The dog days of summer are drawing to a close but there are a few bones that we can't let go of as the situations continue to play out. So, we'll resume reporting by following up on several high-profile matters covered previously.
The long tail of WFC's fake account debacle
In the spring, we traced the sequence of the events for what's come to be known nationally as the "fake account scandal" that - presumably - culminated in the Wells Fargo board clawing back over $180 million in compensation from top executives.
On the last day of last month, Wells Fargo filed an 8-K and issued a press release disclosing the completion of its previously announced expanded third-party review of retail banking accounts dating back to early 2009 and providing an update on the company's progress regarding customer remediation. The new investigation uncovered another 1.4 million unauthorized accounts opened by bank personnel, bringing the total to date to 3.5 million. Thus far, the company has paid $7 million in refunded fees and interest, $3.7 million in compensation to complainants and $147 million to settle a class-action lawsuit - in addition to $185 million to settle with federal and Los Angeles regulators. Due in part to the fake accounts matter, the Office of the Comptroller of the Currency downgraded WFC's Community Reinvestment Act rating, which in turn prompted some state and municipal governments to pull business from the bank.
In November of last year Warren Buffett, CEO of Berkshire Hathaway, WFC's largest shareholder with a 9.4% stake, observed that former WFC CEO John Stumpf was slow to respond to the crisis and that one should face up to a problem fast. In other words, "[g]et it right, get it fast, get it over." When we reported on the matter this spring, the company had announced another tranche of claw-backs from Mr. Stumpf and Executive Vice President Carrie Tolstedt, head of retail banking, amounting to $75 million.
Back then, Mr. Buffett nonetheless was upbeat about the company's prospects looking ahead, noting that one third of the nation does business with WFC and that, although a bond of trust was broken, the number of depositors would be higher a year hence. Commenting on the latest disclosures late last week, however, Mr. Buffett said: "There's never just one cockroach in the kitchen when you start looking around. Any tine you put your focus on an organization that has hundreds of thousands of people...you may very well find that it wasn't just the one who misbehaved that you find out about."
Long past time for preventative measures, Berkshire Hathaway Vice Chairman Charlie Munger might deem WFC to be in the ton-of-cure phase.
Amazon consummates acquisition of Whole Foods
When we last visited the subject earlier this summer, it was not long after Amazon's "whirlwind courtship" of Whole Foods Market resulted in the former popping the offer to acquire the grocer for $13.7 billion or $42 per share, a 27% premium over the previous days' closing price. "We just fell in love," WFM CEO and Co-founder John Mackey said at the time. "It was truly love at first sight," he emphasized.
At WFM's special meeting held on August 23rd, almost 72% of outstanding shares were voted FOR the merger agreement, versus negligible votes AGAINST (.3%), making support virtually unanimous after factoring out the ABSTAIN vote and the broker non-vote. On the same day, the Federal Trade Commission (FTC) green-lighted the deal, noting that "[o]f course, the FTC always has the ability to investigate anticompetitive conduct should such action be warranted."
Since the acquisition was first announced in June, investors have expressed concern that Amazon's entry into the grocery sector would adversely impact other competitors. These worries were not allayed when Amazon slashed prices on some staples like eggs, butter, ground beef, apples and bananas almost immediately after closing the transaction. The combined market capitalization of six major players - Costco (COST), Kroger (KR), Sprouts (SFM), Supervalu (SVU), Target (TGT), Wal-Mart (WMT) - declined by $12 billion in the ensuing days after Amazon announced that its acquisition of WFM would close in a matter of days. Sprouts, losing almost 10%, and Supervalu, losing over 2%, were the hardest hit.
Lower prices should endear Amazon to the ambivalent Whole Foods customer, tired of parting with her whole paycheck, but both entities' progressive reputations are being tested by their converging business practices. Currently accounting for 34% of online sales, on the way to a 50% share by 2021, Amazon's growing dominance is earning it enmity from certain quarters. Amazon is displacing Walmart, in the eyes of many, as the destroyer of mom-and-pop businesses. A 2014 Salon article suggested that Amazon Prime membership might be morally indefensible in light of the company's alleged mistreatment of workers, or sick brutality and secret history of ruthless intimidation, as the piece's title put it.
In the not-too-distant future, Amazon's unrelenting success and expansion plans could draw intensified antitrust scrutiny. The view of this prospect, and its potential impact on shareholder value, from the boardroom and executive suite could be the subject of future analyses.
Laying the groundwork for IPO, Dole Food prunes operations
As we detailed in July, Dole Food Co. is preparing for the third initial public offering (IPO) in company history.
