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In Brief

November 20, 2012 Leave a comment

Pay spins – out of control.  Major corporations are inventing new metrics with which to obscure the amounts they are paying CEOs and other top execs.  The Wall Street Journal notes that so far this year 228 companies define exec comp as “realized” or realizable” pay in proxies — up from 119 companies last year.  The definition of “realized” differs from company to company and companies are free to change their own definitions year to year.  Some examples:  GE CEO $7.82 million (realizable) vs $21.6 million reported to regulators; HP CFO $2.8 million (realizable) vs $11 million reported to regulators; Exxon CEO $24.6 million (realizable) vs. $34.9 reported to regulators.  Executive compensation remains a hot button issue for investors and companies are having greater difficulty getting shareholder support for pay packages.  Yet, rather than reform their practices or better align incentives with shareholders’ interests, some companies are resorting to smoke and mirrors to hide business as usual.

Burnin’ mad in the bayou.  Louisiana Municipal Police Employees’ Retirement System has sued Simon Property Group over a $120 million stock award granted to CEO David Simon last year.  The award, now worth $146 million, made Simon the #2 highest-paid executive last year.  The suit argues not only that the award should have been put to a shareholder vote but that the NYSE abdicated its own rules designed to protect shareholders from questionable pay practices.  The NYSE requires that shareholders vote on pay plans that undergo material changes, such as a change that would significantly dilute shareholders’ stake or a change that expands the types of awards under the plan.  While there are technical arguments on both sides, the NYSE sided with Simon.  It is an unenviable position for an exchange.  On one hand the exchange wants to encourage good governance and fair play for its listed companies.  On the other hand, the exchange wants to keep companies it has listed and attract more to the exchange.  If an exchange gets a reputation for being “anti-corporation” it could suffer defections.  We’ll watch this one.

They’re baaaack. Big, fat birthday bashes are back, at least in the small world of mega private equity funds.  Paul McCartney and John Fogerty headlined the 700-person party TPG founder David Bonderman held for himself at the Wynn in Las Vegas.  McCartney is reported to receive north of $1 million for this kind of private gig.  (PE guys seem to love this kind of thing.  In 2010, Elton John played at Leon Black’s (Apollo) birthday and in 2007 Rod Stewart performed at Stephen Schwarzman’s (Blackstone).)  All this just days after Mitt Romney lost the presidential election, in part, due to his affiliation with the billionaire’s boy club (real or perceived) image of the PE industry.  This kind of in your face consumption shows how out of touch the industry can appear (think Lloyd Blankfein’s now famous line equating investment banking to God’s work).  Even when the going is tough, PE can’t seem to lie low.  TPG’s returns have been “tepid,” as big bets on WaMu and Energy Future Holdings have flamed out.  The kicker?  TPG owns Caesars, just down the street from the Wynn.  Ironically, its own portfolio company wasn’t good enough to serve as the venue for the party.

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Venture capital jumps the shark

July 13, 2012 1 comment

It seems that every sector of the financial industry reaches a point where hubris gets the better of them.

For investment banks, it came in 2009 with Lloyd Blankfein’s “doing God’s work” line.  Private equity is now in the crosshairs and Mitt Romney’s claims that Bain Capital created jobs is falling on deaf ears.  The latest to cross the line are venture capitalists.  Twelve years after the dot-com bust and emboldened by recent IPOs of social media companies, VCs are emerging from their bunkers and they’ve hatched some  peculiar ideas while plotting their comeback.

The Wall Street Journal had two articles yesterday on Andreesen Horowitz , the VC firm co-owned  by Marc Andreesen, tech whiz behind Netscape (remember 1994?). “We are encouraging all of our companies to put in place a dual-class share structure if and when they go public,” said Andreesen to the Journal.  “It is unsafe to go public today without a dual-class share structure,” he continues.

