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Trying to Turn a Castle Into a Cash Register

May 24, 2013 by Leave a Comment

Why the attraction? Lady Carnarvon’s home is the fictional setting for the TV series “Downton Abbey,” and she is determined to cash in. As she told a visitor while scrambling to find a place for lunch that wasn’t already occupied by tourists, the location fees paid for the use of Highclere “are not going to pay for the roof.”

Lady Carnarvon was known as Fiona Aitken before she married Geordie Herbert, the Eighth Earl of Carnarvon and Queen Elizabeth II’s godson, in 1999. She has become the face of Highclere as her husband devotes himself to the less-glamorous operational side of running this vast estate, and speaks with the proper accent of a countess and the numeric frankness of a chief financial officer. “If you win the lottery, you’re winning something called cash,” she said. “With ‘Downton,’ it’s how it can turn in to something like cash.”

The television show has brought worldwide fame to Highclere Castle (which Lady Carnarvon’s husband’s family has owned since the late 17th century), especially among what she calls “lots of lovely Americans.” But the house costs $1.5 million a year to run, and it has not received the windfall that viewers of the show would assume.

It certainly didn’t provide the fortune brought by Almina Wombwell, the Fifth Countess of Carnarvon and daughter of Alfred de Rothschild, who married into the family in 1895; that paid for the first electricity and plumbing. The current Lady Carnarvon recognizes that keeping a house like Highclere financially solvent and in the family is far more difficult today.

“It’s both my husband’s family home and my home, but it has to work in the modern world — it has to be a business,” she said as she finished lunch and asked her assistant to provide her something sweet. “Yes, my lady,” he said and promptly returned with a jelly doughnut.

Lady Carnarvon is such an advocate of prudent finances that she would seem to have more in common with Suze Orman than with her husband’s pedigreed relations. As she gazed out from the footmen’s rooms onto the tents on Highclere’s lawns, she talked about all her efforts to pay for Highclere Castle’s costly renovations, like running a working farm to produce horse feed and hosting events there like an Easter egg hunt that required relocating a field of lambs to make room for visitors.

In addition to bringing in more film and television companies to shoot in Highclere’s less recognizable chambers, she has rented out the home for weddings, including that of the model Katie Price, at rates starting at about $22,000.

A Richmond, Va.-based speaker’s bureau, Arnett Associates, handles Lady Carnarvon’s speaking engagements, with fees starting at $20,000. Then there are her books. “Lady Almina and the Real Downton Abbey,” which was published in 2011, made the New York Times best-seller list and sold a respectable 157,000 copies. (She is writing another book, about her husband’s ancestors, specifically Catherine Wendell, the American-born Sixth Countess of Carnarvon.)

Through all of this fund-raising, she still tries to make Highclere Castle feel like a real home, with magazines strewn on the night tables of bedrooms recognizable to “Downton Abbey” fans and family photographs featuring the royals strategically placed throughout common rooms. Her family spends much of its time exiled to a cottage 20 yards away, where the countess said she keeps the “dogs, rabbits, trampolines, Xbox.” That’s where on a recent afternoon, Lady Carnarvon’s son, Edward, played with her husband’s son from his first marriage, George.

“I never rest,” she said. “I am always looking for the next trick.”

Not everyone has been pleased with how she has tried to make money off Highclere. A former boyfriend, the baronet Sir Benjamin Slade (who successfully sued her in the late 1990s after their breakup over the custody of their dog, Jasper, prompting the tabloids to brand her “Feisty Fiona”), called the Carnarvons “grave robbers” for their discovery of the tombs of Tutankhamen.

Article source: http://www.nytimes.com/2013/05/26/fashion/trying-to-turn-a-castle-into-a-cash-register.html?partner=rss&emc=rss

Filed Under: Media Business Tagged With: , ,

Drug Industry Says 340B Discount Program Is Being Abused

February 13, 2013 by Leave a Comment

What they did not emphasize was that the deal would also create a windfall for them worth millions of dollars a year, courtesy of an obscure federally mandated drug discount program.

The program, known as 340B, requires most drug companies to provide hefty discounts — typically 20 to 50 percent — to hospitals and clinics that treat low-income and uninsured patients.

But despite the seemingly admirable goal, the program is now under siege, the focus of a fierce battle between powerful forces — the pharmaceutical industry, which wants to rein in the discounts, and the hospitals, which say they might have to cut services without them.

