And What a Year It Was!

Posted by Broc Romanek, Editor of TheCorporateCounsel.net:

December 28, 2006
And What a Year It Was!

With Sarbanes-Oxley in the rear-view mirror for 4 years now, one would think that this would have been a quiet year for corporate governance developments. To the contrary, it was arguably the most dramatic year of change in recent history. Here is a snapshot of some of the more significant developments:
- The majority-vote movement matured at an incredible pace. Within the span of a single year, over half of the Fortune 500 adopted some form of policy or standard to move away from pure plurality voting for director elections. This trend is likely to continue as it’s the governance change that investors seek the most.
- An area not touched by Sarbanes-Oxley - executive compensation - continued to be inspected under a microscope by both investors and regulators. The SEC adopted sweeping changes to its compensation disclosure rules and investors became more willing to challenge companies that continue outlandish compensation policies. And House Democrats intend to consider executive compensation legislation early in 2007. [Today's WSJ and Washington Post contain articles in which Rep. Barney Frank expresses displeasure over the SEC's recent change in its exec comp rules - and we have announced a January 11th webcast just on these new changes. More on all this next week.]
- More and more hedge funds and private equity funds found “value” in using governance as an entree into forcing management to alter strategic course or to put a company into "play." The recent hiring of Ken Bertsch, a former TIAA-CREF governance analyst who had been working for Moody’s, by Morgan Stanley is an indicator that using governance as a “big stick” is likely to continue.
- The recent sale of the two primary proxy advisory services - ISS and Glass Lewis - at handsome premiums is a pretty good indicator that governance as a skill set can be quite profitable.
- The re-opening of the SEC’s “shareholder access” proposal - spurred by a recent 2nd Circuit decision - was unthinkable a year ago. But it’s now reality.
- The proposed elimination of broker votes in 2008 - via a rulemaking from the NYSE - means that the 2008 proxy season promises to be the wildest yet. But 2007 surely will be wild enough.
One thing we know for sure - we can’t predict what the New Year will bring! Happy Holidays!
Some Thoughts from Professor John Coffee
In an interview with the Corporate Crime Reporter, Professor John Coffee waxes on problems with the McNulty Memo and the Paulson Committee Report.
A Conservative Year for Holiday Cheer
Fried Frank took it easy in this year's annual festive message. Each year, the firm issues an alert at the end of the year which focuses on a true - and zany - government prosecutorial act. No food fraud to report on this year...

UnitedHealth Says It Has Received Formal Order from S.E.C.

UnitedHealth Group, the health-insurance giant, said Tuesday that it has received a formal order of investigation by the Securities and Exchange Commission related to stock-options backdating. The order was issued Dec. 19, after regulators first notified the company in April of an informal inquiry. UnitedHealth said in its filing that it is cooperating with the investigation. In October, the company fired its longtime chief executive, Dr. William W. McGuire, as well as its general counsel and a raft of other top executives in connection with the timing of options doled out to employees.
Go to United Health Filing with the Securities and Exchange Commission »Go to Previous Item on DealBook »

SEC amends compensation rules

The Securities and Exchange Commission is changing newly adopted rules governing the disclosure of executive and director compensation.
In a statement released Dec. 22, the agency said it is altering the requirements for disclosing the value of stock option awards and giving firms more flexibility in how they report those expenses.
The SEC said the new rules should more closely conform with the reporting of stock option awards under standards in the Financial Accounting Standards Board's rule FAS 123. That rule requires recognition of the costs of stock option awards over the period in which an employee is required to provide service in exchange for the award.
Using this same approach when disclosing executive compensation will give investors a better idea of the compensation earned by an executive or director during a particular reporting period, the SEC explained in its announcement.

Report: Falsification of Docs Core Question in Apple Backdating Case

Federal prosecutors are looking closely at whether Apple’s stock-option paperwork was falsified by Apple executives to maximize the profitability of option grants, reports the Recorder’s Justin Scheck, citing people with knowledge of the company’s situation. The anonymous sources told Scheck that the apparently faked documents were revealed in the three-month internal probe conducted by Quinn Emanuel.
The falsification of documents is a key issue for the feds in trying to determine which of the scores of backdating investigations they will ultimately pursue as criminal matters. Said Keith Krakaur of Skadden Arps to the Recorder, speaking generally about the investigations: “When there are falsified documents, the government views them as an intent to defraud, because people generally don’t falsify documents unless they’re trying to make things different from reality.” He added: “They view that as intent.”
Apple released a statement in October that “the investigation raised serious concerns regarding the actions of two former officers in connection with the accounting, recording and reporting of stock option grants.” Scheck cites “individuals with knowledge of the case” who say the two officers are former GC Nancy Heinen and ex-CFO Fred Anderson. Heinen left the company in the spring.

Judge Dismisses Enron Investors' Claims Against Alliance

A federal judge has dismissed claims by Enron investors against Alliance Capital Management that arose from the service of Alliance executive Frank Savage on the energy company's board.
The investors argued that Alliance should be held liable because Savage signed a registration statement for a $1 billion Enron bond offering that incorporated the company's false financial statements for 1998 to 2000. Alliance, a New York-based money manager, is now known as AllianceBernstein.
U.S. District Judge Melinda Harmon in Houston rejected that argument after concluding that there was "no evidence that Alliance had any authority to influence, supervise, or determine Savage's actions at Enron," The Wall Street Journal reported. She also said there was no evidence that Savage knew or should have known that he had signed a false registration statement.
Jim Hamilton, an analyst at Wolters Kluwer Law & Business, noted the significance of the ruling in a posting on his Web log. Had the judge held Alliance liable based on Savage's service on Enron's board, "the effect would be to chill the willingness of qualified individuals to serve on boards of public companies as independent directors," Hamilton wrote.

U.S. Clears CVS to Acquire Caremark Rx

CVS has won antitrust approval to purchase Caremark Rx, the pharmacy benefit manager, removing potential regulatory opposition to the pending $21 billion acquisition. The approval by the Federal Trade Commission comes shortly after Express Scripts launched rival $26 billion bid for Caremark in hopes of wresting its rival away from CVS. Should either CVS or Caremark scuttle the deal because of a competing offer, it would pay the other a breakup fee of $675 million, CVS’s chief financial officer, David B. Rickard, said in an interview last month.
Go to Article from Bloomberg News via The New York Times »

Love and Marriage, Hedge-Fund Style

Ryan on the soap opera “All My Children” got it all wrong when he compared love with a hedge fund, according to Drinky McDiligence, writing on the Long or Short Capital blog. McDiligence noted a recent New York Times article about how references to hedge funds, those investment pools reserved for institutional investors and the wealthy, are creeping into the popular culture. That article discussed an overwrought bit of TV dialogue in which Ryan told Kendall, ‘’Love isn’t like a hedge fund, you know?”
“Obviously, the writers have no idea what a hedge fund is,” McDiligence sniffed in his blog post. “What they should say is that love isn’t like a non-diversified traditional long-only fund.”
He explains (sort of):
"In reality, love is exactly like a hedge fund. Love is a limited partnership structure — it takes a large initial investment, and is largely unregulated. Frequently, it uses an aggressive strategy, relying on large directional bets and substantial amounts of leverage. The plan is to generate significant alpha (using the Lipper Love Average as a benchmark) but it is not uncommon to see a hedge fund or a love relationship with an unsuitably low Sortino ratio, indicating that it has strayed from it’s raison d’etre."
McDiligence even includes a graph, whose shape would be familiar to any securities analyst, suggesting that a pre-nuptial agreement can work like a “put” option for the wary husband- or bride-to-be. “It floors your downside, and there is unlimited upside,” the post reads. “If the love falters or a better substitute arrives, you can walk away with no marginal pain.”
Go to Item from Long or Short Capital »Go to Previous Item from DealBook »

Board Proposes Lighter Auditing of Internal Controls

Responding to complaints that the costs of the Sarbanes-Oxley Act were too high, the Public Company Accounting Oversight Board proposed a standard Tuesday aimed at allowing auditors to do less work — and charge less money — when assessing internal controls over financial reporting.
The changes would “eliminate unnecessary requirements while preserving the principles of the standard,” the chairman of the oversight board, Mark W. Olson, said.
The new rule, which is expected to be adopted this spring after public comment, is much shorter than the old standard, coming in at 65 pages rather than 180. It encourages auditors to use their judgment in deciding which internal controls should be reviewed, focusing on controls where the risk of significant misstatements is the highest.
Go to Article from The New York Times »

Get Ready For A Red-Hot Proxy Season

If the 2006 proxy season felt dramatic, just wait until spring. The folks with their fingers on the pulse of big shareholder groups have already identified the top five areas of activity this year: majority voting, executive compensation, board declassification, poison pill elimination and activist hedge funds.
Many boards grappled with one or more of these issues last season, but that doesn't mean they've gone away. If anything, shareholders feel empowered by their progress.

