Tag Archives: News event
by Liz Hester
My first thought when I heard the news that Marker’s Mark was planning to reduce the alcohol content of it’s famous bourbon was, “If I wanted to dilute my bourbon, I’d put ice in it myself.”
My second thought was, “Now I have to find another go-to bourbon to order when I’m out.”
I wouldn’t call myself a bourbon nerd, but I do know a thing or two about bourbon and how it’s made. And I’ve always liked Maker’s Mark. Most bars stock it and it makes a nice Manhattan. I’ve got some more obscure labels at home, but that’s the one I order when I’m not trying to think too hard.
The Washington Post blogged about the rise in demand for Maker’s Mark and how it happened.
One of the tricky things about making and selling good whiskey is that it takes time; Maker’s is a blend that is around six years old. Which means that the fine people at the Maker’s Mark distillery in Loretto, Ky., and their corporate overlords at what is now called Beam Inc. were having to make decisions back in 2007 that determined how much Maker’s Mark they have to sell now.
And, it would seem, they guessed wrong. They didn’t properly foresee the booming worldwide demand for the supple, nectar-like perfection of Maker’s. Sales of the bourbon rose 14 percent in 2011 and 15 percent in 2012. This is part of a broader trend: Some 16.9 million cases of Kentucky and Tennessee whiskey were shipped in 2012, according to the Distilled Spirits Council, up from 14.9 million cases in 2007; the revenue earned on that whiskey soared more than 28 percent in that span.
That is normally a problem — too much demand for a product — that a company loves to have. The simple answer to that problem would be to raise prices to whatever level will make the market clear. Maker’s didn’t do that, and the result was predictable: Shortages of the bourbon in some markets.
The problem is that Beam Inc., the parent company of Maker’s Mark, has crafted a role for Maker’s as one of its “power brands,” along with the likes of Jim Beam bourbon, Sauza tequila and Courvoisier cognac. It is supposed to be one of the major drivers of the company’s sales, a standard that can be found at every decent bar in the world (or, as Beam Inc. puts it in its annual report, the power brands are “our core brand equities, with global reach in premium categories and large annual sales volume”).
Here was the reasoning behind the decision from the Associated Press.
The change in recipe started with a shortage of the bourbon amid an ongoing expansion of the company’s operations that cost tens of millions of dollars.
Maker’s Mark Chairman Emeritus Bill Samuels, the founder’s son, said the company focused almost exclusively on not altering the taste of the bourbon while stretching the available product and didn’t consider the emotional attachment that customers have to the brand and its composition.
Bill Samuels said the company tinkered with how much water to add and keep the taste the same for about three months before making the announcement about the change last week. It marked the first time the bourbon brand, more than a half-century old, had altered its proof or alcohol volume.
“Our focus was on the supply problem. That led to us focusing on a solution,” Bill Samuels said. “We got it totally wrong.”
Apparently, I’m not the only one who was upset. The backlash after the Kentucky distiller announced it was going to cut its alcohol content to meet increased demand was swift. The AP again:
Both Bill and Rob Samuels said customer reaction was immediate. Company officials heard from “thousands and thousands of consumers” that a bourbon shortage was preferable to a change in how the spirits were made, Bill Samuels said.
But many in the PR industry are now calling Maker’s Mark’s reaction to the backlash a lesson in how to handle a bad decision. They issued an apology via Facebook, Twitter and their website. A Forbes commentator had this to say:
Of course the reversal was primarily a business decision, but this apology is heartfelt and nicely done. Maker’s Mark’s leaders are human, they made a bad decision, and they’re going to make it right. It’s that simple. They didn’t defend their motives or sneak in any excessive marketing. They didn’t even try compromising to cut the difference. Instead, they acknowledged that they let down their customers and promised to return to the original recipe—even if that means more shortages. The letter reminds fans that Maker’s Mark is still a family business, and including their direct email addresses is a meaningful gesture in itself.
We can’t always predict our customers’ feelings, and when we get something wrong, they have every right to tell us they’re mad. The way we respond to angry customers says a lot about our brand, and Maker’s Mark was listening. This sort of transparency goes a long way with customers.
But it still doesn’t solve the underlying problem, according to the Washington Post.