One issue is that the program allows hospitals to use the discounted drugs to treat not only poor patients but also those covered by Medicare or private insurance. In those cases, the hospital pockets the difference between the reduced price it pays for the drug and the amount it is reimbursed.

That is what happened in Memphis. When the West Clinic teamed with Methodist Healthcare, the huge volume of chemotherapy drugs used by the clinic suddenly qualified for the hospital’s discount, while reimbursement remained the same.

In a report issued on Tuesday, pharmaceutical industry trade groups say that some hospitals have gone overboard in using the program to generate revenue, straying from the original intent of helping needy patients. The report, which was supported by groups representing pharmacies, pharmacy benefit managers and oncology practices, called for the discounts to be more narrowly focused.

Some senior Republicans in the House and Senate are investigating the program, which they say has suffered from murky rules and lax enforcement.

“If ‘nonprofit’ hospitals are essentially profiting from the 340B program without passing those savings to its patients, then the 340B program is not functioning as intended,” Senator Charles E. Grassley, Republican of Iowa, said in letters sent to three medical centers last October.

One reason for the scrutiny is that the program — named after the section in the law that created it in 1992 — now includes one-third of the nation’s hospitals, triple the number in 2005. About $6.9 billion worth of drugs, or about 2 percent of the nation’s total, are sold through the program annually, reducing revenue for the pharmaceutical companies by hundreds of millions of dollars a year.

The industry report says sales could grow to $12 billion by 2016. That is in part because the nation’s new health care law will make more hospitals eligible for the discounts by increasing the number of Medicaid patients they treat, even as the need for the discounts should arguably diminish because fewer people will be uninsured.

Hospitals say 340B was never meant to merely provide cheap medicines to poor people. Rather, it was meant to help the hospitals that treat such patients, and to stretch federal resources. Making money from the spread helps keep the hospitals operating, which in turn helps needy patients, they say.

“If we didn’t have our 340B program, I seriously doubt we could have our outpatient cancer center,” said Burnis D. Breland, director of pharmacy at the Columbus Regional Healthcare System in western Georgia.

Nevertheless, with the program under scrutiny, the organization representing 340B hospitals, Safety Net Hospitals for Pharmaceutical Access, has warned its members to avoid using terms like “increasing profits” and “revenue enhancement.”

A 2011 report by the Government Accountability Office, the investigative arm of Congress, said that federal oversight of the program was insufficient to ensure that hospitals and drug companies were adhering to the rules.

In response, the Health Resources and Services Administration, which oversees the program using an annual budget of only $4.4 million, audited 51 hospitals last year, its first audits since the program began. It also made all hospitals recertify themselves as eligible for the program.

As a result, some 271 treatment sites belonging to 85 hospitals were ejected from the program, said Krista Pedley, the federal official in charge of the 340B program. She said that three hospitals acknowledged receiving discounts for which they were ineligible and were repaying manufacturers.

Some drug companies — Genentech is the only one that has publicly identified itself — are also auditing hospitals or considering doing so.

Previous studies have shown drug companies do not always offer the full discount, though no drug companies are being audited.

Article source: http://www.nytimes.com/2013/02/13/business/dispute-develops-over-340b-discount-drug-program.html?partner=rss&emc=rss

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Early Sales Tempered With Caution at Sundance

January 21, 2013 by Leave a Comment

At the outset of the production, he said, one of the financial backers, Gil Friesen, told him, “I don’t want to lose money.” Mr. Neville’s quick response: “You might have better odds at the track.”

That harsh reality endures, despite shifts in the nature of distribution that have made the independent film business healthier than it has been in years. Those changes include meaningful new revenue from video-on-demand services, stabilizing DVD sales and a cluster of upstart distribution companies.

There have already been a flurry of distributor purchases at this year’s festival. HBO acquired the documentary “Pussy Riot — A Punk Prayer,” about the Russian radical-feminist rock band, for an undisclosed price. Relativity Media spent about $4 million for “Don Jon’s Addiction,” a comedy about a man who watches a little too much Internet pornography, and committed to a wide release.

But the vast majority of the 119 feature films in this year’s Sundance lineup — even if they do find a distributor — will still not recoup their production costs, much less turn a profit, producers and agents say. On-demand sales in particular are helping, but they do not yet not represent the broad windfall that many financiers and filmmakers are counting on, said Tom Bernard, co-president of Sony Pictures Classics, a regular Sundance buyer.

