By Agnes T. Crane

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Coty is making its advances harder for Avon Products to resist. The European fragrance maker has given the down-in-the-dumps U.S. makeup firm until Monday to engage in discussions. But Coty has raised its offer to $10.7 billion, added Warren Buffett’s cash and blessing, and hinted at the possibility of a still higher price – while Avon is, if anything, looking weaker.

Since Coty went public with its interest a month ago, Avon has hired Johnson & Johnson veteran Sheri McCoy to replace long-time Chief Executive Andrea Jung. And it had other reasons beyond uncertainty over Jung’s successor for pushing away Coty’s initial approach. It’s traditional to resist the first offer, of course. And the European company is much smaller, with less than half Avon’s revenue. Being privately held, raising more than $10 billion in cash isn’t an easy task. Breakingviews reckoned when Coty’s initial approach was revealed that beyond what the company could raise itself, wealthy backers might have to stump up $5 billion or more.

But Coty had Buffett’s preferred banker, Byron Trott, in its camp. Together with the nature of Avon’s business, which fits the Sage of Omaha’s criteria reasonably well, that made Berkshire’s involvement a possibility even then. Not only does Buffett’s company have $38 billion of cash on its balance sheet, but his backing for the deal lends credibility to Coty’s ability to finance it.

In his letter outlining the increased offer and Berkshire’s involvement, Coty Chairman Bart Becht also indicated that the offer price – currently $24.75 a share – could go higher still if Avon’s books check out. That’s a carrot for Avon’s owners, whose shares were worth more than $30 apiece less than a year ago but then slid to under $20 before Coty’s interest emerged.

Meanwhile, Avon’s own finances are looking increasingly shaky. First-quarter profit, announced last week, plummeted 82 percent from a year earlier, raising concerns about whether McCoy will have the financial headroom to pay for another makeover of the company without putting its cherished dividend on the chopping block next year. It all adds up to suggest that Coty now deserves a hearing.

By Agnes T. Crane 

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Warren Buffett has built a career on finding value. And insurance-focused Berkshire Hathaway excels at calculated risks. But the ideological divide over a politically charged tax plan with Buffett’s name on it that marred Saturday’s annual shareholder love-fest this year suggests a temporary lapse when it comes to those two virtues. The Buffett Rule may be an unexpected liability for Berkshire.

It all started cheerfully enough. The thousands who made the pilgrimage to Omaha delighted in traditions old and new, including consuming the Oracle’s favorite ice-cream bars and competing with him in a newspaper-tossing competition. It wasn’t long into the proceedings, however, before the fun-loving spirit dissipated.

Buffett tried to defuse controversy over the White House’s “Buffett Rule” that would force millionaires to pay at least a 30 percent tax rate by spoofing it in an introductory skit. But less than an hour into what would be a full day of questioning from journalists and analysts, Buffett was asked to explain his rationale for the scheme.

The polarizing force of Buffett’s decision on the Berkshire faithful quickly became evident. When one shareholder relayed the news that his 84-year-old father didn’t want to hold the company’s stock because of the Buffett Rule, a round of applause erupted in the CenturyLink Center. Buffett bristled at the criticism and suggested that if this fellow octogenarian didn’t like his politics, he should maybe consider owning Fox, the conservative broadcaster owned by Rupert Murdoch, instead. The quip played to another portion of the crowd.

For Buffett, raising taxes on the rich is a matter of fair play – and he has a point. Something is quite obviously wrong with the U.S. tax code when a billionaire’s tax rate can be in the mid-teens while so many others – not just his secretary Debbie Bosanek – in his office are stuck paying a rate in the 30s. The issue also dovetails nicely with Buffett’s populist image, but of course clashes with the beliefs of some of his investors.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

This year’s Woodstock of Capitalism could turn into the revenge of the nerds. For the first time in the history of the closely watched annual gathering of Berkshire Hathaway shareholders, financial analysts have been invited to pepper Warren Buffett with questions in front of the 35,000 or so who will gather for the event. It’s the latest sign that times may be a-changin’ for the company.

