IPO yourself !

Initial Placement Offer (IPO), is the first sale of shares in a company to the public - remember Facebook's IPO and now coming on, Twitter's IPO. It is when successful entrepreneurs who have built a good business cash their millions, along with those who invested early in their company. We've heard of company IPOs. But have you heard of an individual IPOing himself ! That's is what is about to happen - where else ? in the US of A.

An American Football player (remember this is American football; not soccer), is trying to do just that.  Arian Foster is a running back with the Houston Texans, a NFL team. NFL players are paid a fair few millions - being considered more valuable than surgeons or distinguished professors (Profs J and Khe please note !). Now football players are better known for exercising their brawn and are not necessarily top notch in the brains department. Enter financial advisers, brokers, agents, managers and all sorts  who want to touch and feel all that money. Being very bright, they cook up all sorts of ingenious ideas and schemes. The latest is to IPO yourself !

This is how it works, A company has been formed whose only business is the income streams associated with Arian Foster.  They are issuing 20% of the shares of this company for $10 m. He already has a $23.5 million contract with the Houston Texans. In addition he may get endorsement deals and after he retires, hopefully some broadcasting deals. Investors can get a 20% share of all this. If you believe Foster is a huge star, this will be a nice worthwhile investment. If you believe he is a dud, then well .........

This deal sounds strange, but actually is a fairly straightforward affair. The future income flows of a NFL Player can probably be predicted with greater certainty than those of a company. For starters he has a guaranteed $ 23.5 m contract - so a $4m share at 20% is assured. Knowledgeable sports buffs (like yours truly !) can make informed predictions of the future for players. So, this can be an easier evaluation than many others.

I should admit is that this is not the first instance of somebody doing this. The British rock star David Bowie famously did this a while ago. Some other, less famous people have also attempted it. What is strange is all the "innovation" happening here. Surely the best brains in the land can do more productive things than dreaming of an IPO for a player. But then most of the world's innovation is going into areas such as this and not into what society might consider as more useful areas. 

The person most vulnerable in all this is Arian Foster himself. Once he signs this deal, he has virtually pledged his soul to the financial whiz kids. He cannot make any decision anymore regarding anything. If he wants to switch teams, he has to take the approval of the shareholders. If he wants to retire - then too. If he gets injured, he will be cursed and told to get on to the field even if he hobbles on one leg. They will make him do all sorts of endorsements or whatever to earn more money. They might force him to play off season in Matabeleland. And well, after retirement, he has to keep slogging, finding ways to earn more money. Is all this worth a "mere" $10 m.

 Prof Khe might want to to consider IPOing himself too. He can become an instant millionaire. This blogger is prepared to "invest" 24 million manat for a 10% stake in him  !!

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No love lost for hedge funds

Its difficult to reconcile to the way the Kraft Cadbury deal finally ended (the deal got done today). Not the outcome – M&A transactions like this happen all the time. But the way it happened makes me reflect if unbridled capitalism is really a good thing.

My ire is on the hedge funds – they are no different to a herd of vultures which circle over an animal that’s about to die. When there’s a whiff of a M&A transaction, the hedge funds pile in to buy the shares of the target, hoping to make a killing . This is what happened in the Alcon transaction about which I posted here. Somebody tell me how what happened in the Cadbury case is reasonable by any yardstick.

Here’s what happened. When the first whiff of a possible takeover of Cadbury was in the air, the hedge funds bought heavily into Cadbury shares. They then drummed up noise that Kraft’s bid was inadequate and it had to raise the price. They kept making this noise and were prepared to play brinksmanship. Till virtually yesterday, they kept repeating the mantra – Kraft had to bid more.

Kraft caved in. They raised their offer to an effective 850p per share, from the original 745p where they started. Once this happened, the herd turned on Cadbury’s board to accept the offer. Never mind that one of Cadbury’s largest shareholders Standard Life said that they wouldn’t support a bid lower than 900p. Never mind that many independent valuations supported a price above this figure. Never mind that Cadbury released excellent results even with this protracted takeover process was on. The noise making ability of the hedge funds is pretty large . The Board was right to be worried about lawsuits – the scoundrel’s last refuge. Cadbury’s investment bankers advised the Board to accept – they would; wouldn’t they – they don’t make any fees if the deal doesn’t happen. So ultimately the Board of Cadbury caved in.

So the hedge funds win. They are only concerned about a windfall now. Who wants to wait for the long term for value creation. Who cares about the 180 year history of a company. Who cares for the management which has created all this value. So 850 is a great price because they bought it at 750. Forget about long term potential.

I simply cannot accept that a short term raider has the same equal shareholder rights as a long term investor. As managers, we are supposed to be working for our shareholders. But I certainly don’t want to work for vultures. Governments have to intervene – if you haven’t held the shares for more than a year, you have no right to influence a M&A transaction – you have no voting rights, you have no right to sue. The fate of companies built over 180 years cannot be decided by the shark who wants to make a killing now. Its just not on.

The financial services industry has learnt nothing from the past year. Their behaviour is exactly the same. Forget about bonuses and pay which have hogged the headlines. Hedge funds have got back to behaving exactly as before. No wonder the public mood is so much against this lot. They stand next only to Osama bin Laden in public contempt. They deserve this contempt, and more.

