Cross Border blogs

Dealing in the downturn

Eric Daniels, the embattled CEO of Lloyds Banking Group, has got some explaining to do.

His decision to buy HBOS last year has saddled the newly formed group with £10 bn of losses and the prospect of plenty more to come.

So the announcement of Lloyds' 2008 results this morning gave Daniels the chance to do just that.

Among other things, he said: 'We are buying the business in the down part of the economic cycle, at a significant discount to book value, which increases the chances of value creation.'

Now, statistically, Daniels is on the right track.

A survey by the Boston Consulting Group reports that deals made in a downturn tend to outperform the market over two years, while upmarket acquisitions on average underperform over the same period.

But, given HBOS' massive exposure to the UK housing market, which continues to tank, I'm not sure investors will be reassured.

Tim Human
International correspondent

No prizes for being nice

Mark Merson, the outgoing head of IR at Barclays, and his team have been getting some good press recently.

They got some more today, when Merson and his replacement, Stephen Jones (currently head of corporate debt capital markets at Barclays Capital) dropped in on the sales team at Panmure Gordon for 'a friendly chat', according to a note released by the broker.

'This is probably news in itself given our two years of sell recommendations on Barclays, and it reflects well on Barclays,' wrote Panmure analyst Sandy Chen.

But that’s where the good news ended for Barclays' IR team. 

The note goes on to outline how Merson and Jones went back over Barclays' full-year results, released two weeks ago, to push what they view as the bank's 'attractive' outlook.

Chen couldn't agree, however. He felt the prospect of further losses in the near-term and the possibility of a government bailout took the shine off things distinctly.

The result: another sell note!

Chen concluded: 'In summary, a friendly, open and much-appreciated meeting with Barclays investor relations, but nothing that alters our views on Barclays. Maintain sell.'

Tim Human                                                                                                                           International correspondent

Rio Tinto offers an olive branch

After taking a bit of a battering from some of its long-term shareholders, mining giant Rio Tinto is doing its best to appease its investors.

A story in today's Sydney Morning Herald states that Rio Tinto is close to a deal that would allow institutional shareholders to buy bonds on the same terms as its Chinese shareholder Chinalco.

The news will presumably be welcomed by institutional investors, many of whom felt the firm was getting rather too cosy to Chinalco.

According to the report, Rio Tinto plans to offer the bonds to institutions on the same or similar terms, helping to make its 'preferential' deal with Chinalco more palatable to its stalwart investors.

Rio's sudden bout of generosity might set a precedent for other firms that are unable to bribe their investors with dividends or further equity.

Clare Harrison
Deputy international editor

Investors back in love with Barclays

So after much investor neurosis, everyone has decided what a fine bunch they are at Barclays.

And isn't it fabulous that it didn't have to go cap in hand to the government for cash? Jolly well done!

Congratulations also to former IR Magazine Award winner and head of IR at Barclays, Mark Merson, for his promotion. It's good to hear some people receiving favorable employment news in the current climate.

The FT's jocular market bloggers Paul Murphy and Neil Hume note that Merson is off to work for Bob Diamond, or 'Diamond Bob' as they call him.

'...and before anyone says this is because Barc’s IR department has been a failure during the recent market meltdown.. they are wrong,' blogs Hume.

'Analysts say he did a good job and in any case the new role at Bar Cap and BGI looks to be a promotion.'

See yesterday's Alphaville for more details.

Clare Harrison
Deputy international editor

The recession is no reason to stop wining

Has the world gone beserk? I think it possibly has, and you know what? I rather like it.

In a welcome absence of company newsflow, stock broking firm Killik & Co livened up its usually relatively terse daily research note with some tips on low-cost and (almost) guilt-free booze.

After musing on the future of the civil aerospace industry (bleak) and noting a spot of director dealing at Unilever, the research note moved onto one of my personal favourite topics: wine.

In the absence of any decent stocks to issue buys, sells or holds on, the analyst who wrote the note was reduced to advising his readers on some fair trade wines for the weekend.

'Last week, I expressed my concern that the economic downturn may be unhelpful for worthy causes such as ethical trading and animal welfare. With that in mind, I wanted to see what the Co-operative could provide for a wine lover. Not only does the supermarket place responsible retailing at the core of its operations, but it also sells an eclectic range of wines, which represent excellent value for money, some of which have been rewarded with medals. This week, I tried a couple of reds.'

'The first was a Co-op Fairtrade Chile Carmenere. Carmenere is Chile's indigenous red wine grape and is often used in a blend with Cabernet Sauvignon. Although the wine lacked complexity, it was surprisingly elegant with wonderfully plumy fruit and peppery undertones' (and retails at a credit-crunch-busting £4.99).

'The other wine I tried – Rocktail Bay Western Cape – is a blend of Cabernet Sauvignon and Cabernet Franc from South Africa. I found it very easy to drink with soft tannins and black fruit aromas infused with methyl notes. All that and a Bronze Medal Winner in the Decanter 2008 World Wine Awards for only £4.75.'

Clare Harrison
Deputy international editor

Here’s where he stands

It is becoming clear that one of the SEC’s newest commissioners, Luis Aguilar, is no shrinking violet. You may remember his strong dissent in December against making XBRL reporting mandatory for US filers.

He is starting to wade in on other thorny, unsettled topics. At an ‘SEC speaks’ conference last week, Aguilar said he would be strongly in favor of quickly giving shareholders access to the proxy. It has been an issue before the commission on and off since the 1940s, and a holy grail for the good-governance set.