Most companies would simply raise the price of Maker’s until the market cleared. But Beam Inc. depends on Maker’s Mark to be one of its mainstay products — and if it raised the price too quickly, it could lose that status. Many higher-end bars now use Maker’s Mark as their standard go-to bourbon for mixed drinks, and at many mid-tier places it is their standard premium option. If the price of Maker’s gets too out of whack with other bourbons of similar quality, they might rethink that practice and turn to less pricey options. I’ve already noticed a growing number of bars in D.C. using Bulleit bourbon, a bit cheaper and rougher on the finish than Maker’s, as their standard bourbon when making a Manhattan or Old Fashioned.
And if that kind of change happened on a large enough scale, it could cost Maker’s its status as that go-to powerhouse brand that helps underpin a company that sold $3.1 billion worth of liquor last year.
So you can see why it might have been a little wary about raising prices further. It also doesn’t do if you have a “power brand” that people can’t get hold of. Hence, the decision last week, now reversed, to reduce Maker’s Mark from 90 proof to 84 proof (or 45 percent alcohol to 42 percent alcohol). It would stretch the company’s existing supply of bourbon further without either increasing prices or having shortages.
So what now? The underlying problem is still there. And now it’s decision time for Maker’s Mark and Beam Inc. Are they really going to allow there to be shortages of Maker’s at times, meaning that they would be essentially charging a below-market price? Are they going to hike price and risk Maker’s status as a go-to mass market bourbon brand? Or are they going to find other, sneakier ways to get more supply of whiskey that is less blatant than diluting it, such as introducing even younger whiskey into the blend
Either way, I for one, am happy they’re going to leave a time-tested product alone so that I can continue to enjoy a proper Manhattan.
by Liz Hester
After an insider trading case, SAC Capital is set to shell out cash to investors looking to exit the troubled hedge fund run by Steven Cohen. Here’s the story from the Wall Street Journal.
Clients of SAC Capital Advisors LP moved to pull $1.7 billion from the hedge-fund firm, or roughly a quarter of outside investors’ money, as an insider-trading investigation weighed on confidence in the money manager.
SAC will pay out about $660 million next month to investors who had requested withdrawals ahead of Thursday’s deadline, people familiar with the matter said, adding that the firm will return the remaining money over the course of 2013. SAC manages roughly $6 billion in outside capital, according to people familiar with its operation.
A federal insider-trading investigation has ensnared six former SAC employees, and the firm said in November it might face civil charges from securities regulators. SAC has said that both the firm and its founder, Steven A. Cohen, have acted appropriately and that it will cooperate with the probe.
The scrutiny has tested clients’ loyalty and pressed one of the world’s top-performing hedge-fund firms to adapt. Shortly before redemption requests were due, SAC offered clients more time to decide whether to pull their money.
A representative of one investor said SAC can easily manage returning $660 million next month, with little or no noticeable impact on its operations. Still, the exodus was seen by some clients as remarkable for a single quarter considering SAC’s extraordinary track record. SAC has posted average annual returns of about 30%, according to investors.
“Redemptions breed redemptions, and what they have to be careful of is the momentum shifting so people start putting in redemptions regardless of whether they think [regulatory scrutiny] is going to go further or not,” said Brad Balter, an investment manager who oversees more than $1 billion in client money in hedge funds and hasn’t placed any of it with SAC.
Money from outside investors accounts for less than half of the Stamford, Conn.-based firm’s total assets. Mr. Cohen and his employees have around $9 billion of their own money in SAC funds, according to the people close to the firm.
The legal troubles for the fund are far from over. The New York Times reported last week that the government is considering filing charges against another high-ranking employee.
Federal prosecutors are nearing a decision whether to bring criminal charges against Michael Steinberg, a longtime portfolio manager at SAC Capital Advisors, the giant hedge fund owned by the billionaire investor Steven A. Cohen.
In recent months, a former SAC analyst who worked directly for Mr. Steinberg has met with authorities and provided them with information about his former boss, according to a person with direct knowledge of the investigation. The analyst, Jon Horvath, has been cooperating with the government since pleading guilty in September to insider trading charges.
Mr. Horvarth admitted to being part of an insider trading ring that illegally traded the technology stocks Dell and Nvidia. As part of his guilty plea, he implicated Mr. Steinberg, saying that he gave the secret data to his SAC boss and that they traded based on secret financial data about those two companies.
