Ralph Nader steamed as stock buybacks pick up steam

Earlier this month, former presidential candidate and famed consumer advocate Ralph Nader took aim at the $7 trillion of corporate stock buybacks since 2003, declaring the phenomenon a "monster of economic waste."  Mr. Nader notes that prior to the enactment of Rule 10b-18 of the Securities Exchange Act in 1982, stock repurchases were considered unlawful stock manipulation.  But the stock buyback mania was unleashed in 1993 when President Clinton's first budget bill included §162(m) of the Internal Revenue Code.  This provision limits the deductibility of compensation in the form of salary and bonus for a company's top-5 executives to the first $1 million each in computing corporate taxes.

One apparent unintended consequence of the rule is that compensation for top executives has shifted dramatically to equity awards, the effect of which has been to drive up the overall level of pay for CEOs and others.  Although Mr. Nader singles out compensation consultants for initially pushing this innovation, the C-suite does not come off unscathed in the story.  The stock buyback mania, Mr. Nader maintains, is not motivated by a desire to benefit shareholders but to increase CEO pay by improving earnings-per-share to boost share price.  He finds a massive conflict of interest between corporate executives and their own company because stock buybacks extract capital from corporations rather than channeling it to productive corporate purposes.  But it is corporate boards, due to the deference accorded per the business judgment rule, that can authorize substantial share buybacks without seeking shareholder approval.

Arguing that stock buybacks "parasitize" the economy, Mr. Nader is hardly the first prominent figure to criticize the practice that has swept across corporate America.  He contends that the funds allocated to repurchase shares could have been invested in research and development, productive plant and equipment, raising worker pay, shoring up shaky pension fund reserves, or increasing dividends to shareholders.  Citing economics professor William Lazonick, he alleges that CEOs devise buyback programs primarily to escalate their pay to exorbitant levels, resulting in increased societal inequality and stagnant middle class wages.  Finally, he points to data indicating that the share performance of companies with excessive stock buybacks compares unfavorably with market returns, and in some cases suffered outright declines.

The intent behind stock buybacks and their effect on individual companies as well as their impact on the U.S. economy can be explored in greater depth at another time.  But in recent years the vast scale of stock buybacks in aggregate and as a proportion of equity markets is indisputable.  According to Credit Suisse, the corporate sector, by way of buybacks, has been the main buyer of U.S. equities since the market low reached early in 2009 in the aftermath of the global financial crisis.  In July, Credit Suisse strategist Andrew Garthwait wrote that "one of the major features of the US equity market since the low in 2009 is that the US corporate sector has bought 18% of market cap, while institutions have sold 7% of market cap."

Due to policy uncertainty, primarily involving interest rate levels, buyback activity slowed in the first half of 2017, down 21% compared to the first half of 2016.  Goldman Sachs estimates that buybacks will pick up in the second half of 2017 because buybacks in the Financials sector are expected to increase 60% due to improved Comprehensive Capital Analysis and Review (CCAR) results and buyback seasonality (second half buybacks usually account for 60% of the annual total).  For 2017, Goldman lowered its annual corporate demand, i.e., repurchases, forecast to $570 billion from $640 billion, implying a net decline of 9% from 2016.  Its forecast for 2018 is $590 billion, up 3% from 2017.

The modest anticipated increase in 2018 buybacks over the previous year, and below the total for 2016, is attributed to several factors:

• The equity market is at record highs with company valuations stretched.
• Rising interest rates could discourage companies from issuing additional debt to fund buybacks.
• If policy does not become clearer, management teams may throttle back cash outlays like they did in the first half of 2017.
• "Buyback stocks" have lagged broader indexes; in other words, investors appear to be bidding up share prices for companies that invest for growth as opposed to companies returning cash to shareholders.

Unlike U.S. equity markets, e.g., S&P 500 and Dow Jones Industrials, which regularly hit all-time highs these days, annual stock repurchase totals won't be breaking records any time soon.  But barring interest rates settling at a higher plateau, corporate buybacks show little sign of pulling back substantially.