With video on demand, Mr. Bernard said, “There is myth information about where the pot of gold is.”

Last year, at least 28 movies were bought here by distributors, more than double the number of the 2008 festival — prompting some chest beating by Sundance, which strives to bring independent film to broader audiences.

“Beasts of the Southern Wild,” bought here last year by Fox Searchlight Pictures for about $1 million, has taken in $11.3 million at the box office and collected four Oscar nominations. The Richard Gere drama “Arbitrage,” bought by Lionsgate and Roadside Attractions for about $2.5 million, generated $8 million in ticket sales.

“Arbitrage” was also a huge success on video on demand, where it took in about $14 million, according to Lionsgate.

But those films — held up as examples of what is possible here — were by far the exception and not the rule. More typical was the comedy “For a Good Time, Call … .” The film cost Focus Features, the specialty unit of Universal Pictures, about $2.5 million to buy, but it fizzled outside of the festival’s clubby confines and took in just $1.3 million at the box office. Of the 28 films bought from last year’s festival, 12 sold $700,000 or less in tickets (with several selling less than $70,000); four still have not been released.

And while distributors are chattering about how wonderful video on demand is, most of the agents responsible for selling these films say privately that it is still viewed as a last option, “the deal you take when you can’t do any better,” in the words of one agent, who asked for anonymity so he could speak candidly.

Though making money from independent films may remain a crap shoot, some aspects of the new Sundance sales game have solidified into rules.

Gone are the days, most everyone here agrees, of dizzying prices, as when “Little Miss Sunshine” sold for $10.5 million in 2006 ($12 million in today’s dollars). The time of frantic bidding wars among the specialty divisions of major studios — some of which, like Miramax, no longer exist — has also passed.

Now, $6 million is considered a big acquisition price. The pace of making deals has also become steady and deliberate, as sellers weigh their expanding options and buyers think more carefully about whether films truly have crossover appeal.

Article source: http://www.nytimes.com/2013/01/22/business/media/at-sundance-early-sales-are-mixed-with-caution.html?partner=rss&emc=rss

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You’re the Boss Blog: Grow America’s Unusual Approach to Spurring New Ventures and Creating Jobs

November 14, 2012 by Leave a Comment

Alan Hall, standing in striped suit, at a Grow America competition. Alan Hall, standing in striped suit, at a Grow America competition.

Start

The adventure of new ventures.

When Alan Hall saw a hardworking neighbor fall asleep at­ a meeting, he knew something was wrong. The man, Mr. Hall learned, had been laid off and taken on three new jobs – newspaper delivery in the morning, accounting in the afternoon, managing a convenience store by night – to support his family.

“He was barely keeping his nose above water,” said Mr. Hall, a co-founder and managing director of Mercato Partners, an investment firm. So Mr. Hall asked a company in which he is an angel investor to hire the man, who holds an M.B.A., and offered to cover his starting salary. More than a year later, his neighbor is still at work and thriving.

Mr. Hall said the experience made him wonder: “How many millions of Americans in the United States today are unemployed or underemployed and going through the same stress that Phil was? What can I do to help?” With a windfall behind him – Mr. Hall had sold MarketStar, a global sales and marketing firm he founded, to the Omnicom Group in 1999 – he’d also amassed the resources to attempt a solution.

In March, Mr. Hall unveiled a new company, Grow America, with the stated mission of creating jobs by spurring entrepreneurship and bolstering new ventures. Mr. Hall’s program doesn’t invest money in companies; it gives them money. A pilot program, now underway in Utah, is on track to give away $1 million in cash and services through a series of pitch competitions culminating in January. At that time, Mr. Hall says he intends to expand his contests – along with mentoring, marketing and networking help – across the country.

“Our goal is to help 100,000 businesses next year, with the idea that they all grow and hire employees,” Mr. Hall said, adding that his competitions will be open to ventures across all industries, so long as they’re at one of three stages: initial idea, start-up or ready to grow. As for the program’s potential success, he added, “I will measure it in how many people now work who didn’t before.” We caught up with him to ask a few questions:

Tell us about your plans.

This January, we’re launching our national initiative with an online competition. We’ll invite people from around the country who have ideas for start-ups, along with founders of new and growth-stage companies, to participate as contestants. We’ll give away $4,000 to a single company every two weeks to get the ball rolling. That totals $100,000 a year.

