M&A appA lot of the work of investment banking is targeting. The thing that you do, much of the time, is sit around thinking about who should do a deal, so that you can call them up and say "boy have I got a deal for you." Mergers-and-acquisitions bankers make lists of companies that should do mergers or acquisitions, equity capital markets bankers make lists of companies that should issue stock, debt capital markets bankers make lists of companies that should issue bonds, etc. Once you have made the lists you get on planes (in normal times) and meet with the companies on the lists to explain to them why they should do mergers or issue stock or whatever. Occasionally they say "hmm you are right we should do a merger" and hire you to do the merger; then you will spend some time actually doing the merger, and you'll get paid lots of money. But the top of the funnel consists of making lists. How do you make those lists? In a sense the answer is, you just write down a list of all the companies you cover. Your job, as an M&A banker, is to do M and/or A; that's what you get paid for, so if there's a company you can call, you might as well call them and suggest they do a merger. You can't just say that to them, though; you can't call a company and say "hi it would help a lot with my bonus if you would do a merger." You have to call them and say "hi it would help a lot with your company if you would do a merger." For that, you need some finance. You need to say "you have a division that is underperforming and if you sold it the rest of your company would be better, so let me sell it for you and take a commission." Or "there's this company out there whose CEO wants to retire so you could buy it cheap and it would integrate really well with your widgets business and be accretive to earnings." Or whatever. The list-making exercise requires some financial analysis. Not a whole ton: This is the top of the funnel, and you do not necessarily need a deep and nuanced understanding of all aspects of the company's business and competitive landscape in order to come up with some acquisitions and divestitures it could do, though that does help. But, some financial analysis. This can be creative interesting work, or it can be kind of sterile tedious work; in any case it tends to be unrewarding work, in the sense that if you come up with 100 possible deals and end up executing one of them that's a pretty good hit rate. A lot of targeting begins with junior bankers making spreadsheets of companies that might be plausible targets based on some crude financial criteria; the senior bankers who have actually met with the companies whittle the spreadsheet down to the realistic targets, and then try to set up meetings with those companies to pitch ideas that still have a low probability of leading to a deal. What if you could outsource all that work to the companies themselves? What if you built a targeting app that identifies plausible deals based on some crude financial criteria, then sent it to all the companies and said "hey maybe you should do M&A, this app will tell you, if it does then definitely give us a call." Goldman Sachs Group Inc. has an app now: The technology is called Gemini and is already being used by Goldman's bankers. The firm plans to offer it to clients and hopes they will be able to use it to identify under-performing parts of their businesses that make them vulnerable to attacks by activist investors or those that score poorly on environmental, social and government issues. David Dubner, Goldman's global head of M&A structuring, said he also expects clients to use the product to identify sale or spin-off opportunities and possible takeover targets in the form of unloved or poorly performing company divisions. ... It works like this; the app breaks down how different divisions of companies perform relative to peers, showing how they can grow through mergers and partnerships. It also details which ones look ripe for disposal. The app relies on a formula that compares revenue growth, profit margin and other metrics as a percentage of sales. It compares that across a wide peer set to provide a score at the individual segment level that can be used to assess relative performance. The technology raises an obvious question -- does it have the potential to ultimately displace the traditional role of investment banker as matchmaker?
No! It has the potential to displace the traditional role of investment banker as miserable compiler of targeting exercises! If you get a client to download the Should You Divest a Division App, and the app says "yes you should divest a division," the client is still going to need to hire a bank to do all the actual work of divesting the division, structuring the deal and running the auction and negotiating the price and all the rest. The client is going to be more likely to hire you to do that, because after all your app is what gave her the idea. The client, and the app, are doing the dumb speculative unpaid targeting work for you, and when there's an actual deal to be done the client will come to you. Or not, I am not sure how many companies are actually going to do the deals suggested to them by an app, but it's not like the current system is all that efficient. Doesn't hurt to have an app. (Disclosure, I used to work at Goldman, including with Dubner.) There is one of these "[investment bank] has a new app for [investment banking product]" stories every few months, and I love them all. The apps are good! My basic theory here is that a lot of the intellectual content of investment banking consists of the sort of informal regression that goes by the name "market knowledge": If you are a good experienced investment banker, you will remember all the recent deals that have been done in your product and sector, and you'll be able to match your new client's situation to those deals. "Company X sold a bond at 5.5% and Company Y sold a bond at 5% and you're a little better than X and a little worse than Y so I think you can do a bond at 5.25%," that sort of stuff, stuff that you can only do if (1) you are a highly educated banker with finely honed judgment who has spent a decade with your finger on the pulse of the market, executing deals and keeping up with the competition and talking to investors and clients, or (2) you have an app that can do simple regressions on a list of deals. I suppose that, at least for now, the experienced-human-with-judgment approach will get you a better answer than the list-and-regressions app, but the app is way more scalable; you can send it to everyone and tell them "this app will tell you if you should maybe do a deal; if it does, call us to find out for sure." Let the robot do the first cut, and then send it to the humans for their judgment. Shareholder activism is basically murderBeing the chief executive officer of a public company pays well but can be stressful. It is more stressful if you can be thrown out of the job by a proxy fight or a hostile takeover. It is less stressful if you can't. Stress is bad for you. Therefore from first principles it seems like strong takeover defenses would help CEOs live longer. Poison pills, ironically, should be be healthy for CEOs. Is this the sort of thing that finance academics study empirically? Oh you'd better believe it is: We show that increased job demands due to takeover threats and industry crises have significant adverse consequences for managers' long-term health. Using hand-collected data on the dates of birth and death for more than 1,600 CEOs of large, publicly listed U.S. firms, we estimate that CEOs' lifespan increases by around two years when insulated from market discipline via anti-takeover laws. CEOs also stay on the job longer, with no evidence of a compensating differential in the form of lower pay.