The presence of spreadsheet-wielding Cliff Gallant of Keefe, Bruyette & Woods, Jay Gelb of Barclays Capital and Gary Ransom of Dowling & Partners won’t necessarily make the event any less festive or overly pointy-headed. But their addition to the trio of business journalists regularly brought in to pose questions should at least subtly reorient the meeting in a welcome way from the Oracle and his longtime right-hand man Charlie Munger to the nitty-gritty of the sprawling $200 billion conglomerate.

Berkshire has come a long way since the two octogenarians teamed up to create one of the most successful investment companies in the world. Their insights are still highly sought after at the Omaha powwows. But Berkshire has become much more than a glorified mutual fund. Big ticket purchases like railroad Burlington Northern and chemical manufacturer Lubrizol underscore the shift. As far as returns go, earnings from operations will increasingly become more relevant than stock picks.

Buffett’s recent diagnosis of prostate cancer, though it looks manageable, is also a reminder that he and his homespun touch won’t be around forever. So it’s not a bad idea to bring in the pocket-protector set to hopefully grill the Berkshire boss on some of the particulars that can get overlooked in the quest for his views on topics as wide-ranging as how to parent rich kids. It’s even more true now that the company’s book value has become so incredibly difficult to estimate – and can trigger future stock buybacks.

It could make for a slightly more sober affair. That may be a relief to some shareholders, especially after last year’s insider trading scandal involving potential Buffett successor David Sokol tainted the affair. Even the Woodstock generation eventually had to grow up.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Coca-Cola is more than a century old, but it wants to be hip. Even so, the company says it’s not about to buy energy-drink maker Monster Beverages, as a Wall Street Journal report suggested. That sounds mature – in a good way – even if Coke did leave the door open to build on its existing distribution relationship with Monster.

Monster’s double-digit growth has super-charged its stock to trade at an $11 billion market capitalization, more than 30 times its estimated 2012 earnings. That would make an outright purchase very expensive, even for Coca-Cola, which is worth more than $170 billion. With a premium thrown in, it would take approaching twice Coke’s $8.6 billion of profit last year to buy the company that deploys Monster Girls to promote drinks like Khaos and Ubermonster to the extreme-sports set.

For that much money, Coke should be able to concoct its own home-grown youth elixir and marketing campaigns that give young consumers the rush they crave. And it could sell more of its beverages beyond the $31.9 billion American market for alternative soft drinks, where Monster has made the biggest impression. Coke’s vast international distribution network and deep pockets – it spent $5.8 billion on marketing against Monster’s $149 million in 2011 – should be more than enough to steal market share from the soft-drink upstart.

The spendthrift devil on Coca-Cola’s shoulder might argue the company has allowed Monster, which taps Coke’s distribution network to sell its drinks, to become a threat of sorts, even internationally. Monster’s sales outside the United States rose nearly 60 percent in 2011 to account for one-fifth of gross sales. That’s up from 16 percent of total sales in the prior year.

Still, there’s no call for haste. Coke distributes roughly half Monster’s drinks in the United States, so it already gets a cut of those sales. And the Atlanta-based giant is far from desperate. Its shares have risen a healthy 43 percent over the last two years, compared with the near-flatline performance of traditional rival PepsiCo. Sure, Monster’s stock has rocketed nearly 200 percent. But the surge of energy may not last. Coke’s shareholders are better off if the company plays its own long game than if it pays top dollar for a faddish brand that could easily flame out.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.Watchdogs are still coming up short on dealing with the risks of exchange-traded funds. It’s heartening to see one of them, the Financial Industry Regulatory Authority, going after brokers for mis-selling complicated variants of ETFs. But investors need more protection earlier on in the process.

Most of the $1.7 trillion ETF market remains relatively straightforward. They offer a simple solution to a simple problem, allowing retail investors who just want index returns a vehicle that can be traded just like any other stock.

But not all ETFs are created equal. Their overwhelming popularity over the past decade has spawned a host of newer products that are neither simple nor safe – some are high-stakes trading vehicles designed to be bought and sold on the same day, for example. But it’s not always obvious. Some ETF managers like BlackRock are pushing for better disclosures. But brokers aren’t always much help.

The ones Finra has in its sights, for example, allegedly sold leveraged and inverse ETFs to mom-and-pop investors interested in long-term investments. That’s akin to giving a circular saw to a toddler. These short-term, structured ETFs can make mincemeat of an unwitting buyer’s investment portfolio.