If the time comes when we’re able to encourage sponsors and our numbers go up, then we would clearly start to do more, with cash around various categories.

The money we give away is really just a token, but it gets people introduced to the other things Grow America can provide.

What else can you offer?

There are three other areas where we can help: mentoring, marketing and networking. The entrepreneurs we work with, they all want advice, they want counsel. They want someone to tell them what the right next steps are and how to avoid pitfalls. They like to share experiences and to talk with one another.

We’ve also developed an online platform for entrepreneurs to gather insight, information, knowledge that helps them with the various steps of their business. We’ll have podcasts for them, webinars of all sorts.

Grow America is a for-profit firm, but you’re giving away money, rather than investing it. How does that work?

I’m coupling philanthropy with capitalism, which I believe are the two most powerful engines that move things along in the economy. In this case, I give money to companies and seek no return whatsoever. It sounds strange. But the idea is that, when I give money away, somehow I make money on the other side more abundantly. It’s almost a scriptural thing for me.

How will Grow America make money?

We’ll invite sponsors to join us. It’s good P.R. for them. They believe in the vision and, obviously, at some point in time they might be able to help some of the entrepreneurs with their products and services.

Beyond my money, let’s say we have a sponsor, like a Microsoft, an Intel, a bank, whoever. We would be taking a portion of those sponsor dollars, applying them back to overhead, then applying the rest to the competition awards, with the hope that, at the end, there’s a small profit so we can maintain what we’re doing. But we’re giving most of that money away.

Have you tried anything like this before?

For the last six years, we’ve offered a program here in Utah called Grow Utah, holding contests and educating entrepreneurs, and those things have been very successful. We did that in every community here in the state. We’ve seen 7,000 new people employed and more being hired because of that initiative. Utah is a small state, but seven thousand is a pretty good jump in a state like this. I thought, “Let’s take this Grow Utah model and put it on steroids.”

The Utah program was funded with my money coupled with sponsor money; the other sponsor here locally has been Zions Bank. For each of the past last six years, it’s been about a half a million — split between the two of us — per year. So about $3 million, or $1.5 apiece.

Is there a company you’ve funded so far that stands out to you?

Keep in mind: I don’t vote. I don’t judge. I don’t do anything. I just hand out money. But one company we’ve funded that I thought was singular was CompleteSpeech. It makes a speech-therapy device that allows immediate, visual feedback on how to pronounce the right sound. It’s obviously a company that can be profitable, but here they are helping people with speech impediments in a most miraculous way.

They’re going to price the device so any family in the United States could have it, any therapist could have it. We were just pleased as can be to give them $100,000 to move their company forward. They’re now in the process of adding people and putting dollars into their marketing efforts. They already have customers — they just needed additional staff to ramp up.

Will you still be able to seed it at a national scale?

No, no. I wish I were John Rockefeller. My piece will be much more modest compared to what others will give. I’m still part of it, but my end goal is to find others who are like-minded and want to keep this initiative going for the good of the country.

We’re making what we call thousands of small bets. We don’t know which businesses are really going to take off. We’re saying, “We don’t know who will succeed, but let nature take its course. When someone takes off and starts hiring people? Happy day.” We have to get as many people into the pipeline as we possibly can, connect them with resources. We believe if we get everybody thinking about this and working on it, something good will come of it.

You can follow Jessica Bruder on Twitter.

Article source: http://boss.blogs.nytimes.com/2012/11/13/grow-americas-unusual-approach-to-spurring-new-ventures-and-creating-jobs/?partner=rss&emc=rss

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Rig’s Departure to Hamper Cuba’s Oil Prospects

November 10, 2012 by Leave a Comment

The rig, which was built in China to get around the United States trade embargo, is expected to depart in the next few weeks. With no other rigs available for deepwater exploration, that means Cuba must now postpone what had become an abiding dream: a windfall that would save Cuba’s economy and lead to a uniquely Cuban utopia where the island’s socialist system was paid for by oil sales to its capitalist neighbors.

“The Cuban oil dream is over and done with, at least for the next five years,” said Jorge Piñon, a former BP and Amoco executive who fled Cuba as a child but continues to brief foreign oil companies on Cuban oil prospects. “The companies have better prospects by going to Brazil, Angola and the U.S. Gulf.”