Hostility on the Rise in M&A

Takeovers are increasingly turning hostile — again, says BusinessWeek. In 2006, corporate and private equity buyers worldwide lobbed 110 uninvited bids worth $351 billion at acquisition targets — the highest number since 2000, when 129 offers worth $117 billion were launched. Some companies are enlisting the assistance of hedge funds and unions to pour on the pressure, while private equity groups are busting in on each others’ deals, and occasionally making hostile offers themselves.
And with companies and financial buyers awash in cash anxiously looking for ways to put their money to work while interest rates remain low and financing is plentiful and cheap, bankers do not expect the wave of hostility to crest any time soon.
Many executives are making unsolicited bids for companies, BusinessWeek says, because they believe they must buy their rivals or risk being bought out as their industries consolidate.
The magazine cites AirTran Airways’ recent unsolicited $288 million bid for Midwest Airlines as an example. AirTran decided to go hostile after Midwest refused to engage in private merger talks. “You can debate the merits of consolidation, but if it happens, no one wants to be left out” AirTran President Robert L. Fornaro told BusinessWeek.
Go to Article from BusinessWeek »

Express Scripts Tops CVS With $26 Billion Caremark Bid

In an audacious takeover bid that could lead to lower drug prices for consumers, Express Scripts, a company that manages employee drug benefits, has launched a $26 billion hostile bid for larger rival Caremark Rx. The proposal tops a competing offer by the CVS drugstore chain in a bold move that evokes memories of the big buyout deals of the 1980’s and could lead to a bidding war.
Express Scripts is offering $29.25 in cash and 0.426 of its own shares for each Caremark share, or $58.50 in total — a 15 percent premium on Caremark’s closing price on Dec. 15, Express Scripts said in a press release early Monday.
Pharmacy benefit managers act as the middleman between drug companies and employers that offer drug subsidies to their workers as part of health-care coverage. By acquiring Caremark Rx, which is double its size, Express Scripts would become the largest pharmacy benefits manager in the nation by far.
The takeover bid, which seeks to scuttle Caremark Rx’s agreement last month to merge with CVS, will pit Express Scripts, with a market value of $9.3 billion, against the much-larger CVS, worth some $25 billion.
The offer by Express Scripts is a throwback to the 1980’s in two ways: It is a rare hostile bid that could spark a fierce bidding war, and it relies heavily on debt, some $14 billion. Express Scripts’ $26 billion offer is a vivid illustration of the role that cheap credit is playing in fueling the explosion in takeovers, as historically low interest rates and a flood of available cash have enabled private equity firms to buy out bigger and bigger companies.
The offer comes as somewhat of a surprise, as Express Scripts had widely been considered a takeover target, not an acquirer, because of its small size. Indeed, its bid for Caremark could also put it into play.
The proposed merger between CVS and Caremark received a mixed reception by investors. When it was first announced, shares in both companies tumbled, but they have returned to close to where they started after the deal. In that deal, Caremark received no premium for its shares.
Go to Press Release from Express Scripts »Go to Article from The New York Times »Go to Article from Bloomberg News »Go to Previous Item on DealBook »

U.S. Regulators Move to Streamline Merger Reviews

Hoping to reduce the time and expense involved in the merger review process, the Justice Department’s antitrust division on Friday announced changes to its five-year-old guidelines for vetting corporate transactions. Many of the changes focus on the “second request,” in which regulators, after launching a preliminary investigation into a deal’s competitive effects, extend the waiting period and ask the parties for more information. Among the new provisions is an option that allows companies to limit the scope of the documents they must produce in a second request, the Justice Department said.
Second request have become less common in recent years, according to figures published in a document accompanying Friday’s announcement. In the fiscal years 2000 and 2001, before the antitrust division took up its 2001 Merger Review Process Initiative, about 40 percent of preliminary investigations led to second requests. In 2002 and 2003, that percentage fell below 29 percent. In 2004 and 2005, it stood at 24 percent.
Merger reviews have also gotten shorter. Since the 2001 initiative was announced, the average length of time from the opening of a preliminary investigation to the early termination or closing of the investigation has fallen from about 93 days to 57 days, the Justice Department said.
Go to Press Release from the Justice Department »

IPOs Are Looking Tasty Again

BusinessWeek/online, December 2006:

Financial sector offerings paid off big, tech stocks are back, and 2007 promises more of the same

The once-moribund market for initial public offerings heated up in 2006, giving savvy investors an opportunity to beat the market by a wide margin. IPOs gained 24% through Dec. 8, vs. a 13% gain for the Standard & Poor's 500-stock index, according to Renaissance Capital in Greenwich, Conn., as the amount of money raised jumped 19%, to $38 billion.
The market looks just as solid going into 2007. And as the economy slows, upstarts with strong growth potential will look more appealing, says David Antonelli, chief investment officer at MFS Investment Management in Boston.

Deals Haven’t Peaked Yet, Report Says

The merger-and-acquisition boom is likely to be even bigger next year, according to a year-end outlook from PriceWaterhouseCoopers. The accounting firm’s Transaction Services group published its outlook for 2007, and it said that private equity funds will continue to fuel much of the activity “as long as the Goldilocks economy continues.” The consultancy said the health care, media, financial services and telecommunications industries are likely to see the most deals.

U.S. Commercial Real Estate Investment to Set Record

Dec. 14 (Bloomberg) -- U.S. commercial real estate investment is likely to set a record this year, driven by rising rents and occupancies in office and industrial buildings, the National Association of Realtors said.
More than $236 billion in commercial real estate transactions were recorded in the first 10 months of 2006, up from $231.9 billion a year earlier, the Washington-based association said in its Commercial Real Estate Outlook report, released today. Blackstone Group LP's agreement in November to acquire Equity Office Properties Trust, the biggest office landlord in the U.S., for $20 billion, isn't included in the data.

On Stock Options, Google Gets Creative

Under the program, Google will grant employees a new type of option called a transferable stock option. Under certain circumstances, outside investors will be allowed to bid for those options.
The ability to sell these options, which allow the holder to buy Google stock at a specified price, changes the game for Google employees. As The New York Times reported Wednesday, outside investors are likely to pay more for these options than the employee would earn by exercising it. Even “underwater” options — those with an exercise price above Google’s current stock price — could have some value to outside investors, who may expect Google’s shares to rise, putting the options in the money.
Analysts, experts and columnists described Google’s move in generally glowing terms, calling it “elegant” and suggesting it was a win for both employees and shareholders. But the reaction was not entirely positive. Several people raised the possibility that Google was making it too easy for employees to cash out their options early, undermining some of the usefulness as an incentive.
Go to Article from The New York Times »Go to Item from Tech Trader Daily via Barron’s »Go to Item from Internet Outsider »Go to Item from The Precursor Blog »

Insider Trading of Derivatives Won't Be `Tolerated'

Dec. 13 (Bloomberg) -- A group of 12 securities industry associations issued a joint statement today saying the use of material nonpublic information when trading credit derivatives won't be ``tolerated.''
The statement from the International Swaps and Derivatives Association, Securities Industry and Financial Market Association and the other groups follows what some investors and traders have called suspicious trading in credit derivatives before announcements of takeovers and other events that can change the perceptions of a borrower's ability to meet debt payments.
The groups said they have adequate procedures in place to guard against improper trading in the unregulated market for credit derivatives and other markets including loans that are privately negotiated between banks and investors and not traded over an exchange. They will ``educate'' and ``inform'' members about how to handle information that hasn't been publicly disclosed that could influence markets, they said.

SEC Proposes New Guidance on Internal Controls

The Securities and Exchange Commission today proposed guidance to make it easier and less costly for companies to comply with internal-controls rules set forth by the Sarbanes-Oxley Act. The Commission voted 5-0 to publish the proposal and circulate it for public comment.
According to MarketWatch, SEC Chairman Christopher Cox said the accounting rules have posed "the biggest challenge" under the law and "without question, it has imposed the greatest cost." The proposed SEC rules would offer management much more flexibility in carrying out audits.

U.S. Moves to Restrain Prosecutors

The Justice Department placed new restraints on federal prosecutors conducting corporate investigations yesterday, easing tactics adopted in the wake of the Enron collapse.
The changes were outlined in a memorandum written by Paul J. McNulty, the deputy attorney general. Under the revisions, federal prosecutors will no longer have blanket authority to ask routinely that a company under investigation waive the confidentiality of its legal communications or risk being indicted. Instead, they will need written approval for waivers from the deputy attorney general, and can make such requests only rarely.
Another substantial change introduced yesterday prohibits prosecutors from considering, when weighing whether to seek the indictment of a company, whether it is paying the legal fees of an employee caught up in the inquiry.
The revised guidelines follow criticism from legal and business associations and from federal judges, senators and former top Justice Department officials that the tactics used in recent years against companies like the drug maker Bristol-Myers Squibb and the accounting firm KPMG were coercive and unconstitutional.

Hedge funds could require $2.5M net worth

The SEC is expected to vote Wednesday on whether to raise hedge fund net worth minimum to $2.5 million from $1 million.

WASHINGTON (Reuters) -- The Securities and Exchange Commission said Tuesday it is moving to increase the minimum net worth required for an investor to be eligible to invest in hedge funds to $2.5 million from $1 million.
At an open meeting of the investor protection agency scheduled for Wednesday, the proposal is expected to be voted on and then undergo a public comment period, SEC Chairman Christopher Cox told reporters at a briefing.
Final action by the commission would come later.
"We are going to be lifting the accredited investor standard from where it has been since 1982 at $1 million of net worth to $2.5 million," Cox said.

Thompson Memo Out, McNulty Memo In

U.S. Deputy Attorney General Paul J. McNulty announced earlier today that the DOJ is revising its corporate charging guidelines for federal prosecutors throughout the country. The new memorandum, informally titled the “McNulty Memorandum,” will supplant the Thompson Memorandum, which was issued in January 2003 by then-Deputy Attorney General Larry Thompson, now the general counsel at PepsiCo.
Both memoranda were designed to serve the same basic function: to help federal prosecutors decide whether to charge a corporation, rather than or in addition to individuals within the corporation, with criminal offenses. Under the Thompson memo, in deciding whether a corporation was cooperating with an investigation, prosecutors were allowed to consider two controversial factors: 1) whether a company would agree to waive the attorney-client privilege in regard to conversations had by its employees, and 2) whether a company had declined to pay attorneys’ fees for its employees.
The McNulty Memo requires that when federal prosecutors seek privileged attorney-client communications or legal advice from a company, the U.S. Attorney must obtain written approval from the Deputy Attorney General.
The new memorandum also instructs prosecutors that they cannot consider a corporation’s advancement of attorneys’ fees to employees when making a charging decision. An exception is created for those extraordinary instances where the advancement of fees, combined with other significant facts, shows that it was intended to impede the government’s investigation.
The Thompson memo was pointedly criticized by business groups and civil liberties organizations, who claimed that it eviscerated individuals constitutional rights. In July, federal judge Lewis Kaplan slammed the Thompson Memo in a case involving allegedly illegal tax shelters created by former KPMG employees. For more background on the Thompson Memo, check out this WSJ.com exchange between a former U.S. Attorney and two white-collar defense lawyers.

