Thursday, March 23, 2006

Punishing Talent for Fun and Profit

mr. semel, your salary is here Today, Financial Rounds posted this entertaining cartoon about executive pay (one assumes the target is CEOs of public companies).  Notice, however, that the Professor doesn't necessarily advocate the position taken by the cartoon.  At the risk of being branded a republican (trust me, I'm not), and though I think the cartoon is actually quite funny, I don't actually see the issue.  I cannot for the moment think of a market for talent with more transparency, liquidity, or velocity than the market for CEO of publicly held corporations in the United States.  They can bolt at any moment to competition.  Foreign firms are always looking to supplement their access to and knowledge of lucrative American markets.  Private equity firms are prowling around for anyone who wants to come over to "the Dark Side."

In addition, the United States has substantially boosted the risk, intrusiveness and liability surrounding a decision to take the top jobs through mechanisms as varied as the potential piercing of the corporate veil, increased personal liability (civil and criminal) for the senior executive teams, and a microscopic analysis of the personal lives of candidates, in some cases beyond even that endured by presidential candidates.

One Fortune 1000 CEO quipped to me, "It is to the point where you become convinced that you don't yet know it but you actually are a criminal, and you're just waiting for someone to slap the handcuffs on and tell you. I feel like a character in Terry Gilliam's Brazil or something."  We are negotiating with said CEO to quit his burdensome, public job and head up one of our portfolio firms.  The negotiations are quite easy, so far.

Of course, many critics of executive pay like to ignore a few points that put big holes in their arguments.  My favorite is the assumption that because stock options worth, say $10 million, were sold in 2005, that executive's compensation for 2005 should include $10 million in cash.  This, of course, ignores the fact that vesting schedules mean those options were earned over several years.  Prior years with few, if any, vested options are either ignored, potentially tripling or quadrupling actual annual compensation, or counted also in the year of granting by Time and Business Week some of the less detail-attentive publications in the media today.

Convenient omissions, these, and omissions generally resulting in leading paragraphs of press releases and articles that sound something like, "In a year when LargeCo's profits are down 18% LargeCo's larger than life CEO Phil Bigwig cashed out $28 million in options."  Unsaid is the fact that profits for the firm over the 5 year period he slowly collected those options are up 139% even after counting this year's poor showing.  Is it any surprise the AFL-CIO is the worst offender here?

Then there is the whining about backdating of options.  From my perspective the issue here is one of disclosure.  Backdating options is actually a good tool to use to avoid large cash outlays from the company to compensate executives.  Remember also, options themselves align the interests of executives with the firm insofar as stock gains are a prerequisite for options to be valuable.  So long as this practice is disclosed, I don't consider it an issue.  If it isn't, well it could be a 10b-5 violation.  (Securities Fraud).

But most annoying to me, executive pay alarmists seem to be a little short on fact.  The Wall Street Journal and Mercer do a rather comprehensive study on executive pay each year.  The 2004 results illustrate some quite interesting points.

050512_wsj_survey_chart_1aThe most interesting to me is shown in this chart.  It is the significant dip from 2001 to 2002 and the tiny gain in 2003 in total direct compensation.  Even 2004 has barely recovered from 2001.  Can we really believe that risk adjusted returns for CEOs facing Sarbanes Oxley, which could damn them, destroy their career and trash any future earnings potential for the acts of a few rogue subordinates, could show a net gain during the interim before and after SarOx's passage?  Don't get me wrong, I like SarOx on many levels, but in conjunction with reduced CEO compensation, it is a disaster.

050512_wsj_survey_chart_3aNot only that, but CEOs in the United States have had the beta of their compensation substantially increased insofar as it has been shifted heavily into contingent bonuses and long-term compensation, which is often tied to stock performance.  The odd terrorist event could eliminate massive portions of CEO compensation even if they were the best manager the known universe had yet seen.


The character of the long-term potion itself has changed dramatically as well.  In 2004 43% of it is either restricted stock or performance related.  Up from 24% in 2002.  All having, again, an impact on the risk to CEOs.

So let's review.  Longer term, riskier and more contingent compensation.  Lower salaries as a portion of total compensation. Substantially increased legal risk, both civil and criminal.  Short-term focus on returns by the short-term focused markets.  Add to this a private equity sector that, in terms of total investments in 2005, could buy up nearly 10% of the Dow Jones Industrials, and it becomes clear that the market (in this case composed mostly of "smart" institutional money) is increasingly counting on private equity as the more efficient deployment of capital over the highly regulated public markets.