The lack of a quick find comes at a difficult time for Cuba. The effects of Hurricane Sandy, which destroyed more than 100,000 homes in eastern Cuba, are weighing down an economy that remains moribund despite two years of efforts by the Cuban government to cut state payrolls and cautiously encourage free enterprise on a small scale.

Cuba had hoped to become energy independent, after relying first on Russia and now on Venezuela for most of its oil. But with its drilling prospects dimming, experts say, Cuban officials may be pushed to accelerate the process of economic opening. At the very least, it may embolden members of the bureaucracy looking for broader or faster changes in the economy.

“This could represent a crucial setback for the Cuban regime,” said Blake Clayton, an energy fellow at the Council on Foreign Relations. In the meantime, the government has mostly tried to put a positive spin on the disappointing drilling results and the decision of the rig operator to lease in other waters. Granma, the Communist Party newspaper, reported last week that while Venezuela’s state oil firm had plugged its hole because “it did not offer possibilities of commercial exploitation,” the drilling had obtained valuable geological information. The Venezuelan firm was the last of three foreign oil companies to use the rig, after the Spanish company Repsol and the Malaysian company Petronas.

The government said more exploration could be expected.

The potential for Cuba’s oil reserves, like nearly everything involving Cuba, has been a matter of dispute. Cuban officials had predicted that oil companies would find 20 billion barrels of oil reserves off its northern coast. The United States Geological Survey has estimated Cuban oil reserves at 5 billion barrels, one quarter of the Cuban estimate.

The best-case scenario for production, according to some oil experts, would be for Cuba to eventually become a medium-size producer like Ecuador. But as the three dry holes showed, far more exploration effort would be needed, and that presents a challenge for a country with limited resources and the hurdle of American sanctions. There are many offshore areas that are competing with Cuba for the attention of oil companies, particularly off the coasts of South America and East and West Africa.

In Cuba’s case, the American embargo makes it far more difficult for companies seeking to explore Cuban waters. The Scarabeo 9, the rig set to depart, is the only one available that is capable of drilling in deep waters and complies with the embargo. To get it built, Repsol, the Spanish oil giant, was forced to contract an Italian operator to build a rig in China to drill exploration wells.

Cuban officials have also run into environmental concerns in the United States. The prospect of drilling only 50 miles from the Florida Keys had worried ocean scientists, who warned that if the kind of blowout that occurred on the BP rig in 2010 in the Gulf of Mexico was repeated in Cuban waters, it could send oil spewing onto Florida coastlines in as little as three days. If the oil reached the Gulf Stream, the powerful current that passes through the area, oil could flow up the coast to Miami and beyond.

Still, Cuba has been bullish about oil since plans for the rig’s arrival were first made several years ago. Cuba produces a small amount of oil and relies on Venezuela to provide around 115,000 barrels a day at highly subsidized rates, in exchange for the services of Cuban doctors and other professionals. Venezuelan production has been sliding steeply in recent years, and Cuban officials have been unnerved by the health problems of Venezuela’s president, Hugo Chávez, a crucial ally for the island.

Lee Hunt, a former president of the International Association of Drilling Contractors, said there were still potential opportunities off the island. The first Repsol well, he said, was not productive, but a subsequent study of the drilling results concluded that there could be promising oil-producing rocks in nearby waters.

The second well drilled by Petronas found only heavy oil that was so thick it could not be economically lifted out of the ground. And the third attempt by the Venezuelan state company found rock that was so hard and thick that it wore down drill bits before reaching oil.

Mr. Hunt said oil consultants continued to train Cuban drilling crews for the Russian company Zarubezhneft, which plans to drill using a Norwegian rig in shallow waters about 200 miles east of Havana. But that area is not considered as promising as the deep waters.

So the next deepwater exploration effort, Mr. Hunt said, may have to come from farther away: oil companies from Vietnam and Angola still have active leases in Cuba for future drilling.

Clifford Krauss reported from Houston, and Damien Cave from Mexico City.

Article source: http://www.nytimes.com/2012/11/10/world/americas/rigs-departure-to-hamper-cubas-oil-prospects.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Deal Professor: Hedge Fund’s Complex Scheme May Backfire, Costing It Millions

September 25, 2012 by Leave a Comment

Harry Campbell

Hedge funds are supposed to be the smart money, but sometimes even they can be outsmarted.

Take the case of Mason Capital Management and the Telus Corporation, a large Canadian telecommunications company. Mason Capital, a New York and London hedge fund with about $8 billion in assets under management, has made a complex bet in Telus stock that looked shrewd at first, but that may now lose tens of millions of dollars.