Options Scandal is a Tax Scam

From Business Law Prof Blog:

The WSJ today has a front page story about "How Backdating Helped Executives Cut Their Taxes." A later section carried the story "Another Consequence of Backdated Options: Stiff Tax Bills." Finally. The essence of the options backdating scandal, backdating either exercise dates or option grant dates, is a tax scam. What is disappointing is the degree to which senior executives in major companies thought that cheating on taxes was legit. The second story, by Theo Francis, explains why so many companies are cleaning up their past back dated options -- a 60% tax penalty that can be avoided if unexcersied, back dated options are repriced before year end.

Private Equity: The Challenges Ahead

Pioneer Tom Hicks says competition and higher interest rates may drive down returns—and smaller deals may end up being the most lucrative

BusinessWeek.com, December 12, 2006, 12:00AM EST

The last year has been notable for a string of massive leveraged buyouts that have extended the limits of what private equity firms can do. Kohlberg Kravis Roberts bought hospital company HCA for $33 billion, beating the record that KKR established in 1988 with the RJR Nabisco deal (see BusinessWeek.com, 11/10/06, "The Dark Side of the M&A Boom"). The record was broken again in November with The Blackstone Group's $36 billion acquisition of Sam Zell's Equity Office Properties Trust (see BusinessWeek.com, 12/08/06, "Private Equity: What's the Limit?").
But in a year of record deal volume (see BusinessWeek.com, 11/07/06, "The Money Behind the Private Equity Boom"), the vast majority of transactions are much smaller. Buyout pioneer Thomas Hicks specializes in those smaller deals, which he says can be at least as profitable as bigger LBOs that dominate the headlines. On Dec. 8, his Hicks Holdings teamed up with The Watermill Group, a private equity firm in Lexington, Mass., to acquire Latrobe Specialty Steel of Latrobe, Pa., for $215 million in cash and $35 million in assumed debt. The company sells steel to civilian and military aircraft makers.

Venture Bubble Redux?

The foreboding headline on a Financial Times story Monday is not sitting well with at least one venture investor. “VC rises to dotcom bubble levels,” the headline declares. The article goes onto explain that total venture-capital investment is estimated to reach $32 billion this year, which is the highest in the past four years and “closer to levels seen during the dot-com bubble.”
“It’s not even close,” writes Paul Kedrosky in his Infectious Greed blog:
Sure, it’s the highest it’s been in four years, but you might equally write that VC funding is still 36 percent off its dotcom peak, or that it is more or less flat year-over-year. Instead we have this irresponsible stuff.
Go to Article from The Financial Times via MSNBC.com »Go to Item from Infectious Greed »

The Heisman Trophy, Archie Griffin & the Law

From today's WSJ Law Blog: The Law Blog just ran into Archie Griffin, the only two-time winner of the Heisman Trophy. The Ohio State legend walked by our desk after giving an interview to Dow Jones Video. We introduced ourselves, shook hands and asked, “Did you know John Heisman had a law degree?” “No,” he responded, bursting into a smile. “What do you think of that?” we asked. “I think that’s fantastic,” said Griffin. “Woody wanted me to be a lawyer. Actually, I think Woody really wanted to be a lawyer. He urged a bunch of us to become lawyers and his son became one.”
Woody, for all you non-athletic supporters, is Woody Hayes, the iconic coach for whom millions of Buckeye fans are grateful never became a lawyer. Woody’s son is Steven B. Hayes, a municipal judge in Columbus. Thanks for the tip, Archie!

Soros fund denies insider info

NEW YORK (Reuters) -- An investment fund controlled by billionaire investor George Soros said Friday it did not have any inside information when it sold $24 million worth of Auxilium Pharmaceuticals Inc. shares a day before the company announced problems with a key clinical trial.
"We were not in possession of any material, non-public information at the time of the trade," the Perseus-Soros Biopharmaceutical Fund said in a statement.

Deloitte and Banks to Pay $455 Million to Adelphia Investors

The auditor Deloitte & Touche, Bank of America and 38 other banks have agreed to pay a total of $455 million to settle a lawsuit with investors in Adelphia Communications, the bankrupt cable television company.
Deloitte & Touche will pay $210 million and the banks will pay $245 million under a settlement approved Nov. 10 by Judge Lawrence McKenna of Federal District Court in New York. The amount each bank owes is confidential. Adelphia filed for bankruptcy in 2002 after an accounting fraud that led to the criminal convictions of its founder, John J. Rigas, and his son Timothy.
Investors had claimed losses as high as $5.5 billion, saying that Deloitte & Touche and the banks contributed to the fraud. Adelphia sold its cable properties to Comcast and Time Warner for $16.7 billion in July.

Paulson: Hedge Funds 'Positive' But Need to Be Monitored

In an exclusive interview on cnbc.com, Treasury Secretary Henry Paulson said hedge funds have had a positive impact on capital markets but need to be more closely monitored in an effort to protect investors.
"This is something we are giving a lot of thought and attention to," Paulson told CNBC's Maria Bartiromo. "There have been major changes in the capital markets over the past five to ten years, including big increases in private pools of capital."
Paulson said they are examining hedge funds in three areas, including: investor protection; systemic risk, or ensuring that there is enough liquidity in the system; and transparency between the hedge funds and those lending them money.
The Securities and Exchange Commission adopted a rule in 2004 ordering most hedge fund advisers to register with the investor protection agency. But a federal court threw out the rule in June.
Since the SEC's registration rule was struck down, the agency has been developing scaled-back rule proposals, including one to raise the minimum net worth an investor must possess to be allowed to invest in hedge funds. That proposal is expected to come before the SEC for a vote next week.
The average annualized performance of hedge funds 14.03%, according to the HFRI Fund Weighted Composite Index. The typical hedge fund charges investors a 2% management fee, along with a 20% share of profits.

Study Finds Value in Latest Wave of Deals

Seeking to answer one of Wall Street’s most controversial questions, Towers Perrin, an M&A consultancy, has taken a look at whether shareholders were helped or hurt in the recent flurry of corporate transactions. Its study, conducted with the Cass Business School, concludes that mergers and acquisitions “are now delivering shareholder value,” although it also found that medium-size deals performed better than big ones. The study compared deals completed in 2004 and 2005 with prior “waves” of deals in 1998 and 1988.
Go to News Release from Towers Perrin »

Tech Bankers See More Deals in the Pipeline

Technology investment bankers, already enjoying a banner year for mergers and acquisitions, expect to be even busier in 2007, a recent survey suggests. Of the more than 100 senior-level tech bankers who responded to The 451 Group’s second annual Technology Banking Survey, more than one-third said the number of their formal deal mandates is running 25 percent to 50 percent higher than at the same time last year. A year ago, only 23 percent of survey respondents reported growth in that bracket.
Go to Report from The 451 Group’s TechDealmaker »

Antitrust Ambiguity to Be on Justices’ Docket

WASHINGTON, Dec. 7 — The Supreme Court added two important antitrust cases on Thursday to its calendar for the current term. Both cases, granted at the request of defendants in private antitrust suits, are likely to lead to clarification of areas of antitrust law that have increasingly become unsettled.
One case has been closely watched on Wall Street. It is a class-action lawsuit against more than a dozen leading investment banks and institutional investors that took part in syndicates to underwrite the initial public offerings of hundreds of technology companies in the 1990s.
The suit, brought by purchasers of the stocks, charges that the sharing of information among the underwriters and the way in which they allocated shares to their customers amounted to an antitrust conspiracy.
While the eventual outcome of the case is uncertain, there is little uncertainty about the second antitrust case the court accepted. The question in that case, Leegin Creative Leather Products v. PSKS, No. 06-480, is how antitrust law should treat the minimum prices that manufacturers require retailers to charge for their products.
In a 1911 case known as the Dr. Miles precedent, this practice of “resale price maintenance” was deemed always illegal under the Sherman Act. The case asks the justices to re-evaluate the precedent in light of modern economic theory, and instead to make these arrangements subject to case-by-case analysis under what is known as the rule of reason.
In other areas of antitrust law, the court has steadily backed away from a categorical view of antitrust liability and is highly likely to use this case as a vehicle for doing the same for resale price maintenance.

