In connection with its ongoing evaluation of the asset management industry, the U.S. Financial Stability Oversight Council (the “FSOC”) recently issued a notice seeking public comment (the “Notice”) on whether asset management products and activities may pose potential risks to U.S. financial stability.  Specifically, the FSOC seeks comment on the systemic risks posed by: (1) liquidity and redemption practices; (2) use of leverage; (3) operational functions; and (4) resolution, i.e., the extent to which the failure or closure of an asset manager, investment vehicle or an affiliate could have an adverse impact on financial markets or the economy. Comments on the Notice must be submitted by February 23, 2015; and we are working with several clients to prepare and submit such comments. This post summarizes some of the FSOC’s key concerns and questions outlined in the Notice.
Manitowoc Co. showed the world Thursday that investors won’t ignore other problems simply because a company says it will split in two.
Manitowoc, a company that makes cranes and commercial food equipment, disclosed plans to split up Thursday afternoon about a month after activist investor Carl Icahn urged the company to take that step.
The announcement came as the firm reported weak quarterly results Thursday evening.
Manitowoc’s stock dropped nearly 3% Friday. That diverges from how the market typically greets splits. In 2014, companies announcing split-ups or spinoffs saw their stocks pop an average of 2.26% the following trading day, according to FactSet.
Manitowoc has struggled as a conglomerate. The company purchased U.K.-based Enodis PLC for $2.7 billion in 2008, combining a cyclical crane business with a commercial kitchen business. As the WSJ wrote Friday, that strategy has failed to deliver, and Thursday Manitowoc offered investors a gloomy forecast for 2015, particularly for its cranes business.
While analysts at Deutsche Bank said that the company’s stock, which closed at $18.71 Friday, could be worth between $23 per share and $28 per share if the businesses were split, they have concerns in particular about how its crane business will fare solo.
So do analysts at J.P. Morgan Chase & Co. ”We question the timing as it is unclear where the upside is for a standalone crane business that is likely to see more downside in the near-mid term,” J.P. Morgan analyst Ann Duignan wrote in a research note.
Mr. Icahn disclosed a nearly 8% stake in late December and said he wanted to see the company separate its crane business from its food-service unit.
The activist fund manager has been a vocal proponent of breakups at several public companies, including eBay Inc. and Gannett Co., over the past year, but he hasn’t been alone in advocating for them. Corporations, in turn, seem more willing to consider split ups. In 2014, 63 U.S. public companies announced breakups, the highest amount since FactSet started tracking the data in 1995.
This week Manitowoc joined that club, admitting that their divisions might be better off parting ways: “The timing is right now so each of them can pursue individual strategies and they can attract capital in different environments,” Chairman and Chief Executive Glen Tellock said in an interview with The Wall Street Journal.
Yet even though the stock prices at companies have popped on average when these splits are announced, their stock prices haven’t stayed up. FactSet said that the stocks of companies that have announced spinoffs are down nearly 5% from the closing price on the day of announcement.
EBay Inc.’s stock jumped more than 7% when it said it would spin off PayPal unit in late September, but its stock is now down 6% from its closing price that day. Hewlett-Packard Co.'s stock also rose nearly 5% the day the company said it would split in two in October, yet its stock is also down from its closing price that day by nearly 2%.
Now that shareholders have rejected the $5.85 per share buyout of GFI Group Inc. by CME Group Inc. with a side deal for management, what will become of BGC Partners Inc.’s hostile bid of $6.10 per share?
GFI announced Friday that its agreement with CME has been terminated and that is exploring strategic alternatives. One that has been in front of the board for months is BGC’s tender offer.
So is the BGC deal all but done now that shareholders have rejected the CME deal? Perhaps not.
The GFI board has at least the theoretical power to prevent the BGC deal from happening. In addition to refusing to authorize execution of its proposed tender offer agreement, the board could decide not to give BGC control of the board, a condition of BGC’s offer. The GFI board could even adopt a poison pill which would effectively prevent BGC from buying shares under the tender offer.
But could the board legally do so when BGC is offering $6.10 per share and the board wholeheartedly supported a $5.85-share-bid from CME? The legality of such actions would raise complex issues going to the heart of Delaware corporate law on governance and takeovers.
First, it would test the so-called Revlon duties of the board. In the Revlon case decided in the 1980s, the Supreme Court of Delaware said that once a board approves a sale of a company, it has to seek the highest price reasonably attainable. As long as the CME deal was pending, the Revlon duties applied.