If prosecutors file a criminal case against him, Mr. Steinberg, 40, would be the most senior SAC employee charged in the government’s investigation of the hedge fund, which is based in Stamford, Conn. Including Mr. Steinberg, at least eight current or former SAC employees have been tied to allegations of insider trading while working there. Four have pleaded guilty to federal charges.
Another interesting turn of events is that large investor Blackstone pushed SAC to alter its redemption terms. Here are the details according to Bloomberg.
Clients account for about 40 percent of SAC’s assets under management and the rest is from Cohen and his employees. SAC this week reached a deal with Blackstone Group LP that gives all clients three more months to decide whether to stay in the fund.
The hedge fund was told by the U.S. Securities and Exchange Commission in November that the agency is considering pursuing civil fraud claims against it, related to alleged insider trading in two drugmakers by former portfolio manager Mathew Martoma. Blackstone, one of the biggest investors in SAC, with about $550 million in the fund, will leave most of the money in place for at least another quarter under the new liquidity agreement, it said yesterday in a statement.
The new terms give SAC investors time to see if the fund and its billionaire founder are charged as part of a multiyear government probe that has already linked at least eight current or former employees to allegations of insider trading at the firm.
Clients faced a deadline of yesterday to tell SAC, which is based in Stamford, Connecticut, if they wanted to start the process of withdrawing all their money by the end of the year. Under existing rules, they could redeem 25 percent of their assets from the firm each quarter.
Now, SAC is telling investors they can wait until mid-May to make the decision. At that time, they can redeem a third of their money each in the second, third and fourth quarters.
That leaves the fund in a state of flux and uncertainty, making it hard to make investments or show returns. And funds that can’t post outsized returns typically end up returning investors’ cash anyway.
by Chris Roush
Bob Moog, the editor of the Dallas Morning News, writes about how his paper’s business desk team covered the merger of Dallas-based American Airlines with US Airways.
Moog writes, “The Dallas Morning News unleashed a talented team of journalists to make sure readers stayed ahead on every element of this rapidly evolving story.
“As always, aviation specialist Terry Maxon was on point in print and on the Web. Terry’s long experience on the beat kept readers out front on major developments. ‘He had a front-row seat,’ said business editor Dennis Fulton, ‘to the cat-and-mouse game between US Airways and the much larger American Airlines.’
“A strong cast of writers, columnists, graphic artists and photojournalists helped readers see this huge story in a larger context.
“Columnist Cheryl Hall scooped the world with her exclusive interview of AMR leader Tom Horton. Reporter Sheryl Jean covered the merger from a consumer perspective. Columnist Mitchell Schnurman, an astute airline industry observer, likened this airline combination to Jerry Jones’ takeover of the Dallas Cowboys.”
Read more here.
by Liz Hester
Now the Oracle of Omaha is getting into the deal game by helping out with a $23 billion buyout of H.J. Heinz Co with 3G Capital.
Here’s the Wall Street Journal story:
Berkshire and the Brazilian-owned private-equity firm agreed to buy Heinz for $23 billion, marking one of the food industry’s largest-ever acquisitions. While the buyers will share ownership, 3G will call the shots on operations.
Pittsburgh-based Heinz generates two-thirds of its $11.6 billion in annual sales outside the U.S., with 25% in emerging markets, making Heinz a platform from which 3G Capital could make additional acquisitions in the food industry. Heinz’s strong cash flow could help make that happen.
The New York Times offers some context at the top of its story:
The proposed acquisition, coming fast on the heels of a planned $24 billion buyout of the computer maker Dell and a number of smaller deals, heralds a possible reemergence in merger activity. The number of deals and the prices being paid for companies are still a far cry from the lofty heights of the boom before the financial crisis. But an improving stock market, growing confidence among business executives and mounting piles of cash held by corporations and private equity funds all favor a return to deal-making.
In many ways, Heinz fits Mr. Buffett’s deal criteria almost to a T. It has broad brand recognition – besides ketchup, it owns Ore-Ida and Lea & Perrins Worcestershire sauce – and has performed well. Over the last 12 months, its stock has risen nearly 17 percent.
Mr. Buffett told CNBC that he had a file on Heinz dating back to 1980. But the genesis of Thursday’s deal actually lies with 3G, an investment firm backed by several wealthy Brazilian families, according to a person with direct knowledge of the matter.
