Opinion

Felix Salmon

What would JP Morgan do with Arminio Fraga?

Felix Salmon
Jun 21, 2010 16:50 UTC

Citigroup famously paid $800 million for a young and doomed hedge fund, Old Lane, just so that it could hire its founder, Vikram Pandit. No one thinks that decision was a good one, in hindsight. But JP Morgan is setting its sights rather higher, looking to buy Gávea Investimentos, along with (one presumes) its founder, Arminio Fraga.

The price would certainly be higher than $800 million, but then again Arminio (as he’s universally known) is a much juicier catch than Vikram. After cutting his teeth successfully running large amounts of money for George Soros, he more or less singlehandedly gave much-needed credibility to the Brazilian central bank in the wake of the Russia crisis and through Argentina’s default. Facing a monster liquidity crisis and spreads of more than 2,000bp over Treasuries, Fraga navigated the markets and the multinationals masterfully, setting the stage for the improbable yet lucrative embrace of Lula’s left-wing government by the international markets.

Now that Arminio has become dynastically wealthy through setting up Gávea, he might just see one last act left in his life, taking over the House of Morgan and solving Jamie Dimon’s succession dilemma. But he’s only one year younger than Dimon, who shows no signs of wanting to leave, and in any case it’s hard to imagine Arminio moving back to chilly New York from his beloved Rio.

That said, I can’t imagine that JP Morgan would be happy simply leaving Arminio where he is; at the very least they’d be likely to give him some sort of oversight at Highbridge. That would quintuple Arminio’s assets under management at a stroke. My guess is that a JP Morgan board seat is probably on the table as well. Whatever makes Arminio happy: there’s really no point in JP Morgan buying Gávea if he just turns around and leaves shortly after the acquisition. His investors are loyal, and their money would be sure to follow him out the door.

One thing I can’t quite understand, though: why is JP Morgan putting what is presumably quite a lot of effort into trying to acquire Gávea now, given that they’re not going to close until after the financial regulatory reform bill has been signed and there’s a lot more clarity on what they’re allowed to do on the buy side? Why not wait and see how powerful the Volcker rule ends up being, before getting deep into negotiations? Is there urgency here to buy Gávea? And if so, what is it?

Acquiring companies with stock

Felix Salmon
Jan 27, 2010 13:22 UTC

John Gapper and Nadav Manham have both picked up on Warren Buffett’s explanation of how he thinks about M&A, especially when a company is paying with stock:

Kraft, in my judgment, well just in the past two weeks there’s been two things that caused me to feel poorer. They sold a very fine pizza business and they said they got $3.7 billion for it. But, because it had practically no tax basis, they really got about $2.5 billion. They sold a business for $2.5 billion that Nestle is willing to pay $3.7 billion. Now can Nestle run it that much better than Kraft? I doubt it. But that business that was sold for $2.5 billion earned $280 million pre-tax last year. But they sold that at less, right around nine times pre-tax earnings in terms of their own figure.

Now they mentioned paying 13 times EBITDA for Cadbury, but they’re paying more than that. For one thing, EBITDA is not the same as earnings. Depreciation is a very real expense. But on top of that, they’ve got a billion-three they’re going to spend of various rearrangements of Cadbury. They’ve got $390 million of deal expenses. They are using their own stock, 260 million shares or something like that, that their own directors say is significantly undervalued. And when they calculate that 13, they’re calculating Kraft at market price, not at what their own directors think the stock is worth. So, the actual multiple, if you look at the value of the Kraft stock, is more like 16 or 17 and they sold earnings at nine times. So, it’s hard to get rich doing that.

There’s a lot of very smart analysis packed into this extemporizing (Buffett was talking on TV). Kraft is selling a business for $2.5 billion, after taxes, which throws off $280 million a year. Yet it’s buying Cadbury at a much higher multiple than that, and it’s paying in undervalued stock.

