WFM swept up in AMZN current

Since last November's presidential election, CEOs of the nation’s largest companies have sounded more confident than in recent years, expressing optimism in surveys about the economy and their own businesses, anticipating fewer regulations and lower taxes under President Trump and a Republican-controlled Congress.   Investors, likewise, appear buoyant, bidding up shares as reflected in the almost 14% rise in the S&P 500 index since Mr. Trump's election November 8th.

On June 12, NYT's Dealbook observed, however, that this confidence runs counter to Wall Street's "one barometer that is considered the ultimate truth serum when it comes to reflecting C.E.O. confidence: merger and acquisition activity."  Corporate chiefs tend to do deals when they are confident about their own business and the trends in the economy, and are reluctant when apprehensive about the future and consequently focus internally.  (Other observers dispute that such activity is necessarily a manifestation of corporate confidence, but that's an argument for another day.)  The article even posited that the prospect of an early morning Twitter tirade from Mr. Trump may be holding back deal making.  Year-to-date, the number of deals and their aggregate value are at the lowest level since 2013.  Total deal making in the United States in the first quarter was off nearly 40 percent from its peak during the same period in 2015, according to S&P Global Market Intelligence.

Later that week, Amazon (AMZN), not afraid to swim against the current, announced plans to acquire Whole Foods Market (WFM) at $42 a share, a 27% premium to the previous day's closing price.  The $13.7 billion outlay would make the deal the largest to date for the massive online retailer.  The announcement sent the grocery sector into a tailspin, with Kroger (KR), Target (TGT) and Wal-Mart (WMT) shares sinking.  Bulk retailer Costco (COST), behind the curve developing a digital platform endured a "vertiginous" 12.7% drop in the week after the deal's announcement.  Since "grocery stores are in [Warren Buffett and Charlie Munger's] blood", their Berkshire Hathaway (BRK.A), with big stakes in Wal-Mart, Costco and food producer Kraft Heinz (KHC), could also be adversely impacted.  Comparing it to Buy-N-Large, the satirical megacorporation depicted on Pixar's Wall-E, one columnist is not standing idly by as "Amazon eats the world."

Leaving aside for the moment the riptide caused by Amazon's latest bold move, the question at hand is how does Whole Foods - and its co-founder and CEO John Mackey - find itself it this situation.

Last September, Neuberger Berman, an investment firm with $267 billion of assets under management, broke with its longstanding buy-and-hold philosophy and sent a letter to the WFM board of directors raising issues with the company's performance.  Since peaking at $57.20 on Feb. 2, 2015, Whole Foods shares had been on a protracted slide hitting a new low of $28 on Sep. 13, 2016, a decline of 51%.  The S&P 500 Index was up 5.25% and the S&P Retail Select Industry Index (of which WFM is a top-10 component by index weight) down 8.4% over the same period.  At the time, Neuberger Berman was in the process of amassing a stake in WFM, which amounted to 2.4% of the company's common by yearend, according to its 13-F filing with the SEC.

On November 2, WFM disclosed Walter Robb's resignation as co-CEO effective December 31st, leaving Mr. Mackey as the sole CEO after six years sharing the role.  Mr. Robb was thought to be Mr. Mackey's heir apparent.  The company entered into a Separation, Advisory, and Noncompetition Agreement with the former providing for, among other things, $10 million in severance and, perhaps more lucrative, a lifetime 30% discount on purchases made at Whole Foods stores.  The company also announced that Glenda Flanagan, Executive Vice President and Chief Financial Officer, intended to retire from her role, effective as of September 24, 2017 (i.e., the end of the Company’s 2017 fiscal year).  Mr. Mackey pledged to increase margins and revamp operations but the changes apparently were not enough for Neuberger Berman, which continued its behind-the-scenes campaign to spur changes at Whole Foods and to drum up support among activist hedge funds.

February's annual shareholders meeting then provided the occasion for shareholders to express mounting dissatisfaction with slowing sales growth and a languishing stock price.  In the weeks before the meeting, WFM lowered financial guidance, dropped previous plans to expand to 1,200 stores in the U.S., and announced the closure of nine stores and the company's last two remaining commissary kitchens and the termination of two leases.  Whole Foods also announced teaming up with dunnhumby, the consumer data subsidiary of Tesco (TSCDY), aiming to make up ground with rivals already using such information to boost merchandising to loyal customers.  Proxy adviser Glass Lewis, meantime, had raised concerns over WFM's board independence, board attendance and executive pay and opposed the severance package for Walter Robb.