Keep it up, America.  Right or wrong, we private equity folks love the massive flood of senior management talent currently being driven our way out of public companies.

Monday, April 17, 2006

Executive Compensation Lies

ceo comp issue exploration expands Listen to the howls that have been eminating from anyone who was paying attention.  It is totally outrageous and shocking that Exxon's Lee Raymond got $425 $400 $350 in golden parachute payments when he retired as CEO of Exxon in January.  Well, except that Exxon's Lee Raymond did not get $350 million in golden parachute payments when he retired as CEO of Exxon in January.

ABC News, purveyor of quality facts nationwide, called it a $400 million retirement package "amid soring gas prices."  CBS was little better, calculating the per-day payment Raymond had and then lining up a university professor as comparison.  As if Bob Schieffer, the CBS Evening News anchor who announced this miscarriage of justice, isn't from Texas and drives a hybrid to work everyday or something.  As Abnormal Returns points out, The New York Times even echoed this day-by-day playback.

The problem is not with the messengers, annoying as they are.  The problem is that is they were both wrong.

Raymond got:
$48 million in 2005 salary.
A lump sum of $98.4 million.
$69.9 million in stock option profits.
$183 million in restricted share grants.

Minus the salary, that's $351.3 million dollars.  The pig.  Except it's not.

The lump sum payment of $98.4 million represents the disbursement of Raymond's accumulated pension over the last 43 years (a good bit of the appreciation of which is related to the rocket-like rise of Exxon's stock over the last 10 years, not just the last 2).  And yes, that is forty three (43) years.

$69.9 million in "stock option profits," are only paper gains.  Given where Exxon's stock is, it is not all that surprising (the company's price was in the low 30s only 3 years ago, the 20s ten years ago and is in the 60s today) even before you count the fact that these are options that have been granted as long as 10 years ago.  Remember, the value of these instruments has been growing at something like 12.5% a year for over a decade.

As for the $183 million in restricted share grants, these too have been accumulating for years.  Only $32.1 million of them are 2005 grants.  Also, these grants are issued by Exxon with particular restrictions.  Specifically, half of them cannot be sold for 5 years and the other half cannot be sold for 10.  Ouch.  Guess what, gang.  If you lock shares up for years and you grow the company in massive strides, you're going to have a big lump sum one day.

Raymond's grants from 1993 alone were worth $620,000 when issued.  Today they are worth $32.1 million.  Nicely done, Lee.  Of course, those with a bone to pick about CEO pay have been both counting these options grants as part of annual salary, and again now that he has retired.  A clever ruse, but one we have seen before and one generally cited by CEO Compensation Bonos who either shouldn't be let near a financial calculator because they might hurt themselves or others, or are "just" willfully ignorant.

Bloomberg's Graef Crystal has a good run-down of the details.

The reality that as a long-term incentives package, Exxon's isn't bad.  Raymond is getting paid obscene amounts of money, to be sure, but Exxon has been making obscene amounts of money providing a product that Americans thirstily suck down in stunning quantities without a second thought, and a lot of his eventual payout depends on the stock price of Exxon in five to ten years.  This makes the package not only long-term but future-term, incentivizing Raymond to do good for the firm even as a retired CEO.  Interesting.

Then again, if you have a CEO compensation chip on your shoulder, don't let something as irrelevant as the facts get in your way.

Monday, April 24, 2006

Punishing Talent for Fun and Profit Part II

the u.s. treasury hits a gusher The Economist introduces (subscription required) what is, to my way of thinking, a bit of rationality into the executive pay debate with particular emphasis on Exxon's former CEO, Lee Raymond.  It is amusing to me that this particular pay package has attracted so much ire, particularly in the face of much larger and disproportionate packages recently disclosed.  (HealthSouth UnitedHealth and Yahoo, for instance).  I suspect that the current hostile climate towards "big oil" represents a good bit of the rationale.  Says the Economist:

What is more, he has a point. Exxon earned more in profit last year—over $36 billion—than any company has ever done before. True, Mr Raymond has had the good fortune to work in an industry that has benefited from the soaring oil price. But even allowing for that, Exxon under Mr Raymond has enjoyed a remarkable record of using its capital to earn high profits—one reason why it has easily outperformed most other large oil companies in terms of total shareholder returns.