Retail investors should also be wary of exchange-traded notes. These are a distant cousin of the ETF and are, in fact, uncollateralized bank debt. So if the issuing lender goes bust, bye-bye ETN. And unlike ETFs these vehicles aren’t covered by the Investment Company Act of 1940. That means there are no standard disclosure requirements or a board of directors with a fiduciary responsibility to investors. That has led to a proliferation of hidden fees in novel-length prospectuses that can exceed 300 pages.

ETNs and complex ETFs may only account for around $50 billion of the exchange-traded universe. But they are growing. Regulators are certainly aware of some of the potential pitfalls, as the Finra case shows. But reacting after the event should not be the first option. Even something as simple as requiring a health warning on the front page of the prospectus for riskier ETFs would be a start. But without a broader overhaul of the rules to require that managers and brokers vastly improve disclosure on the financial exposures and investment aims of riskier vehicles, as well as their fees and other costs, there are likely to be more accusations of ETF wrongdoing in the future.

By Agnes Crane and Antony Currie The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

All is not lost for Vikram Pandit. While a majority of Citigroup shareholders voted against the chief executive’s pay package at this week’s annual meeting, there’s still a way to incentivize him while also benefiting investors. General Electric, which faced similar unrest over pay last year, offers a good starting point.

A number of the Connecticut conglomerate’s owners last year told the company they weren’t happy with the long-term incentive plan it had given chairman and CEO Jeffrey Immelt. In response, GE changed two of the absolute and relative targets the company needed to hit before awarding Immelt his full whack of two million options over GE shares.

Immelt will only get half of the options if GE’s industrial operations generate at least $55 billion of cash flow over a four-year period ending in December 2014. That’s no simple feat: based on last year’s showing, GE would fall $6.6 billion short. To receive the other half, GE’s total shareholder return has to meet, or exceed, the S&P 500’s. Again, that’s no foregone conclusion: GE has underperformed since 2008.

Similar fixes could be made to Pandit’s package. For instance, he’s slated to receive 0.55 percent of whatever Citi’s core business cumulatively earns over 2012 and 2013 as long as it’s at least $12 billion – meaning a minimum of $6.5 million for Pandit. Yet Citicorp raked in just over half the target amount in the first quarter alone and $30 billion over the previous two years. The pay wasn’t the problem – the target was just too low.

Similarly, Citi set touchy-feely targets for Pandit in return for a $10 million award of deferred stock. Ensuring the bank has adequate capital, decent people, good risk management and exercises responsible finance are basic tasks for the boss. Replacing these with a less subjective metric, like hitting a certain return on equity or beating the KBW banks index would better align the interests of the CEO and shareholders.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.Coty is going to need a bigger ring. Avon Products has rejected its $10 billion marriage approach, and the company this week hired a formidable new chief executive, Sheri McCoy. That rams home the point that Avon would rather go it alone than sell itself short. A new Breakingviews calculator shows just how much bigger Coty’s proffered engagement ring could be.

Coty, the maker of fragrances like Baby Phat, indicated it was willing to pay $23.25 a share, a 20 percent premium over Avon’s beaten-down stock price the Friday before the offer was made public. Avon’s shares have traded much higher even in the past year. The emergence of another possible suitor – privately-held U.S. investment firm Richmont Holdings, whose founder tried to take over Avon in the 1980s, is interested, according to Fortune – could mean even more pressure on Coty to raise its bid.

A lot depends on how big an equity check Coty can write for a deal that would look a bit like a leveraged buyout. Suppose it can scrape together $5 billion between its wealthy owners, the Reimann family, and banker Byron Trott’s connections, who include Warren Buffett. Then assume Coty could borrow a fairly hefty 5.5 times Avon’s $1.4 billion of estimated 2012 EBITDA, increased by potential synergies at 5 percent of the smaller Coty’s $4.5 billion of annual revenue. That’s $8.7 billion of total debt. That would allow Coty to hike its offer to just over $27 a share, doubling the premium to 40 percent.