On April 10, Jana Partners, an $8.5 billion activist investment manager, filed a Form 13-D with the SEC disclosing that it had become WFM's largest shareholder (surpassing Vanguard Group and Blackrock), by acquiring a 9% stake.  Virtually unchanged since its AGM, WFM shares were up 10% for the day.  Jana stated its intention "to have discussions with the Issuer's board of directors and management regarding topics including: (1) addressing the Issuer's chronic underperformance for shareholders, (2) changing the Issuer's board and senior management composition and addressing governance, (3) optimizing the Issuer's real estate and capital allocation strategies, including discussing the Issuer's "365" small store format and opportunities to improve returns on invested capital, (4) pursuing opportunities to improve performance by advancing its brand development and by addressing core operating deficiencies in areas including customer loyalty and analytics, category management and analytics, technology and digital capabilities."

Jana took a stake in Safeway, a national supermarket chain, in 2013 and within six months Cerberus Capital Management bid $8 billion for the company so that it could be combined with Albertson's to create a direct competitor to Kroger.  Accordingly, Jana stated in its filing that it has "substantial experience analyzing and investing in the grocery sector and more broadly across the food and retail sectors, and the other reporting persons collectively possess significant operational, financial and nutritional expertise, including, for some of the other reporting persons, experience creating significant shareholder value in the food and grocery sectors."

In a lengthy Texas Monthly article entitled "THE SHELF LIFE OF JOHN MACKEY", published on June 14, Mr. Mackey said, "[t]here's a narrative about business in America that says, 'Business sucks,'" which conveys "the idea that business is about a bunch of greedy bastards running around exploiting people, screwing their customers, taking advantage of their employees, dumping their toxic waste in the environment, acting like sociopaths."  Whole Foods, conversely, "is really, really trying to do the right thing."

Back in 2013, Mr. Mackey co-wrote a book about conscious capitalism - coining the term - contending that business and capitalism are fundamentally heroic systems.  "In the long arc of history, no human creation has had a greater positive impact on more people more rapidly than free-enterprise capitalism," he writes.  Professor Raj Sisodia, the book's co-author, conducted research that showed that the stock prices of a sample of companies ostensibly exhibiting conscious capitalism outperformed the wider market over fifteen years by more than tenfold.  Perhaps, goes their reasoning, conscious companies make for better investments over the long-run.

Mr. Mackey does not argue that Whole Foods should get a pass from Wall Street because it means well, but that patience is warranted.  In the Texas Monthly interview, Mr. Mackey then proceeded to hone in on WFM's activist investors, i.e., major shareholders: "We need to get better, and we're doing that.  But these guys just want to sell us, because they think they can make forty or fifty percent in a short period of time.  They're greedy bastards, and they're putting a bunch of propaganda out there, trying to destroy my reputation and the reputation of Whole Foods, because it's in their self-interest to do so."  Of course, some media outlets played up Mr. Mackey's colorful characterization of Jana Partners.

"These people, they just want to sell Whole Foods Market and make hundreds of millions of dollars, and they have to know that I'm going to resist that," Mr. Mackey continued.  "That's my baby.  I'm going to protect my kid, and they've got to knock Daddy out if they want to take it over."  However, when this year's proxy was filed in January, Mr. Mackey owned less than a million shares.  All directors and officers as a group owned only 1.30% of the outstanding shares, which would not provide much of a base upon which to build support for keeping the company independent.

On June 16, after a "whirlwind courtship", Amazon said it planned to buy Whole Foods.  It turns out that Mr. Mackey and colleagues visited Amazon's Seattle headquarters late in May for a meeting arranged by mutual acquaintances.  "We just fell in love," Mr. Mackey said.  "It was truly love at first sight."

Don't fight the tape, advises the old trader's adage.  Considering the downward trend in the WFM share price in recent years, not to mention the grocery industry's roiling structural changes driven primarily by technology integration, it's remarkable that the company stayed independent until now, particularly because it has no takeover defenses in place.  Under the circumstances, a company is swimming upstream in trying to ward off activist investors clamoring for change, making it wise - and inevitable - to explore strategic alternatives.