Robert Stead

Unfortunate timing for SEC disclosure of hacking incident

We recently looked into the massive data breach of personal information maintained by the publicly-traded company Equifax (EFX), one of the three major credit bureaus entrusted with such sensitive information.  The debacle claimed two of the company's top executives, chief information officer David Webb and chief security officer Susan Mauldin, who both resigned in mid-September.  On September 26, the company announced that its CEO Richard Smith is retiring but would act as an unpaid adviser for 90 days to help with the transition.  Mr. Smith will collect $72 million owed for this year and $17.9 million in pension and other benefits.  Fortune mischievously apportioned the $90 million payday across the customers whose information was improperly accessed at roughly 63 cents a head.

The House Energy and Commerce Committee and the Financial Services Committee have signaled their intent to hold hearings on the matter and the Senate Commerce and Finance Committees sent letters to the company demanding answers about the extent of the breach and the steps the company is taking to mitigate the damage.  Breaking with normal practice because of the scale and seriousness of the incident, the Federal Trade Commission publicly disclosed that it had opened a formal investigation of the massive data breech.  Days later, thirty-six U.S. senators asked the SEC and other federal authorities to investigate approximately $1.8 million of Equifax stock sales by three of its executives between July 29 - the day the company said it learned of the data breach - and September 7, when it was revealed it publicly.

The SEC hasn't publicly indicated if such an investigation is underway but it has definitely been out front in pushing entities it oversees to be vigilant in staying on top cybersecurity risks and candid in informing investors and other market participants of such risks.  In December 2014, the SEC released Regulation Systems Compliance and Integrity (Regulation SCI), which promulgated regulations requiring securities exchanges and clearinghouses to "take corrective action with respect to SCI events (defined to include systems disruptions, systems compliance issues and systems intrusions), and notify the Commission of such events."  Then on September 20, the Commission released a lengthy statement "highlighting the importance of cybersecurity to the agency and market participants, and detailing the agency's approach to cybersecurity as an organization and as a regulatory body."

Midway through the document, the Commission divulged that it learned last month that a hacking "incident previously detected in 2016 may have provided the basis for illicit gain through trading."  "Specifically, a software vulnerability in the test filing component of our EDGAR system, which was patched promptly after discovery, was exploited and resulted in access to nonpublic information.  Distinguishing the situation from the Equilar data breach, the Commission expressed the belief that "the intrusion did not result in unauthorized access to personally identifiable information, jeopardizing the operations of the commission, or result in systematic risk."

Although the Commission did not provide the specifics of the "incident" referenced in the document, it can pinpointed to May 14, 2016, an otherwise quiet Thursday when a sudden 20% surge in Avon Products (AVP) shares caused a stir.  The unexplained move was quickly traced to a filing by a "private-equity" firm, purportedly bidding to take Avon private, that was uploaded to Edgar, the SEC's online public filing repository.  The authenticity of the document became suspect because it was riddled with typographical errors, and also misspelled the firm's name, specifically its 3-letter acronym.  Further investigation did not turn up a PTG Capital operating in London, where it was located according to the filing, or anywhere else.  Investors quickly determined that the filing was a hoax and Avon shares plummeted to their preexisting level.  At the time, federal prosecutors attributed the episode to a Bulgarian hacker and said the culprit made a mere $5,000 from the plot.

In an editorial entitled "The SEC's Cyber Embarrassment", the Wall Street Journal took the Commission to task for dropping the news that the filing system had been penetrated - all four sentences of it - in the middle of a 4,000 word document advising publicly-traded companies and exchanges on regulatory obligations to manage and disclose cyber risks; in journalism, the editorial board deadpanned, this is known as burying the lead.  Indeed the document raised more questions than it provided answers.

Considering that the EDGAR system receives and processes 1.7 million fillings year, more frequent or widespread intrusions into it could undermine the integrity of the information and wreak havoc on investment and trading decisions.  Moreover, news of the hack of its systems might not inspire confidence in the security of the SEC's Consolidated Audit Trail that is scheduled to go online this fall after seven years of development.  If all goes according to plan, the CAT, a single, comprehensive database, will enable regulators to more efficiently and thoroughly track all trading in the U.S. equity and options markets.  U.S. financial exchange officials have warned that the system will be an inviting target for hackers.