That is the abstract to a paper gloriously titled "CEO Stress, Aging, and Death," by Mark Borgschulte, Marius Guenzel, Canyao Liu and Ulrike Malmendier. Actually it's the first half of the abstract, it goes on: In a second analysis, we find diminished longevity arising from increases in job demands caused by industry-wide downturns during a CEO's tenure. Finally, we utilize machine-learning age-estimation methods to detect visible signs of aging in pictures of CEOs. We estimate that exposure to a distress shock during the Great Recession increases CEOs' apparent age by roughly one year over the next decade.
Here's more on the first result, from the paper: In the first part, we relate variation in the intensity of CEO monitoring due to the passage of anti-takeover laws across U.S. states in the mid-1980s to CEO longevity. These laws shielded CEOs from market discipline by making hostile takeovers by corporate raiders more difficult. Prior research has documented some of the associated private benefits. The business combination (BC) laws in particular allowed CEOs to be less tough in wage negotiations, decreased the rate of both plant creation and plant closures, and firm returns fell (Bertrand and Mullainathan 2003). The authors coined the expression that managers were "enjoying the quiet life," implying that the anti-takeover laws made CEOs' lives easier for CEOs and lowered job-related stress. In fact, the prevailing view in law and economics at the time of the passage of the laws was that the "continuous threat of takeover" is an important means to counteract lagging managerial performance (Easterbrook and Fischel 1981).3 While some later studies question whether BC laws in fact reduced hostile takeover activity (e.g. Cain, McKeon, and Solomon 2017), the passage of anti-takeover arguably constituted a significant shift in managers' perception of their job environment. We find that anti-takeover laws led to significant improvements in the life expectancy of incumbent CEOs. One additional year under lenient corporate governance lowers mortality rates by four to five percent for an average CEO in the sample. … The estimated effect sizes are large by comparison to other variables affecting longevity within our CEO sample. For example, in the hazard model one additional year of age increases a CEO's mortality hazard by roughly twelve percent. Thus, for a typical CEO in our sample, the effect of experiencing the anti-takeover laws is roughly equivalent to that of making the CEO two years younger.
