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What's New
Pension gains point to changes in 2014
Corporations assess best way to respond to Typhoon Haiyan disaster Editor's Corner: While the getting is good News Scan: Big law mergers reflect weakness
An overheating IPO market?
Twitter's non-GAAP measure of profit and much more... News From the Fierce Network:
1. New tool to combat market manipulation
2. Judge declines to quickly approve SAC settlement
3. Big insider trading trial to start soon
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While the getting is good
All the hoopla over the Twitter IPO on Friday makes me nervous. Yes, it's great for investors that that the stock soared by 70-plus percent in first-day trading, never mind the naysayers, including yours truly. The problem is that IPO mania is invariably a sign that the stock market is entering dangerously high territory (see today's News Scan). And IPO hype isn't the only indication of a potential market top. In fact, the growing use of non-GAAP measures to get investors to ignore "the bad stuff"—such as stock options, as in Twitter's case, and who knows what in other cases—may be even more troubling (again, see News Scan). The last time we saw a big boom in the use of metrics such as "mindshare" or similar measures unrelated to profit was also the last time we saw IPOs go through the roof, that is, not long before the end of the 1990s tech bubble. Now, it's multiples of "eyeballs," "likes" and, well, the like. As we also point out below, the debt market is also looking frothy, as leveraged finance is back, complete with a return to "covenant-lite" lending, though it hasn't reached the levels seen prior to the financial crisis—yet. Here's hoping history doesn't repeat itself, though you can't help but suspect it will do just that when you start hearing market pundits claim things are different this time or utter words that are really the equivalent but are all dressed up as fresh insight. For CFOs of companies in need of capital, of course, market mania means they should get it while they can. Stock and bonds may not be this cheap, from an issuer's perspective, for much longer. In fact, the news that Facebook director Mark Andreeson's firm has sold a third of its shares in the company may be as clear a sign as any that the end of the bull market is nearer than most investors seem to think. There's a reason those like Andreeson are called the smart money. Separately, in our Monday morning "duh" moment: Reuters reports that evidence of a rebounding U.S. economy is putting pressure on emerging market currencies, as the start of Fed tapering would strengthen the dollar by raising interest rates on Treasury securities (not that the markets aren't getting way ahead of themselves here). And that explains why U.S. multinationals' earnings got hit by currency translation in the last quarter. The uptick in U.S interest rates after the Fed started its taper talk late last spring evidently caught them by surprise. Apologies for any confusion we created by failing to point out the obvious. Finally, I don't buy this business about central bank policymakers trying to fake out the markets (or for that matter the opposite charge that they don't communicate well with the markets, which we heard a lot about when interest rates started climbing last summer). The fact is, Ben Bernanke explicitly stipulated back in May that the Fed would not begin to taper if the U.S. economy showed more weakness than expected, which it then did. And Mario Draghi clearly signaled that the ECB was worried about deflation several days before it cut rates. As for the BoJ, Shinzo Abe's big campaign promise was monetary largesse, months before the bank complied. Sorry, guys, central bankers are not trying to pull the wool over investors' eyes here. Nor are they abject failures at managing their expecations. What are they supposed to do when investors hear what they want to hear, even if its not true, until reality bites them in the rear-end? Answer: Attend to the real economy. Read more about: IPOs, Fed
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Today's Top News Pension gains point to changes in 2014
Corporate pension plans made considerable progress in digging themselves out of their funding hole this year, paving the way for companies to make changes to their plans next year. The improvement in funding puts companies in a better position to adopt liability-driven investing (LDI), which matches a plan's investments more closely to its liabilities, or to offload pension risk by offering buyouts to participants or transferring liabilities to an insurance company by purchasing a group annuity. HR consultancy Mercer reported that plans operated by S&P 1500 companies had an average funded ratio of 91 percent last month, the highest level since October 2008, and a big improvement from the 74 percent funded ratio at the end of last year. Mercer estimates companies now face an aggregate deficit of $185 million, down from $557 billion at the end of 2012. "The improvements in funded status represent a real opportunity for sponsors to take some de-risking actions," said Leah Evans, a principal in Mercer's financial strategy group in New York. Evans suggested that companies could make changes fairly rapidly. "We've been talking to a lot of our clients about this for a while," she said. "In many cases they've already done a lot of the preparation work, which means that as the funded status improves, they're in the position to do something quite quickly." Some companies have set up programs that move their asset allocation toward LDI as their funded status improves, she said. "We have lots of clients that have preset triggers and shift their investment strategy automatically." Which path will companies take? A survey of 181 senior finance executives conducted by Prudential Financial and