Adam Neumann vs. SoftBankWelllllllllp: WeWork co-founder Adam Neumann sued SoftBank Group Corp., its biggest investor, over the Japanese company's decision to scuttle a $3 billion deal to buy stock from employees and other shareholders, that was part of an effort to bail out the struggling workplace provider. Neumann, who was set to reap the biggest windfall from the transaction, claims SoftBank and its Vision Fund relied on legally faulty pretexts to renege on an agreement to purchase the shares as the conglomerate's financial position weakened, according to a copy of the complaint reviewed by Bloomberg.
I have, in the past, praised Adam Neumann's chutzpah in taking so very much of SoftBank's money. When WeWork's initial public offering was pulled and SoftBank agreed to pour in more money, much of it for Neumann, I wrote: Neumann created a company that destroyed value at a blistering pace and nonetheless extracted a billion dollars for himself. He lit $10 billion of SoftBank's money on fire and then went back to them and demanded a 10% commission. What an absolute legend.
That was in the relatively good times, when Neumann was negotiating a face-saving exit and SoftBank had the money to give him. Now in the terrible times SoftBank is walking away from its agreement to give Neumann another billion dollars, and Neumann is suing. It really only adds to the Neumann legend. An ordinary person who managed to sell someone a worthless company for billions of dollars, and who then couldn't collect the last billion, might count himself lucky, content himself with his other billions of dollars and lay low. Neumann wants to squeeze every last penny out of SoftBank. "Mr Neumann put his trust in [SoftBank and the Vision Fund] to be stewards of WeWork, which he — and thousands of others — had worked so hard to build," his lawsuit actually says, somehow. Otherwise though the WeWork vs. SoftBank lawsuits are disappointingly dull. You might want—I do want—the dispute to be SoftBank saying "you deceived us into sinking billions into a worthless company" and WeWork responding "no you used your money to trick us into turning a good little office-space startup into an overextended vapid monstrosity," but the actual dispute is SoftBank saying "we do not need to close a tender offer because a condition involving a Chinese share exchange has not been satisfied" and WeWork responding "actually you undermined that share exchange in your meetings with the minority investors." WeWork's independent directors sued SoftBank last month, and we talked about it at the time; Neumann's lawsuit covers essentially the same ground. Still, the fact that the actual lawsuits are boring and technical shouldn't distract too much from the fact that the underlying dispute is juicy and emotional, and that the lawsuit can draw out a lot of good facts about it. I wrote last month: I have an obvious rooting interest in litigation! It is hard to think of a better end—or, just, continuation—of the WeWork story than Adam Neumann suing SoftBank for his billion dollars. I want the internal documents, the depositions, the actors' own accounts, under oath, of what they were thinking and how it all went wrong. I want Neumann to act as his own lawyer and tearfully cross-examine Masayoshi Son in court.
Yes, that, still. The thing is, this lawsuit has the potential to embarrass SoftBank—my Bloomberg Opinion colleague Tim Culpan writes that the lawsuit is likely to bring out details on "how exactly SoftBank got into this mess in the first place," and that "none of that is likely to make Son and his team look any smarter"—but it certainly also has the potential to embarrass Neumann. When a CEO takes billions of dollars of an investor's money and trades it for a handful of magic beans, no one exactly looks great, you know? I suppose both sides have incentives to settle. But they haven't yet! Both sides are also … I mean, famously, "Mr. Neumann has told others that Mr. Son appreciated how he was crazy—but thought that he needed to be crazier." These are not people who will back down from confrontation just because it might make them look bad. Really it is way too late for that now. Victoria's Secret vs. SycamoreHuh, okay: L Brands Inc. agreed to cancel a deal that would have given private equity firm Sycamore Partners control of beleaguered lingerie chain Victoria's Secret, which now faces an uncertain future as a standalone business in a ravaged retail industry. Now, L Brands will operate its Bath & Body Works as a standalone public company, while attempting to turn around the lingerie brand as a separate entity. Sycamore Partners and L Brands also agreed to settle all pending litigation, the companies said in statements on Monday. Shares of L Brands fell as much as 18% to $9.82 in late trading on Monday. … Neither party will be required to pay the other a termination fee over the cancelled deal, according to a separate statement from Sycamore.