And it is the shareholders, after all, who pay Mr Raymond—and who have done well out of Exxon themselves. The real executive compensation scandals are those cases when bosses do well, while their shareholders do not.

It has always been my view that whining about executive pay is akin to whining about professional athlete pay.  After all, if the seats are filled....

Oil is taking a hit all over at the moment.  Trial balloons involving a "windfall profits" tax are floating around in such numbers one wonders if we might be in the midst of an inaugural ball or something.  These talks of "windfall" tax are, I believe, even more absurd.  I guess the treasury is feeling the pinch now that a penny costs 1.4 cents to make.  Using this tax as some kind of spiked club to pressure oil firms to "lower prices" is equally daft.  "Let's tax our way to lower prices."  Excellent.  Where do I sign up for that plan?

1 : something (as a tree or fruit) blown down by the wind
2 : an unexpected, unearned, or sudden gain or advantage

To call the "good fortunes" of oil firms a "windfall," an "unexpected, unearned, or sudden gain or advantage" is a bit silly.  "Sudden," perhaps.  It seems, however, that everyone has forgotten that oil is a rather intensely capital expenditure dependent business.  To give you an idea, Exxon reported $10.3 billion in depreciation and amortization along with $13.8 billion in capital expenditures (nearly 40% of net income) in 2005.

That substantial risks, including notoriously difficult to price political risks, plague strategic decision making in the business with serious uncertainty is just "part of the job."  Oil assets are primarily on non-US soil and often the political systems in the states in which they reside are crippled for having been dependent on an "extraction model" for so long.  If all you need to do is call in foreign firms to suck magic fluid, ore or gems from the ground to give you 20%-50% of your GDP, then you never really need to develop your own economy, you are never dependent on your own citizens for substantial contributions to GDP and you, therefore, can fairly easily avoid the expense of developing their social freedoms, forming sophisticated institutions and the political systems to support them.  No surprise, then, that developed oilfields tend to reside in areas with a limited connection to free market systems.  (Venezuela and the Russian Republic are the most notable if not isolated examples of capricious extra-legal interference with oil businesses of late).

Aren't we supposed to reward firms that take substantial risks, develop capacity and are are wise enough to have it waiting in spades as demand thickens?  And why is it that the same voices I hear today calling for punitive taxes on these firms have, over the last 3 years, been shouting at top of breath to alert consumers that an oil shortage and "peak oil" is just around the corner.  Is it any wonder that hype seems to be driving oil price far more aggressively than anything like reserves, currently at something like an 8 year high, would suggest?

Well, what if the oil supply nay-sayers are correct?  What if Iran halts oil contracts to the West?  (Wouldn't be the first time).  What if peak oil is around the corner?  Well, do we want to appropriate a large portion of the funds, 40% of which would presumably be earmarked for continued exploration right when the theory has it that oil is going to get dramatically harder and more expensive to find? I love the message.  "Don't succeed too well.  We'll take it from you." Genius at work.  Perhaps the U.S. isn't so different than Venezuela after all?

Thursday, May 04, 2006

Punishing Talent for Fun and Profit III

maybe i should have held outMy favorite reader and Bain Capital guru, sent me an interesting missive on executive pay. With all the mewing about the payment of decades of accumulated long-term compensation to Exxon's former CEO Lee Raymond, have we looked at what private equity compensation structures look like? Perhaps we should.

Let's pretend, for a moment, that Exxon was Burger King in December 2002. Exxon was hardly distressed in 2002, but Exxon stock was quite near a five year low. If you were going to do a buyout, that would be probably be the time. Let's also assume that the transaction adopted Burger King's compensation structure for management. How might that look?

Well, it's not a perfect comparison, of course, and not only because the former CEO of Burger King bailed before the IPO for reasons unknown. He probably would have gotten a much nicer bit of compensation than I suggest below. Ignoring this, Gregory D. Brenneman had 3,025,724 shares, some of these underlying options grants before he forfeited a good chunk by leaving. This is about 2.23% of the firm, after the offering and I'm not sure it counts some of the restricted share grants. At $16 per share that values his stake at something like $48 million. Deducting for the options price and strike, he'd probably be sitting at around $38 million.