Robert Stead

Eric Holder urges UBER vigilance on CG

Based on its most recent funding round last year, which reportedly brought the total raised to $15 billion, Uber Technologies' valuation is $68 billion.  Although the company hasn't tipped its hand, anticipation of a 2017 initial public offering (IPO) was in the air, although there were doubts that it would come off in line with the stratospheric valuation.

Since it is not currently a publicly-traded company, Uber is not required to disclose its financial results.  However, according to figures shared with Bloomberg, the company's 2016 gross bookings (total fares collected) more than doubled to $20 billion.  For the year, net revenue was $6.5 billion and the net loss was $2.8 billion.  In the last quarter of 2016, gross bookings increased 28 percent from the previous quarter to $6.9 billion, generating $2.9 billion in revenue, a 74 percent increase from the third quarter, while tallying a $991 million loss, up 6.1 percent from the same period.

Since its founding in 2009, Uber has burned through at least $8 billion, although it had $7 billion of cash on hand as of this spring, along with an untapped $2.3 billion credit facility.  But the daunting cash burn rate is not the only factor making the near future inopportune for a big IPO. 

In February, software engineer Susan Fowler Rigetti, who'd left Uber the previous December, posted on her blog a damnatory account of a male dominated workplace run amuck, rife with sexual harassment and sexism.  The allegations prompted the company to hire the law firm Covington & Burling to conduct an investigation, which included a multitude of employee interviews and online focus groups.  The four-month effort was led by partner Eric Holder, who served as U.S. Attorney General in the Obama Administration.  The executive summary of the 47 recommendations arising from the investigation was released earlier this week.

Almost simultaneously, CEO Travis Kalanick, a self-described "hustler" who built the hard-driving culture, sent an email to the company's 12,000 employees informing that he would be taking an indefinite leave of absence, dispersing his responsibilities among 14 direct reports.  "If we are going to work on Uber 2.0, I also need to work on Travis 2.0 to become the leader that his company needs and that you deserve," wrote Mr. Kalanick.

Mr. Kalanick's apparently temporary departure follows the recent "permanent" departures of the COO, CFO, CBO, CMO and Head of Engineering, among others.  Not long after Ms. Rigetti posted her "lessons learned" from working at Uber, Mr. Kalanick was caught on tape responding testily to an Uber driver who complained about suffering financially due to falling fares.  Notwithstanding any of the foregoing, the CEO taking time away would be understandable in the aftermath of losing his mother in a fatal boating accident last month.

Several of the 47 recommendations involve corporate governance, primarily aimed at enhancing board oversight and changing senior leadership.  Mr. Holder's report prods the company to:

• Enhance independence of the board

The board should be restructured to add independent members with meaningful experience on other boards.  On Monday, the company named Nestlé EVP Wang Ling Martello an independent director.  On the following day, however, the company lost one when David Bonderman, a founder of private equity firm TPG Capital, resigned after making a "disrespectful" and "inappropriate" remark to fellow director Arianna Huffington.  

• Install an independent chairperson of the board

The appointment of an independent chairman is considered a best practice by CG experts, particularly where there is a desire to enhance the level of board oversight.

• Create an oversight committee

The creation of an Ethics and Culture Committee, a standing committee of the board to oversee  efforts to enhance a culture of ethics, diversity and inclusion within the organization.

• Use compensation to hold senior leaders accountable

The Board should incorporate ethics, diversity and inclusion and other values into its executive compensation program.

• Nominate a senior executive team member to oversee implementation of any recommendations

The company should nominate a senior level executive, reporting directly to the Board, who is responsible for the assessment and implementation of the report's recommendations.

• Review and reallocate the responsibilities of Travis Kalanick

The Board should look at parceling out some of the CEOs historical responsibilities, in part or in whole.

• Use the Chief Operating Officer search to identify candidates who can help address these recommendations

The Board should see to it that a COO is hired who will act as a "full partner" with the CEO but focus on day-to-day operations, culture and institutions within Uber.