What?  It’s 2012, fellas!  Andreesen and his partner have been soaking too long in the Hot Tub Time Machine.  Not only do they not recognize that multiple classes of stock are routinely denounced by corporate governance experts, but they are overstepping their own expertise and role in the marketplace when they comment about how to organize long-lasting, public companies.

This anti-shareholder view is not new for Andreesen.  In a blog post from 2009, he argues that dual-class shares are OK  when “the controlling Class B shareholders have a commitment to treat Class A shareholders fairly and equally in all respects other than voting power.”  Yeah, that’s realistic.  In his list of nine factors that can work against the almighty founder-CEO’s quest to create a “long-term franchise” he lists “hedge funds aggressively short-term buying and shorting stocks for the quick pop, and often spreading malicious and untrue rumors along the way” and financial journalists who might “write all kinds of nonsense.”  ROTFLMFAO.  If a CEO can’t handle facts of business as usual like short sellers and negative press, then there is no chance for a long-term franchise!

In the other Journal article Ben Horowitz (the other half of Andreesen Horowitz) recalls encounters with an “activist investor” when he was the 35-year-old founder and CEO of Loudcloud.  “She started this campaign to force the board to remove me so we would sell the company for $10 a share. She would go to shareholder meetings, call sell-side analysts and send letters to the board,” he laments.  The journalist does not identify the investor, but one can assume this was not an institutional investor advocating for change in a programatic way.  It was some vocal individual, perhaps a smart individual, but one person all the same.  That’s the price of going public Ben.  Live with it.

In our economy, venture capital firms, investment banks, private equity firms have valuable specialist roles to play.  No one would argue that Morgan Stanley should prowl the garages in Silicon Valley to fund the next big thing.  Venture capitalists like Andreesen and Horowitz should stay in their start-up sandboxes and understand that being a public company is a privilege and with that privilege come expectations for performance and that founder-CEOs in particular need checks and balances.

Demand for social media companies, however, has resulted in several IPOs with multi-class stock and founders who retain voting control.  According to the Journal, 14% of tech IPOs in the last two years have at least two classes of stock — most notably, Facebook, LinkedIn, Groupon and Zynga.

ISS was among the many critics of Facebook’s dual class share structure, citing “retrograde government practices,” and LinkedIn has also come under fire.

Update:  Felix Salmon at Reuters also takes a look at Andreesen’s comments and notes that Andreesen “has a level of access to management and corporate information that most public shareholders can only dream of. If he likes that system, maybe he should start thinking about how to port it over to public companies, as well.”

Communication breakdown

At the Wall Street Journal‘s recent CFO Network Conference, Glenn Hutchins, CEO of PE firm Silver Lake, said the expectations of analysts and shareholders created resistance for companies wanting to invest in new businesses and technologies. CFOs, he said, find it hard to make transformative investments because “making a short-term diminution for the purpose of a long-term gain is very difficult to do” in the equity markets. Pardon me, but bullshit.

If companies feel constrained by short-term expectations, it is their own fault. If a CEO/CFO wants to focus on long term and get shareholder support for a series of large investments, he/she needs have a sound strategy and get to work selling it to investors, analysts, journalists and the board. Stop giving earnings guidance and start talking about the long view, your growth plan and how investments will pay off.  Make sure employees understand and buy into the strategy.

The problem Hutchins identifies is not with the markets, but with management and their lack of the vision thing. There is a difference between setting financial objectives and creating the strategy that leads to growth. Investors will buy into a solid strategy — just ask Amazon, ExxonMobil, drug companies, Apple, and others known for heavy capital expenditures and R&D.

If a company is getting pressure from shareholders they have a communications breakdown or a strategy breakdown. Don’t shoot the messengers, Mr. Hutchins. Oh, and is it surprising that an LBO firm might be making an argument for the benefits of being a private company?

Silver Lake and Mr. Hutchins have been very active on the media front recently. A live interview with Charlie Rose and opinion piece in the FT cover his views on the economy, the deficit, education, innovation, and other macro issues. Is a run for political office in the works? You heard it here first.

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