

Similarly, Mr. Ackman has made some long-term bets — he held his short position in MBIA for years and is now a long-term investor and director of J. C. Penney — but he has also made a series of short-term investments as well.

As for Mr. Einhorn’s fight with Apple, it is hard to argue he is a short-term investor in the company; his firm, Greenlight Capital, has held a stake for the past three years. But the measures he is pressing the company to pursue — creating a “iPref” or preferred share that pays a dividend to shareholders in perpetuity — feel a lot like financial engineering to create some quick value for investors.

In a news release announcing his proposal, which would have Apple create $50 billion in perpetual preferred stock, Mr. Einhorn said that amount of the new shares “would unlock about $30 billion, or $32 per share in value. Greenlight believes that Apple has the capacity to ultimately distribute several hundred billion dollars of preferred, which would unlock hundreds of dollars of value per share.” He continued, “Greenlight believes additional value may be realized when Apple’s price-to-earnings multiple expands, as the market appreciates a more shareholder-friendly capital allocation policy.”

In truth, Mr. Einhorn’s proposal is a lot more long-term thinking than just pressing Apple to distribute a special one-time dividend or pursue a series of stock buybacks; his proposal requires shareholders to remain so as to reap the dividends the special “iPrefs” would throw off. But make no mistake, Mr. Einhorn is also hoping that Apple’s common shares will jump in price if Apple takes up his proposal.

Mr. Einhorn declined to comment for this column.

I’ve had my own run-ins with Mr. Lipton. In 2008, before the financial crisis, I wrote a column questioning Mr. Lipton’s various efforts “to stiff-arm the people who actually own the company.” At the time, he wrote a memo arguing that the “limits on executive compensation, splitting the role of chairman and C.E.O. and efforts to impose shareholder referendums on matters that have been the province of boards should be resisted.”

As the inventor of the anti-takeover maneuver called the “poison pill” and as one who has made a career trying to protect boards from agitators, Mr. Lipton was talking his own book. I wrote, “Mr. Lipton’s advice isn’t just wrongheaded. It’s dangerous.”

But nearly five years later, with the perspective of the financial crisis, Mr. Lipton’s underlying worry that certain shareholders will abuse the powers of democracy is not unfounded. The question, as is often the case, is whether the influence of a few interested in the short term overwhelms the best interests of the many in the long term.

A version of this article appeared in print on 02/26/2013, on page B1 of the NewYork edition with the headline: ‘Shareholder Democracy’
Can Mask
Abuses.

Article source: http://dealbook.nytimes.com/2013/02/25/shareholder-democracy-can-mask-abuses/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Hewlett-Packard 4th-Quarter Results Top Modest Wall St. Forecasts

November 22, 2011 by Leave a Comment

SAN FRANCISCO — Meg Whitman tried to stay positive Monday, even as she was managing sharply lower expectations about Hewlett-Packard’s near-term prospects.

“This company has been through a lot,” Ms. Whitman said in an interview, after delivering news to investors of a fiscal fourth quarter with a 91 percent drop in net income. “We’ve got some rebuilding to do,” she said. “What this company has been through would have felled lesser companies.”

In contrast to the ambition of her two recent predecessors, Ms. Whitman indicated that H.P. would focus on internal development of its businesses, which include personal computers, servers, printers, software and providing data management services to corporations. There will most likely be no large-scale acquisitions, she said. H.P. will instead work over the coming year to rebuild a company damaged by big purchases and excessive budget-cutting in areas like research and development.

Rebuilding may indeed be what H.P., the world’s largest technology company by revenue, needs after the tumult of the last 16 months. Ms. Whitman took over as chief executive of H.P. in mid-September from Léo Apotheker, who in less than a year roiled the company’s stock by acquiring the British software firm Autonomy for $11.7 billion, dropping its tablet computer business and publicly musing about whether H.P. might get out of the personal computer business. Mr. Apotheker had succeeded Mark V. Hurd, who wielded a sharp pencil on costs, but resigned from the company when the directors questioned his accounting of expenses involving a female contractor.

Ms. Whitman, who joined H.P.’s board only last January, kept expectations low. She said that over the coming year, “we will grow at G.D.P.-type growth rates, maybe faster,” and indicated that economic growth, particularly in Europe, would probably be sluggish. Profitability, she said, would rise through superior management of H.P.’s internal assets.

H.P. reported that net income in the fourth fiscal quarter fell to $200 million, or 12 cents a share, from $2.5 billion, or $1.10 a share, in the year-ago quarter. The quarter includes $2.1 billion in after-tax costs for closing its Web OS mobile software business. The company said revenue fell 3 percent to $32.1 billion, from $33.3 billion in the same quarter a year ago. While the bottom line was better than many on Wall Street had expected, it was not clear that the shareholders appreciated Ms. Whitman’s longer-term focus. H.P. closed at $26.86 a share, down 4 percent, in a tough day for the market. On the first news of the earnings, the stock rose 4 percent because the results were better than expected by Wall Street analysts. Once Ms. Whitman delivered her vision for H.P. in a conference call with analysts after the earnings release, however, the shares began dropping 2 percent below the market’s closing price.

Some analysts thought Ms. Whitman was smart to intentionally tamp down expectations, so that she might surprise investors with better than expected results in the coming year. “H.P. did the right thing by lowering the bar and lowering expectations,” said A.M. Sacconaghi, an analyst with Sanford Bernstein. “If anything, it was a little too forceful. They were calling for earnings to go down 15 percent, year on year.”