We have talked a couple of times about this busted deal and, while I don't think I made any explicit predictions, I definitely thought that L Brands had the better of the argument. The agreement between L Brands and Sycamore provided that Sycamore could get out of the deal if Victoria's Secret's business collapsed, unless that collapse was caused by a pandemic. Then the business collapsed due to the pandemic. Kind of seems like Sycamore can't get out of it? But Sycamore argued that it could terminate the agreement because L Brands had breached it by not operating the business "in the ordinary course consistent with past practice." That seemed … true? … but also kind of too cute; obviously you can't operate normally in a pandemic, and L Brands seemed to be operating sensibly under the circumstances. Its court papers pointed out that it had run all of its decisions by Sycamore for their approval, and that Sycamore was just opportunistically trying to renegotiate the price. I kind of figured that L Brands would get something out of it? One rarely wins a total victory in lawsuits like this, but I imagined a settlement in which Sycamore still buys Victoria's Secret but gets a bit of a discount on the price, or in which Sycamore walks away but gives L Brands a chunk of money as consolation. There is a wide bid-ask here: Sycamore had agreed to pay $525 million for 55% of Victoria's Secret in February and it is now worth, let's say, considerably less, so paying $450 million or whatever to buy it, or $50 million or whatever not to buy it, would give both sides a bit of a win. But instead L Brands seems to have gotten nothing. I do not know why. Possibly their lawyers took a dimmer view of their prospects in court than I did. (Possibly their executives had a more optimistic view of their prospects in business than I did: If you think that Victoria's Secret is a $2 billion business, you'd want to get out of a deal to sell half of it for $525 million, though that seems like a bit of a stretch now.) Also, "L Brands said it wanted to focus on navigating the crisis rather than litigation to force Sycamore into their partnership." I mentioned yesterday that, "in a financial crisis, one of the key constraints is people's time": If you run L Brands, you've just got a lot to do right now, and if you keep suing Sycamore then you have to parallel-track trying to win the lawsuit and figuring out how to keep Victoria's Secret and run it sensibly in a pandemic in case you lose. Both of those are hard, and you might be better off doing only one of them. There is also a sort of strategic and optical problem with fighting tooth and nail to sell a business to a buyer who no longer wants it. (Especially if you are planning to retain a large minority stake even after the sale.) It conveys a certain desperation, you know? One rule of thumb in mergers and acquisitions is that, if you sign a deal to sell your business and the deal falls apart, that is much worse than never signing the deal in the first place. When you sign a deal you convey that you don't want the business; when it falls apart that conveys that the buyer doesn't either. The signal to the market is that no one wants it, and the market values it accordingly. Still there are nuances here, different levels of desperation. "We sold a business but the buyer backed out so we said never mind it's great we'll keep it" might look a bit better to investors than "we sold a business but the buyer backed out so we fought to the death to make them take it off our hands because we don't want it, feh." Elon Musk vs. TeslaThe basic idea when you hire a chief executive officer for a public company is that you want him to make the stock go up. That's not exactly right. You actually want him to run the company in a good way, strategic and ethical and long-term-focused and so forth. The stock price is a side effect, a way of measuring that he's doing a good job with the company. Still it is a popular thing to say, and a lot of people feel pretty comfortable with problematic but useful shorthands like "a CEO's job is to make the stock go up" or "a CEO's fiduciary duty to shareholders is to increase their stock price." Certainly it informs executive pay decisions. The basic way you pay a CEO is you give him a lot of stock, or stock options, so that he gets richer as the stock goes up. This encourages him to make the stock go up, which is his job, or whatever. (Much tedious discussion of stock buybacks focuses on this point.) Sometimes you promise him more options if he hits financial or operational or I suppose even ethical targets, which gives him specific incentives to run the company in a way you like; sometimes you promise him more options if he hits stock-price targets, which makes him care even more about the stock price; either way, if you pay him in options, he's going to care about the stock price. The core idea of executive compensation is that incentives matter: You get what you pay for, you should pay for what you want, etc. If you pay your CEO more as your stock goes up, then whatever you and he think and say about what his job is, in some sense his real job is to make the stock go up. This is mostly fine because of another central idea of modern finance, which is that, in an efficient market, the stock price is a good measure of the future prospects of a company; the basic way to make the stock price go up is to make good long-term decisions for the company. In an abstract efficient world everything kind of works. Tesla Inc. is not an abstract efficient company, in a number of ways. For instance its stock price does not reflect only a dispassionate emergent market consensus about its long-term cash-flow prospects; it also, quite directly, reflects Elon Musk's whims about what the stock price should be. Like any public-company CEO, Musk can influence the stock price by making and announcing strategic decisions that affect the company's business, but he can also influence it by just saying that it should be higher or lower. At least lower. We talked yesterday about how Musk tweeted "Tesla stock price too high imo" on Friday; the stock fell by 10%. When Musk wants to