If we used this formula on Exxon, we'd end up with something like 136 million shares for a 2.23% stake. Even assuming all these were options priced at a weighted average of $45.00 (December 2002 prices for Exxon had them around $34.50) our theoretical CEO would be looking at $2.7 billion. Let's half that, and keep his stake down to 1.1% or so. $1.3 billion. Of course, I haven't added any "compensatory make-whole payments" yet, or bonuses, or pension.

Wednesday, May 24, 2006

Punishing Talent for Fun and Profit V

time is on my side Just after an outstanding article (subscription required) on the real brains behind Voltaire (his lover, Emilie du Châtelet), the Economist chimes in (subscription required) on executive pay.  The article outlines the perils of stock option based pay (stock prices badly correlated with executive performance and the evil this does, e.g., rewarding poor bosses who happen to preside over the firm during a general stock market boom) and notes some of the various performance based packages that seem to be all the rage.  Pay "inflation," seems now to be in full effect, in Britain at least, with the Economist noting the impact of some of the typical scapegoats:

But pay moderation among British executives may now be coming to an end. Hedge funds and private-equity deals are proliferating, bringing with them rewards that make the offerings from public companies look stingy. So remuneration committees are approving more generous schemes to retain their best executives.

I've touched on CEO compensation before, more than once actually.  So have the Economist (subscription required), Gary Becker, Richard Posner, and Financial Rounds.  This most recent Economist article makes three interesting points, one implicitly and two directly.

First and implicitly, the article suggests there is an active market for managerial talent, at least in Britain, with the passage I cite above.  That senior management pay floats with supply and demand is, and please do forgive me for being a capitalist, a good thing.  I expect that enumerating the arguments for such a system would be beneath the notice of Going Private readers.

Second, the Economist points out that there has been a move to "absolute" metrics to trigger incentive pay (bonuses, etc.) and away from "relative" metrics, based, for example, on the firm's performance relative to the competition.  The Economist notes that payouts under relative systems that could, for example, require the firm to beat the average for the industry in, say, earnings growth, have a particular effect.  Quoth the Economist: "Indeed, if all companies used them, only half of all bosses would get a payout in any given year."  That great sucking sound you hear is the slurping draw of managerial expertise to the far higher pay packages offered by private equity and hedge funds.  Absolute metrics, that might even be set quite arbitrarily low or split into two severable targets, tend to increase the frequency of payouts and keep public firms competitive in an inflationary compensation environment.

Finally, the Economist comments:

Transplanting pay plans from private-equity firms to public companies is dangerous, not least because doing so confuses two quite separate issues: how much executives ought to be paid and what their incentives should be. Managers involved in buy-outs are usually expected to put some of their own money at risk. And it is far easier to fire an executive in a private company than in a public one. Big rewards in private-equity firms are in part supposed to compensate for bigger risk. But more important, private-equity investors typically have direct control of the companies they manage and are able to set targets and structure incentives that align managers' interests with their own.

I have some issues with this analysis.  First, insofar as executive compensation is being moved from salary to incentive based pay, executives do have their own money at risk.  Second, I'm not sure how one can argue that the compensation committee of the board of directors of a public firm doesn't have similarly "direct control of the companies they manage..." with respect to "[setting targets and structure incentives that align managers' interests with [the shareholders]."

Of course, this silliness about executive pay has caused all sorts of regulation and calls for regulation on the issue.  Section 162(m) of the internal revenue code limits deductions for executive pay to $1,000,000- unless it is "incentive based."  At least one article I caught the other day wondered in print if options backdating, the latest scandal, isn't just a means to avoid these deduction issues by giving an option grant with a built in cash certainty.  Looks just like a bonus, when you think about it.

Friday, July 28, 2006

Punishing Talent for Fun and Profit VI

upward? Readers of Going Private will be familiar with my many critiques of the critics of executive pay.  Hardly a week passes without another bit of hand wringing over the W2 forms of public company CEOs.  These are usually accompanied by cute little graphics of fat cats with overflowing bags of money.  Any number of sound bites pointing to the rising inequity in CEO pay are cited by plastic "financial reporters."  Never mind what scholars on the subject say.  A loose connection to the facts seems a required line on the resume of executive pay critics.  So it doesn't surprise me that it is only the Economist that has managed to pick up on the rather compelling view on the subject of no less a luminary than Steven Kaplan, the University of Chicago professor and economist.