Two members of management and one independent director (a majority of the five person GFI board) determined to keep pursuing the lower-priced CME, citing concern that the BGC deal wouldn’t close and it wasn’t worth losing the CME deal to take that risk. Does the board now have to test BGC to see if it will close? An announcement that a board is exploring alternatives does not normally trigger those Revlon duties — those alternatives could include acquisitions. But since the board was pushing a sale until hours before the announcement, that distinction might be a hard sell to a court.
In addition, since the board has announced it will be exploring strategic alternatives, it could claim it needs time to do so. If BGC isn’t prepared to wait around, that might not bother GFI directors if the board resists being rushed.
Another issue is whether the two management members of the board should be able to vote on the BGC deal. In the CME deal they had a stake in the outcome, as it included a side sale to a group of insiders, including them, of a GFI business. Now that the CME deal is terminated, the management directors may argue that they are not interested other than through their ownership of shares of GFI. They control 37% of the GFI shares.
Finally, and perhaps most interestingly, the management directors could argue that the BGC deal is unfair to them. It is conditioned on the board turning over 2/3 of the directors to BGC. That, combined with the minimum of 45% of the GFI shares that BGC would own after the tender offer would give effective control to BGC. That would effectively disenfranchise management’s 37% stake if it doesn’t sell to BGC. Under the corporate charter, BGC could not complete a merger and obtain complete ownership of GFI without a 2/3 vote of the shareholders.
Should the board be required to effectively deliver control to BGC under these circumstances? The directors have fiduciary duties to the management shareholders in addition to the public shareholders.
Another play for the board would be to start down the path of a lengthy exploration of strategic alternatives and saying no to BGC in order to get BGC to improve the terms.
Although these technical issues are interesting, in my view a Delaware judge is going to be skeptical of a board–particularly one in which the management directors voted on matters they were interested in–turning down a $6.10 per share when until Friday they were pushing hard for a $5.85 per share sale. But litigation means delay and delay is the enemy of all deals. The delay caused by these issues and the board’s exploration of alternatives could test BGC’s patience.
The stock jumped nearly 5% Friday–an odd reaction given that the Web giant’s results from the previous afternoon missed nearly every analyst forecast. Google’s valuation is low versus its peers, though investors may also be clinging to the hope that the company may take a breather from its legendary spending habit.
In the earnings call Thursday, finance chief Patrick Pichette noted that investments in 2014 were significant, but added that the company also has “willingness to throttle back” when it sees the need. He cited the recent decision to hit the reset button on the Google Glass project as an example.
It remains to be seen if frugality will take hold. Google’s capital expenditure bill was almost $11 billion last year, up 49%. Operating expenses rose 19% to $23.8 billion. Other deep-pocketed tech giants like Microsoft and Apple are also spending big to fuel their expansion. So Google may find it difficult to lock its own war chest.
Investors aren’t the only ones piling into Shake Shack Inc.
The MoneyBeat team took a trip to Shake Shack in Midtown Manhattan Friday, where lines were out the doors — hardly atypical for some of the burger joint’s New York City locations.
The company, which started as a hot dog stand in Madison Square Park, priced five million shares Thursday night at $21 apiece giving it a $745.5 million valuation. Shares more than doubled in their debut, pushing the valuation to $1.7 billion.
That’s a BIG bet on the fast-casual dining spot’s future.
The question is: How appetizing will the burger place, popular in New York City especially among the Wall Street crowd, be with the rest of America as Shake Shack expands its operations? We asked some customers what they thought in the video above.
Shake Shack plans to grow from 63 locations to at least 450 domestic restaurants, and it’s riding the fast-casual wave by offering what customers say is “fresh” food without a ridiculously expensive price tag. A double ShackBurger topped with cheese, lettuce, tomato and ShackSauce, for example, costs $7.99.
Whether or not the company can sustain its first-day stock pop will depend on how the economics work in different environments. Since 2013, three other fast-casual chains – Potbelly Corp., The Habit Restaurants Inc. and Noodles & Co. – have seen triple-digit first-day pops. But all three of them are now trading down more than double digits from where their stocks ended on their IPO days, according to IPO exchange-traded fund manager Renaissance Capital.
Do you have an appetite for Shake Shack? Tell us what you think in the comments section below!