One of the firm’s principal backers, Jorge Paulo Lemann, brought the idea of buying Heinz to Berkshire about two months ago, this person said. Mr. Buffett agreed, and the two sides approached Heinz’s chief executive, William R. Johnson, about buying the company.
Talk about patience, Buffett waited nearly 33 years for the chance to buy Heinz. But according to Bloomberg Heinz wasn’t initially interested.
Buffett’s Berkshire Hathaway Inc. and Lemann’s 3G Capital made a $70-a-share bid for Heinz in a letter sent on Jan. 14, the people said. Heinz sought a better price, so within weeks Buffett and Lemann had offered $72.50 a share and got the deal done, said the people, who asked not to be named because the process was private. The stock closed yesterday at $60.48.
The rapid transaction shows how when you have the combined coffers of the 82-year-old Buffett, worth $52.7 billion according to the Bloomberg Billionaires Index, and Brazil’s richest man, Lemann, 73, worth $19.1 billion, it’s a lot easier to pull off a buyout of an American icon like Heinz.
“You have two guys with decision-making power and really big check books,” said Erik Gordon, business professor at the University of Michigan in Ann Arbor. “They were able to make the deal happen without a lot of screaming and yelling. And it probably takes about 20 minutes to line up the debt for a deal like this.”
In the proposed takeover, Berkshire and 3G will each have more than $4 billion in equity in Heinz, and Buffett’s firm will also take a preferred stake of $8 billion, which gets an annual dividend of 9 percent, according to three people familiar with the deal.
Bloomberg also said that Heinz CEO Bill Johnson stands to gain a lot in the deal.
Johnson, who became Heinz’s sixth CEO in 1998, has made about 40 acquisitions, helping expand the company into emerging markets. He streamlined the brand portfolio, boosted spending on marketing and ratcheted up innovation, including Dip & Squeeze ketchup packs. Heinz boosted sales to $11.7 billion in fiscal 2012, a gain of 8.8 percent from the year before.
“Johnson took Heinz back to basics and turned it around,” said Nancy Koehn, a professor at Harvard Business School in Cambridge, Massachusetts. “In the years before he took charge, performance slid.”
Johnson worked at Ralston, Frito-Lay and Anderson-Clayton Foods before joining Heinz in 1982 as a general manager of new business. In 1988, as head of the poorly performing Heinz Pet Products, he revived the business. Four years later he did the same thing at Starkist Foods. Johnson was named president and chief operating officer in 1996.
Not a bad paycheck for turning the company around. But the WSJ also gave credit to activist shareholder Nelson Peltz:
Heinz wasn’t always considered a top-operating food company. The company’s shares had languished for years before 2006, when activist investor Nelson Peltz won a board seat for himself and a friend following a lengthy and bitter proxy fight.
Mr. Peltz, whose Trian Fund Management LP had taken a roughly 5% stake in the company, criticized Heinz for spending too much on supermarket promotions and not enough on marketing its brands. Since then—but before Thursday’s news—Heinz shares had risen more than 44%. The company has posted 30 consecutive quarters of revenue growth. Trian now owns less than 1% of Heinz shares.
The food company has been increasing its overseas footprint in recent years through acquisitions, including that of Foodstar, a Chinese soy sauce maker. Heinz in 2011 also took an 80% stake in the Brazilian company that makes Quero brand condiments, which almost doubled Heinz’s sales in Latin America in the first full year. Heinz also has been introducing more of its brands to emerging markets, including its infant formula to China.
Buffett lending his name to the deal gives it the sheen of success, but only time will tell if it will be a good investment.
by Chris Roush
Alexia Tsotsis and Ingrid Lunden of TechCrunch report that AOL has acquired tech news site gdgt for an undisclosed amount.
Tsotsis and Lunden write, “Financial terms of the deal have not been disclosed, but we have heard that the deal was in the high seven figures, and that there was another — higher — offer from another company but that gdgt’s co-founders, Ryan Block and Peter Rojas, went with AOL because it was a better fit.