Kaplan points out via the Economist (subscription required) and his published study that effectively the only way to show chief-executive pay on the rise since 2000-2001, the years Kaplan believes it peaked, is to "combine forward-looking and backward-looking measures of pay in any year."  I won't insult the statistical acumen of Going Private's readers by outlining how great a farce such a method would be.

Thursday, November 30, 2006

Private Equity, Private Lies

the real friedman? With Milton Friedman dead what else would we expect to but encounter all manner of schemes now afoot to defuse the market.  The scene suggests the death of a long-hated and aged dictator after a long illness or quick coup, given the number of parties vying for thought leadership and the demagogy involved.  I suppose that would equate the subject of the latest round, management buyouts, to Italian fascism.  Andrew Ross Sorkin seems to have jumped onto the bandwagon Ben Stein has been piloting in this capacity.  Michael Kinsley of seems to have been relegated to the position of navigator, though given the position he recently penned for Slate on capitalism he should perhaps be sitting way out on the left wing.  Sorkin outlined his own four point plan to make management buyouts "fair" again.  I am reminded of the communists emerging once again, dusty faced, but bright eyed, from the ruins of Stalingrad, emboldened by the receding shadows of vanquished fascism.  You will see, I think, that the communists have always proved much better propagandists than the fascists.  Their lies are far more enticing as they are wrapped in the cloak of populism and contrasted to fascism's intrinsic elitist strain.  The reality is that communism is centered around its own elitism, it is just far more adroitly camouflaged.  Either way you go, you can smell the sickly sweet stench of lies.

Loyal Going Private readers will already be aware of my feelings about the word "fair," but for the uninitiated, it seems pretty clear to me that whenever someone calls for change to make things "fair," what they usually mean is that they plan to take someone else's hard work and hand it out to someone who hasn't gotten their hands dirty yet- in the interest of "fairness," you understand.

Sorkin begins:

Management led buyouts, by their very nature, are meant to benefit management and their private equity backers,” Stephen Lowey, a lawyer who often represents institutional investors, said to me last week.

No?  You mean they aren't meant to benefit starving African children?  Who knew?  Hard not to point out that Sorkin's foot dips into the water this way- with the assumption that these transactions are presumptively zero-sum games- and that this is somewhat concerning.  Just wait, dear readers.  Just wait.

The trip continues:

He contended that public investors almost always get cheated, and it’s not hard to see what he’s talking about. Every day, it seems, some stock that has been battered is being picked off by its own management and private equity firms at a paltry premium.

Watch carefully, this is the magic that is at the root of all these anti-MBO arguments, be they Steinisms or Sorkinettes.  Did you catch it?  It was a pretty quick slight of hand there, but it only took twenty words or so to point to an asset that is being traded in one of the most liquid and efficient markets on the planet and claim that it has been mispriced.  And this, dear readers, is the conceit at the heart of these arguments.  That we have to protect the market from itself.  That the very shareholders who have bid the company down need to be protected from the pricing action they, themselves created, by preventing interested parties from buying the asset at the quoted price.  You see, it's really worth more.  Damn the market, full speed ahead!

And even that isn't the whole story, as apparently these same shareholders deserve a premium.  Not just a "paltry premium," mind you, but a substantial premium.  Let's ignore for a moment that this would have the effect of rewarding the kind of short-term speculation that hangs on every fraction of a penny in earnings for this quarter to determine if the stock should be battered or not.

What we have quickly said here, is that because someone might, possibly, benefit in future, albeit at greater risk, and despite the fact that the shareholders as a whole don't see the value (if they did why is the stock price so depressed) we cannot possibly allow third parties to pay above market price for a company, undertake a risky (to themselves) plan to improve value and put their own reputation and capital on the line to do it.  In the interests of fairness, they need to share those "windfalls."  Please.  Where is Muffie Benson-Perella when you need her?

I cannot imagine we would feel the same way if a farmer, who had leased land from a landowner for years, paying via a portion of his crops, suddenly offered to buy it with a loan from the bank, and thereafter, following a systematic improvement of the soil, doubled his profits.  Even if he found oil one day we'd cheer him on and produce a half-hour comedy about his new life in Beverley Hills Greenwich.

In the United States we generally do not tax contingent, unrealized gains.  Why do shareholder's think they are entitled to them?