raise the stock price whimsically it's a bit harder—he has to, for instance, pretend he's going to take Tesla private—but he has certainly shown an ability to do that too. This is weird. Markets aren't supposed to work that way, CEOs aren't supposed to be able to move stock prices just by saying that they would prefer a different stock price. But it's also weird because executive compensation isn't supposed to work that way. If you pay a CEO in stock options, you are implicitly relying on the link between stock prices and economic value. If the CEO can only raise the stock price by being a good CEO, it all kind of works. If the CEO can raise the stock price by saying "hey everyone let's raise the stock price" then … what are you paying him for? You have given him a weird machine to print money for himself when he feels like it, independent of the company's performance. But it's actually okay because Tesla is a weird company in another, offsetting way, which is: Elon Musk does not respond to financial incentives. He actually has an enormous package of stock options, stock options that he only gets to exercise if the company meets certain (operational but also) stock-price targets. Plus he owns billions of dollars of Tesla stock outright. So he has huge incentives to keep the stock price high, huge incentives to go around tweeting things like "Tesla stock price too low imo." He is unmoved by those incentives. He has vowed to give away most of his possessions, I don't know. Sometimes he tweets to boost Tesla's stock; on Friday he tweeted to tank it. Even though keeping Tesla's stock price up right now is worth hundreds of millions of dollars to him under his stock option plan: Barring a sudden and massive plunge in the electric-car maker's market value, its chief executive officer is poised to meet the final performance threshold needed to claim the first of 12 tranches as early as next week, data compiled by Bloomberg show. The options would yield Musk a windfall of about $730 million if he exercised them immediately and sold the shares, based on Thursday's closing price, but that's unlikely given that Musk, 48, hasn't sold any Tesla stock for years, except to satisfy tax obligations. … Musk himself has never accepted a salary. Instead, his pay has consisted of massive awards of options that he can collect only if the company meets ambitious targets. The most recent iteration, unveiled in early 2018, was the largest-ever corporate pay deal struck between a CEO and a board of directors. It includes 20.3 million options, split into 12 tranches, that could yield Musk more than $50 billion if all goals are met, according to Tesla's estimates. Getting all of it, however, is still far from certain. Each tranche is tied to several distinct targets for revenue, adjusted earnings before interest, taxes, depreciation and amortization; and Tesla's average trailing market capitalization over 30 days and six months. The first market-value threshold was set at $100 billion, with the others following in $50 billion increments. Tesla reached its first milestones for sales and Ebitda -- $20 billion and $1.5 billion, respectively -- last year. And its 30-day market value average has been well above $100 billion threshold for some time. Once the six-month average exceeds that level, Musk can claim the first 1.69 million options and exercise them at will. At Thursday's market close, Tesla's market value was $144.9 billion, and the average trailing six-month figure stood at $99.1 billion, according to data compiled by Bloomberg.
He'd actually have to work very hard to keep the six-month average below $100 billion for much longer—one tweet isn't going to do it—but still. You might expect a CEO who is in line to make $700 million if his stock price stays high enough to be a bit tactical about keeping the stock price up. Maybe he'd be extra bullish on conference calls, maybe he'd announce a new product line early while deferring disclosure of bad news, all the sort of soft expectations-management tricks that CEOs can use to tinker at the margin with their stock prices. You certainly wouldn't expect him to tweet that the price is too high so that it goes down. That is not rational![1] Here we are. One question that you might ask—that I have asked—is: Why give him the options at all? If he doesn't respond to financial incentives and doesn't want to maximize the stock price, why bother giving him hundreds of millions of dollars' worth of Tesla stock for maximizing the stock price? You could set up a list of targets for him and, like, launch a flamethrower into the sun for each one he achieves. It just seems very expensive to pay him in stock options he doesn't care about. Oh meanwhile Musk and Grimes apparently had a baby. According to Musk's Twitter the baby's name is "X Æ A-12 Musk" and he has face tattoos so, you know, what even is reality anyway. Everyone vs. coronavirusA lot of businesses are shut right now, but the business of suing over coronavirus is booming. I mean, it would be booming if the courts were open. It is hard to sue anyone right now, WeWork and Victoria's Secret and so forth notwithstanding, because no one really wants to show up in court to hear your complaints. But soon, soon: At law firm Morrison Cohen in New York, chairman David Scharf is already swamped with phone calls from clients. "We are preparing the lawsuits, the litigation budgets and the strategic analyses for those who are prepared to litigate. And they want to launch as soon as the court system is open," Mr Scharf notes. In some cases, they do not want to wait — and so Morrison Cohen has been busy looking for venues outside New York where it might file sooner. Some companies will ultimately balk at the costs of litigation. For those who will go forward, he divides them into two broad categories: those who expect some sort of commercial settlement but want to use litigation as leverage; and those who feel they have no alternative to try to protect their business. Mr Scharf is awestruck at the breadth of possible litigants — from real estate to manufacturing. "Just name it," he says. "Everyone's been ravaged. Everyone's been impacted."