CFO Research earlier this year found 10 percent had already adopted LDI and another 44 percent were somewhat or very likely to do so. Eight percent had purchased an annuity for some participants, while 37 percent were somewhat or very likely to do so, and 18 percent already had offered lump-sum buyouts, while 44 percent were somewhat or very likely to do so. Evans said companies' decisions will reflect "their accounting situation, their liability profile," and how many of their participants are current employees versus retirees versus vested participants who no longer work for the company. Some companies see LDI as a way to lower the plan's risk in preparation for a buyout or annuitization, she said. Conversely, providing some participants with buyouts lowers the plan's risk and could be looked at as an alternative to LDI, Evans said. Pension de-risking hit the headlines back in 2012, when General Motors transferred its pension liabilities for some participants to Prudential Financial by paying $26 million for an annuity, Ford offered lump-sum buyouts to 98,000 retirees and former employees, and Verizon paid Prudential $7.5 billion to assume the liabilities for 41,000 of its management retirees. While 2013 hasn't seen any jumbo deals, "there's still a high level of activity," Evans said. "And we're expecting activity to stay high and increase going forward." For more:
- see this Mercer press release on funding
- see this Prudential Finance-CFO Research survey
- see this Aon Hewitt report on the GM, Ford and Verizon transactions Read more about: group annuities, lump-sum buyouts
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Corporations assess best way to respond to Typhoon Haiyan disaster
Slowly but surely, Monday morning's trickle of corporate press releases relating to providing relief after Typhoon Haiyan will increase to a steady flow, as corporations decide how best to react. So far, the press has heard from The National Basketball Association and National Basketball Player's Association, which said they will donate $250,000 to the U.S. Fund for UNICEF, and Sun Life Financial Inc., a Canadian financial services company with operations in the Philippines, which said it will contribute $100,000. The care that companies seem to be taking with their giving is in keeping with two factors: First, the work that's being done to discover what's most urgently needed, and second, a trend that reveals corporate philanthropy is evolving to be more strategic: less about cash and more about products and services. "At this early stage, it would be premature to speculate exactly what the corporate response will be to Typhoon Haiyan," said Mark Shamley, president and chief executive of the Association of Corporate Contributions Professionals (ACCP), in an e-mail. "The mere scope of the disaster warrants careful assessment of the most immediate needs of relief agencies and people impacted." One example, UPS, which is "assessing the situation," and coordinating with its Global relief partners The World Food Programme (WFP); UNICEF; UNHCR (The UN's Refugee Agency); CARE; and the International Federation of the Red Cross, Kristen Petrella, a spokesperson for UPS, said by phone. UPS is also working with relief partners Maersk; TNT Express; Agility; the World Economic Forum; and WFP to coordinate a response, Ms. Petrella said. That companies are not throwing cash at the horrendous disaster right away, but planning a coordinated, careful response, is in keeping with a broader trend. "In general, companies have moved to being more thoughtful about allocating resources to address such events," Mr. Shamley noted in his e-mail. "Companies have moved from being 'reactive' in disaster relief efforts to a 'preparedness' strategy that involves the dispersing of assets at the right time and place. During the first 48 to 72 hours, it's of the utmost importance that giving aligns with on-the-ground needs and verification of an infrastructure to ensure delivery." Donating products and services is also far more popular these days than cash donations, according to a survey conducted annually by The Chronicle of Philanthropy. The value of cash and products combined rose 20.2 percent in 2012 to $18.6 billion, the newspaper stated in July, with Pfizer in the top spot among just over 100 companies surveyed, with $3.1 billion donated. That compares with a much slower increase in cash donations alone. In 2012, donations rose 2.7 percent to $5.3 billion, at 106 companies responding with two years of data. Businesses also revealed that they gave a median 0.8 percent of 2011 pretax profits to charity last year, measured in cash, a figure less than any in the prior six years, when figures ranged from 1 to 1.4 percent, The Chronicle of Philanthropy reported. For more:
- see this Chronicle of Philanthropy article
- see this Wall Street Journal article
- see this New York Times article Read more about: Typhoon Haiyan
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News Scan >> Management: Big law mergers reflect weakness Consolidation among big law firms isn't necessarily producing stronger firms, as Susan Kelly explained at Crain's New York Business recently. That's especially true in an environment where corporate M&A has fallen off after driving much of the big firms' income, since litigation inspired by the financial crisis has only gone partway to fill the gap. In fact, to the extent mergers are an attempt to hold on to the hourly fee system, the big firms may be opening themselves up to competition from smaller firms that are carving out unique specialties and charging clients less in the bargain. IBM's internal legal eagle certainly doesn't think much of the firms' urge to merge. Read more