Several of H.P.’s mainstay lines were hit hard in the last quarter. The printing division, often a big money maker because of the high profit margins on replacement ink, recorded revenue 14 percent lower than in the fourth quarter of 2010. Ms. Whitman called those results “painful,” but said they were tied to poor management and a weak economy, and not a shift away from printing or H.P.’s products.

Revenue from the server business and notebook computers also dropped. The services business, which has been trying to move from things like call centers to higher-margin software design, barely grew.

Earlier Monday, the research firm Canalys projected that Apple would overtake H.P. to become the leading global PC vendor in 2012, thanks to strong sales of its iPad tablet. While not everyone counts tablets as PCs, the mobile devices are clearly a replacement for a PC for many people. Ms. Whitman said in the interview that H.P. would re-enter the tablet market around mid-2012 with a product using Microsoft’s operating system.

Ms. Whitman said she saw strength in the company and pointed to innovations like low-power servers that use the kind of chips found in mobile phones, and software to analyze very large sets of data for pattern analysis and prediction coming out of the Autonomy acquisition. These products would not have meaningful impact on H.P.’s fortunes for at least a year, however, she said.

Instead, the company would try to function less as a collection of separate businesses, and more as a single corporate entity. “I feel quite good about the portfolio of assets. We can do more,” she said.

Article source: http://feeds.nytimes.com/click.phdo?i=9038714ed4fbee5e3fc4063c781c26f2

Filed Under: Business News Tagged With: , ,

Wall Street Recovers After Slipping on Fed Remarks

August 26, 2011 by Leave a Comment

The absence of an announcement on any new economic stimulus by the Federal Reserve chairman appeared to briefly disappoint investors on Friday, sending Wall Street indexes down by more than 1 percent, but they more than made up the decline by afternoon.

The financial markets had pinned their hopes early this week on some new announcement by the Fed chairman, Ben S. Bernanke, of aid to the economy at a symposium in Jackson Hole, Wyo., on Friday. But expectations began to wane by Thursday, when indexes closed more than 1 percent lower.

On Friday, shortly after Mr. Bernanke started to deliver his speech, investors generally got what they had been expecting. Mr. Bernanke said the economy was recovering and the nation’s long-term prospects remained strong, but he offered little indication of any plans for additional measures to bolster short-term growth.

The Standard Poor’s 500-stock index promptly slipped 2 percent. The Dow Jones industrial average lost 1.8 percent, and the Nasdaq composite index slipped 1.3 percent. But within a half-hour, there was some recovery, and by afternoon, the S. P. was up 1.5 percent, the Dow was up 1.3 percent and the Nasdaq rose more than 2 percent.

“It was a bit of a nonevent,” said Schwab’s chief investment strategist, Liz Ann Sonders, referring to the impact of the speech.

While Mr. Bernanke “did not close the door to anything,” she said, it appeared that the Fed wanted to give itself more time to assess the economy. “They continue to say they expect growth to pick up in the second half of the year. At least that is a non-negative.”

Mr. Bernanke made his standard announcement that the Fed would take any steps necessary to help the economy, and he said the issue would be discussed at the next meeting of the Fed’s policy-making board, in late September. But he made no mention of the measures the Fed might take, something he has provided on several occasions earlier this year.

Nigel Gault, the chief United States economist for IHS Global Insight, said the initial equity market reaction to the Fed statement was negative since there was no mention of new action, but the market probably turned around in the hope that action would still come in September. “Unfortunately, the Fed doesn’t have any rabbits to pull out of the hat to magically re-ignite economic growth,” said Mr. Gault.

Still, there were other factors at work on the markets on Friday. Technology shares pulled up the broader market, and on the Nasdaq, Aruba Network rose more than 20 percent. It reported on Thursday that fiscal fourth-quarter revenue was up 47 percent year over year, and the company said it was confident it would increase market share in the 2012 fiscal year.

Aside from corporate results, there were economic data points to contend with. After taking in disappointing jobs data on Thursday, the markets heard that gross domestic product for the second quarter rose at annual rate of 1.0 percent, the Commerce Department said, a downward revision of its prior estimate of 1.3 percent. Economists had expected growth to be revised down to 1.1 percent. In the first quarter, the economy advanced just 0.4 percent.

Clark Yingst, the chief market analyst at Joseph Gunnar, said the markets had already sent out signals before the speech that investors did not appear to be expecting anything new, but he also said they could be reacting to the new G.D.P. number. Stocks and the dollar were lower, and gold firmed slightly.

“The slight weakness in the dollar might be a knee-jerk reaction to that,” Mr. Yingst said of the new data. “The market is still anticipating certainly no official announcement of any change in monetary policy.”

Gold, which is typically a safe-haven asset, has been declining in recent days as many analysts said it was overpriced. On Friday Comex futures showed a slight increase, rising to $1,785.30 an ounce.

“Gold and the dollar are inversely related, so I think on the headline G.D.P. report, gold is higher,” Mr. Yingst said. “It may be nothing more than a bit of a bounce. I don’t think the action in gold and the dollar is anticipating something” from Mr. Bernanke.

The benchmark 10-year Treasury bond yield was lower at 2.185 percent.

Stock markets in Europe also fell for a second day, and markets in Asia were mixed on Friday.

Markets continued downward Friday in Hong Kong, where the Hang Seng index was 0.86 percent lower by midafternoon, and in India, where the Sensex was down 1.1 percent by the afternoon. The Nikkei 225-stock index rose 0.3 percent after Prime Minister Naoto Kan announced his resignation.

Binyamin Appelbaum contributed reporting from Jackson Hole, Wyo., and Julia Werdigier contributed from London.

Article source: http://www.nytimes.com/2011/08/27/business/global/daily-stock-market-activity.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,