Specter Bill Seeks to Alter DOJ Corporate Fraud Investigations

In an attempt to pressure the Justice Department to alter the way it investigates corporate fraud, a key member of the Senate Judiciary Committee on Thursday formally introduced legislation aimed at preventing prosecutors from forcing companies to waive the attorney-client privilege in order to avoid indictment. Sen. Arlen Specter, R-Pa., the outgoing chairman of the committee, said on the Senate floor that the DOJ had not moved quickly enough to change policies that he said encroached on corporate defendants' constitutional right to counsel.
Specter was joined by former Attorney General Richard Thornburgh and lobbyists from a number of business and legal groups, who said that forcing a change in the DOJ's policy could lead the Securities and Exchange Commission, the Internal Revenue Service and other government agencies to review their policies on privilege waivers.
Specter's move comes as Deputy Attorney General Paul McNulty is leading an internal review of the government's corporate-fraud prosecution policies in the wake of a concerted lobbying effort by business groups and a court decision in New York that found one of the policies to be unconstitutional.
At issue is the way federal prosecutors have interpreted provisions of the so-called Thompson memo, issued in 2003 by then-Deputy Attorney General Larry Thompson. In the memo, Thompson lists a number of factors prosecutors should consider when deciding whether to indict a company for corporate fraud. Among them: whether the company has waived the attorney-client or work-product privilege and granted prosecutors access to internal investigations prepared by the company's lawyers. (Thompson is now general counsel of PepsiCo.) Given that companies under criminal indictment are often driven to bankruptcy -- most notably exemplified in the case of accounting firm Arthur Andersen -- the DOJ's critics say corporate defendants are left with little choice but to waive their privilege and turn over documents relating to internal investigations. Those documents often become public through court proceedings and provide fodder for shareholder class actions.

South Korea Calls Deal With U.S. Buyout Firm Illegal

As private equity firms in the United States increasingly look overseas for takeover targets, they might want to consider the plight of Lone Star Funds. The Dallas-based firm, whose 2003 acquisition of Korea Exchange Bank has prompted an investigation by South Korea’s government, faced a new setback on Thursday when a senior prosecutor claimed to have discovered illegal aspects of the transaction. The finding could lead to the $1.3 billion sale being voided, Reuters said. The controversy comes amid concern that stepped-up investments from foreign firms could prompt a backlash, not just in South Korea but in other nations as well.
The months-long inquiry in South Korea has already led Lone Star to cancel a deal to sell its stake in Korea Exchange Bank to Kookmin Bank for $7.3 billion, which would have allowed the firm a highly profitable exit. In deciding to scrap the deal last month, Lone Star cited the uncertainty created by the open-ended investigations conducted by what it called “politically motivated'’ prosecutors.
Lone Star defended its acquisition of the Korean bank on Thursday, calling the prosecutors’ latest findings “the same old broad conspiracy theory that never made any sense and still is not supported by any hard evidence.” The notion that Korea Exchange Bank was sold for a bargain price is “absurd,” Lone Star said.
Go to Article from Reuters via The New York Times »Go to The Financial Times’s FT Video »Go to Press Release from Lone Star Funds via PRNewswire »

Whirlpool to Sell Hoover to Hong Kong Company

Appliance maker Whirlpool has found a buyer for Hoover, the vacuum-cleaner company it picked up through its acquisition of rival Maytag in March. Whirlpool said Thursday it would sell the Hoover unit for $107 million in cash to Techtronic Industries, a Hong Kong-based company whose brands include Ryobi power tools and the Dirt Devil vacuum cleaner. Whirpool acquired Maytag in March for $1.9 billion in cash, stock and acquisition-related expenses.
Go to Press Release from Whirlpool via PRNewswire »

Court Rejects I.P.O. Class Action Against Banks

That sound emanating from lower Manhattan on Tuesday was a communal sigh of relief from the major Wall Street banks. These firms scored a huge victory when a federal appeals court ruled that they will not have to face a huge securities class-action suit related to accusations that they manipulated the prices of initial public offerings of technology companies during the market boom of the late 1990s. If they had chosen to avoid a trial, the banks faced the prospect of paying billions of dollars to settle the suit, which involved 55 underwriters, including Merrill Lynch, Goldman Sachs, Morgan Stanley and Credit Suisse First Boston. A link to the full text of the ruling is below.
There was more good news for the banks in Tuesday’s ruling. The decision raises the prospects that earlier settlements in the case, in particular a $425 million agreement with J.P. Morgan Chase and a $1 billion guaranteed proposed deal with the issuers of the new shares that was still pending approval by the judge in the case, could be nullified.
Described by many as the largest consolidated securities class-action case ever, the I.P.O. lawsuit involved more than 300 individual investors and 309 issuers.
The ruling was a devastating blow to the embattled securities class-action powerhouse Milberg Weiss Bershad & Schulman, which is a co-leader for the plaintiffs. The firm has been operating under a cloud for months after it was indicted by a federal grand jury in Los Angeles in May. The firm and two of its named partners are accused of making $11.3 million in secret payments to entice people to serve as plaintiffs in more than 150 lawsuits.
Download the Appeals Court Ruling (PDF) »Go to Article from The New York Times »

S.E.C. Proposes Compliance Delay for Small Firms

The Securities and Exchange Commission will propose giving the smallest companies an additional one-year delay before having to comply completely with the audit provisions of the Sarbanes-Oxley law, Commissioner Roel Campos said Monday.
Go to Article from Bloomberg News via The Los Angeles Times »

The Real Stakes in the Hedge Fund Hearings

Limits on the amount of debt that companies such as private-equity firms use to finance acquisitions may be one of the fallouts from the increasing scrutiny of hedge fund practices, BusinessWeek says. • Go to Article from BusinessWeek

S.E.C. and Critics to Square Off in Senate

The Securities and Exchange Commission may have ended its investigation of Pequot Capital Management last week, but the questions surrounding the inquiry keep coming. Today, Linda C. Thomsen, the S.E.C.’s director of enforcement, and eight others are scheduled to go before the Senate Judiciary Committee to testify about allegations by former S.E.C. lawyer Gary Aguirre that the agency prematurely halted its inquiry after it led them in the direction of John Mack, Morgan Stanley’s chief executive.
The New York Times reports that a second S.E.C. official, who is also on Tuesday’s witness list, asked to be removed from the Pequot inquiry because of his serious misgivings about decisions made on the case. The Wall Street Journal writes that Ms. Thomsen will tell the committee that Mr. Aguirre “resisted standard supervision, and ignored the S.E.C.’s chain of command.”
Like Mr. Aguirre, S.E.C. investigator Eric Ribelin believed that the inquiry “was not handled right,” Senator Arlen Specter, the chairman of the Judiciary Committee, told The Times. “Something smells rotten here,” Mr. Ribelin wrote in an e-mail message to an S.E.C. supervisor last year.
Mr. Aguirre, who led the hedge fund investigation until he was fired last year, has told members of Congress that senior S.E.C. officials blocked him from taking testimony from Mr. Mack. S.E.C. officials deny that their probe of Mr. Mack was blocked by politics. Ms. Thomsen said in testimony prepared for today’s hearing that the S.E.C. has sued “captains of industry, presidential cabinet members, members of Congress and celebrities. The enforcement division does not pull its punches.”
The S.E.C. is also under review by the Government Accountability Office, the investigative arm of Congress. Charles E. Grassley, the Iowa Republican who is chairman of the Senate Finance Committee, asked for the review in September because he was growing concerned, he said, about whether the S.E.C. was “faithfully adhering to its mission.”
Go to Agenda of Tuesday’s Hearing »Go to Article from The New York Times »Go to Article from The Wall Street Journal (Subscription Required) »Go to Article from Bloomberg News »

Market Regulators to Ramp Up Scrutiny of Hedge Funds

Hedge funds will face greater scrutiny as U.S. market regulators coordinate efforts to uncover illegal trading, the New York Stock Exchange’s head of market surveillance said. “Given the proliferation of hedge funds and the impact they can have on a marketplace, we’re looking at ways to build up our database on hedge funds,” Robert Marchman told Bloomberg News. “Our scope of review of relationships between hedge funds and other financial business-related entities will expand,” he said.
The N.Y.S.E. and the NASD, which are merging their regulatory arms, will work with the Securities and Exchange Commission and the Chicago Board Options Exchange as pressure mounts on regulators to better police hedge funds for crimes, including insider trading, which will be the focus of a Senate Judiciary Committee meeting later today.
Go to Article from Bloomberg News »

Nice Deal for Wall Street, Bummer on Main Street

Dec. 1 (Bloomberg) -- Opinion By Susan Antilla:

The Wall Street crowd is giddier than a 10-year-old with a PlayStation 3 over news that the NASD and the New York Stock Exchange will be merging their regulatory units.
It has set off industry-wide celebration. Brokerage officials are handing out happy quotes to reporters about the welcome change. Lawyers who represent crooked stock brokers are making statesmanlike predictions of regulatory synergies.
The last time I saw people in the brokerage industry this happy, the Republicans had just swept the Senate. As with all mergers, though, this one is bound to be bum news for someone. I hate to throw cold water on this party, but what does it all mean for the customers?

Commentary: Beat the Clock (and Get a Double Bonus)

While the flurry of year-end deal announcements may seem like someone’s hitting the egg nogg a little too often, it’s more likely that someone else wants to stuff a little more into their stockings. One reason for the late rush of multibillion-dollar buyouts and sales is that investment bankers are trying to wrangle a bigger year-end gift in what some call the “double-bonus game,” Andrew Ross Sorkin writes in his Sunday DealBook column. Read on to see how it works.

SEC Democrats balk at plan

The honeymoon for Christopher Cox may soon be over at the Securities and Exchange Commission.
A Democratic commissioner Friday, Dec. 1, said he expects that the agency will be divided over a vote later this month on investor rights. If so, this will be the first time the agency has been split on a critical vote since Cox took charge at the SEC almost two years ago.
At issue is a federal appeals court's Sept. 5 ruling that the SEC was wrong to let American International Group Inc. exclude from its proxy an investor proposal intended to make it easier for shareholders to nominate alternative director candidates on corporate ballots.
To resolve the difference between the SEC's interpretation of the rules and the court's, Cox's most viable options would force him to choose between one option sure to be opposed by the SEC's two Democrats and another that faces resistance from at least one of his GOP colleagues.