In general, you see many more stock-based acquisitions when companies are overvalued than when they’re undervalued. (Think of AOL buying Time Warner, or for that matter just about any acquisition by WorldCom.) It’s even possible to use stock-based acquisitions as an indication that a company thinks its shares are trading at too high a level. But sometimes, as Buffett notes, companies will use their stock even when it’s undervalued. And that can be very bad for existing shareholders.

All of which raises the question: what are we to make of the fact that Bufffett himself is using Berkshire Hathaway stock to buy Burlington Northern? Does it mean he thinks that his stock is overvalued? Or, if he thinks BRK is undervalued, does that mean he’s making a similar mistake to that which he deplores at Kraft? Either way, there seems to be an implicit “sell” signal here. Or is there something I’m missing?

COMMENT

The comment I made wasn’t meant to deny that Buffett was a market mouthpiece. It was meant to point out that your statement (He has a derivatives bet the size of his entire company’s present value.. which requires the NYSE to remain elevated. Stock market falls? BRK goes BK.) was ridiculous.

If I wanted to deny the fact that Buffett was a market mouthpiece, I’d point to the 1999 Fortune article where he laid out very clearly why he viewed the stock market as extremely overvalued (while Berkshire had enormous market exposure): http://money.cnn.com/magazines/fortune/f ortune_archive/1999/11/22/269071/index.h tm.

If I wanted to point out that he’s fine pointing out when even Berkshire is overvalued, I’d point out that he said Berkshire was overvalued when the company issued its B class shares. (He said he wouldn’t buy the shares at that price, but I can’t find a convenient link.)

So given that Buffett has made public proclamations over the past 40 years that the market was overvalued and that the market is undervalued, it’s easier for me to believe that he’s simply giving his opinion than talking his book.

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Felix Salmon egg-on-face datapoint of the day

Felix Salmon
Oct 14, 2009 15:51 UTC

So, that happened. Guess I was wrong about this. But if you’re never wrong, you’re never interesting, nicht wahr?

COMMENT

Would like to be a fly on the wall when you have the Reut-blog, breakingwind team bonding!

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Mint gets eaten by the Borg

Felix Salmon
Sep 14, 2009 15:51 UTC

Intuit is buying Mint.com for a whopping $170 million. That’s a lot of money for a company which has yet to make a dollar in profit — indeed, it found itself in need of an extra $14 million in equity capital only last month.

So what makes Mint worth so much? The website basically has two main possible revenue sources. The first is the way it’s making money right now (or getting revenues, anyway): armed with its users’ financial information, it can act as a broker, introducing them to offers from financial-services companies which might be a good deal. And like any broker, it gets to keep a commission.

There’s also what Mike Arrington calls “a goldmine of user data” — incredibly granular information on the saving, spending and borrowing habits of 1.4 million registered users who between them account for $175 billion in transactions, and $47 billion in assets. If that information is added to the information which Intuit already holds, it could provide unprecedented insight into how Americans deal with money.

The problem is that while Mint is generally much-loved, Intuit is generally much-hated. Mint is free; Intuit is constantly trying to squeeze every marginal dollar out of its customers. Mint’s user experience is a joy; Intuit’s is gruesomely bad. (And is possibly responsible for the whole nightmare that was Tim Geithner’s tax situation.) Mint is trusted; Intuit isn’t.

The fear is that Intuit will stop showing Mint’s customers the offers which are best for them, and will start showing Mint’s customers the offers that are best for Intuit, even if those offers are predatory or otherwise unsuitable. And as for the money which Intuit might squeeze out of those users’ personal financial data — again, while I trusted Mint not to do anything evil, I don’t have the same feelings about Intuit.

I do have a Mint account, but I don’t use it very much, and it’s a bit glitchy. I think I’ll probably deactivate it now. Better safe than sorry.

COMMENT

Will Mint survive the Intuit acquisition?

Intuit is sales driven and is always looking for new customers. It could care less about existing customers who they abuse with forced “upgrades” of their bug ridden software.

In 1995 I wrote Quicken a letter detailing numerous, severe bugs. In 2005, having just upgraded (again) I happened to come across the letter in my files. Guess what? Same bugs. (Quicken admits this.)