>> Capital: An overheating IPO market? A big spike in issuance of stocks and bonds is really another sign of a market top, say skeptics who compare the surge in IPOs this year to what was seen near the top of the 1990s tech bubble. Certainly there's no end to speculation as to which hot Internet company will seek to follow Twitter in light of its smash debut on Friday, with names such as Box, Square and Airbnb all cited as possibilities. So far this year, U.S. IPOs have raised $51 billion, the most since $63 billion in the same period of 2000, the year bubbles in tech stocks and IPOs both popped. Follow-on offerings by already public companies have been even larger, surpassing $155 billion this year, the most for the first 10-plus months of any year in Dealogic's records, which start in 1995. But if companies see higher and higher valuations as more reason to sell more stock and bonds, buyers are eventually likely to balk. The question, as always, is when. Read more >> Accounting and Tax: Twitter's non-GAAP measure of profit Twitter likes to tell investors to value the company without the cost of the stock options it grants, in which case it would be in the black. (And as we pointed out last Friday, those options are considerable.) But telling investors to ignore the cost is to engage in the pretense that its managers work for nothing, notes Jack Ciesielski, an accounting expert who runs the Analyst's Accounting Observer, an investment newsletter. And Twitter isn't alone in favoring non-GAAP measures of profitability. A recent study by Ciesielski found that 56 of the 69 tech companies in the S&P 500 index used non-GAAP measurements in 2011 and 2012. The group's 2012 non-GAAP earnings were $40.7 billion higher than its GAAP results, following a $25.6 billion difference in 2011. Read more >> Management: Can banks earn a profit without leverage? What happened to the idea of borrowing short, lending long, and pocketing the difference? That's how banks have always made money, or at least how modern ones did. But this approach, or more elaborate variations on the leverage it creates, has become less viable since the financial crisis, and that spells red ink for banks, given their cost structure. As Citigroup CFO John Gerspach said last July: "If you take a look at the return on equity that most financial institutions are producing these days, there's reason to think that the profitability is really not enough to sustain continued investor involvement." So now the banks are being forced to innovate for the first time in a long while. Read more >> Capital: Deutsche Bank CEO's claim that regulation curbs lending is arguably if not demonstrably false Deutsche Bank co-CEO Juergen Fitschen says new regulations are curbing the bank's ability to provide loans, and that corporate clients should diversify their sources of capital as a result. But as I pointed out at Global Finance after Jamie Dimon of JPMorgan Chase said much the same thing a few months ago, such claims should be taken with a considerable grain of salt. A Fed study shows that ever since regulators began requiring banks to hold a minimum amount of capital in 1990, their lending has been tied more to expectations about the economy and risk than to their capital. In addition, widely accepted finance theory holds that the better capitalized a bank is, the better able it is to lend. On the flip side, a new study suggests that financial deregulation leads to overleveraged companies. Read more >> Compliance: Does public disclosure really lead to short-termism? Not sure what to make of this column in Sunday's New York Times by a finance professor who claims that the pressure on publicly traded companies to disclose more and more information leads to more and more of a focus on short-term moves that the market will applaud at the expense of value-creating longer term ones, such as innovation, that get lost in the valuation shuffle. And he cites a recent research paper that shows that. But its hard to square such a conclusion with the almost universally applauded benefits of transparency. To be sure, short-term thinking is apparent and it reflects investors' obsession with quarterly performance. And ultimately, this line of thinking is an argument for being a privately traded company instead of a publicly traded one. And the trade-offs there are all too familiar. The problem is, being public also has advantages, including potentially cheaper capital than banks focused on free cash flow will provide, a means for founders to exit, and an acquisition currency. Read more >> Human Capital: More 401(k) fee litigation? A recent lawsuit alleging that MassMutual's 401(k) charged excessive fees suggests litigation regarding retirement plans may shift to plans that use group annuities and stable-value products. Read more >> Technology: The best defense against hacking may be a good offense Some big companies are mounting an "active defense" against cyber threats that can include infiltrating hacking groups and tracking down cybercriminals. Read more
Briefly noted:
> Facebook director Andreesen's firm dumps a third of its shares. Article > Supreme Court case could make it harder for labor to organize. Article > Feds seek $864M from BofA over alleged mortgage fraud. Article > Democrats take fresh aim at private equity tax break. Article > State and local governments no longer a drag on economy. Article > Covenant-lite lending is back, though it isn't yet as scary as last time. Article > To BlackBerry's rescue comes Canada's version of Warren Buffett. Article > Washington state lawmakers extend tax break to attract Boeing production facility. Article > Deutsche Telekom buys GTS Central Europe for $729M. Article And finally … Imagining Jamie Dimon's "settlement" conversation with Eric Holder. > Get Subscriptions to the Leading Finance Magazines for FREE Mercury Magazines offers top Finance titles for Free to professionals. No Credit Card Required. Stay Ahead in your Industry. Sign up now. | |
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