Alibaba Group Holding Ltd. investors got a taste this week of why investing in Chinese businesses can be fraught no matter how large or blue chip the company is. Although the e-commerce giant, in my view, appears to be on solid legal ground with the disclosures it made to investors ahead of its IPO in September about its challenges with fake goods, the skirmish shows there are limits on how much investors can really know about Alibaba or any public company relying heavily on Chinese operations.
On Wednesday, a Chinese government regulator issued a report criticizing Alibaba for failure to crack down on the sale of fake goods, bribery and other illegal activity on its platform. The regulator said the report was based on discussions last July but that the regulator held off on disclosing details of the talk so as not to affect Alibaba’s IPO. Alibaba called the report flawed and unfair.
From a legal perspective, the timing of events could raises issues about Alibaba’s disclosure in its IPO documents, particularly in light of the Chinese regulator’s implication that its concerns were kept secret to facilitate the IPO. If there were a material misstatement in, or omission from, the 442 page prospectus Alibaba prepared for the IPO and issued last September, the company and even the directors and underwriters could have liability. Liability standards around an offering are much lower than other disclosure missteps.
To avoid liability with an IPO, directors and underwriters must generally show they conducted a reasonable investigation and had reasonable grounds to believe there was not a material error. This is sometimes called the due diligence defense. Outside of public offerings, director liability is extraordinarily rare. Proof of intentional fraud or at least reckless conduct is usually required if there is no offering.
It is because of the low liability threshold in an offering that the WorldCom directors were among the very few directors of public companies who personally had to write checks when WorldCom melted down a few months after a big sale of bonds. After a landmark opinion on due diligence, the underwriters also ended up with liability in WorldCom.
On Thursday’s earnings call, Alibaba Executive Vice Chairman Joe Tsai stated that the company thought the meeting with the regulator last July was routine. And he said that the company did not ask the regulator to delay the report and didn’t see it until it was posted. Under these circumstances, in my view it could be hard to hold anyone liable on the IPO even with the low threshold of liability.
The so-called risk factors Alibaba included in its September prospectus make very clear that Alibaba faced these kinds of risks. One risk factor says “We have received in the past, and we anticipate we will receive in the future, communications alleging that items offered or sold through our online marketplaces… infringe third-party” rights. It even discloses that bad things may come from that: “Any costs incurred as a result of liability or asserted liability relating to the sale of unlawful goods or other infringement could harm our business.”
And the regulatory risks of operating in China are discussed in several places. One disclosure says: “Changes in regulatory enforcement … in [China] could also result in additional compliance obligations and increased costs or place restrictions upon our current or future operations. Any such legislation or regulation could also severely disrupt and constrain our business…”
Although these disclosures are general, unless the company knew of more specific information that was material at the time the company went public, the language is probably sufficient to protect everyone from liability. Such risk factors—frequently criticized as boilerplate—are intended to have that effect. Lawyers sometimes explain them to their clients who balk at such negative disclosure as “insurance policies” to protect everyone if something goes wrong. In this case they look like they have done their job.
The biggest impact the regulator’s white paper may have is to emphasize the lack of reliable information about business in China, even with respect to a large and prestigious company like Alibaba.
Even if Alibaba has been trying all along to do the right thing, investors now know there were some questions – legitimate or not — that someone in the government kept out of public view. Transparency has long been an issue for investors and regulators for other companies listed in the U.S. with significant operations in China. Over the last several years, the Securities and Exchange Commission has fought with Chinese accounting firms and Chinese regulators over the SEC’s ability to review work papers generated in the audit of companies publicly traded in the US. And a little over a year ago, U.S.-based Cooper Tire & Rubber Co. saw its sale effectively blocked by a Chinese joint venture partner and a labor union which locked Cooper out of access to its own books and records, even though they had no apparent contractual right to stop the deal.
In the case of Alibaba, the Chinese regulator hasn’t helped the concern over lack of transparency. First, it delayed the issuance of the report, purportedly to facilitate the IPO.
Now, word today emerges that it has taken the report off of its web site as part of what appears to be a potential resolution of the dispute. Late Friday in China, the regulator said it and Alibaba agreed tackle fakes and boost consumer protection online. Alibaba said it felt “vindicated” by the outcome.
The bottom line is that the protective disclosures in massive prospectuses can help a company on the legal front, but investing in companies dependent on Chinese operations has its own risks, even for the largest companies operating there.