In 2009, I upgraded again. Same bugs.
Sort sells were miscalculated, graphs mislabeled, and several Mutual Fund metrics are meaningless.

The benefits of using Quicken are only slightly above using no software at all.

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Where the efficient markets hypothesis never took hold

Felix Salmon
Sep 8, 2009 13:25 UTC

In the wake of Justin’s book and Cadbury’s rejection of Kraft’s takeover offer, it’s probably worth noting that the one place the efficient markets hypothesis never took hold was in corporate boardrooms. It’s commonplace for boards to say that offers significantly above the stock-market valuation “significantly undervalue the company”, or somesuch — with the clear implication that the market is not rational at all. At least when it’s your own company on the line.

COMMENT

Schoolboy error Felix, as pointed out by Sterling.

CBRY was worth £5.70 standalone last Friday, but when you add the potential revenue and cost synergies to that you see a value up to £9-10.
Kraft wanted to keep some of the value-creating synergies for themselves so offered roughly the mid-point: £7.45.

CBRY board is simply stating that Kraft has undervalued the CBRY within Kraft entity, not CBRY standalone.
Without Kraft, CBRY is still worth just £5.70 or so.
By rejecting the offer, the board is hoping to take more than 50% of value of the synergies for their shareholders. i.e. They are negotiating, as is their fiduciary duty.

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Friendliness isn’t insider trading

Felix Salmon
Sep 5, 2009 17:24 UTC

Joe Nocera this week looks at eBay’s sale of Skype, and wonders who would pay $2 billion for a company with a massive lawsuit hanging over its head. With apologies for quoting at some length, here’s the nub of Nocera’s thesis:

The Skype founders’ essential complaint is that eBay tampered with their software, and in doing so, violated the terms of the licensing agreement. They were demanding that Skype be forced to stop using the technology, which, for all intents and purposes, would mean shutting down Skype itself…

The founders would have been willing to come up with a price that suited eBay — if they had been able to enter into negotiations. What is clear is that the bad blood that had developed between eBay and the founders was infecting the potential negotiations over a buyback of the company…

Not long before Index Ventures became interested in Skype, it brought on board a man named Michelangelo A. Volpi, a highly respected former Cisco executive who — hmmm — once sat on the Skype board. In fact, he was so well liked by the Skype founders that they hired him to run Joost…

Mr. Volpi told me that not long after he arrived at Index Ventures, he discussed the possibility of making a run at Skype — and he and another Index Ventures partner, Danny Rimer, in turn rounded up Silver Lake and Mr. Andreessen, who — hmmm — sits on the eBay board.

So another theory: because of his friendship with the Skype founders, Mr. Volpi believes he’ll be able to settle the lawsuit…

It is, alas, unsatisfying to delve into a mystery like this and not be able to solve it. But over time, it will become clear. Either the case will linger, and we’ll know that Silver Lake, Andreessen et al. do indeed have nerves of steel.

Or it will quickly go away, which will provide an answer of a less seemly sort.

The problem I have here is with the “hmmm”s and the “less seemly”. Nocera is clearly of the opinion that if Skype’s buyers have a tacit agreement to settle with JoltID, that would be pretty scandalous. But why?

From the point of view of eBay’s shareholders, the existence of any such agreement would clearly be a good thing: they managed to sell Skype for $2 billion as a result. More generally, it’s clearly Pareto-optimal that Skype and JoltID are on good, non-litigious terms with each other. And it’s obvious that they were never going to be on such terms so long as eBay owned Skype. If Adam Smith’s invisible hand were doing its job, then, eBay would sell Skype to someone who had much friendlier relations with JoltID. What’s unseemly about that?

COMMENT

eBay made a mistake by not buying the technology

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Consider both backs scratched

Felix Salmon
Jul 10, 2009 14:55 UTC

Jimmy Lee on Rupert Murdoch, after the successful acquisition of Dow Jones:

James B. Lee of JPMorgan Chase & Company, who has represented clients in some of the biggest deals in history, said of Mr. Murdoch, “nobody else I have ever banked could have pulled it off.”