• Use performance reviews to hold senior leaders accountable

Uber should establish metrics by which its leaders will be held accountable in the performance review process, including metrics tied to improving diversity, responsiveness to employee complaints, employee satisfaction and compliance.

• Increase the profile of Uber's Head of Diversity and the efforts of his organization

The Chief Diversity and Inclusion Officer should be empowered and his visibility elevated and should report directly to either the CEO or the COO.

These recommendations are ostensibly intended solely to address shortcomings in the company's culture and, in so doing, to help repair damage to the company's reputation.  Nevertheless, getting a head start on tidying up its corporate governance policies and practices can only be advantageous for the world's most valuable startup company since an IPO is likely on the horizon.

Robert Stead

FBI Director nominee is a vigilant CG-man

Almost a month after he summarily - and unexpectedly - dismissed FBI Director Jim Comey, President Trump yesterday tweeted his choice for his successor:

I will be nominating Christopher A. Wray, a man of impeccable credentials, to be the new Director of the FBI.  Details to follow.

Mr. Wray is currently a litigation partner at King & Spalding, working out of the Atlanta, Washington, DC, and Manhattan offices. Prior to joining the firm, Mr. Wray served as the Assistant Attorney General in charge of the U.S. Department of Justice’s (DOJ) Criminal Division from 2003 to 2005.  He was confirmed by the U.S. Senate’s unanimous consent for that position to which was nominated by President Bush.  Mr. Wray helped spearhead the DOJ's efforts to address the wave of corporate fraud scandals and restore integrity to U.S. financial markets.  He served on the President’s Corporate Fraud Task Force and oversaw the Enron Task Force and other major fraud investigations, both around the country and internationally.

Mr. Wray initially joined the DOJ’s leadership as Associate Deputy Attorney General in May 2001 and was appointed the Principal Associate Deputy Attorney General four months later, with oversight responsibilities spanning the full Department.  From 1997 to 2001, Mr. Wray served as an Assistant U.S. Attorney for the Northern District of Georgia.

Mr. Wray has acted as New Jersey Governor Chris Christie's personal attorney in the high-profile Bridgegate investigation.  King & Spalding's list of Mr. Wray’s recent engagements for publicly-traded companies since rejoining the firm includes:

• A Fortune 100 healthcare company in multiple federal and state regulatory investigations around the country.
• A special committee of the board of directors of a leading technology company in conducting an independent investigation of stock options issues.
• A Fortune 100 pharmacy benefits company in parallel investigations by the Department of Justice and SEC into stock options issues.
• A leading telecommunications company in parallel Department of Justice, SEC, IRS, and Department of Labor investigations into stock options practices.
• A leading global financial institution in parallel investigations by the Department of Justice, Manhattan District Attorney’s Office, Treasury Department’s Office of Foreign Assets Control (OFAC), New York Federal Reserve Bank, and various domestic and foreign regulatory agencies.
• A leading global financial institution in parallel investigations by the Department of Justice, IRS, SEC, New York Federal Reserve Bank, New York Department of Financial Services (DFS), Congress and foreign regulatory agencies.
• One of the largest global medical device manufacturers in parallel Department of Justice and SEC investigations of Foreign Corrupt Practices Act issues.
• A Fortune 100 transportation company in conducting internal investigations of Foreign Corrupt Practices Act issues voluntarily disclosed to the Department of Justice and SEC.
• Two different Fortune 250 energy companies in conducting internal investigations of Foreign Corrupt Practices Act issues.
• A leading defense contractor in qui tam litigation under the False Claims Act.
• The audit committee of the board of directors of a Fortune 250 technology company in conducting an independent investigation of revenue recognition and corporate governance issues.
• Appointment by the World Bank as the compliance consultant under a settlement with a leading global technology company.

Mr. Wray is well-versed in corporate governance matters.  He is a member of the Lead Director Network, a select group of lead outside directors from many of America’s top companies, focused on improving corporate performance and earning shareholder trust through more effective board leadership.  Mr. Wray contributed an essay to the U.S. State Department journal Economic Perspectives' issue entitled PROMOTING GROWTH THROUGH CORPORATE GOVERNANCE.

We can rest assured that Christopher Wray, who already knows his way around the halls of Justice and will likely be the next Director of the FBI, is no stranger to the courtroom or the boardroom.

Robert Stead