Market Overhaul Proposal Draws Criticism

From NYT's Deal Book:


Depending on whom you ask, a panel’s sweeping proposal to revamp securities rules goes too far, or not far enough. The panel, formed with the endorsement of Treasury Secretary Henry Paulson, issued a report Thursday that recommended making it harder for companies to be indicted or sued and seeking to limit rules that impose high costs on business, among other changes. The Council of Institutional Investors, a corporate governance group, responded Thursday by saying that the recommendations “would undermine the effectiveness of market watchdogs and weaken critical investor protections.” The National Venture Capital Association had a very different take.
The venture association, which represents firms that invest in start-up companies, suggested the committee’s proposal did not give enough relief to small businesses. It called the report a “step backwards based on work and recommendations that have already been put forth.”
The opposing views reflect the growing debate over whether the Sarbanes-Oxley Act of 2002, passed after the collapses of Enron and WorldCom, has made the U.S. a less-hospitable place for business, a safer place for investors, or some combination of the two.
The panel, called the called the Committee on Capital Markets Regulation, is co-chaired by R. Glenn Hubbard, the dean of the Columbia University Graduate School of Business, and John L. Thornton, the chairman of the Brookings Institution. It has no official standing, but its recommendations are likely to help set the agenda at the Bush administration.
The report spends a lot of time describing what it considers to be the flight of initial public offerings to markets outside the U.S., a trend it suggests is driven by the additional red tape and costs of a U.S. listing. The Council of Institutional Investors, a nonprofit group of pension funds, called this analysis “off-base.” In a statement released Thursday, the council argued that the nation’s declining I.P.O. share reflects increased globalization, higher investment banking fees in the U.S. and the privatizations of many state-owned companies overseas.
The National Venture Capital Association issued its own statement, in which it criticized the report for failing to recommend more measures to shield small businesses from Sarbanes-Oxley. It argued that the scope of small businesses that would be granted relief is “much narrower” than a proposal recently put forth by a committee of the Securities and Exchange Commission.
Go to Press Release from the Council of Institutional Investors »
Go to Press Release from the National Venture Capital Association »

Are Securities Rules Hurting U.S. Markets?

An independent committee formed with the endorsement of Treasury Secretary Henry M. Paulson Jr. called for a sweeping overhaul of securities regulations, citing concerns that American markets are losing their competitiveness. In a report released Thursday, the committee recommends making it harder for companies to be indicted by the government or sued by private lawyers, and urges policies to keep the Securities and Exchange Commission from adopting rules that impose high costs on business. The committee has no official standing, but it includes many influential members. Harvey J. Goldschmid, a professor at Columbia Law School who had served as general counsel and as a member of the S.E.C., said the report "raised legitimate questions but over all their recommendations are unbalanced and unwise." A briefing on the report was scheduled for 10:30 a.m. Thursday in New York.
• Go to Article from The New York Times
• Go to Article from Bloomberg News
• Go to Report from the Committee on Capital Markets Regulation
• Go to Webcast of Committee Briefing

PE Week Wire - Monday, November 27

From Monday's "Random Ramblings":

In 2001, the Boston Red Sox hiked ticket prices just 24 hours after the New England Patriots had won their first Super Bowl. It was an egregious increase, but no one noticed.
People also don’t notice much on the day after Thanksgiving, because they either are suffering tryptophan hangovers or are in pre-stampede mode at the local Best Buy. Even the public markets take half the day off.
So it isn’t terribly surprising that hospital chain HCA picked Friday to disclose additional terms of its $21 billion sale to Bain Capital, KKR and Merrill Lynch. After all, $175 million in transaction fees and $15 million annual management fees aren't something to promote (or list in the small print on an ER visit bill). In addition, the management fee can increase annually beginning in 2008, while new owners will be entitled to: “a fee equal to 1% of the gross transaction value in connection with certain subsequent financing, acquisition, disposition, and change of control transactions as well as a termination fee based on the net present value of future payment obligations under the management agreement in the event of an initial public offering or under certain other circumstances.”
Once again, we are watching new private equity owners raid the corporate coffers for their own benefit (as opposed to for the company’s benefit). Let me repeat that word: “Owners.” Shouldn’t it be implicit that owners will participate in company management? Do they deserve extra financial credit for paying active attention to their own control investment? And, even worse, why do they get paid to terminate said agreement? It’s a pre-baked golden parachute that presumes KKR is just as valuable to HCA while “not managing” as it is “managing.” I wonder if Daddy Thomson would agree that I'm as valuable when "not writing" as when "writing?" Methinks not.
The counterargument here is: “Hey, the private equity firms now own HCA, so they’re the only ones who get hurt if the company’s valuation is reduced.” Yes and no. First, value also is being reduced for any HCA employee holding company options (for the inevitable flip). More importantly, not all private equity firms share either the transaction or management fees with limited partners. You remember limited partners, don’t you? They’re the ones who actually funded the buyout’s equity tranche.
Bain, for example, almost never shares any of those fees with LPs. Well, it officially does, but then takes out all of the unaccounted for consulting fees generated by affiliate Bain & Co. Even firms with more generous sharing – which usually means 50/50 or 60/40 in the LP’s favor – still apply carried interest, which means that even firms that give 100% to LPs may only end up giving 80 percent. It’s worth pointing out that buyout firms all used to take 100% of such fees for themselves, but progress in this area has still moved like stubborn molasses.
The solution: End management fee agreements, and probably transaction fees as well. Private equity is supposed to be about building portfolio company value over time – not about getting rich on Day 1.

Richard Epstein Blasts Thompson Memorandum

Today in a searing WSJ op-ed, Chicago law professor Richard Epstein takes aim at deferred prosecution agreements. He blasts the Thompson Memorandum, the 2003 Justice Department policy statement that laid out guidelines for prosecuting corporations. “The Thompson memorandum insisted that corporations receive a temporary reprieve only if they purge themselves of individual wrongdoers and agree to extensive government oversight to make them walk the straight and narrow path.”
He mocks the deferred-prosecution agreement the feds struck with Bristol-Myers Squibb, which was accused of inflating its revenues. New Jersey U.S. Attorney Chris Christie went too far, says Epstein. “The most striking evidence of the abuse of power is paragraph 20 of the agreement, which requires BMS to ‘endow a chair at Seton Hall University School of Law,’ Mr. Christie’s alma mater, for teaching business ethics, a course that he himself could stand to take.”

NASD, NYSE Agree to Merge Regulatory Arms

The NASD and the NYSE Group said Tuesday they intend on combining their regulatory operations, creating a single private overseer for all stock market activity in the United States. The new organization, which has not yet been named, is expected to begin operation next year, the NYSE Group said in a press release.
The new regulator will retain all of NASD’s 2,400-person regulatory team, as well as 470 of the NYSE Group’s operation. NYSE’s regulation chairman, Richard G. Ketchum, will serve as interim chairman of the combined operation for three years, while NASD’s chairman and chief executive, Mary L. Schapiro, will serve as C.E.O.
Earlier this year, the Securities and Industry Association, Wall Street’s trade and lobbying group, said it favored eliminating duplication by creating one regulator with one set of rules and interpretations to govern the industry. The association also sought a seat for itself on the board of whatever regulator emerged.
Go to NYSE Group Press Release »

S.E.C. Sets Date to Consider New Hedge Fund Regulations

It’s a date. After indicating that it would seek tougher regulations for hedge funds, the Securities and Exchange Commission has scheduled a public meeting for Monday, Dec. 4, to consider two measures that would tighten rules governing these lightly regulated pools of capital.
One proposal to be considered would deal with the minimum net worth that an investor must possess to be allowed to invest in hedge funds. Earlier this month, S.E.C. chairman Christopher Cox said that it was necessary to further isolate hedge funds from small investors.
Another measure to be batted about next Monday would tighten up the anti-fraud statute dealing with hedge funds.

For M&A, a Much-Deserved Holiday

Investment bankers and corporate lawyers seemed to take a break on Wednesday — and they certainly earned it. About $3.1 trillion worth of transactions have been announced this year, including about $50 billion on Monday alone. That was when Blackstone offered $20 billion (excluding debt) for Equity Office Properties and Freeport-McMoRan agreed to pay $25 billion for Phelps-Dodge.
On Wednesday, both BusinessWeek and Fortune magazine took a look at why there is such a deal-making frenzy.
They covered some familiar territory (bulging private equity funds in search of takeover targets, easy access to the debt markets), but BusinessWeek hinted at a tantalizing, if a bit far-fetched, political angle. It cited the incoming Democratic congress as one big reason for the year-end spate of deals. In the new year, “deals may see a greater degree of scrutiny in Washington,” it concludes.
Meanwhile, the tone of the media’s merger-related coverage seems to grow more portentous every day. “If the good times keep rolling,” Fortune writes, the buyers will “do fine.” But “if the normal cycle reasserts itself, if the world hasn’t really changed, the buyers will end up with a wicked hangover.”
Because private equity buyers tend to offer cash, as opposed to the stock that strategic buyers tend to offer, sellers are more willing to deal. But that shows that the sellers “apparently would rather cash out than bank their future on the success of an expensive merger,” the article continued.
On Tuesday, The New York Times noted how the deal-financing scene has gone topsy-turvy, thanks to free and easy debt markets. It is so cheap to borrow that buyers essentially cannot help themselves, and debt financing is often seen as safer than using stock. While “normally cautious bond investors are living like Las Vegas high rollers,” the article noted, “stock speculators are behaving like worry-warts.”
Go to Article from BusinessWeek »
Go to Article from Fortune »
Go to Earlier Article from The New York Times »