The SEC demands that publicly-traded companies scrupulously adhere to stringent disclosure regulations, which has been facilitated in recent years by its online platforms.  After required information is made known in public filings via SEC systems, companies are not responsible for its safekeeping and integrity.  But any shortcomings in doing so will invariably be felt on the issuer side.

Robert Stead

EFX execs' untimely stock sales draw heightened scrutiny

By now everyone's aware of the Equifax (EFX) data - or security - breach in which hackers accessed the personal information (i.e., names, Social Security numbers, birth dates, addresses and, in some instances, driver's license numbers) for up to 143 million people in the U.S, per the press release attached to the company's 8-K filed with the SEC on September, 7.  The unidentified culprits also stole credit card numbers for about 209,000 U.S. customers and "personal identifying information" for 182,000 Americans; the company has not explained how this latter information differs from the aforementioned personal information.  The company also revealed that unspecified numbers of U.K. and Canada residents had "limited personal information" compromised.  (The company subsequently divulged that 400,000 U.K. customers may have also had their data compromised.)

According to Equifax, I'm one of those whose "personal information may have been impacted by this incident."  If you haven't yet checked for yourself, you can do so by visiting this website set up by Equifax and input your last name and last six digits of your Social Security number.

The breach lasted from mid-May through July.  The company discovered the hack on July 29 and informed the public on September 7.  The breach was traced to a tool, called Apache Struts, used to build web applications.  Equifax utilized it to support its online dispute portal, where customers go to log issues with their credit reports.  The company admitted that its personnel was aware of the security vulnerability a full two months before the hackers first accessed customer data.

Unsurprisingly, a wave of investigations and lawsuits has been unleashed by the debacle that has affected so many.  "The [Federal Trade Commission] typically does not comment on ongoing investigations, Peter Kaplan, the FTC's acting director of public affairs, said in a statement.  "However, in the light of the intense public interest and the potential impact of this matter, I can confirm that FTC staff is investigating the Equifax data breach."  The attorney general of Massachusetts, Maura Healey, said she intends to file the first state lawsuit over the breach of customer data.  U.S. Rep. Jeb Hensarling (R-TX), chairman of the House Financial Services Committee, has indicated that preparations are underway to hold congressional hearings on the matter.  Not to be outdone, Senate Minority Leader Chuck Schumer (D-NY) compared Equifax to Enron, the eponymous company brought down by an accounting fraud scandal.

Along with Experian (LON: EXPN) and TransUnion (TRU), Equifax is a major credit reporting bureau that collects and maintains consumer credit information and resells the data in mainly the form of credit reports.  While Equifax has been publicly-traded since 1978 and Experian since 2006, TransUnion only went public in 2015.  Because of the often determinative impact of credit scores in the financial lives of Americans, and because the bureaus "don't care, because they don't have to," Bloomberg's Joe Nocera says that, at a minimum, the government needs to create incentives that would reward the companies for accuracy, customer service, and ironclad data security.  If that doesn't do the trick, he proposes a "radical and sensible" solution: treat the three companies like public utilities.  The companies would remain publicly-traded but would be overseen by a government regulator that would set performance standards for accuracy, data security, etc., and would be empowered to restrict dividends and executive compensation for failing to measure up.

As if that's not enough, according to SEC Form 4 filings, three senior EFX executives sold shares worth approximately $1.8 million three days after the company discovered the security breach.  Company spokeswoman Ines Gutzmer said they "had no knowledge that an intrusion had occurred at the time" and only "sold a small percentage of their Equifax shares."  On August 1, Chief Financial Officer John Gamble sold just over 13 percent of his shares worth $946,347, president of U.S. information solutions Joseph Loughran sold 9 percent of his shares (in conjunction with an option exercise) worth $584,099, and president of workforce solutions Rodolfo Ploder sold 4 percent of his shares worth $250,458.  The filings do not indicate that these were transactions pursuant Rule 10b5-1 plans, by which executives can sell a predetermined number of shares at a predetermined time.