But, cry the masses, shareholders have no say in the company.  They cannot easily change management or challenge/force the deal effectively because (proxy contests are expensive/boards are staggered/there are poison pill arrangements in place).  Such masses often forget the purpose of the separation of ownership and control, of capital and competence- to permit management specialization generally unmolested by the old widow who wants to paint the plant pink.

It is also easily forgotten that shareholders knew or should have known full well how much power they had or didn't have when they bought the shares.  It is not as if such matters are opaque.  Arguing for more control (absent paying a premium for it) after purchasing shares you knew lacked such control strikes me as awfully disingenuous.  Not that that surprises anyone.

"Aren't managers who mount MBOs guilty of a conflict of interest?" wonders one commentator.  Here, I cannot help but be amused.  Despite what you might hear on CNN, one is not "guilty of a conflict of interest."  A conflict of interest is not, of itself, a crime.  Think on this long and hard.  It is easy to get another impression in this day and age.  A conflict of interest simply exists, or does not exist.  The solution to one that exists is simple.  Disclosure, additional scrutiny.  I don't think anyone observing an MBO will fail to recognize the various roles of the parties involved.  The danger of hidden self-dealing is actually quite low in a public transaction.  And, frankly given the transparency of the process, if outright fraud, (say, non disclosure of good news or dumbing down of the numbers pending the MBO) occurs you can well bet that the plaintiff's bar will be on it like white on rice, that is unless you want to take the somewhat dense position that there aren't enough shareholder lawsuits in the United States.

Really worried about some manager making too much in an MBO that you don't have the power to prevent?  Don't buy the stock in the first place.  Stick to firms with corporate governance policies that make MBOs nearly impossible, or slates of directors unlikely to approve such measures.  One public company director I know responds to MBO proposals by asking the manager to quit first, and then mount the bid if she wants the board's support.  Are all directors so tough?  Probably not.  If that's important to you as a shareholder, find out and vote with your wallet.

Let's take Sorkin's suggestions one by one:

Let minority shareholders decide, too.  While it’s understood that a controlling shareholder has the right to steer the company, that investor shouldn’t be able to do so at the expense of minority shareholders. You should be irate to hear Isadore Sharp, the chief executive and controlling shareholder of Four Seasons Hotels, tell shareholders that his offer for the company “is the only one I am prepared to pursue.” The Dolans of Cablevision pulled the same stunt.

That’s fine, but transactions like this should then require a majority of the minority shareholders to approve the deal. It’s not enough to have an independent committee of board members and an investment bank’s fairness opinion bless a deal that is clearly below market value simply because the controlling shareholder won’t allow a true market for the company.

Why should you, or anyone else be irate?  It was the daft shareholder that did not make herself aware of the corporate governance nuances of the company she just bought a piece of.  I have no sympathy for shareholders who willingly buy into Class B shares when there is a Class A with supermajority voting rights and then complain that they are being "oppressed" and file a minority shareholder oppression lawsuit as if we were dealing with a closely held firm.  These shareholders neither paid for control nor should they have it after having acquired the shares at a discount to what control bearing shares would have called for.  Again, they knew full well the nature of the transaction they were entering into.  Changing the rules now, particularly with regulation, is folly.

The reality is that if corporate governance is actually worth something to shareholders they will bid up or down based on their ability to oust management or block a transaction.  This is what gives rise to things like the "Dolan Factor," at Cablevision.  Even the New York Post is in touch with this effect.  When you recognize this you see that these shareholders want a free lunch.  Non-control prices for controlling shares.  Poor shareholders.  Even assuming our shareholders were a sympathetic bunch, why should this sort of thing be regulated, rather than left to each firm to decide via its public by-laws so that the market can price control accordingly?

Sorkin continues:

Use truly independent advisors. The investment bankers that run these auctions have a huge hand in shaping their outcome. Since management is part of the buying group, it already feels like an inside job. When an adviser has a longtime relationship with the family or company, it feels even more that way.

Again, one is not "guilty" of a conflict of interest.  And absent some actual showing of wrongdoing, which would, once again, garner the wrath of the plaintiff's bar, I am not particularly sympathetic.  This is, however, the more compelling of Sorkin's issues (for whatever that's worth).