Telus has two classes of shares, one that is voting and trades only in Canada and another that is nonvoting and trades in Canada and the United States. The nonvoting shares traditionally trade at a discount to the voting shares, but Telus is proposing to convert the shares on a one-for-one basis, giving a windfall to the holders of nonvoting shares.

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Mason has taken a complex trading position in opposition to the proposal. In April, the hedge fund announced that it had acquired 19 percent of Telus’s voting stock, worth 1.9 billion Canadian dollars, or $1.8 billion.

Mason was able to finance this position by setting up a roughly equivalent short position in Telus’s nonvoting common stock, betting that those shares would fall. Basically, for every dollar that Mason earned on the voting shares, it would lose a dollar on the nonvoting shares. Since Mason is almost perfectly hedged, this was a bet that Telus’s proposal would fail, causing the nonvoting stock to lose value and the voting stock to gain.

Pretty clever, right?

Mason has no real economic interest in the future of the company because of its offsetting positions, but it can still vote its 19 percent against the share conversion proposal. This anomaly has led Telus to claim that Mason is an “empty voter” — voting shares in which it has no economic interest “at the expense of other shareholders.”

The hedge fund has argued that Telus is seeking to hand the nonvoting shareholders free money by collapsing the shares at a 1-to-1 ratio instead of at the traditional discount.

According to Mason, “over the past 13 years, Telus voting shares have traded at an average premium of 4.83 percent relative to the nonvoting shares; the premium has been as high as 15.23 percent.” The hedge fund also argues that the Telus directors who approved this transaction are conflicted because 89 percent of their total holdings are in the nonvoting shares.

In response, Telus claims that the lack of a discount is justified because the voting shares would get additional liquidity.

Mason won Round 1 of this argument in May, when Telus withdrew its proposal.

At the same time, Telus also planted the seeds to thwart Mason’s trade. The company announced that it would try again to collapse the shares at some future time. This gave price support to the nonvoting shares and prevented Mason from cashing out its position.

Mason reportedly hired the Blackstone Group to look at strategic alternatives for its Telus stake, but was unable to sell it. In August, the fund sought to press the issue by calling a shareholder meeting to amend Telus’s charter to prevent the nonvoting shares from being converted into voting shares without a discount.

This started Round 2.

Telus again proposed that the shares be collapsed. But in a twist, the company has structured the transaction so that only a majority of the voting shares are needed to approve it, instead of the 66 2/3 vote initially required. The reduction in the number of necessary votes gives the proposal a much better chance of passing despite Mason’s 19 percent holding.

Telus also refused to hold a special meeting. The battle came before the Supreme Court of British Columbia, and on Sept. 11, the court rejected on technical grounds Mason’s effort to force Telus to hold the meeting. But in an aside, the court heavily criticized the hedge fund for its voting strategy, calling it “empty voting.” The court stated that “the practice of empty voting presents a challenge to shareholder democracy … when a party has a vote in a company but no economic interest in that company, that party’s interests may not lie in the well-being of the company itself.” Mason has appealed the ruling.

Unless a higher court intervenes, the share collapse is heading to a shareholder vote on Oct. 17. Given that only a majority vote is needed, Telus may have the votes necessary to push the measure through. And with the decision of the Canadian court, other hedge funds appear to have closed out their positions in Telus, further narrowing the spread between the two share classes.

On paper, Mason’s trade was a deliciously clever scheme that made perfect sense. But once the trade went public, its position in Telus raised eyebrows. Mason has argued that it is not an empty voter because its interests are aligned with the voting shareholders; the conversion will be at their expense. That message may make sense, but the messenger has been viewed with suspicion. As a result, Mason has had a hard time convincing Canadian shareholders to support it.

And with the nonvoting shares still holding on to their earlier gains, Mason finds itself boxed in. Telus’s total market value has increased by $2 billion since February. Mason would have made much more money — hundreds of millions, in fact — had it simply taken a long position.

Lost in all of this maneuvering are the economic merits of Telus’s share collapse and the fact that nonvoting shares do appear to be getting a significant benefit that may be inappropriate.

According to sources close to Mason, the trade is currently profitable. But Mason is finding that its ingenious trade may lose it millions, thanks to the equally adroit maneuvering of Telus. Who said Canadians were too nice?

Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.

Article source: http://dealbook.nytimes.com/2012/09/25/hedge-funds-complex-scheme-may-backfire-costing-it-millions/?partner=rss&emc=rss

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But Nobody Pays That : Tax Breaks From Options a Windfall for Businesses

December 30, 2011 by Leave a Comment

Now, the corporations that gave those generous awards are beginning to benefit, too, in the form of tax savings.

Thanks to a quirk in tax law, companies can claim a tax deduction in future years that is much bigger than the value of the stock options when they were granted to executives. This tax break will deprive the federal government of tens of billions of dollars in revenue over the next decade. And it is one of the many obscure provisions buried in the tax code that together enable most American companies to pay far less than the top corporate tax rate of 35 percent — in some cases, virtually nothing even in very profitable years.

In Washington, where executive pay and taxes are highly charged issues, some critics in Congress have long sought to eliminate this tax benefit, saying it is bad policy to let companies claim such large deductions for stock options without having to make any cash outlay. Moreover, they say, the policy essentially forces taxpayers to subsidize executive pay, which has soared in recent decades. Those drawbacks have been magnified, they say, now that executives — and companies — are reaping inordinate benefits by taking advantage of once depressed stock prices.

A stock option entitles its owner to buy a share of company stock at a set price over a specified period. The corporate tax savings stem from the fact that executives typically cash in stock options at a much higher price than the initial value that companies report to shareholders when they are granted.

But companies are then allowed a tax deduction for that higher price.

For example, in the dark days of June 2009, Mel Karmazin, chief executive of SiriusXM Radio, was granted options to buy the company stock at 43 cents a share. At today’s price of about $1.80 a share, the value of those options has risen to $165 million from the $35 million reported by the company as a compensation expense when they were issued.

If he exercises and sells at that price, Mr. Karmazin would, of course, owe taxes on the $165 million as ordinary income. The company, meanwhile, would be entitled to deduct the $165 million as additional compensation on its tax return as if it had paid that amount in cash. That could reduce its federal tax bill by an estimated $57 million, at the top corporate tax rate.

SiriusXM did not respond to repeated requests for comment.


Dozens of other major corporations doled out unusually large grants of stock options in late 2008 and 2009 — including Ford, General Electric, Goldman Sachs, Google and Starbucks — and soon may be eligible for corresponding tax breaks.

Executive compensation experts say that barring another market collapse, the payouts to executives — and tax benefits for the companies — will run well into the billions of dollars in the coming years. Indeed, of the billions of shares worth of options issued after the crisis, only about 11 million have thus far been exercised, according to data compiled by InsiderScore, a consulting firm that compiles regulatory filings on insider stock sales.

“These options gave executives a highly leveraged bet that stock prices would rebound from their 2008 and 2009 lows, and are now rewarding them for rising tides rather than performance,” said Robert J. Jackson Jr., an associate professor of law at Columbia who worked as an adviser to the office that oversaw compensation of executives at companies receiving federal bailout money. “The tax code does nothing to ensure that these rewards go only to executives who have created sustainable long-term value.”

For some companies, awarding stock options can seem like a tempting bargain, since there is no cash outlay and the tax benefits can exceed the original cost.

Article source: http://feeds.nytimes.com/click.phdo?i=1c970d65526fb79d3a3b2c73de786a4a

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Debit Card Fees Prompt a Push Near Deadline

April 1, 2011 by Leave a Comment

Without much warning or debate, the Senate passed an amendment directing the Federal Reserve to reduce the hidden “swipe fees” that banks collect from retailers each time a customer makes a purchase with a debit card.

Merchants, who had complained that the $20.5 billion in annual fees were biting into their profits, were elated. Banks were stunned. Their lobbyists tried to reverse the move, but when the overhaul of the nation’s financial regulation was passed by Congress last July, the debit card cut survived.

Now, as the Fed faces a deadline in April to write the rules for the lower fees, banks and debit card companies are engaged in an all-out assault on Capitol Hill, enlisting a growing cadre of lawmakers and lobbyists to push for changes, delay or outright repeal. Banks contend the proposed cut in fees — to 12 cents per transaction from an average of 44 cents — will leave many of them unable to afford to issue debit cards to customers or will force them to raise other consumer banking charges to cover the costs. They also claim retailers will reap unfair profits.