“It seems poetic that future of a company so deeply embedded in the Internet’s past would hinge upon amassing properties that so vehemently chronicle its future. The deal will see Ryan Block take on a bigger role at AOL, where we have heard from sources that he will become head of product for AOL Tech Media, reporting to Jay Kirsch, and taking some of the learnings, technology and sensibility that he and Rojas have brought to gdgt and applying it across AOL’s portfolio of tech sites. In addition to TechCrunch, those sites include Engadget (which Rojas founded and Block used to edit), TUAW and Joystiq. In other words, the acquisition will give gdgt much greater scale for its product.
“With AOL’s tech portfolio heavy on blogs and news, gdgt will be bringing complementary content in the form of a huge database of gadget information, created with the aim of ‘improving the buying experience,’ in the words of Block.
“The move lets the two come full-circle and, for those who ever wondered, provides more color on why they left in the first place. ‘We didn’t leave Engadget (or AOL) because we were unhappy, we left to do gdgt because at the time it was tough to build something that was clearly not editorial,’ Block told me. ‘That’s obviously changed, and we’re excited to be able to continue to invest in and grow gdgt, while also bringing a lot of the stuff we’ve built to the rest of AOL Tech.’”
Read more here.
by Liz Hester
In yet another attempt at consolidation in the airline industry, American Airlines and U.S. Airways are close to closing a deal to create the biggest U.S. carrier. Despite recent high profile opposition to large mergers, the Wall Street Journal is reporting the deal will likely go through.
Here’s their story:
U.S. antitrust authorities over the past year have been particularly active, blocking acquisitions in industries from beer to e-books. But the potential deal to create the world’s biggest airline likely would fly clear of government objections, experts said.
American Airlines parent AMR Corp. and US Airways Group Inc. are in final negotiations on a marriage that could be announced as early as this week. The combined company would surpass United Continental Holdings Inc. as the No. 1 carrier by traffic and control about one-quarter of U.S. domestic capacity.
But the deal involves only about a dozen overlapping routes, similar to the number in the most recent three big airline mergers, according to research by J.P. Morgan. Those transactions were cleared by the Justice Department, with the carriers in only one deal required to relinquish takeoff and landing slots to maintain competition.
“The government has tended to regard some overlaps as not problematic,” said Alison Smith, an antitrust lawyer at McDermott Will & Emery LLP in Houston who isn’t involved in the AMR deal. “If a merger combines complementary networks, that could bring benefits to consumers.”
Ms. Smith, who once worked in the Justice Department’s antitrust division, said the key question is whether regulators believe the airline industry already is sufficiently concentrated. “The going thought is that this will be approved,” she said.
Bloomberg had these details about the structure of the new company and who would be in charge.
The boards of American Airlines parent AMR Corp. and US Airways Group Inc. are prepared to vote on a merger on Feb. 11 as executives and advisers work on final terms this weekend, people familiar with the matter said.
The sides have agreed that AMR’s bankruptcy creditors would get 72 percent of the equity in the new carrier, with 28 percent for US Airways shareholders, said two of the people, who asked not to be identified because the talks are private. US Airways Chief Executive Officer Doug Parker will run the airline as AMR CEO Tom Horton becomes non-executive chairman, the person said.
Horton’s tenure in that post is still being negotiated, and will be limited to one or two years, one of the people said. AMR’s bankruptcy creditors committee is poised for a vote early next week on any merger accord, with an announcement as soon as Feb. 12, two people said.
Leadership and the division of the equity had been the final major issues in the discussions, people familiar with the talks have said. A tie-up between American, the third-largest U.S. airline, and No. 5 US Airways would create the world’s biggest carrier by passenger traffic.
London’s Financial Times said that an investment from British Airways was looking increasingly less likely as the deal came together.
However, the parent of British Airways has declared it is “increasingly unlikely” to buy a minority stake in American as part of its planned exit from Chapter 11 bankruptcy protection.
Having last year raised the prospect of investing in American, International Airlines Group is now playing down the possibility of taking a minority stake, partly because it has not been encouraged to make such a move by the US carrier.
AMR has also been attempting an ambitious restructuring – it filed for Chapter 11 bankruptcy protection in November 2011, in order to cut its high operating costs and large debt load.
The airline’s progress in Chapter 11 was highlighted at its annual results last month, when it reported an operating profit of $107m, a marked turnround from a loss of $1.1bn in 2011.
The boards of AMR and US Airways are due to convene this week to approve the merger terms. The main sticking points are mostly resolved, although one person familiar with the matter stressed there were still some outstanding issues.
