Speak Softly and Carry a Stock Pick

Do execs talk bearish so they can go bargain-hunting? Also: Money managers at the superstore; anti-discrimination pledge has its skeptics; an acquisition by Kodak; board members don't know whether they're on track; and more.

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“Actions Speak Louder Than Words” reads the title of a just-released article from Standard & Poor’s. It suggests that some corporate executives are not only trying to beat the earnings-estimate game for the third and fourth quarters — they’re projecting a gloomy economic outlook for 2003 so they can pick up bargains in the equity arena.

“Although reluctant to predict improving conditions,” says the article, “corporate executives are buying assets to benefit from the expected upturn.” The article also argues that the often-bearish predictions of U.S. corporate honchos are less than heartfelt, especially given the earnings recently reported by a number of companies.

Indeed, despite the cautious words of CEOs and CFOs and the “corporate carefulness [that] has caused stock prices to retreat,” executives are increasingly stepping up to the plate and making investment decisions that are anything other than bearish, according to the ratings agency.

Take mergers and acquisitions. True, only 4,100 U.S. deals had been announced through July 17, compared with 4,481 for the same period last year, according to M&A tracking service FactSet Mergerstat. But the biggest deals are increasing in number; June alone saw announcements of 18 mergers and acquisitions in the United States and Europe that were worth more than $1 billion apiece.

These big deals strongly indicate that, cautious pronouncements notwithstanding, the corporate world has confidence in the eventual rebound of the economy, continues the article. Unlike the all-stock deals of the late 1990s, most mergers these days are being done primarily for cash or a mixture of cash and stock. “This requires some level of conviction on the part of the acquiring company that the pact will be beneficial,” says the article. “After all, that cash could be used to pay a dividend or buy back the company’s own shares.”

Money Managers at the Superstore?

Should nonfinancial companies take advantage of investor discontent? Two professors from New York University’s Stern School of Business believe that the time may be ripe.

Roy Smith and Ingo Walter, writing in the Financial Times, note that the relationship between directors and shareholders has lately come under close scrutiny, and that “boards are not being held accountable by those they are supposed to represent.”

Smith and Walter see this as an especially glaring problem among institutional investors, who have displayed a conspicuous lack of muscle given that they control 60 percent of all traded stocks and 80 percent of trading volume in the United States. Mutual funds were among the biggest investors in Enron, WorldCom, and Global Crossing, note the professors. They add that managers of mutual funds, which in the United States held close to $3 trillion of equities as of the end of last year, are technically supposed to be beholden to “independent” directors, but these directors enjoy “exceptionally lucrative conditions of employment” — often sitting on several related boards at the same time.

All this conflict, or the appearance of conflict, has contributed to a sharp drop in the flow into equity mutual funds so far this year, according to Smith and Walter, who propose the following business model.

“A non-financial company with a trusted name — Wal-Mart, say, or General Electric, could set up a fund, with respected business professionals as directors,” they write. The job of these directors would be to select the best money managers and commit to the cost-effective long-term allocation of client assets, fully exploiting the fund’s market power and economies of scale and promoting disciplined corporate governance.

A related problem in search of a solution, note the professors, is that companies managing mutual funds have increasingly exposed themselves to conflicts “not too dissimilar from those facing the securities industries.” This has become particularly true as those companies have become more and more involved in pension plan asset management, they argue. By 2001, mutual funds’ share of U.S. pension assets had grown to 21 percent of total mutual funds assets, up from 5 percent in 1990, making “it less likely that mutual fund managers will object to flawed compensation arrangements, risky merger strategies or excessive leverage in capital structures.” In Smith and Walter’s proposal, managers would steer clear of pension fund management to avoid conflicts of interest.

“Money market funds developed because banks and their regulators exploited the retail deposit market, opening the doors to competitors from the securities industry,” note the professors. They maintain that their business model is nothing more than an example of “the way free markets are supposed to work, after all.”

Execs Skeptical of Anti-Discrimination Pledge

Whether or not Wal-Mart opens new vistas for funds management as professors Smith and Walter propose, most executives say they don’t think the retailer’s recent decision to include gays and lesbians in its anti-discrimination policy will open opportunities.

A poll of 135 senior executives at public companies found that 66 percent do not believe the policy change will result in any significant degree of advancement for those affected. The poll was conducted the week of July 7 by Christian & Timbers, an executive search firm.

Steve Mader, CEO of Christian & Timbers, stated that “Although the door is opening for more opportunity at the entry and mid-level of companies, it is clear there is still a glass ceiling for minorities, women, gays, and lesbians.”

Kodak Takes Expansive View with $500 Million Acquisition

The Eastman Kodak Co., eager as always to diversify away from its core (and increasingly obsolescent) film business, has inked a deal to buy PracticeWorks, a provider of software-based information technology systems and related services for dentists, orthodontists, and maxillofacial surgeons, for $500 million in cash.

The deal, announced on Monday by PracticeWorks, would have Kodak pay $21.50 for each share of PracticeWorks common stock and $7.33 for each share of the firm’s Series B preferred stock.

PracticeWorks had been quoted on Nasdaq at $17.68 prior to the announcement, making the acquisition a 21.6 percent premium for holders of the common stock.

On Track? Board Members Can’t Say for Sure

In the wake of scandals stemming from fraudulent financial reporting at some of the country’s largest companies, more than 85 percent of corporate board members surveyed express serious reservations about the methodologies and tools used by management to track performance, according to the results of a study of more than 150 board members.

The study, underwritten by Hyperion and published Monday by the Business Performance Management Forum, was conducted from May 8 to June 30. It found that fully two-thirds of board members are uncomfortable with the accuracy of their company’s financial business forecasts, and that nearly one-third aren’t confident they have all the information they need to ensure the disclosure of appropriate information to investors and other parties.

Among the survey’s other findings:

  • Barely 20 percent of the respondents to the survey say their company has already allocated funds specifically to address Sarbanes-Oxley;
  • Perhaps as a result, only 40 percent expect immediate compliance with Sarbanes-Oxley;
  • More than 60 percent of the respondents say one crucial piece of analysis they don’t get, but need, is performance data measured against that of key competitors;
  • Nearly 40 percent of companies don’t measure operational indicators regularly.

That Was the Recession That Was

John Lonski, writing for Moody’s Investors Service, points to evidence that the U.S. economic recession may have ended almost two years ago.

The official arbiter of these matters — the National Bureau of Economic Research (NBER) — declared that the latest recession commenced in March 2001 and ended that same November, writes Lonski. In other words, it lasted all of nine months.

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