I wish they had checked that by running the machine-learning how-old-does-this-CEO-look algorithm on those 1980s CEOs, but I guess it was harder to collect the data. If you're a shareholder, what should you take from this? Clearly some things are bad for both shareholders and CEO lifespan/appearance: "A distress shock during the Great Recession" is going to lower the value of the stock (I conclude based on common sense) and make the CEO look older (I conclude based on the real results of this actual academic finance paper). Other things are more ambiguous: The effect of takeover protections on shareholder value has been debated for decades, with probably the majority view being that strong takeover protections are bad for shareholder value, but they definitely (?) make CEOs live longer. If you are a big investor in a company, and you meet with the CEO and she seems fit and happy, should you conclude "things must be good here because the CEO is so happy," or should you conclude "this CEO is too happy, she must not be working hard enough for shareholders"? Maybe shareholder value maximization requires working the CEO to death. There is that famous result that CEOs who play more golf get worse returns. Maybe they live longer! If you're a CEO, what should you take from this? A stereotype of Silicon Valley tech founders is that a lot of them are really into life extension, brain uploading, vampirism, and immortality generally, but if you want to extend your life there is lower-hanging fruit than feeding on the blood of the young. If you are the founder of a private company looking to go public, should you have dual-class stock that allows you to control the company forever (as many tech CEOs prefer), or should you have single-class stock that gives every shareholder an equal vote (as most public investors prefer)? Traditionally tech CEOs who choose the dual-class approach will talk about wanting to preserve the values of their company, wanting to focus on long-term community-building rather than the short-term whims of public markets, blah blah blah, but all of that seems less important after this paper. Their lives might depend on being insulated from shareholder votes! The Kodak thingLast Tuesday, Eastman Kodak Co., the former camera company and (briefly) blockchain company, announced a pivot to producing generic drug ingredients with hundreds of millions of dollars of federal funding. This seems good for Kodak's business: Before getting a huge federal loan to make drugs, Kodak was sort of aimlessly puttering around and losing money; now it will add jobs and reopen factories and, one hopes, make money. Certainly, though, it was good for Kodak's stock: The day before the announcement, Kodak closed at $2.62, for a market capitalization of about $114 million; by Friday, it closed at $21.85, for a market cap of $956 million, up 734%. It was also really good for Kodak's executives and directors. Here is Judd Legum: On July 27, the day before the deal was announced, Kodak awarded Continenza and three other top Kodak executives stock options. Those stock options include the right to buy Kodak stock at $3.03, $4.53, $6.03, and $12 until February 2026. But while the options were awarded on July 27, they weren't disclosed until after 7 PM on July 29. As the Non-Gaap newsletter notes, this means that when Continenza appeared on CNBC and Fox Business about the deal on the morning of July 29, he could not be asked about the transaction.
Giving CEO James Continenza options to buy 2 million shares at prices up to $12, when the stock was trading at $2.62, the day before an announcement that sent the stock up to $21.85, seems (1) generous and (2) well-timed. It does not help that the explanation for the grant is kind of bizarre: Eastman Kodak on Monday granted its executive chairman options for 1.75 million shares as the result of what a person familiar with the arrangement described as an "understanding" with its board that had previously neither been listed in his employment contract nor made public. One day later, the administration of President Donald Trump announced a $765 million financing deal with Eastman Kodak, and in the days that followed the stock soared, making those additional options now held by executive chairman Jim Continenza worth tens of millions. The decision to grant Continenza options was never formalized or made into a binding agreement, which is why it was not disclosed previously, according to the person familiar with the arrangement. The options were granted to shield Continenza's overall stake in the company from being diluted by a $100 million convertible bond deal clinched in May 2019 to help Eastman Kodak stay afloat, according to the person's account.
Yeah don't do that, that's not good. Leaving aside the merits of compensating a CEO for dilution from a convertible to keep the company afloat (arguably a good reason to dilute the CEO!), you either have an agreement or you don't. If you do, you should formalize and disclose it (in May 2019); if you don't, it seems implausible to discover a year later, the day before a huge company-changing announcement, that actually you had an "understanding" and need to urgently follow through on it. On the other hand I have trouble getting mad at this? The thing is that if you get a huge grant of shares or options roughly simultaneous with doing a transformative deal that saves your company, and you keep them for a while and become rich by owning a bunch of stock, then that seems like exactly how executive compensation is supposed to work? A company is bad, its CEO says "what if we got a giant windfall federal contract and became a different, good company," the board approves, the federal government approves, the stock market approves—that CEO should get rich! He created shareholder value! Kodak's shareholders got $800 million richer in a week out of absolutely nowhere; why shouldn't the guy who landed that deal get a little extra finder's fee? In general if you are the CEO of a public company and you have a good idea for the company and you start negotiating a good deal and you are excited and optimistic about the chances that the deal will get done and it will be good for the company, you might be tempted to buy stock to bet on your optimism. And in some rough sense that's good! You want CEOs to do stuff that increases the value of the company, and to bet their own money on that success. The problem is that buying the stock in the market is generally illegal insider trading: If you have material nonpublic information about an unannounced transformative deal, you can't just go buy stock, because the people you are buying the stock from don't know about the deal and could, after the fact, get mad at you for cheating them.