Airlines are obviously in trouble, so maybe a merger of two of the largest carriers will yield some savings for them. But that likely means selling spots at high-traffic airports, selling other assets like planes – and job losses. No one is reporting about that just yet, but it seems like it will happen. Where else will they find savings?
by Liz Hester
Hedge fund (and poker) star David Einhorn has long been in love with Apple. Until Thursday when the news hit that he’s making a move against the company. Here are the details from the New York Times.
The hedge fund magnate David Einhorn has long been known as a fervent fan of Apple. But he is making an unusually public stand to oppose a move by the company: a lawsuit.
His hedge fund, Greenlight Capital, sued Apple on Thursday in an effort to block a move that would eliminate preferred shares. In a letter to fellow stockholders, Mr. Einhorn said the move to amend the company’s charter would unnecessarily limit the technology giant’s ability to create value for shareholders and called on them for support.
“This is an unprecedented action to curtail the company’s options,” he wrote in the letter. “We are not aware of any other company that has ever voluntarily taken this step.”
The stated goal of the legal action is technical, based on an accusation that Apple is violating securities rules by bundling several shareholder initiatives in one proposal. But underneath it lies deeper dissatisfaction with the company.
The Wall Street Journal had more of the technical details of the suit, which I’m sure their readers definitely want to understand.
Apple’s board already has the right to issue preferred stock, but it is asking shareholders at its annual meeting later this month to vote on a proposal that would require shareholder approval to issue the stock.
Mr. Einhorn’s lawsuit, filed in the federal court in Manhattan, argues that the very formulation of Apple’s proxy statement violates Securities and Exchange Commission rules that allow shareholders to vote on “each matter” in the proposals. The suit seeks a court injunction against Apple’s proxy vote, and says he asked twice this week for the company to stop the vote or to “unbundle” the proposal at issue, but was rejected by the company.
Apple said in a statement Thursday that its management team “has been in active discussions about returning additional cash to shareholders.” The company said it will evaluate Greenlight’s proposal to issue preferred stock, and emphasized that adoption of its own proposal wouldn’t prevent the issuance of the security.
Mr. Einhorn is asking Apple to create a “perpetual preferred stock” using operating cash flow. Preferred shares are often viewed as high-yielding securities that are less volatile than common shares and typically pay generous income akin to high-yield bonds. Mr. Einhorn suggests the preferred stock could yield a 4% dividend rate.
The Businessweek story detailed Einhorn’s press run on several business channels. (The below skips around, so read the whole story.)
David Einhorn loves Apple (AAPL). On CNBC (CMCSA) and Bloomberg Television appearances this morning, the hedge fund manager described the company as “phenomenal” multiple times. He reiterated that the single largest position his Greenlight Capital holds is a bullish bet on Apple. In a press release, he said the company was “filled with talented people creating iconic products that consumers around the world love.”
Einhorn has a cheerful, boyish face, and it almost appeared to pain him that all of this publicity has to do with him suing the company he loves.
“Several hundred dollars per share would be unlocked if Apple were to follow through on this suggestion,” Einhorn said of his proposals during the Bloomberg TV interview. He said he had spoken with Apple Chief Executive Officer Tim Cook on Feb. 6 in some detail, and that he hoped the dispute could be resolved amicably.
That might be difficult. Despite Einhorn’s affection for the listing, Apple is the largest company in the world by market value, is highly secretive and deliberate, and doesn’t like being pushed around. Einhorn has a long history of high-profile disputes with publicly traded companies. He is credited with single-handedly starting a 73 percent one-year drop in the price of Green Mountain Coffee Roasters (GMCR) with an October 2011 presentation, and he triumphed in a battle with Lehman Brothers before the financial crisis, spotting its insolvency problems well before many others.
While it might seem a bit inside baseball for some readers, executives and boards across the U.S. are watching to see if Einhorn can successful get what he wants either from Apple or from the courts. This is definitely a new tactic, so it will be interesting to see how the story plays out. From the coverage, you can see each publication’s tone coming through. And that’s also interesting.
by Adam Levy
Hewlett-Packard Co. reacted swiftly to the news that Dell was going private in a $24.4 billion buyout.