Rupert Murdoch on Jimmy Lee:

News Corp.’s Murdoch says he consults regularly with Lee, and gives him a great deal of credit for helping him buy Dow Jones in 2007 — a deal many believed was impossible, because the Bancroft family that had owned the company for 105 years was thought to be totally opposed to the idea.

“He knew it was something I’d given a thought but he actually made the contacts and got things together,” Murdoch told TheStreet.com. “Without him it wouldn’t have happened or would have happened much later.”

Revisiting the Merrill acquisition

Felix Salmon
Jun 11, 2009 13:57 UTC

All eyes are on Ken Lewis today: he’ll be testifying to Congress, and, according to the Reuters news planning email this morning, “Lewis is a fiery character and we will be looking for any departure from his script.”

Yet again we’ll be revisiting the history of the last four months of 2008, and specifically two decisions made by Lewis: the September decision to buy Merrill, and the December decision, in the face of pressure from regulators, not to pull out of the deal.

There’s no doubt that the September deal was done hastily. Matt Goldstein reckons that redounds badly on Lewis:

There’s still no evidence that anyone from the federal government was holding a gun to Lewis’ head when he and John Thain shook hands on the merger just as Lehman was spinning towards bankruptcy.

Lewis bears full responsibilty for that deal–along with his newly annointed chief risk officer Greg Curl. It didn’t take a rocket scientist or a mathematician to know that Lehman’s uncontrolled bankruptcy filing would have grave consequences for the financial system. Yet that didn’t stop Lewis and Curl from agreeing to buy Merrill. And at a price that was then a substantial premium to Merrill’s then share price.

If Congressional investigators want to do more than simple grandstanding they should begin by asking Lewis what kind of due diligence his team did in September when he inked the deal. They can start by asking whether he did any due diligence or was it just wishful thinking that everything would out.

But two facts are worth bearing in mind here. Firstly, the deal was of necessity rushed: Lewis and Curl simply didn’t have the time to do due diligence on a bank the size of Merrill over the course of one frantic weekend. But if the Merrill deal hadn’t been announced, there was an extremely high chance that Merrill would have collapsed in short order — and that at that point the shock waves from the Lehman-Merrill 1-2 punch would have been so systemically damaging that Bank of America itself would probably have gone under as well. Given that Lehman’s bankruptcy was obviously going to be harmful, it made some sense for Lewis to essentially draw a line under Lehman and show the market that at least Merrill was safe. If he didn’t, the entire financial system was in jeopardy.

Secondly, essentially all deals done during the financial crisis could reasonably be considered contingent until they actually closed. I noted when Lewis announced the purchase of Countrywide that it wasn’t an acquisition so much as a call option, and after that a whole spate of announced deals ended up being unwound, including Chris Flowers’s acquisition of Sallie Mae and Citigroup’s purchase of Wachovia. Given the rushed nature of the Merrill deal, it was probably reasonable for Lewis to think that if his due diligence turned up some particularly monster black hole in Merrill’s accounts (as it did), he would be able to find a way to wiggle out of the deal somehow.

The problem was that Lewis didn’t wiggle hard enough. Faced with stern disapproval from Ben Bernanke, Lewis quietly stopped wiggling and went ahead with the acquisition, even though he knew it would be extremely bad for his own shareholders. What he should have done is simply told Bernanke in no uncertain terms that his fiduciary duty to his shareholders forced him to back out of the Merrill deal, even if doing so was going to cost him his job. It was when he buckled in December that Lewis made his biggest mistake — not when he agreed to buy Merrill in September.

COMMENT

if you read the MAC he really didnt have much room to get out of the deal, so really you are overstating his strategic intelligence. The fed really were only telling him what was obvious. Furthermore if you believe that Lewis paid that price initially to prevent the failure of the banking system then surely he would have felt the same before pulling out of the deal. as its happens the guy is just an idiot.

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