What’s more, Aguilar, a securities lawyer and former general counsel of Invesco, among other titles, said he thinks the oft-proposed 5 percent ownership threshold for the right to nominate directors may be too high, especially for large-cap companies.

The commissioner is also troubled by lack of shareholder participation under e-proxy. The dire retail investor voting statistics mean ‘we need to fix e-proxy or scrap it,’ he said.

Aguilar told his own story of coming to America as a six-year-old refugee from Cuba and living here for four years without his parents. ‘My experiences are different from my fellow commissioners…[and give] me a profound respect for how hard people work for their money’ and ‘the need to be vigilant’ in protecting it, he said.

Immelt on guidance

Scene: Wall Street Journal executive breakfast series

Dramatis personae:

Jeff Immelt, chairman and CEO, GE

Alan Murray, deputy managing editor, WSJ

(Lights up on dais. Murray launches into Q&A, grilling Immelt on GE’s shocking earnings miss last year, and pulling back on guidance.)

Immelt: It was a credibility knock.

Murray: You didn’t feel like it was a failure in the flow of information to you? [Was] it just a market change?

Immelt: I think always when that happens you have to change the way, the speed and the frequency of information and we’ve tried to learn and get better and do a better job in the timing of how we discuss things with each other, the ranges and the scenario planning…

Murray: So it changed the way information flows inside the company, but also your attitude toward what kind of information you put out?

Immelt: Both of those.

Murray: Is giving guidance on earnings just a mistake?

Immelt: There have been a million articles about it, right? I always thought at some point it was best for GE to get out of giving guidance. I was hoping to wait for like a calm sea in which to do it. [Big laugh]. It turned out to be never a calm sea.

But I think a company our size, for the investor we are trying to attract, giving quarterly guidance just creates too much volatility and that’s ultimately the decision we made.

Murray: Do you think that will go away for other companies?

Immelt: I think it’s largely already going away. I think there are a lot of people in our sector that went from giving quarterly to giving annual guidance. Reg FD actually created more scrutiny around quarter points than it solved, so that was a little bit of the issue as well.

I think we like where we’re at right now in the way we communicate about the company.

The Obama memo every IRO must read

Suddenly our beat is hot. Did you see this memo from the White House today, the one seeking more restrictions on executive compensation at the bailed-out banks?

It is six dense pages covering the landscape of topics that only shareholder-relations geeks like ourselves normally care about: clawbacks, say on pay, CEO certification, disclosure, the list goes on.

Secretary of the Treasury Timothy Geithner is even planning, get this, a conference on long-term executive pay reform. He says he will host shareholder advocates and institutional investors among others ‘[seeking] testimony, comment and white papers on model executive pay initiatives in the cause of establishing best practices’ in the financial sector. OK, now this is really hitting close to home.

At a press conference today, Obama was sounding pretty angry, saying he was ‘disgusted’ with executives up to their ‘same old tricks’. We can’t see how there won’t be fallout for companies outside banking. So start reading up.

COMMENT: The price of mediocrity

This may be the Chinese Year of the Ox but, for many people, 2009 will be the year of the scapegoat. Having one person – or several people – at whom to direct our collective anguish will probably be one of the few things to keep us sane over the coming months.

Where the scapegoat analogy falls down, though, is that, according to its origins in ancient theology, the scapegoat is an innocent victim, punished for the crimes and sins of others. With a few minor exceptions, the bankers on the receiving end of much of our exasperation are deserving recipients.

As many companies fine-tune their remuneration reports, they should be thinking extremely carefully about how they incentivize their senior management members; bonuses don’t always reward ingenuity. It is something of a myth that bonuses foster wealth-maximizing strategies, especially in the long term. It is also a myth that bonuses necessarily lead to divergent trading and investment strategies.

For all their lofty talk of the merits of capitalism, the free market and rewarding individualism, many bankers have exhibited little more than lowest-common-denominator herd mentality. As one institution reaped the benefit of securitization, so the others blindly followed, and the rest, as we now know, is history.

Dr Paul Wilmott, an expert on quantitative finance, explains that bonuses actually encourage traders in banks to pursue identical strategies and make similar mistakes. The math behind the theory is relatively simple: even if you have a strategy that will make more money than your co-workers, you will pursue the same course as your colleagues because your probability of receiving a bonus is higher if you all follow the same course of action. Therefore, the best way to maximize your bonus is to make the same trade as everyone else. Bonuses reward mediocrity. QED.

So how should companies reward their staff to ensure value is enhanced rather than extinguished? The way firms answer this question will have a huge bearing on their performance over the coming years.

Clare Harrison
Deputy international editor

Defunct company lives on

‘Spanish police arrested six people in connection with a suspected $600 mn fraud in which shares in a company with little capital and fictitious operations were issued and sold on London’s Alternative Investment Market (AIM),’ reported the Financial Times last week. 

According to the article, police claimed the six suspects used false documents and ‘complex stock market operations... to make shares in the company rise’. They then ‘enriched themselves via the fraudulent sale of the shares.’

Initial Spanish reports don't name the company involved, but the Serious Fraud Office confirmed it as Langbar; an AIM-listed company that was removed from the market back in 2005 when the fraud was originally uncovered.

What’s interesting is not only why it took four years to track down the culprits, but also how the company can still exist to this day.

It wasn’t until 2007 that the London Stock Exchange (LSE) took the appropriate disciplinary action against Nabarro Wells, the nominated advisor (or nomad) it fined for bringing Langbar to the market.

Even the LSE was surprised to learn the company still existed, when it spotted the firm's website was still functioning. It seems a group of recovery specialists have been brought in to try to get some of the shareholders’ cash back.