“Dell has a very tough road ahead,” the company said in a statement it issued. “Leveraged buyouts tend to leave existing customers an innovation at the curb.”
Now, I know these two companies have a history of sparring in public. But this latest salvo seems so unnecessary. After all, it’s not like HP hasn’t had a few boardroom disasters of its own. Carly Fiorina stepped down in 2005 amid an upheavel. Patricia Dunn was forced out from the board after a disastrous investigation into boardroom leaks that included spying on the phone records of reports and directors. I’m going to stop after mentioning these two – but as anyone who follows HP knows, the list of ignominious decisions, acquisitions and missteps is a long, long one.
Why didn’t HP just decline comment or keep its comments to itself – and let its actions speak for the corporation? You want to pounce on the competition in a moment of perceived weakness? Fine, go out-innovate or outsell Dell.
I can think of several different businesses – one that I covered for many years and one that I worked for – that would never publicly speak of the competition. These businesses were invigorated by the competition. They were keenly aware of all developments. They reacted to any signs of weakness.
But, they took the high road and kept mudslinging out of the public record. In fact, neither the business I covered nor the one I worked for ever publicly mentioned the competition’s name. It was always Brand X.
I’m not trying to defend Dell here. Sure, I can see how the LBO might leave the company vulnerable. I don’t blame HP for trying to pounce on Dell, either. They should be pouncing. While Dell’s management is focused on restructuring the company, it’s the perfect opportunity for HP to capture market share by focusing on new products and their customers. I’m just not sure it needed to announce it with a statement; just do it.
If I were a shareholder of HP – one who had seen the company trip up so often – I’d want them to keep their focus on the business, and not on crafting some silly statement. This seems more fitting for a playground spat, not a major corporation. But then again, reviewing the corporate history of HP during the past decade, this is par for its course.
Now we’ll see if the jab can be reinforced with a blow to Dell’s market share or if it’s just empty words.
by Liz Hester
I’m having flashbacks to 2007 thanks to Dell’s more than $24 billion buy out. It’s a return to the big deal and all the hype that goes along with big companies going private for massive amounts of money.
Let’s take a look at the coverage from Tuesday.
Here’s the New York Times coverage, which includes the text from Michael Dell’s note to employees at the bottom:
Dell announced on Tuesday that it had agreed to go private in a $24.4 billion deal led by its founder and the investment firm Silver Lake, in the biggest leveraged buyout since the financial crisis.
Under the terms of the deal, the buyers’ consortium, which also includes Microsoft, will pay $13.65 a share in cash. That is roughly 25 percent above where Dell’s stock traded before word emerged of the negotiations of its sale.
Michael S. Dell will contribute his stake of roughly 14 percent toward the transaction, and will contribute additional cash through his private investment firm, MSD Capital. Silver Lake is expected to contribute about $1 billion in cash, while Microsoft will loan an additional $2 billion.
The Wall Street Journal added this information about the terms of the deal as well as the process the board is taking to avoid any allegations of favoritism.
The transaction will be financed through a combination of cash and equity contributed by Mr. Dell, cash funded by investment funds affiliated with Silver Lake, cash invested by MSD Capital L.P., a $2 billion loan from Microsoft, rollover of existing debt, as well as debt financing that has been committed by Bank of America Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets, and cash on hand.
Mr. Dell first approached the board of directors about a buyout in August, according to the company. “The board went through a very disciplined and structured process,” Mr. Gladden said.
The merger agreement provides for a “go-shop” period—initially for 45 days—during which Dell can actively solicit alternative proposals. The buyout group would get a termination fee of only $180 million if Dell strikes a deal with competing bidder during the go-shop period. For a bid outside of the go-shop period, the buyout group would get a $450 million fee.
Reuters added this perspective to its story, outlining the reasons for taking the huge company private.
Dell, whose fairy-tale rise throughout the 1990s and the early part of the next decade once made it a Wall Street darling, has ceded market share in recent years to nimbler rivals such as Lenovo Group. That is in spite of Michael Dell’s efforts in the five years since he retook the helm of the company following a brief hiatus during which its fortunes waned.
As of 2012′s fourth quarter, Dell’s share of the global PC market had slid to just above 10 percent from 12.5 percent a year earlier as its shipments dived 20 percent – the fastest quarterly pace of decline in years, according to research house IDC.