Given the foreseeable reverberations of selling shares while cognizant of adverse - or explosive - non-public information, it's hard to fathom executives nonetheless proceeding with the transactions under such circumstances.  We're likely to find out, though, because a bipartisan group of 36 senators sent a letter urging the FTC, the Department of Justice and the Securities and Exchange Commission to investigate the company over the executives' early-August stock sales.  Having worked at MSCI/ISS, I'm rather familiar with the intricacies of an elaborate system of option exercise blackout periods, share trading windows, preclearance requirements, and the like.  In the midst of dealing with the fallout of the massive customer data breach, temporarily tightening prohibitions on executive stock sales was probably the last thing on their minds in the C-suite.  But, at the very least, the transactions aren't helping with optics in the light of the mounting damage to customer relationships, company and industry reputation and, potentially, the bottom line.

Robert Stead

Weekend Update: WFC, AMZN, Dole Food & Uber

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

The imperishable Dole Food Co.'s latest IPO

The universe of publicly-traded companies continues shrinking and the IPO pipeline remains sluggish despite U.S. stock market indexes moving relentlessly higher in recent years.  Both are important issues that we'll explore in depth soon.  In the meantime, that hardy perennial Dole Food Company filed for an IPO this spring, apparently aiming to go public this fall.  Fresh out of Harvard's School of Horticulture & Agriculture, James Dole in 1899 moved to Hawaii and within two years founded the Hawaiian Pineapple Company (HAPCO) to grow pineapples on Oahu; the enterprise ultimately evolved into today's Dole Food Company, the largest producer of fruit and vegetables in the world.

Dole Food Co. actually traces its history back to 1851, when the trading company Castle & Cooke (C&C) was established in Hawaii by Samuel Castle and Amos Cooke, both originally from Boston.  C&C eventually became one of the Big Five companies that dominated sugarcane growing and processing in the Territory of Hawaii during the early 20th century.  In 1930, C&C acquired a 21% interest in HAPCO, which had successfully promoted its pineapples via American magazine advertisements in one of the first nationwide advertising campaigns; only in 1933 did the company start stamping "DOLE" on cans of pineapples and pineapple juice.

In 1961, C&C purchased the remaining shares of HAPCO and also acquired Columbia River Packers, which was renamed Bumble Bee Seafoods (which was sold off in 1985).  In two tranches, 1964 and 1968, it acquired the Standard Fruit Company, a major grower and distributor of bananas and other tropical fruit.  (Standard Fruit and other fruit companies from the U.S. famously wielded outsized influence in Latin America throughout much of the 20th century.)  In 1976, C&C acquired Bud Antle Inc., a large California-based lettuce and celery grower. 

After experiencing financial difficulties in the ensuing years, in 1985 C&C merged with Flexi-Van Corp., a NYSE-traded transportation leasing company controlled by David Murdock, who became CEO of the combined entity, which retained the C&C name.  In 1991, shareholders approved changing the company's name to Dole Food and in 1995 spun off to shareholders C&C, its subsidiary that owned and developed real estate.  Garnering headlines worldwide, C&C in 2012 sold 98% of the total acreage on Lanai, the sixth largest of the Hawaiian islands, to Larry Ellison, the founder and then-CEO of Oracle Corp. (ORCL), for $300 million; until 1992, the island had been home of one of the world's largest pineapple plantations, but which was no longer viable due to overseas producers driving down prices.

Since the turn of the century, the company has continued to expand the depth and breadth of its product line through acquisition, absorbing JR Wood (frozen fruit products) and Coastal Berry (strawberries and bushberries) in 2004, SunnyRidge Farm (mainly blueberries) in 2011, Mrs. May's Naturals (healthy snacks) in 2012 and Chile's TucFrut Farms (apples, blueberries and kiwifruit) in 2016.  Among its divestitures, the company in 2012 sold its worldwide packaged foods and Asia fresh produce businesses to Japan's Itochu Corp. for $1.7 billion in cash, which was applied to paying down debt.  Dole now operates plantations throughout Central and South America and in the Asia-Pacific region, including on the Hawaiian island of Oahu.