Even that might not be enough to turn the heads of Avon’s directors. The juicier premium would still fall short compared to other deals in the beauty sector, based on the deal’s enterprise value-to-EBITDA ratio.

If Coty got into a bidding war, more equity or an even more aggressive debt ratio could allow it to raise its price. But it might not find that to be worth it. Initially, the company was considering being acquired by Avon rather than the other way around – a move that would have reversed it into a U.S. stock exchange listing. Coty may yet find that its most promising wedding party includes public equity markets, not private ones.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.Golf and business often mix well. But Augusta National Golf Club, which hosts the famed Masters tournament, staunchly remains an all-boys club. That conflicts with the diversity aims of tournament sponsor International Business Machines. The difficulty is particularly noticeable this year, given the gender of the technology company’s new chief executive, Virginia Rometty.

As a private organization, Augusta can do what it likes. But with the financial logic for sponsorship fuzzy anyway, the club’s policy raises serious questions for IBM and the other big Masters sponsors, AT&T and Exxon Mobil. IBM, for one, talks about all its business, social and recreational activities being conducted without discrimination of any kind.

The company has the record to back that up, having been among the first big employers to embrace anti-discriminatory hiring practices in the 1950s. Former CEO Lou Gerstner, whose decade-long tenure ended in 2002, increased the number of female executives by 370 percent and minority leaders by 233 percent, according to the Harvard Business Review.

However, sponsoring Augusta’s annual tournament dilutes that message for the company’s 430,000 or so employees, and particularly for the women among them who aspire to follow in Rometty’s footsteps. As it happens, it also poses a tricky test for Augusta. The club has granted membership to IBM’s last four CEOs, all male. If continued, that tradition would demand the admission of one of the very few women in charge of Fortune 500 companies. But that move would break Augusta’s much longer men-only history.

When the last such storm blew up a decade ago, Augusta resisted the pressure and went two years without sponsorships to underline its prerogative. The sponsors came back, and IBM and others can argue their involvement is justified by the exclusive showcase and high-end viewership the Masters offers. But any return on the millions of dollars presumably handed over is nearly impossible to quantify. It’s largely a question of image and brand.

And that kind of benefit is in jeopardy if a sponsored event contradicts other important corporate messages. Even if IBM could make the business case, it would still be better off pulling the plug.

By Agnes T. Crane and Rob Cox The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Coty needs another dash of powder to win over Avon shareholders with its $10 billion bid. But thanks to years of flawed stewardship by the iconic American cosmetics group’s board and management, attracting Avon’s shareholders shouldn’t be impossible for the privately-held maker of Playboy and Chupa Chups fragrances. It just needs to be more creative to seal the deal.

Avon has two basic, if big, challenges. Its business model, whereby Avon ladies hawk makeup door-to-door, has faltered despite obvious advantages in penetrating emerging markets. Compounding the problem, rather than kicking out its longtime chief executive Andrea Jung, Avon’s compliant board appointed her chairman in December. That’s not just bad governance, it has queered the pitch in recruiting Jung’s replacement.

Coty’s offer is clearly opportunistic. The group chaired by former Reckitt Benckiser boss Bart Becht had been wooing Avon behind the scenes to no avail. Its $23.25 a share offer puts Avon’s hapless directors further on their back heels. The trouble is that even with a 20 percent premium Coty’s offer comes at a 30 percent discount to the stock price less than a year ago. Even hot-money investors won’t find that a compelling prospect.

There’s a way to square the circle, however. Coty is lining up potential equity financing for the deal from Warren Buffett’s favorite banker, Byron Trott, alongside debt financing from JPMorgan. Why not restructure the deal to provide Avon shareholders with some of the upside to be created by merging the two groups under a proven management team?

Becht recently left household and personal care giant Reckitt, whose primary shareholder, the Benckiser family, is also Coty’s. While there, he restructured a humdrum business once best known for its mustard, improved margins and completed a handful of takeovers to create economies of scale. It worked. Under his leadership Reckitt’s market value soared from $7 billion to some $40 billion today.

True, engineering a reverse takeover that effectively takes Coty public and puts its management in charge wouldn’t be simple. But absent plunking down a far bigger chunk of change, it may be the only way to break the unprofitable tyranny of Avon’s board over the company’s shareholders.