While analysts said Dell could be more nimble as a private company, it will still have to deal with the same difficult market conditions. International Business Machines Corp last decade underwent what is considered one of the most successful transformations of a hardware company, all while trading on public markets.
“This is an opportunity for Michael Dell to be a little more flexible managing the company,” said FBN Securities analyst Shebly Seyrafi. “That doesn’t take away from the fact they will have challenges in the PC market like they did before.”
The deal would be the biggest private equity-backed leverage buyout since Blackstone Group LP’s takeout of the Hilton Hotels Group in July 2007 for more than $20 billion, and is the 11th-largest on record.
The parties expect the transaction to close before the end of Dell’s 2014 second quarter, which ends in July.
The Journal story had the most skepticism about the deal, interviewing shareholders and, in an odd public relations move, rival HP’s statement. It’s rare for competitors to comment publicly on rivals business decisions, making a press release on the topic even odder.
Some stockholders aren’t happy about the deal. James Rosenwald, managing partner at Dalton Investments LLC, said he believes Dell shareholders could do better if the company borrowed money and paid shareholders a large one-time dividend. The hedge fund reported owning 1.1 million Dell shares as of Sept. 30.
Analysts at ISI Group, an investment research firm, said in a note Tuesday that the deal’s price may be “perceived as cheap” and that “the deal could face some shareholder resistance at any price under $15 a share.” But the analysts also said the deal makes sense for Dell and added they see no other bidders emerging in the go-shop period.
Less than two hours after the deal was announced, rival Hewlett-Packard Co. was quick to criticize the takeover, saying the buyout would add uncertainty for customers and limit Dell’s ability to invest in new products.
“Leveraged buyouts tend to leave existing customers and innovation at the curb,” H-P said in a press release. “We believe Dell’s customers will now be eager to explore alternatives, and H-P plans to take full advantage of that opportunity.”
Businessweek had this pithy commentary about the possible reasons for the buyout.
In the intervening years, Dell has spent many billions of dollars buying up services, additional services, and even more of them, alongside software and hardware companies. It’s all part of a grand strategy to become a one-stop technology and services shop for the small to mid-sized companies that IBM (IBM), Hewlett-Packard (HPQ), Oracle (ORCL), and Accenture (ACN) don’t seem to want to bother with. Last year, the strategy was good enough for Dell to post revenue of $62.1 billion and net income of $3.5 billion, while reporting cash flow from operations of about $1.5 billion per quarter.
When you look at these figures, it’s clear that Dell’s financial situation is not dire. The issue has been that investors see little upside in the company’s still-massive PC business and seem to have zero faith that Michael Dell has another big idea in him. Over the past 10 years, investors have pushed Dell shares ever downward and have done so even more aggressively since Michael Dell returned as chief executive officer in 2007.
Add all these factors up, and it starts to become very clear why Michael Dell, Silver Lake, and Microsoft (MSFT) moved to take the company private on Tuesday. Dell was destined to face further years of scrutiny as his company tried to expand its higher-profit software and services businesses. While this may be sound strategy, it takes a long time to execute and certainly does not look revolutionary. Dell basically bought the IBM business plan and made some minor alterations. Michael Dell may be one of the wealthiest, most successful people this country has ever fostered, but such accomplishments must do little to soothe his ego as people ask, again and again and again, why the company has seemed so darned inept in such areas as smartphones and tablets and … well, anything interesting.
Now it remains to be seen what the coming years will bring for Dell, especially when those private equity funds will need to show returns on this massive investment.
by Chris Roush
The U.S. Court of Appeals ruled Friday that documents prepared by an examiner of government-backed American International Group Inc. are not public and won’t be released to a reporter who requested them.
The ruling reverses a lower court’s decision to grant the journalist access.
Tom Schoenberg of Bloomberg News writes, “The documents were created by James Cole, then a lawyer at Bryan Cave LLP in Washington, who was hired by AIG as part of a $126 million settlement over regulators’ accusations that the insurer helped clients such as PNC Financial Services Group Inc. inflate profit.
“Cole, who is now the Justice Department’s deputy attorney general, reviewed transactions to determine if clients used them to violate generally accepted accounting principles.
“Sue Reisinger, a reporter for Corporate Counsel and American Lawyer magazines, asked the court to release the reports.”
Read more here.