A venerable institution in his own right, the nonagenarian Mr. Murdock this spring disclosed his intention to take the company public for the third time.  And since he expects to live to 125, this may not be the last round-trip for Dole Food Co. under his stewardship.  To spread his vision of the benefits of a plant-based diet, Mr. Murdock continues to fund a major research institute dedicated to the "advancement of nutrition, agriculture and human health."  He's not afraid to dole out advice on longevity, as one wag put it.

On June 5, 1964, Dole Food's predecessor Castle & Cooke, then the largest company in Hawaii, went public, trading on the New York Stock Exchange under the ticker symbol CKE.  The New York Times noted that it was best known for food products such as Dole pineapple products, Bumble Bee seafoods and Royal Hawaiian macadamia nuts, but also had interests in land development, shipping, merchandising, insurance and a cemetery.

It wasn't until 2003 that Mr. Murdock, then the chairman and CEO of Dole Food, won shareholder approval (with a 77% "FOR" vote) to purchase the 76% of the company shares he did not already own for $33.50, plus the assumption of approximately $1 billion in debt, for a total enterprise value (including the debt assumed) of approximately $2.5 billion.  Mr. Murdock explained at the time that taking the company private would allow him to expand Dole's operations around the globe and develop new products without having to answer to investors.  Moreover, "[i]t takes capital and we will be spending capital to teach people how to eat," Mr. Murdock said at the time.

On October 23, 2009, Dole Food went public for the second time, raising $446 million.  Below the estimated range of $13-15, the shares priced at $12.50 giving the company a market capitalization of approximately $1.1 billion; the shares closed at $12.28, down 1.7% that day.  The depressed opening price and subsequent trading were attributed to concerns over the company's heavy debt load of $2 billion, which the proceeds of the offering were intended to pay down.

On August 12, 2013, Dole Food announced signing an agreement by which Mr. Murdock would purchase the 60% of the company's shares he did not already own for $13.50 in cash each, placing the total enterprise value (including the assumption of debt) at approximately $1.6 billion.  The company's press release stated that the price represented an increase of $1.50 per share over Mr. Murdock's original proposal, and a premium of 32% over the $10.20 per share price immediately prior to such proposal.  When proposing the takeover, Mr. Murdock wrote to the board: "Operating Dole Food Company as a private enterprise is the best alternative given the public-market focus on short-term earnings and predictable quarterly results.  This will give the company greater flexibility to make investment and operating decisions based on long-term strategic goals."

Although 62% of disinterested shareholders voted "FOR" the deal in October, certain shareholders filed suit against the company, Mr. Murdock and C. Michael Carter, COO and general counsel, in the Court of Chancery of Delaware, where the company is incorporated, alleging that the buyout price was too low.  Having lost at trial, the company and the executives settled the litigation with shareholders for $115 million at the end of 2015.  Dole reincorporated from Hawaii to Delaware in 2001 and Mr. Murdock is not the first executive to express dissatisfaction with the latter state's inhospitality to business (a contention we'll delve into one day soon).  In March of this year, the company and the executives settled for $74 million separate litigation in federal court with shareholders who accused them of providing "false, negative information designed to artificially depress the price of Dole's common stock."

On April 24, 2017, the company filed with the SEC a registration statement on Form S-1 for an initial public offering.  Although the filing indicates that the company will raise $100 million (likely as a placeholder in the document), Bloomberg reports that the company is seeking to raise about $400 million.  According to the S-1, the company will use the proceeds of the offering to pay down indebtedness, which stood at $2.5 billion at December 31, 2016.  For the year, the company showed a net loss of $23 million on $4.5 billion in revenues.  While Mr. Murdock remains chairman of the board, Johan Lindén, who had held various management positions in the company's European operations, was named president and CEO earlier in April.