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When shareholders’ and company’s interests don’t coincide

What happens when the interests of the shareholders do not coincide with what’s good for the company ? Ordinarily there should not be any conflict – the company should have no interests of its own other than the interests of its shareholders. In the capitalist model, the interests of management or the employees – doesn’t matter; they operate solely to safeguard and promote the interest of the shareholders. But once in a while a situation crops up where its not so clear cut. That’s the position with Carrefour today.

Carrefour is the second largest retailer in the world after Walmart. It is the most international of the retail chains – Walmart for all its successes in the US has not really shone outside. Tesco, another giant retailer is a relative newcomer to the international arena. Carrefour has been the truly successful international retailer – it came to Brazil in 1975 and to China in 1995.

In the peak of the boom, a little while ago, a couple of investors, including some famous names, bought a 13% stake in Carrefour at around Є 50 a share. With the recession, Carrefour’s shares are now at Є 30 a share. They don’t like this , of course, but there’s nothing to suggest that any of this is due to Carrefours’ performance. On the contrary the company is doing OK. Its share price has just been a victim of the global circumstances.

So what do these shareholders want to do ? They want Carrefour to sell off its Latin American and Asian businesses and then pay them a special dividend. They then want Carrefour to withdraw into becoming a European (mainly French) retailer.

Here’s the conflict with the company’s interests. Clearly the strength of Carrefour is its international leadership. In its home markets in Europe, it is plagued by low growth (in France) and poor profitability (most other countries). If it withdraws from Asia and Latin America, then it doesn’t have a real future. In any case, who would want to withdraw from China, if you already have a strong presence there.

There’s an argument to say that however rosy the future may be, if you get a full price for the business, you should sell. In this case, its far from clear how Carrefour would get its full value. The more obvious buyer is Walmart, but its highly unlikely that the Chinese are going to allow this on anti trust grounds. Who’s going to pay the full price ? And is it OK for a bunch of shareholders with an extremely short term motive to cut losses and run, and perhaps harm the company’s future ?

So, is the shareholder always right ? I am not so sure. Perhaps the question should be posed differently. Is it OK for the shareholder to have a sub optimal short term motive, when an alternate long term view is demonstrably superior ? And who should be the judge of this ?

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Are these the guys we work for ?

We all work for our shareholders. That's what capitalism is all about, isn't it ? All employees are there to maximise returns for the shareholders. If we all work for them, shouldn't we get to know better who these guys are ?

Amongst all stakeholders, the shareholder is the guy we know the least about. If you are an average employee, you'll get to meet customers once in a while. You'll get to meet consumers fairly often. You'll meet employees every day. Ditto, with the community around you. But the shareholder ? Probably never. The Investor Relations guy meets them often and the Chairman and the CFO once every quarter or so, but the others ? Maybe never?

You are an employee in a fairly large global company that's listed in a couple of places in the world. Lets say widely held. Its very probable that the company last issued share capital many decades ago and the original investors of the company are long gone. So the shares are held by all sorts of individuals and institutions who have given nothing directly to the company.

So who are these shareholders. There are all types of them. Lets see some of the usual suspects.

There are the sovereign wealth funds. Rich countries investing their surpluses in companies. Maybe the sovereign wealth funds of Dubai or Singapore. Do you want to work for these governments ? Especially when they create such incredible trouble in granting you a visa even to visit them for business !

Then there are the pension funds. These seem to be good guys - after all they may be paying your pension too when you retire. Along with them come mutual funds,insurance companies, banks, funds, etc etc. These are the aggregators of private savings. Its difficult to love this lot. Just consider the mess they have created globally and we can rest our case. They care two hoots about your company, unless you make them tons of money. They invest in all your competitors as well. They don't care much for the products you make - they might very well be consuming the products of your competitor. They cheer when lots of employees are sacked. They put enormous pressure on you every quarter. They are fair weather friends - they abandon you in a second when the slightest ill wind blows. Do you want to work for them ?

Then there are the speculators. They don't hold your shares really - they come in and out, often many times a day. They absolutely don't care who you are - you might as well be the fly on the window. The only thing they are doing is betting whether you'll open your left eye or the right eye. Do you want to work for them ?

Then there are the old geezers. They have held your shares for 50 years and very probably their fathers were direct investors in your company. Half of them have lost their shares , or whatever slip of paper needed to claim their ownership. The other half have meticulously kept their certificates and come diligently to every AGM - to grab the eats that you lay out and to make a boring, irrelevant, soporific speech under the guise of asking a question. Do you want to work for them ?

Sometimes your shareholder might be a corporate raider. He's wanting to steal your company, break it up into bits , sell them off, get fabulously rich and screw you. Surely you can't want to work for them ?

Or you might be working for yourself. After all employees are shareholders too. But wait. You hold a few measly shares that you invested your hard earned savings in. But the %$@#s who sit on the top floor, rewarded themselves with options, grants and the like and they are the employees who hold the most shares. You already work your backside off for those insensitive %$#@s. You don't want to work "more" for them surely !

Oh yes - I know all the economics. You work for whoever gives you the capital and its none of your business as to whether he is a likeable fellow or not. All very true. The world cannot run if this is not so.

But then, surely something is not exactly right. You can't give your whole life (and most of us do indeed give our whole life to the companies we work for), to make some faceless lot, that you have never seen, and don't very much like, rich. Did somebody say capitalism doesn't have a heart ? Maybe that's why, despite all the good it has done to the world, its not liked very much.

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