The Importance of Being Private

Leveraged buyouts are not the get-rich-quick schemes they are often made out to be. Or at least, not always. That is the assessment of Geoffrey Colvin and Ram Charan, whose article in Fortune offers a different view of the private-equity phenomenon than many recent articles in the business media.
Rather than focus on buyout funds’ record-setting size or quick exits, Fortune looks at how private equity investment changes business.
Go to Article from Fortune »

The Sorkin RoadMap for Fairness

From today's PE Week Wire:

Andrew Ross Sorkin of NY Times Dealbook has developed some middle ground between Ben Stein’s call for banning management buyouts and the private equity market’s calls for continued regulatory indifference. Specifically, he has a four-part plan for fixing certain problems inherent in management buyouts. It goes something like this:
Require that a majority of minority shareholders approve the transaction. If senior management holds a control position, don’t let its vote be the only one that matters.
Use independent advisors. Real ones without either existing company relationships or a financial stake in the deal (i.e., stapled financing agreements).
Set aside up to 10% of the newly-private company for public shareholders. In other words, pre-empt the whining.
Provide some detail of the business plan for the company, once it becomes private. Let shareholders decide if management can best add value as a public or private entity.
Points one and two seem like no-brainers. Both help prevent self-dealing without much downside. If it’s really a good deal, then the minority shareholders will vote for it. Sure certain Wall Street firms will lose some fees, but not in the aggregate. It might even promote the creation of new boutique I-banks.
Points three and four are a bit trickier (as Sorkin admits).
My concern on point three isn’t so much the mechanics of it, difficult though they may be to design. Instead, it’s an issue of consistency. Assuming the point one becomes a generally-accepted principle, would a majority of this new 10% class have the right to veto a subsequent sale? If not, why not? Maybe the answer is that public and private shareholders are granted different levels of privilege, but then the same could be argued of controlling and non-controlling shareholders. It seems that you must either accept point one and deny three, or accept them both with a giant addendum to number three.
I have been arguing for a while that there is an inherent unfairness that public shareholders vote on acquisitions without knowing what the future possibilities are. I also think that the only viable solution is to demand more of the banks charged with writing fairness opinions (I’d also ask more of corporate boards, but it’s futile to request objectivity of cronies). If a company gives away its future gameplan – particularly when adoption of said plan is not yet approved – it almost certainly puts the company at a competitive disadvantage. Again, put some bite in the currently-toothless fairness opinions.
Finally, let’s add a fifth point (as first suggested by DealBook reader Andy Johnston): Make public all auctions of public companies. Once a corporate board is actively willing to consider buyout bids, retain a banker and issue what would amount to a buyout RFP (request for proposal). Give everyone one month to submit bids – which is a tight enough timeframe to still reward those private equity firms that helped initiate the deal.To be clear, I mean something even more transparent than afterthought “go shop” provisions.
Some M&A bankers may object to this proposal, saying that their selective bluebook mailing lists are designed to discourage frivolous bids. I say that I’d rather suffer through a handful of frivolous bids, rather than arbitrarily restrict the process in a may that may depress/prevent legitimate bids.
It also is worth noting, of course, that all of the above likely would require federal regulatory action. So be it. Even free markets require some ground rules.

The temptations of private equity

With financing free and easy, many companies are coming out of leveraged buyouts with just enough cash flow to cover their interest expense and capital spending, according to an analysis by The Deal. But some buyouts have more liquidity and flexibility than might appear on the surface, The Deal writes. Breakingviews suggests that easy access to funds has driven many private equity firms to chase "larger, more expensive and overly indebted companies," which it calls a "classic sign of a bubble."
• Go to Article from The Deal
• Go to Article from Breakingviews

Treasury Chief Urges ‘Balance’ in Regulation of U.S. Companies

Amid growing fears that London may replace New York as king of the I.P.O. castle, Treasury Secretary Henry M. Paulson Jr. said yesterday that excessive regulation and burdensome litigation were prompting companies to choose to list their stock on foreign exchanges over American ones.
• Go to Article from The New York Times

Merger Monday

Merger and acquisition activity worldwide surged on Monday with a focus on real estate, mining, media and exchanges sectors as demand by private equity funds and the push for industry consolidation gathered pace.
• Go to Article from Reuters
• Go to Item on DealBook

Rewriting the Rules for Buyouts

How can shareholders trust management to represent their interests when it is trying to make off with the company? DealBook's Sunday column in The New York Times offers a four-step cure for the conflicts of interest that are inherent in management-led buyouts.

$70 Billion Merger Monday

Investment bankers have plenty to be thankful for in this holiday-shortened week, which began with several megadeal announcements with a combined value of more than $70 billion. There was the Blackstone Group’s record-breaking agreement to buy Equity Office Properties Trust, the nation’s largest office-building owner and manager, for about $36 billion in cash and debt. That deal, announced Sunday night, ranks as the largest leveraged buyout in history, surpassing the $33 billion buyout earlier this year of hospital chain H.C.A.
In a research note published Monday, Sri Nagarajan of RBC Capital Markets called Blackstone’s offer “attractive” for Equity Office’s shareholders and said he thought competing bids were unlikely. By targeting Equity Office, Blackstone is probably betting that it can further reduce corporate overhead at the company and profit from a rise in office rents in late 2007 or early 2008, Mr. Nagarajan wrote.
Also on Sunday, mining giant Phelps Dodgesaid it would be acquired by smaller competitor Freeport-McMoRan Copper and Gold in a cash and stock deal worth $25.9 billion. Earlier this year, Phelps Dodge unsuccessfully tried to arrange a three-way transaction with two Canadian miners.
John Tumazos of Prudential Equity Group suggested Monday that Freeport-McMoRan is getting a bargain in the proposed transaction, which calls for each Phelps Dodge’s share to be swapped for $88 in cash plus 0.67 of a Freeport-McMoRan share. Mr. Tumazos wrote in a research note Monday that the offer is “not the full or maximum value that [Phelps Dodge] could obtain,” even though it represents a 33 premium over Phelps Dodge’s closing price on Friday.
Early Monday, Nasdaq unveiled a $5.1 billion offer for the London Stock Exchange, marking its second attempt to buy Europe’s largest stock market. And Charles Schwab said Monday morning it would sell its U.S. Trust wealth-management unit to Bank of America for $3.3 billion in cash.

M&A party is rocking, for now

On today's Business Week Online "Deal Flow" blog:

Researcher Dealogic reported today--and I know, this is a shock--that global M&A volume has hit an all time record....

Before too long, we're likely to see another record broken, as investment bankers share the largest bonus pool in history.

I know, everyone hates a buzz kill. But I won't be surprised a few years from now if the M&A party is followed by a huge hangover, as more and more of the principal on the junk bonds used to finance these deals has to be paid back. It's a borrowers market. Lenders are competing to win deals. I hear a number of them have been offering easy terms, in which a few years of interest-only payments are allowed. But if financial sponsors can't make an exit, they will be stuck with huge bills when the payments on principal kick in three, four, five or more years down the road. Weaker acquisitions are going to be under extreme pressure at that point, as limited cash flow is stretched to pay back expensive junk debt. It's like the corporate version of an exotic mortgage.

Hedge funds face a shortage of talent

Of all the problems hedge funds face today — increased government scrutiny, declining returns for some — this is perhaps the strangest problem to have: running short of talent.
Chalk it up to their success. According to Financial News Online, so much capital has flown in that managers cannot find enough savvy employees to maintain that momentum. Hedge funds collected $111 billion in the first nine months of 2006, swelling hedge fund assets under management to $1.3 trillion and helping pump up salaries and bonuses more than 20 percent to an average of $1.5 million before profit sharing. While one would think that enviable, that rise in investors’ money has created a “structural problem” for the industry.
Individual managers, attracted to the billions being poured into hedge funds, are striking out on their own, leaving the established firms that are favored by most institutional investors without enough help.

Civil Suit Accuses 13 Buyout Firms of Antitrust Violations

Three investors filed a class-action lawsuit Wednesday against some of the biggest buyout funds in the United States, accusing the firms of colluding to take companies private at below-value prices. The suit, which was filed in federal court in Manhattan, follows a similar Justice Department investigation into the practice in question, known as the club deal.
The suit is the first civil action taken against the buyout funds, several of which already have received letters from the Justice Department regarding potentially anticompetitive behavior. At the heart of both suits seem to be club deals, when private-equity firms form consortiums to collectively bid on a target.

The Ben Stein Interview

PE Week Wire interviewed Ben Stein on his controversial NYT OpEd piece of last month:

Last month, Ben Stein wrote in The New York Times that management buyouts of public companies should be outlawed. Pretty surprising for a free-market Republican who made his bones in the Nixon White House, before becoming an economic pundit, actor, gameshow host and economic pundit (again). So surprising, in fact, that some financial bloggers wondered if it was a fit of pique that has since abated.
It hasn’t. I spoke with Stein yesterday about the article, and have posted the entire audio interview at peHUB.com. My goal was to let Stein expound on the points he made in print, but also to play a bit of Devil’s Advocate. For example, if management buyouts are such good deals for company management, how come they don’t get outbid? Aren’t there certain operational efficiencies a company can recognize as a private entity that it can’t as a public entity? Isn’t there a possibility that company management will overvalue its corporate assets (the “falling in love with your own players” problem)? Don’t shareholders have the ultimate responsibility here, since they have the final vote?