"Awestruck at the breadth of possible litigants" is the best description I have ever read of a lawyer, but "everyone's been ravaged" is actually not a great fact for your litigation plans. Ideally the ravaged would sue the un-ravaged, that's usually how litigation works. Perhaps you'd round everyone up—sick people and unemployed people and closed businesses and hard-hit governments and investors whose stocks have gone down—and sign them up as plaintiffs in a big class-action lawsuit against, um, the coronavirus? And then you'd win a complete victory and a judge would order the coronavirus to pay everyone trillions of dollars, and the coronavirus would grudgingly hand over the money and everyone would be made whole. In the actual world the coronavirus can't be sued and doesn't have money—yes, I know, you can try suing China, sure—so the only real option is for the victims of the coronavirus to sue each other. (And insurance companies who specifically disclaimed pandemic coverage.) Litigation might work as a crude risk-pooling method—maybe people who were hit harder can sue to get some money out of people who held up relatively well—but it seems unlikely to accomplish the big goals. It won't make all the victims whole; it certainly won't punish the villain, or deter the virus from doing it again. GuidanceA good philosophical question in finance is: Does the CEO of a public company know anything about the company's performance next quarter that the market doesn't already know? That is, if you called up the CEO of a public company and asked her "how much money will you make next quarter," and she told you, would that give you any information that you didn't already have? (Assuming that the company did not already publish guidance on that question.) The case for "yes" is, you know, the CEO comes to work at the company every day, she gets daily performance reports, she has a great deal of detail on how the company is doing and what it is planning. The case for "no" is strong-form market efficiency, and that it's hard to predict the future. The market aggregates investors' expectations about future earnings, and that aggregation may produce a better guess than the CEO can manage herself, even though she has much more data than any individual investor. A delightful fact is that just getting earnings releases in advance is not always enough to beat the market. Anyway now I guess there will be a natural experiment: The number of US blue-chips offering full-year profit guidance alongside their first-quarter earnings has been cut in half, leaving Wall Street analysts struggling to assess the full impact of measures to contain the spread of coronavirus. America's earnings season has passed the halfway mark, with 283 companies in the S&P 500 having reported by Friday last week. Within that group, 53 of the 103 companies that provided earnings guidance earlier this year have scrapped it according to Credit Suisse data. ... The shift reflects the uncertainty for corporate executives after widespread lockdowns that have caused revenues to collapse across a variety of sectors. Yet strategists say the lack of guidance for investors comes at a critical moment. The US stock market is up by about a quarter since its March low in a rebound driven partly by optimism over an end to the crisis — even as some economic data continues to deteriorate. "I haven't experienced anything like this since the fall of 2008 — companies don't feel like they have any predictive power at all," said Jim Shanahan, an analyst covering insurers and banks for Edward Jones in St Louis, Missouri. "Companies can give you a lot of guidance about earnings when you least need it, but when you need it the most, that's when it's pulled."
"Companies can give you a lot of guidance about earnings when you least need it, but when you need it the most, that's when it's pulled" is a pretty good summary of the strong-form efficient markets hypothesis. Things happen"Demand for high quality dollar-denominated assets saddles the United States with a financial 'Dutch Disease'; a situation in which the reliance on exporting a single commodity raises the exchange rate and thus squeezes out the production of tradable, value-added goods in favor of services and financial rent." German court calls on ECB to justify bond-buying programme. Markets Worry Ruling May Lead to Doubts About Other ECB Programs. Hedge funds bet on gold as refuge from 'unfettered' currency printing. Big Banks Pull Ahead in U.S. Small-Business Aid After Stumbles. Argentina ready to consider ninth sovereign default, says Guzmán. California Is First State to Borrow From Federal Government to Make Unemployment Payments. Hertz Gets Forbearance From Lenders in Bid to Avert Bankruptcy. SEC Ramps Up Whistleblower Awards. Carnival Dangles $28-a-Night Fares for Planned Aug. 1 Restart. "The boy told them he left home after an argument with his mom, who refused to buy him a Lamborghini." If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] I suppose you could argue that (1) it's too late to tank the stock now, and he will definitely get to exercise this tranche of options soon, but (2) there is a tax benefit to Musk in exercising them against a temporarily relatively low stock price. I do not believe that this is what Musk is thinking. | 
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