For the prospective investor, there's plenty of - even recent - history to unpack before trying to get in on the IPO. If IPOs are rather scarce these days and some execs find running a public company disadvantageous, Mr. Murdock seems to have no qualms entering the public arena again.  Perhaps Dole Food's public offering could enliven the IPO market while bucking the trend of U.S. companies opting out of the publicly-traded realm.

Robert Stead

Revamped banks sailing into stormy seas?

Following up on our recent post on major banks' capital allocation plans all passing muster for the first time since the imposition of Fed-administered stress tests, let's try put in perspective how far these financial institutions have come since the depths of the financial crisis almost a decade ago.  Clearing this hurdle, individually and collectively, happens perhaps not a moment too soon in light of JPMorgan Chase (JPM) CEO Jamie Dimon's recent ominous comments on the changing terrain looming for these companies.

On July 11, at the Europlace International Financial Forum in Paris, Mr. Dimon, chairman and chief executive of the largest bank in the U.S., expressed concern that the Federal Reserve's unfolding plan to unwind it bond-buying programs, otherwise known as "quantitative easing", or QE, might not go as smoothly as many anticipate.  Last month, the Fed announced that it would soon start selling some of its portfolio of $4.5 trillion of treasury bonds, $3.5 trillion of which has been amassed in several rounds starting late in 2008.

"We've never had QE like this before, we've never had unwinding like this before," said Mr. Dimon at the conference.  "Obviously that should say something to you about the risk that might mean, because we've never lived with it before."  All the main buyers of sovereign debt over the last ten years, i.e., financial institutions, central banks and foreign exchange managers, will become net sellers, Mr. Dimon noted.  "When that happens of size and substance, it could be a little more disruptive than people think," Mr. Dimon continued.  "We act like we know exactly how its going to happen and we don't"  Central banks aim to provide certainty but you "cannot make things certain that are uncertain."

Of course, it is no coincidence that QE started a month or so after the passage of the legislation that authorized $700 billion to purchase "troubled" assets via the Troubled Asset Relief Program (TARP).  Both were intended, in large part, to stabilize the critical financial sector.  While QE boosted liquidity in the economy in part to promote lending, TARP was intended to shore up the balance sheets of financial institutions of all sizes.  The initial proposal to purchase "troubled" assets, mainly mortgage-backed securities containing subprime mortgages, quickly gave way to the plan to purchase preferred shares in banking companies (coupled with warrants to purchase their common shares as an equity kicker) due the complexity of pricing the target assets and the need for expedience under the dire circumstances.

Some major financial institutions only reluctantly got with the program, so to speak.  Having quipped that there's no "A, R or P" in the government's Troubled Asset Relief Program, U.S. Bancorp (USB) CEO Richard Davis went on to say back in February 2009 that "[w]e were told to take it so that we could help Darwin synthesize the weaker banks and acquire those and put them under different leadership."  In June of the same year, BB&T (BBT) chairman John Allison said "[i]t was a huge rip-off for us," complaining that the bank was paying 9% on the TARP funds that "we didn't want in the first place."  Because "TARP contributed to an unnecessary panic in the marketplace that still hasn't been fully restored[,...t]he decision by the U.S. Treasury and the Federal Reserve in October 2008 to make the banks take TARP money even if they didn't want it or need it was one of the worst economic decisions in the history of the United States," contended former Wells Fargo (WFC) CEO Dick Kovacevich at the Stanford Institute for Economic Policy Research in June of 2012.

Bank of NY-Mellon CEO Robert Kelly, on the other hand, asserted that TARP "helped avert a global calamity."  To be sure, many banks of varying size were in dire need of the capital infusion to keep the doors open.  The Treasury Department distributed a total of $313 billion in capital to financial institutions through these initiatives.  The government came out ahead on TARP and the separate support of Citigroup (C) and Bank of America (BAC), showing a net gain of $24 million.  The Congressional Budget Office (CBO) reported in June that, overall, TARP is in the red to the tune of $33 billion, owing mainly to losses on assistance for American International Group (AIG), the automotive industry and mortgage programs.