A coalition of banks and card companies have plastered subway cars and Internet sites with ads warning, “Bureaucrats want to take away your debit card!”

“I am appalled that our members will shoulder tremendous financial burden and still be on the hook for fraud loss while large retailers receive a giant windfall at the hands of the government,” John P. Buckley Jr., the president of Gerber Federal Credit Union of Fremont, Mich., told a House of Representatives subcommittee last week.

This week, a trade group of convenience store owners will storm Capitol Hill with their side of the story.

“These fees are stunting business growth and hurting efforts to hire more workers and expand operations,” Douglas Kantor, a lobbyist for the Merchants Payments Coalition, a retailer trade group, said recently.

The lobbying has been intense over the last year with the card companies and banks hiring, among others, Sam Geduldig, a former adviser to Representative John A. Boehner, Republican of Ohio and the House speaker, and Regina Mahony, formerly a senior adviser to Representative Steny H. Hoyer, Democrat of Maryland, according to OpenSecrets.org, which tracks lobbyists.

Representatives of the retailers include the former Republican Senator Don Nickles of Oklahoma, and Sheryl Cohen, a former chief of staff for Christopher J. Dodd of Connecticut, the Democratic senator who sponsored the financial regulation bill and is now retired.

This debate is but one area where the consequences — intended and not — of the sprawling Dodd-Frank financial regulation law are coming to light. In an interview with CNBC on Friday, Alan Greenspan, the former Fed chairman, predicted that portions of the law would have to be reversed. “And that’s going to create very high degrees of uncertainty,” Mr. Greenspan said, something the markets hate.

Lawmakers tried to soften the blow by exempting smaller banks from the fee cap. But now even those institutions with less than $10 billion in assets oppose the law. They say that if they continue to levy the current, higher fees, their debit cards will not be able to compete against the big banks, which will charge lower fees because they have no choice. They gained a significant ally when Ben S. Bernanke, the Fed chairman, told a Senate panel last month that he thought a two-tier fee system would not work.

Several lawmakers who supported the debit card amendment or the broader financial regulation bill as a whole are now reversing course, as the antibank climate here softens. “I believe the Fed was given too narrow of set of rules” with which to draft the regulation, said Representative Barney Frank, the Massachusetts Democrat who sponsored Dodd-Frank in the House, which never voted separately on the debit-fee amendment. “Now there is genuine political pressure to do something. It’s very much in play.”

At least two Republican senators who voted for the debit card amendment last year — David Vitter of Louisiana and Michael D. Crapo of Idaho — have expressed reservations, urging the Fed to consider “all costs to the issuers,” including the cost of protecting themselves against fraudulent use of debit cards, which totaled $1.4 billion in 2009, according to the banks.

The law requires the Fed to limit debit fees to the “reasonable and proportional” cost of each transaction, and the Fed proposed a rule that did not yet include the cost of fraud protection.

Banks encourage consumers to use debit cards by signing for their purchases, rather than entering a personal identification number at the cash register. Card companies and banks earn higher fees on signature-debit transactions, but they also incur higher rates of fraud.

The fee cap still has some powerful backers, who say it should it take effect in July as scheduled. They are led by the amendment’s original sponsor, Senator Richard J. Durbin, Democrat of Illinois.

Mr. Durbin accused the debit card companies of employing “scare tactics” by saying the government wants to take away cards, or that merchants might no longer accept them.

The banks are already trying to make up for the lost revenue, with lenders like Bank of America, JPMorgan Chase and U.S. Bancorp charging fees for things that once were free, like paper statements or online banking. TCF Financial, a Minnesota regional bank that relies heavily on revenue from debit card fees, has sued the Federal Reserve board to block the enactment of the Durbin amendment.

Banks and credit card companies contend that the fee cap will create a windfall for giant retailers like Home Depot and Wal-Mart, which they say generate the bulk of debit card transactions, while doing little for small retailers.

Banking lobbyists eagerly point to a conference call in which a Home Depot executive told financial analysts the proposed rule would lower its debit fees by about $35 million a year.

Small-business owners, for their part, cite what they say is the devastating impact of rising debit card fees. Small banks and credit unions say they depend on debit fees to allow them to offer other services, like free checking. “Under the current proposal,” Frank Michael, president of Allied Credit Union of Stockton, Calif., told the subcommittee, “we are going to lose money on every transaction.”

Eric Dash contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=ac1457fa49f08c004a3441139abe6f0d

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