[1] If you instead go to the board and say "hey I am doing a good deal here and would like to own more stock, hint hint," and they respond by giving you a bunch of stock to reward you for doing the good deal, then that isn't insider trading, since the board knows about the deal too and there is no information disparity. It may be a little bit irregular depending on how you were being paid anyway and how much the deal is in your general line of duty and what the disclosed compensation policies are and so forth, but broadly speaking it seems fine for the CEO to do something good and for the board to reward him with stock. The bad thing, incidentally, is selling. If you are an executive or director of a public company and you negotiate a huge transformative deal and get a huge option grant, and then you announce the deal and the stock skyrockets, and you exercise all the options and sell all the stock, that's … troubling. If everyone read your announcement and bought stock, while you sold stock, then that might suggest that you didn't quite believe your announcement, that the whole arrangement is not about rewarding you for increasing the long-term value of the company but about pumping and dumping for a quick gain. (Though it doesn't prove it, you might sensibly be hedging your risk, it might be fine.) But as far as I know there is no suggestion of that here. The Twitter thingLast month, when someone hacked the Twitter accounts of prominent people including Joe Biden and Warren Buffett and Elon Musk and used them to run an extremely dumb Bitcoin scam that brought in about $100,000, my first reaction was "I tell you what, if I got Elon Musk's Twitter password I'd wait until market hours to use it." A lot of people had similar reactions: If you could tweet from Elon Musk's account for an hour, you could probably do quite a lot to move Tesla Inc.'s stock, as Musk himself regularly does. Buy puts and tweet "the factory blew up and I'm quitting," buy calls and tweet "I'm taking Tesla private for real now" and then have Buffett chime in to say he's financing it, pretend to take over Nikola or Hertz, whatever, the world is really your oyster. I was soon persuaded that I had it all wrong. A few days later, I wrote: A lot of smart people pushed back on this idea, fairly I think, noting that making a lot of money here by manipulating traditional financial markets would require (1) capital and (2) a good strategy for getting the money, and yourself, out of reach of the authorities. Bitcoin's irreversibility and anonymity make it a lot safer for this sort of high-profile hack. If you want to maximize the dollar value of your score, in a frictionless no-transaction-costs perfect-market sort of environment, you'd probably trade Tesla options, but in the real world the way to maximize your utility might be to leave a lot of hypothetical money on the table.
Well now I feel doubly stupid, because they caught the guy who allegedly did the hack and two of his alleged accomplices; here is the Justice Department press release. The main alleged hacker is a Florida teen with a history of dumb online scams, and it is possible that he chose this dumb Bitcoin scam not because he did a sophisticated analysis of the risks and rewards of different monetization methods but because dumb Bitcoin scams were what he knew. Also, you know, the hackers were caught in like two weeks! It's not like they only made $100,000 on the Bitcoin scam and got away with it; they only made $100,000 on the Bitcoin scam and got arrested almost immediately. And of course the way that they were caught seems to be that Bitcoin is just incredibly non-anonymous and easy to trace: According to federal agents, Sheppard was found out partly because he used a personal driver's license to verify himself with the Binance and Coinbase cryptocurrency exchanges, and his accounts were found to have sent and received some of the scammed bitcoin. Fazeli also used a driver's license to verify with Coinbase, where accounts controlled by "Rolex" allegedly received payments in exchange for stolen Twitter usernames.
At this point if you want to do financial crimes it's possible that the feds will have an easier time tracing the proceeds through the (public! immutable!) Bitcoin ledger, and catching you when you withdraw money from a (legally licensed! subject to know-your-customer laws! asking you for a driver's license!) crypto exchange, than they would through the regular old system of securities brokers and banks. Things happenThe Only One in the Room: What It's Like Being Black on Wall Street. Fed Weighs Abandoning Pre-Emptive Rate Moves to Curb Inflation. Microsoft Aims for a Deal to Buy TikTok's U.S. Business. CLO ETF. SPAC ETF. When Tesla Hits the S&P 500, It'll Spark the Wildest Passive Trade Ever. SoftBank and Wirecard both paid German middleman to broker $1.1bn deal. Goldman, BofA Left Off Ant IPO After Working for Alibaba Rivals. Fed Is Headed for a Clash With Hedge Funds, Other Shadow Banks. Luxury Department Store Lord & Taylor Files for Bankruptcy. If Oxford's Covid-19 Vaccine Succeeds, Layers of Private Investors Could Profit. Blackstone and TPG vehicles renegotiate debt after Covid upheaval. Cayman, Curaçao and Cyprus: the hunt for $240m of Russian bank bonds. Oakland A's cardboard cutouts include Astros mascot Orbit in a trash can. Dachshund museum. You can now bid on Fyre Fest merch. 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] This is true if you are the CEO and have, arguably, a fiduciary duty to your shareholders not to trade on information that you got in the course of your job and didn't share with them. In general I subscribe to the view that insider trading is not about fairness, it's about theft, so the sentence is the text isn't always true, but it's true enough for CEOs. | 
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