American Express' (AXP) TARP preferred stock and warrants provide an example of a profitable transaction for the Treasury.  In June of 2009, the company repaid the $3.39 billion it had received for issuing the previous January preferred stock carrying a 5% annual interest rate; it had also paid $74.4 million in accrued interest.  A month later, the company agreed to repurchase the associated warrants held by the Treasury for $340 million.  All told, the Treasury's return on investment was over 12%.

Less than a year after receiving the funds, Bank of America finished repaying the U.S. Treasury $45 billion after having paid $2.54 billion in dividends on the preferred stock.  In connection with this repayment late in 2009, the company issued Common Equivalent Securities, which subsequently required it to seek shareholder approval to increase BAC's authorized shares outstanding from 10 to 11.3 billion, eliciting some opposition due to shareholder dilution.  Because the company and the government could not agree on price, the Treasury Department auctioned off the associated warrants for $1.54 billion, bringing its total return on the BAC capital infusion to 9%.

The table below lays out the TARP principal disbursements to each of the 34 major financial institutions recently given a clean bill of health by the Fed.  The eight institutions below that received no funds via TARP are U.S. subsidiaries of foreign entities, and thus were not eligible for this program.  However, several of the institutions, e.g., HSBC, benefited significantly from other Fed funding.  CIT Group, which emerged from bankruptcy in 2013, was the only recipient in this group that was unable to redeem the preferred stock and repay the Treasury.  If Mr. Dimon is correct that the normalization of Fed policy, i.e, shrinking its balance sheet along with lifting interest rates, means that banking sector is heading into uncharted - and perhaps rough - waters, then the stabilization of its flagship institutions comes at an opportune time.

Named CEO of Bank One in 2000 and then JPMorgan in 2005, the estimable Mr. Dimon has sounded a warning to the financial sector - and perhaps to the nation as a whole - that "the tide is going out;" only then, his friend Berkshire Hathaway (BRK.A) CEO Warren Buffett has observed, do you "find out who is swimming naked."

Robert Stead

Institution	Investment
Ally	$17,200,000,000
American Express	$3,390,000,000
BankWest
Bank of America	$45,000,000,000
Bank of NY-Mellon	$3,000,000,000
BB&T	$3,100,000,000
BBVA Compass
BMO *	$1,700,000,000
Capital One	$3,570,000,000
CIT	$2,330,000,000
Citigroup	$45,000,000,000
Citizens
Comerica	$2,250,000,000
Deutsche Bank Trust Co.
Discover	$1,200,000,000
Fifth Third	$3,400,000,000
Goldman Sachs	$10,000,000,000
HSBC
Huntington	$1,400,000,000
JPMorgan Chase	$25,000,000,000
Keycorp	$2,500,000,000
M&T	$750,000,000
Morgan Stanley	$10,000,000,000
MUFG Americas
Northern Trust	$1,576,000,000
PNC	$7,600,000,000
Regions	$3,500,000,000
Santander
State Street	$2,000,000,000
SunTrust	$4,850,000,000
TD Group
U.S. Bancorp	$6,600,000,000
Wells Fargo	$25,000,000,000
Zions	$1,400,000,000
TOTAL	$233,316,000,000

* In June 2011, completed acquisition of Marshall & Isley, which had received TARP funds.

Corp exec latest nominated for Trump Admin.

President Trump nominated Janet Dhillon to chair the Equal Employment Opportunity Commission (EEOC), the forceful federal agency that administers and enforces civil rights laws against workplace discrimination.  Ms. Dhillon is currently Executive Vice President and General Counsel of Burlington Stores (BURL) and previously was EVP and GC of J.C. Penney Co. (JCP) and SVP and GC of US Airways Group, which merged with American Airlines (AAL) in 2013.  She is the latest corporate executive nominated to serve in the Trump Administration.  Secretary of State Rex Tillerson, former CEO of ExxonMobile (XON), and Small Business Administration (SBA) Administrator Linda McMahon, former CEO of World Wrestling Entertainment (WWE), are among the most well-known execs who have joined Mr. Trump's cabinet, although the EEOC chair ranks just below the cabinet-level.  