In recent weeks, the company has announced the closing of packing and cooling plants in Southern and Northern California, and layoffs of the facilities' employees, as well as those harvesting strawberries to be packaged. "This is part of an ongoing initiative to evaluate all berry operations to ensure they remain aligned with our growth objectives and position to remain competitive in the market place," Dole spokesman William Goldfield.
More broadly, according to the S-1, Dole Food is "continuing the rationalization of [its] footprint of locations and offices" and aims to "improve cash flow generation by being actively engaged in divestment of non core assets, particularly the approximately 14,800 acres of idle land [the company owns] in Hawaii." The company owns and operates 124,000 acres worldwide, but only 1,600 acres on the mainland U.S. Although they only represent a fraction of the overall portfolio, these acres are likely among the most valuable, and yet among the most costly to farm; the company also farms 19,000 acres on leased land across five states.
According to the S-1, the company signed a term sheet to acquire Dole Plantation, a theme park and one of Hawaii's leading tourist attractions, from Castle & Cooke Properties, Inc., another company owned by Dole Food owner and chairman David Murdock. The company said the intention for entering into the transaction is primarily to increase earnings. Last spring, the company anticipated structuring the acquisition as a like-kind exchange (to defer tax liability per IRC §1031) for the company's headquarters facility in Westlake Village, CA, which apparently Dole would still occupy. Per the S-1, the company contemplated completing the acquisition by mid-2017, but there's been no indication that this has happened.
Dole Food Co. remains the largest producer of fruit and vegetables in the world but is striving to boost revenues and operating margins, while reducing debt. Revenues for year ended December 31, 2016, were down 3% from the
previous year. The company's operating margin is less than 1%, versus 4.4%, according to Morningstar,
for Fresh Del Monte Produce (FDP), a publicly-traded company with a comparable profile. Total debt of approximately $2.5 billion at yearend 2016 was
up slightly from the previous yearend. So there seems to be some work to do before Dole's IPO ripens enough to sell.
Uber hails new CEO to ready for IPO
Earlier this summer, we considered the corporate governance recommendations in Eric Holder's report on the hostile work environment allegedly tolerated, if not encouraged, by senior management at Uber. Among the recommendations was that the company hire a COO who would act as a "full partner" with the CEO (who took an indefinite leave of absence at the time) but focus on day-to-day operations, culture and institutions within Uber. Within a week, founder Travis Kalanick stepped down as CEO, reported the New York Times, after five major investors demanded that he resign immediately.
Later in the summer, the Washington Post proclaimed that "Uber's search for a female CEO is narrowed down to three men." The article opened by asserting that "[a] company trying to recover from allegations from rampant sexism might reasonably think that hiring a female chief executive would help it restore credibility with customers and - perhaps more importantly - with potential employees in a tight marketplace for talent." Although there's no indication that the company predetermined that a female would be be hired as CEO only to be thwarted, several high profile women reportedly were approached to fill the role. General Motors (GM) CEO Mary Barra, EasyJet (LON:EZJ) CEO Carolyn McCall, Facebook (FB) COO Sheryl Sandberg, HP (HPQ) CEO Meg Whitman and Google (GOOGL) subsidiary YouTube CEO Susan Wojcicki all apparently turned down overtures from Uber's board.
Late in August, the Uber board settled on the highly-regarded CEO of online travel company Expedia (EXPE), based in Bellevue, WA; among other accomplishments, Dara Khosrowshahi drove revenues from $2.1 to $8.7 billion since becoming EXPE's chief in 2005. "This company has to change," Mr. Khosrowshahi said in a tweet on Wednesday, August 30, before a private all-hands meeting at Uber's headquarters in San Francisco. "What got us here is not what's going to get us to the next level."
While Mr. Holder recommended appointing an independent chairman, the company tweeted that Mr. Khosrowshahi plans to bring in a chairman who can serve as his "partner at the board level." The new CEO also has multiple C-suite openings, such as chief operating officer, chief marketing officer and chief financial officer, to fill. Just after taking the helm. the new CEO was greeted with more
controversy when news leaked that the Justice Department was looking
into allegations that company officials violated U.S. laws by bribing
foreign officials.
At the Uber all-hands assembly, Mr. Khosrowshahi reportedly indicated that privately-held Uber could go public in "18 to 36 months." While the new CEO plans to focus on the core business to "pay the bills," he also must change the company's "baller" culture, burnish the tarnished brand, rebuild the depleted executive team, beef up legal and regulatory compliance, decide which big bets, e.g., self-driving car research, to stick with, and overhaul the "founder-friendly" corporate governance structure, among other things. So there's a lot on his plate.
Robert Stead
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