Hedge Funds and Wall St. Are Warned to Be Vigilant on Misdeeds

The Securities and Exchange Commission expects to file more lawsuits aimed at hedge funds accused of illegal trading and violating their clients’ trust, the agency’s chief enforcer said yesterday.
At the same time, a senior official at the New York Stock Exchange said that Wall Street’s prime brokerages, which lend to hedge funds and process their trades, might be held accountable if they failed to catch illegal conduct.
The S.E.C.’s enforcement director, Linda C. Thomsen, said that federal regulators were concerned about illegal trading and the potential for harm to hedge fund investors.
“I expect to see activity in connection with both,” she said yesterday at a securities conference in Manhattan.

Venture firms bank on Pelosi to relax Sarbanes-Oxley rules

SAN FRANCISCO: For Silicon Valley venture capitalists eager to weaken the corporate governance law known as Sarbanes-Oxley, Representative Nancy Pelosi may prove to be a useful ally.
Pelosi, a Democrat, already has identified revising the law as a priority when she becomes the speaker of the U.S. House of Representatives in January.
Venture capital firms have been lobbying the White House, legislators and regulators for months to water down the law, arguing that higher auditing and legal fees were driving companies to take initial public offerings overseas. This year, Pelosi has received more campaign money from partners at Kleiner Perkins Caulfield & Byers, which helped get Google and Amazon.com started, than she got from the labor federation AFL-CIO.

Middle Market Back En Vogue

In today's Merger Mogul (Association for Corporate Growth):

Middle Market Back En Vogue
The middle market is back in the “in crowd.” For the past three years the mid-sized buyout firms have been an easy target for critics that wallow in the platitude of too much money chasing too few deals. There are even investment strategies, such as the barbell theory, based on avoiding the “ugliness” seen in the middle market. And by now every weathered soul that targets companies around $500 million in size knows that JAMBOG derisively stands for “just another mid market buyout group.”

But rather than wonder when mid-market investors became PE’s version of Willy Loman, a more timely question to ponder is when exactly Willy Loman became so damn cool? The answer to that, apparently, is last week.

That’s when news broke that both Texas Pacific Group and Silver Lake Partners each had designs on launching new mid-market vehicles, bringing long-overdue attention to what might be the largest overlooked segment in finance.
It’s easy for the mainstream press and others to neglect what’s been going on in the middle market. Most mid-sized firms aren’t buying gigantic brands like Dunkin’ Donuts or Hertz. They’re not necessarily attracting the Lou Gerstners or Jack Welches of the world to sit on their boards. But what shouldn’t be missed is the very reason that TPG and Silver Lake are moving in – there’s money to be made.

Proof can be found by perusing the return data of the reporting public pensions. A quick look at some of the investments that fell between 2001 and 2003, for example, reveals Thomas H. Lee’s fifth fund is being currently being topped by a Thoma Cressey vehicle launched the same year; KKR’s famed Millennium Fund, while generating a robust 40% IRR, is still running short of Advent’s less heralded 2002-vintage fourth fund; and the 38.7% IRR being generated by Apollo’s 2001 vehicle stands shy of TowerBrook Investors I! , raised that same year.

It’s time to call Maury Povich for a booking. The red-headed stepchild has turned out to be legitimate, and her hair has developed into a lovely auburn with age.

Ken MacFadyen

High Court asked to hear IPO case

Lawyers for the government last week asked the Supreme Court to take a case that has the potential to wreak havoc on initial public offerings in the U.S. by calling into question much of the cooperation investment banks engage in when they form underwriting syndicates.
The class action, Glen Billing v. Credit Suisse First Boston Ltd., charges that common practices such as setting prices and allocating shares among themselves is essentially illegal collaboration among competitors.
Aside from the threat to current IPO practices, the case already has sparked a turf battle between the Securities and Exchange Commission, the primary regulator for Wall Street, and the Department of Justice, which has jurisdiction over antitrust enforcement.

Hedge Funds Could Face New Limits

The Securities and Exchange Commission will propose rules next month raising asset requirements for investing in hedge funds after one fund, Amaranth Advisers, lost $6.5 billion on bad natural gas trades.
The changes will be proposed to the S.E.C.’s five commissioners at a December meeting in Washington, the agency chairman, Christopher Cox, said yesterday. He did not specify how the agency might limit the pool of hedge-fund investors.

Eddie Bauer to Be Taken Private

A year and a half after emerging from bankruptcy protection, Eddie Bauer Holdings, which runs a chain of outdoorsy clothing stores, has agreed to be acquired by two private equity firms. An affiliate of Sun Capital Partners and Golden Gate Capital will buy the company for $286 million in cash and $328 million in assumed debt, for a total transaction value of $614 million, Eddie Bauer said in a press release.

KB Home Chief Resigns Amid Options Probe

The longtime chief executive of KB Home, one of the nation’s largest home builders, resigned under pressure on Sunday night and agreed to return $13 million in profit from backdated stock options, the company said.
Two other KB Home executives were also ousted, including the head of human resources, whom the company said worked with Bruce E. Karatz, the company’s chairman and chief executive, to set the dates for stock option grants.

Wave of corporate bankruptcies seen on horizon

Corporate bankruptcy filings, subdued by the high availability of credit in recent years, should hit courts in a wave within the next six to 18 months, according to a report released this week.The survey said 70.7 percent of 90 respondents expect "the next big wave of restructurings" is on its way, according to an analysis by the American Bankruptcy Institute and Dow Jones' Daily Bankruptcy Review.

Cox: Hedge Funds, Regulators under the Microscope

What’s next for the Securities and Exchange Commission, especially as it prepares to operate under a Democratic Congress? According to Chairman Christopher Cox, hedge funds and securities regulators could see significant changes to their operations.

The Dark Side of the M&A Boom

Private equity may be setting record levels for fundraising, but it is also charting new highs in high-yield debt, a trend that worries BusinessWeek.

Private equity Under the microscope

Critics are calling for stricter oversight regulations involving private equity firms, especially following a failed $51 billion bid by Kohlberg Kravis Roberts for Vivendi.

Texas Pacific founder hits at private equity critics

David Bonderman, the founder of giant private equity firm Texas Pacific Group, has mounted a spirited defense of the industry a few days after British regulators expressed concern that a default of a major private-equity-backed company was "inevitable."

This Fund Is Making a Bundle

As Fortress Investment Group filed to sell $750 million shares to the public, valuing the hedge fund at $7.5 billion, its filing makes two things clear: money management, under good conditions, is extraordinarily profitable, and its principals will make a killing in the offering.

Fortress Opens the Gates to Landmark Hedge-Fund I.P.O.

Throwing aside hedge funds’ traditional taste for secrecy, the Fortress Investment Group has filed with regulators to sell shares in an initial public offering. The I.P.O. would be the first listing of its kind in the United States, allowing ordinary investors to own a piece of a firm that manages billions of dollars in hedge-fund and private-equity investments, which are usually restricted to institutional investors and the wealthy.
The preliminary filing said the I.P.O. could raise as much as $750 million by selling a 10 percent stake in the company, giving Fortress an implied value of $7.5 billion.

A more active Capitol Hill

Sweeping gains by Democrats in the congressional midterm elections guarantee that Wall Street and corporate America will deal with a more hostile Capitol Hill next year.
Those in the M&A world got a taste of what Tuesday, Nov. 7's elections mean for them in the comments of Rep. John Dingell, the Michigan Democrat in line to chair the Commerce Committee, following his party's dramatic takeover of the House of Representatives. Dingell, whose panel will oversee competition in nearly every sector of the economy, made media consolidation one of his first shots.
Similar antagonism is expected from John Conyers, also of Michigan, who is slated to take over the House Judiciary Committee, the chamber's primary overseer of antitrust policy.
Although which party will control the Senate remained unclear Wednesday, a change in leadership of the Antitrust Subcommittee is nevertheless guaranteed. Sen. Mike DeWine, who chaired the panel, was defeated in his bid for a third term. Uncertainty over a Virginia Senate seat Wednesday offered Republicans a long-shot chance of retaining the Senate, but DeWine's most likely successor will be Democrat Herb Kohl of Wisconsin.
Regarding the financial services industry, the shift in power means that Massachusetts Rep. Barney Frank is expected to succeed Ohio Republican Michael Oxley as head of the House Financial Services Committee.
The House panel oversees the U.S. Securities and Exchange Commission and the Federal Reserve, and it helps in setting policy for the banking, securities and mortgage industries. Frank, a social liberal, is expected to take a much more activist approach than his predecessor, but one not always unsympathetic to business.

Financial Power Shift in Washington

The upset on Capitol Hill has many in the financial-services industry asking one question: What will Barney Frank do? With the Democrats winning back control of the House in Tuesday’s elections, Mr. Frank, who has long represented a district in suburban Boston, is widely expected to succeed Michael Oxley, a Republican who is retiring, as head of the House Financial Services Committee.
While Mr. Frank’s priorities as the committee chairman are likely to be issues such as affordable housing and consumer protection, some items on his agenda are apt to affect Wall Street more directly. High on that list is the issue of executive pay, one of the most hotly disputed corporate-governance issues of recent years.

Smithfield deal gets DOJ scrutiny

A merger between two of the nation's largest pork processing companies is officially under review by the antitrust lawyers at the Department of Justice, according to Smithfield Foods Inc. and Premium Standard Farms Inc.
Smithfield, based in the Virginia town of the same name, agreed to pay more than $810 million in cash and stock, including debt assumption, for Premium Standard Farms, the nation's second-largest pork producer and the sixth-largest pork processor. After a 30-day initial review at the DOJ, the agency has formally issued a second request for information, a move that could mean another six months or so before the agency makes a decision on the deal.