In the fight between chemicals giant DuPont Co. and activist Trian Fund Management LP, DuPont’s main argument is it has done a lot to improve.
One activist says that can make for an uphill battle for Trian.
ValueAct Capital Management LP’s CEO Jeffrey Ubben, speaking at a conference closed to the media and off the record, Mr. Ubben said that large companies can be vulnerable to activists, but it’s tough for activists to win a proxy fight against a giant company unless shareholder discontent is particularly high, according to people familiar with his remarks.
DuPont shareholders’ views might not rise to that level of discontent, given all the steps CEO Ellen Kullman has taken to transform the company, said Mr. Ubben. The conference on corporate governance was hosted by Institutional Shareholder Services in Florida Thursday and Friday.
That argument is essentially what DuPont has been saying for months, promoting Ms. Kullman and the board’s plans as activism-like. It has also been pointing to stock performance that beat the broader market.
“As you know, over the past six years our actions have been guided by a clear plan,” Ms. Kullman said on the company’s quarterly conference call Tuesday. She listed off steps to acquire and shed businesses and operations, and efforts to rework the company to focus on growth and return $14 billion to shareholders.
“When you consider that over a three-year period we will soon have divested of our two largest legacy businesses representing over $11 billion in total sales, you’ll begin to understand the magnitude of change we’re driving,” she said.
The argument has struck a chord with some shareholders and analysts. Wells Fargo called Ms. Kullman the “No. 1 Activist” in a report earlier this month, saying Trian may struggle to find enough support.
That echoed a comment Trian’s Ed Garden made last May, before talks between the two sides broke down, where he credited Ms. Kullman for acting like an activist. But Trian thinks the company hasn’t gone far enough.
Trian says the performance isn’t good enough and that more should be done to reform the portfolio, including breaking it into two separate companies. It says the individual businesses inside DuPont are struggling against competition and would be better served under more-focused management. And it’s pointed to DuPont’s struggles to hit earnings guidance.
Mr. Ubben has some familiarity with such mega-cap activism, with ValueAct having stakes in such technology giants as Microsoft Corp. and Adobe Systems Inc. and having gotten board seats there, though without using a proxy fight as Trian has launched at DuPont. Friday, his $16 billion firm reached a settlement with stock-index provider MSCI Inc. to add a ValueAct partner to the board along with two others.
In honor of its trading debut, Shake Shack Inc. has turned the New York Stock Exchange into the New York “Shack” Exchange.
That’s what the (temporary) sign on the front of the exchange said Friday, as the company’s shares more than doubled in their first day of trading. In the street outside the exchange, the burger chain started the morning serving egg sandwiches outside the stock exchange to passersby, and at midday switched to its classic burgers, according to the company’s CEO Randy Garutti.
The lines for the free food remained massive well into the afternoon.
Just don’t call the chain “fast casual.”
“We refer to ourselves as fine casual,” said Mr. Garutti, adding that while there’s a “bit of an arms race” in the fast-casual space, Shake Shack is in a different category.
“Eating behavior has changed. People want to know where their food is from, and Shake Shack brings that to them,” he said.
Nonetheless, the stock is reacting similar to other recent fast-casual restaurant debuts—it’s surging. The stock is currently trading at $48.68, up 132% above its IPO price of $21 a share. Similarly, burger chain Habit Restaurants rose 120% in its stock-market debut in November.
According to Ipreo, a market intelligence firm, restaurant IPOs have outperformed the broader IPO market since 2012, rising an average of 48% in their first trading sessions versus a 15.3% average gain across all IPOs.
And not a single restaurant IPO since 2012 has ended its first day in the red, Ipreo says.
Here are more photos from the scene in and around the exchange Friday:
“Our ideas of data privacy are a total illusion.” That’s the disturbing upshot of a new study conducted by MIT scientists into metadata and the ability to identify people just by piecing together a few piece of information about their shopping habits.
WSJ’s Lee Hotz sat down at the MoneyBeat desk to talk about his story about the survey. Despite the idea that consumer privacy is protected, “metadata tells you an awful lot” about people, he said, and with just four pieces of information, it’s possible to track down somebody with 90% certainty. If you take that information and connect it to other information we put out publicly, on social media, for instance, it’s very possible to identify and track people.
“We’re being shadowed by our credit cards,” he said.
A bogus foreign exchange trader was on Friday handed the longest-ever sentence given as the result of a prosecution by the U.K’s Financial Conduct Authority — or its predecessor — having been found guilty earlier this month of defrauding clients of over £5 million ($7.5 million).