More from Sorkin:

Give public shareholders a stake.  One reason shareholders are so suspicious of take-private deals is that they see private equity firms quickly flipping companies they just bought onto the public market and making a multiple of their original investment. Here’s a solution: Offer shareholders as much as a 10 percent stake in the deal. That way, shareholders who see long-term value — and are willing to have illiquid shares — can go along for the ride and won’t feel ripped off if the deal turns out to be a grand slam.

How to structure this would be a little tricky, however. It should be available only to shareholders who held the company before it announced its sale, so that you don’t have arbitrageurs and other fast money jumping into the fray.

A little tricky?  I'll say.  Now we are classifying shareholders based on their corporate structure and proposing regulations that say who can purchase public shares when.  Enforcement of this clause would require the SEC to develop a set of "shareholder thought police" to divine the intent of shareholders before permitting them to buy.  We can't let those evil fast-money shareholders get involved.  Instead, we have to give, not sell mind you, but give, shares away to existing shareholders because... well because they are existing shareholders.  Are they going to share in the risk going forward?  Not really.  The premium they were paid on their existing shares means that they were effectively paid to take 10% of their prior holdings.  That's about as backwards a plan as I have seen.  It is also pretty obvious that Sorkin doesn't understand the important role arbitrageurs play in markets.  That's not really surprising though, is it?

What is surprising, a little surprising anyhow, is the hypocrisy of Sorkin here.  Of course, this part of his plan screws shareholders by artificially depressing the price.  Hopefully, these shareholders will be able to sue Sorkin for the difference.  Wasn't it the same Sorkin that was moaning over supermajority holders who prevent a "real market for shares" just a few paragraphs back?  Looks to me like Sorkin has just become what he despises- one of those fascists who doesn't permit a "real market" for public shares.

What about regulation?  Does Sorkin propose that these shareholders who keep a stake will also be entitled to public disclosure of financials?  Will the company still have to file with the SEC?  Comply with SarOx?  How exactly will shareholders be convinced to forgo their rights to SEC regulation and disclosure in the shares?  If so, will the shareholders have to be "qualified persons" as if it were a private placement?  If not, what assurance does the SEC have that they are sophisticated enough to hold what amounts to private placement shares?  The SEC would never permit such an offering in other contexts, why are shareholders now suddenly smart enough to take advantage of a QP-type deal without being QPs?  What company would ever embark on a buyout in that circumstance in any event?  Few, if any.  It has the effect of locking effectively all companies into the public equity markets and the burdensome disclosure regimes for eternity or breaking safe-harbor laws.  Sorry, I just don't see it. 

Next genius idea:

Show us the business plan.  ...shareholders should have a chance to see the company’s future business plan so they can judge for themselves whether the same strategy could be accomplished if the company remained public. Companies shouldn’t have to give away all their secrets, but they should make available the same business plan that they provide to the banks and debt holders that are financing the transaction.

Shareholders should either take their premium and go on to other things or protest the deal.  Car dealers do not ask for a statement of use for a car before selling it to someone in order to determine the price.  Why are shareholders different exactly?

The reality is that the public equity markets are just not the place for many companies.  The public markets and public shareholders have failed, perhaps because they have become intensely short-term in the last 40 years, any number of companies that could prosper if they were free to manage their balance sheet aggressively (but not too aggressively), adopt long-term strategies that might well result in break-even returns for several years before bearing fruit.  The kinds of strategies that the public markets simply have no patience for.  Why should we look askance at the move to more efficient allocation of capital?  Because it is not "fair?"  And who's "fair" is it?

Sorkin's approach has the common thread I see quite a bit with the neo-marxists who struggle to redistribute "windfalls" to other segments of society who cannot be bothered to think long term or otherwise create wealth.  It is the thermodynamic theory of collectivism:

First, make sure they cannot win.  (e.g., a windfall profits tax).
Second, make sure they cannot break even. (minority shareholder oppression suits, compulsory disclosure of post-transaction plans).
Third, make sure they cannot get out of the game (compulsory public equity markets participation).

This is the sure sign of a scheme that is failing, its death rattle gurgling.  I am reminded of the music industry, desperately trying to legislate themselves into insulation, any sort of insulation, from any sort of progress that forces them to rethink their ancient and now flawed business model.

Those seeking to improve "fairness" (ahem, Dr. Mark Klein) would do well instead to concentrate on understanding the concept of risk adjusted returns and get out of the way.  I'm not holding my breath.

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