Treasury Dealers Get an Earful From the Fed

Trading in Treasury bonds may not be the most glamorous corner of Wall Street. But it has gotten the attention of the New York Federal Reserve, which assembled a collection of Treasury dealers on Monday and advised them to do more to prevent market manipulation. Executives from the 22 primary dealers, which buy the securities directly from the Fed, were called to a meeting with officials from the Fed and the Treasury Department.
The meeting shows Treasury officials’ mounting concerns about suspicious market activity in the trading of U.S. bonds. Investment bank UBS recently said it was cooperating with U.S. authorities who are reportedly investigating possibly manipulative trading practices.
Officials are concerned that primary dealers are using their positions unfairly, making it difficult for investors to buy the securities at market prices. Forbes.com quoted one market researcher who said the inquiry would likely extend to hedge funds that work with primary dealers on bond trading.

Regulators in U.S., U.K. eye private equity

Apparent U.S. focus on Hertz deal as company plans rich IPO

NEW YORK (MarketWatch) -- American and U.K. regulators are looking into their oversight roles in the exploding private-equity market, and the U.S. Department of Justice is reported to be looking particularly closely at the purchase of former Ford unit Hertz.
The moves by regulators come just a week before Hertz is set to take itself public in one of the year's richest deals.
The U.S. Department of Justice has added Merrill Lynch & Co's private-equity arm to its informal inquiry into the private-equity world, in a move that suggests the Hertz Global Holdings Corp. auction is being looked at, according to a report in The Wall Street Journal. The report cited people familiar with the matter.
And, in a separate announcement Monday morning, Britain's Financial Services Authority (FSA) said it's studying whether it needs to more closely regulate the private-equity market. It will add private-equity supervisory responsibilities to a unit that already monitors hedge funds.

VC Firms Look To M&A For Exits

From the November 6 edition of Merger Mogul newsletter, published by the Association for Corporate Growth:

The M&A market is proving to be a handy escape hatch for venture capitalists trying to cash out of portfolio companies. Outright sales of venture-backed companies account for just a sliver of M&A deals each year and are rarely eye-catching, but M&A remains an intriguing option to liquify a VC portfolio at a time when the more publicized exit mechanism—the IPO—has gone into deep freeze for venture investors.
In fact, recent M&A trends involving VC-backed targets are nothing to shout about. Total disclosed deals, according to the National Venture Capital Association (NVCA) and Thomson Corp., continued to slide in the third quarter to 74 from 91 in the second quarter and 104 in the opening leg of 2006. But compared to IPOs, the deals outlet shines. A mere eight venture-backed firms went public in the third quarter against 19 in the second and 10 in the first. NVCA President Mark Heesen says the M&A slowdown may be a “quarterly aberration” that reflects a “slower summer business climate.” Deal flow may be up 15% to 20% in the final quarter, he suggests. Heesen makes no bones about the difficulty in floating new issues, saying IPO activity is at “alarmingly low levels” and that public markets may not be “the destination they once were for emerging growth companies.”
For the first nine months of 2006, the NVCA-Thomson Exit Poll found, 269 venture-backed targets were acquired compared with about 6,300 deals overall. Disclosed values—for 119 deals—came in just shy of $1.2 billion versus around $856 billion overall. Average deal price for a VC-backed sell-off was $99.9 million for the first nine months against $95.8 million.
Venture capitalists seem to have historically preferred IPOs because the new-issues market has bought growth stories and because public markets have allowed follow-on cash-outs—the proverbial extra bites of the apple. But M&A is no slouch in rewarding them either. Investors sold for less than their total investment in 13 of the 34 third-quarter deals with disclosed prices. But they made money in the others—including 10 times the investment in seven deals and four to 10 times in one other deal, while doing as well as four times their investment in 13 others.

By Marty Sikora

Where Were The Auditors?

It's pretty clear by now that the stock option backdating scandal is much more widespread than initially believed. More than 150 companies are either embroiled in internal probes or are now being investigated by the Securities and Exchange Commission for potential stock option backdating abuses. The deluge is growing daily, with a fresh batch of companies announcing stock option accounting problems with each passing day.
Says Elizabeth MacDonald of Forbes.com:

So where are all those expensive auditors who are paid a lot of shareholder money to catch such problems? Right now, just as in past accounting scandals, they're reverting to type: They're trying to run away, or at the very least, blame the accounting rules.

BlackBerry Redux? Patent Holder Sues Palm

The same company that wrested a $612.5 million settlement from the maker of the BlackBerry has set its sights on another purveyor of handheld gadgets: Palm Inc. NTP, a patent holding firm, said Monday that it filed a patent infringement lawsuit again Palm, the maker of the Treo smart phone. Shares of Palm slumped 8.5 percent on Monday afternoon after the lawsuit was announced.

Treasury Police Act for First Time Since Salomon

Nov. 6 (Bloomberg) -- Regulators who police the U.S. Treasury market are preparing to warn Wall Street's top bond traders against manipulation for the first time in 15 years.
The heads of Treasury bond trading and compliance officers from the 22 primary dealers -- the banks and securities firms that trade government securities directly with the Fed -- were summoned to a meeting at 4 p.m. today by Dino Kos, executive vice president of the Federal Reserve Bank of New York.
The executives will be addressing concerns raised by the Interagency Working Group on Market Surveillance, a group set up after Salomon Inc. admitted to rigging five Treasury auctions in 1991. The group, made up of officials from the Treasury Department, Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission, is probing firms including UBS AG for allegedly hoarding securities to profit by boosting prices. Regulators are concerned because an average $528 billion of Treasuries trade each day and provide the benchmarks for borrowing costs around the world.

Creeping Hedges: Study Shows Funds’ Growing Reach

Public companies are increasingly likely to have hedge funds as large shareholders, a new study suggests. Conducted for Financial News by Gartmore, a British fund manager, the study found that hedge funds now have significant stakes — more than 5 percent — in 38 percent of public companies worldwide, up from 24 percent two years ago. Given many hedge funds’ tendency to shake things up at companies in which they invest, chief executives might want to brace for some turbulence.
Hedge funds are more often taking large stakes as well. The study found that in one-fifth of all public companies, hedge funds hold stakes of 10 percent or more, twice the proportion as in 2004.

SEC Chief, No `Cox in Henhouse,' Defies Skeptics

Reporter Bob Drummond has an excellent, if lengthy, article at Bloomberg.com regarding SEC Chairman Christopher Cox's thus far tenure in office. The article describes in some detail the manner in which Cox's performance has frustrated some expectations.

Resumes, it turns out, can be deceiving. Cox, a securities lawyer who holds MBA and law degrees from Harvard University, says he never contemplated overturning existing regulations or going easy on corporate crooks. ``It was maddening,'' says Cox, who was under instructions to make no public statements before his Senate confirmation hearing. ``I might have set a lot of the speculation to rest if only I could have said something.''
More than a year after taking office, Cox has taken no action to unravel the 2002 Sarbanes-Oxley corporate reform law, which set up strict new accounting rules, or any of the new regulations adopted under Donaldson after bitter battles and 3-2 votes.
He has won passage of a rule requiring more and clearer disclosures of pay and benefits for top executives.

British Regulators Warn of Buyout Blow-ups

Calling a default of a large private-equity-backed company or a cluster of smaller ones “inevitable,” the United Kingdom’s market regulator on Monday published a report on what it considers to be the major risks from the buyout boom, including excessive leverage, market abuse and conflicts of interest. With classic British restraint, it said that the amount of debt in buyout transactions has surged, and that “this lending may not, in some circumstances, be entirely prudent.”
The F.S.A. said it hopes to get feedback from private equity executives and public policy makers on a number of initiatives related to leveraged buyout activity, which has been setting records in both the United Kindgdom and in the United States. For example, the agency said it plans to create an alternative investment team to bolster its oversight of private equity deals. It may also conduct regular surveys on leveraged loans, which are used to fund private-equity takeovers.
Despite the concerns outlined in the 102-page report, it did not call for tighter oversight of the industry in general, which is likely to come as a relief to many private equity professionals. On the subject of private equity, the F.S.A. said it believes “our current regulatory architecture is effective, proportionate and adequately resourced.”

General Electric CEO Jeff Immelt on Internal Pay Equity and More

From today's CorporateCounsel.net Blog:

Here is a "must read" article and free video from Friday's Financial Times: "Jeffrey Immelt, chairman and chief executive of General Electric, has urged company leaders in the US to ensure their pay does not dramatically outstrip that of their senior managers and to limit the influence of compensation consultants.
Mr. Immelt's intervention in the debate over executive pay - featured in a video interview with the Financial Times - underlines the growing importance of the issue for shareholders and executives of America's largest companies. "These are public jobs, there were so many abuses in the late 90s and in the early part of this century and that created concerns," he said.
Mr. Immelt argued that chief executives should not have multi-year contracts, which could lead to large pay-offs if they were dismissed, and the bulk of their compensation should be linked to performance. Yesterday, the FT revealed that a group of leading public pension funds had urged the top 25 companies in the US, including GE, to ban pay consultants from advising the board and working on other company matters.
Mr. Immelt, who took over the leadership of the industrial conglomerate five years ago from Jack Welch, did not mention the letter but said the board should be the final judge of executive pay. "I think it should be based on the good judgment of the compensation committees, the board and the CEO," he said. "I don't think consultants should be involved."
In a separate conversation with the FT, he said that, to motivate staff and avoid excesses, chief executives' pay should remain within a small multiple of the pay of their 25 most senior managers. "The key relationship is the one between the CEO and the top 25 managers in the company because that is the key team. Should the CEO make five times, three times or twice what this group make? That is debatable, but 20 times is lunacy," he said. Mr. Immelt, who last year received $3.2m in salary and no cash bonus, added that his pay was within the 2-3 times range."