Alex Hope was handed a seven-year prison term at the U.K.’s Southwark Crown Court, having been found guilty on January 9, 2015 of defrauding investors of significant sums and operating a collective investment scheme without authorization. Mr. Hope pleaded guilty to operating a collective investment scheme without a license in April last year.
Over 100 investors entrusted Mr. Hope with more than £5.5 million to trade on the foreign exchange markets, according to the FCA. However, only 12% of the money was ever traded at all and almost all of that was lost, according to the regulator.
Mr. Hope doctored statements from his trading account to mislead investors and attract new funds, according to the FCA, with new money used to pay those who wanted to withdraw their cash.
He used more than £2 million of his clients’ money to fund his lavish lifestyle, including spending over £1 million in a casino and £600,000 on bars and nightclubs in London, Miami and New York, the FCA said.
Georgina Philippou, acting director of enforcement and market oversight at the regulator added in the statement: “Alex Hope presented himself as a trader with a flair for trading on the foreign exchange markets when in reality he spent a good deal of his investors’ money on himself.”
The scheme was closed by the U.K. regulator in 2012.
Mr. Hope’s co-defendant Raj Von Badlo, who helped him canvass potential investors for cash, was also sentenced on Friday.
Mr. Von Badlo pleaded guilty to lesser charges and was sentenced to two years imprisonment for promoting Hope’s scheme to a large group of investors. In total he raised £4.29 million, the FCA said.
Legal representatives for Mr. Hope and Mr. Von Badlo could not be reached for comment on Friday evening.
Higher education endowments and foundations saw a rebound in the returns from private equity for the fiscal year ended June 30, but a strong exit environment in 2014 proved a double-edged sword and caused their allocations in the asset classes to fall, according to a study.
Private equity, venture capital, energy and natural resources gave nonprofits a boost in the fiscal year ended June 30 after single-digit performance in the previous year, according to the 2014 National Association of College and University Business Officers-Commonfund Study of Endowments, which polled 832 higher education institutions.
Private equity-which includes leveraged buyout funds and mezzanine funds-delivered net of fee returns of 16.5%, in the latest fiscal year, compared with 9.1% in the previous year. Venture capital returns rose to 23.3% in the latest fiscal year, from 6.1% the year before. Returns from natural resource and energy rose in the latest fiscal year to 15.3%, from 4.7%.
The largest institutions saw allocations to private equity fall, as private managers in their portfolio took advantage of the robust environment to exit out of holdings with a profit in fiscal 2014.
The allocation of endowments and foundations to private equity, on a dollar-weighted basis, fell to 11% from 12% a year earlier.
For endowments and foundations that managed more than $1 billion dollars, the average allocation to private equity fell to 12% in fiscal 2014 from 15% a year earlier. For funds between $501 million and $1 billion, the average allocation to private equity fell to 7% from 8%.
Write to Dawn Lim at email@example.com
The London investment banking arm of Banco Espirito Santo SA, the failed Portuguese lender, is planning a hiring drive ahead of its sale to a Chinese buyer.
The unit is part of Novo Banco, which took over the “good” assets of Banco Espírito Santo when it was broken up and bailed out by Portugal and domestic banks in August.
Novo Banco agreed a €379 million ($424 million) deal in December to sell its investment banking arm, Banco Espírito Santo de Investimento Co. to Haitong Securities in a transaction expected to close later this year. The investment bank now plans to initiate a hiring spree while that deal is pushed through.
Senior figures at the unit invited recruiters in recent weeks to discuss the potential to hire a significant number of staff across equity research, sales and trading, according to people familiar with the situation. At least one of those search firms has landed a retained role, the people said.
Nick Wilson, promoted to head of research earlier this month, confirmed the appointment of headhunters but said the strategy was still under discussion. He said: “I think it would be fair to say that we are potentially entering a very exciting time for the bank which has been through a fairly mixed time of late, and hopefully we will have a pretty positive message to say going forward.”
Banco Espírito Santo de Investimento hit headlines earlier this month for failing to inform the U.K.’s Financial Conduct Authority of a mass departure of staff after two-thirds of its sponsor team left between June and November 2013, while the bank continued to market its services during that period.
The hiring will initially focus on replacing those who have left the firm, with a second round of recruitment potentially taking place once the deal with Haitong has closed.