According to Bloomberg, Sen. Lamar Alexander (R- TN), chairman of the Health, Labor and Pension Committee, said that he's "hopeful" the nominee "will help restore" the agency to "its core mission of protecting American workers from discrimination."  In general, the corporate community continues to anticipate that the Trump administration will usher in an improved business climate, manifested by tax reform, deregulation and a massive infrastructure plan.  Treasury Secretary Steve Mnuchin is leading the effort to pass a package of business and personal tax cuts, which he hopes can get done this year.  In 2009, after leading the investor group that purchased failed IndyMac Bank from the Federal Deposit Insurance Corp., Mr. Mnuchin became CEO of OneWest Bank, the new name for the bank.  In 2015, Mr. Mnuchin became vice chairman and board member of  CIT Group (CIT), upon the $3.4 billion acquisition of OneWest by the financial holding company.  When nominated, Mr. Mnuchin also stepped down as a director of Sears Holdings Corp. (SHLD) and as CEO of Dune Entertainment, a private company that finances Hollywood films.

Meantime, Transportation Secretary Elaine Chao is working on formulating a $1 trillion infrastructure plan that relies heavily on public-private partnerships.  Ms. Chao formerly served as CEO of United Way, a worldwide nonprofit network of community service organizations, and has been a member of the boards of directors of C.R. Bard (BCR), Clorox Co. (CLX), Dole Food Co. (DOLE, prior to being taken private by CEO David Murdock), HCA Healthcare (HCA), Ingersoll-Rand (IR), Lotus Development (prior to its acquisition by IBM), Millipore Corp. (prior to its acquisition by Germany's Merck), News Corp. (NWSA), Northwest Airlines (prior to its acquisition by Delta), Protective Life Insurance (prior to its acquisition by Dai-ichi Life), Raymond James Financial (RJF), Twenty-first Century Fox (FOXA), Vulcan Materials (VMC) and Wells Fargo & Co. (WFC).  It could be edifying to track an index or ETF comprised entirely of companies on whose boards Ms. Chao has served.

Just today, the Senate confirmed Neomi Rao as Administrator of Office of Information and Regulatory Affairs, a role otherwise known as the regulatory czar.  OIRA, part of the Office of Management and Budget (OMB), is often referred to as the "most important office you never heard of" because it must review all significant regulations issued by all federal agencies before they become legally binding on the citizenry, in essence the "cockpit" of the regulatory state.  Since 2006, Ms. Rao has been an associate professor of law at George Mason University and director of its Center for the Study of the Administrative State.

Ms. Rao is expected to spearhead the administration's drive to overhaul the regulatory environment for American business.  "I applaud my colleagues in the Senate for confirming Professor Rao's nomination," said Sen. Ron Johnson (R-WI), chairman of the Senate Homeland Security and Governmental Affairs Committees, in a statement.  "We can all agree that federal regulations should achieve their aim without imposing unnecessary costs on the country's economy and job creators.  I look forward to working with Professor Rao to reduce the burden of regulations - by our estimates as high as $2 trillion a year - that weigh on the American economy."

Although her confirmation, by a 54-41 vote largely along party lines, was never in doubt, Senator Elizabeth Warren (D- MA) strongly objected to her suitability for the job.  "If confirmed, Professor Rao will be perfectly positioned to put her theories into practice," Sen. Warren said.  "She will head the Trump administration's efforts to toss out the rules that big businesses don't like."  Sen. Warren's position could have been swayed by a coalition of consumer, small business, labor, good government, financial protection, community, health, environmental, civil rights and public interest groups that wrote to urge the committee chairman and ranking member, Sen. Claire McCaskill (D- MO), to vote against Ms. Rao's confirmation.  The coalition contends that '[t]he Trump Administration has taken a strong deregulatory stance and used their selection of individuals, such as Scott Pruitt as the Environmental Protection Agency (EPA) Administrator, Betsy DeVos as the Secretary of Education and Ajit Pai as the Federal Communications Commission (FCC) Chairman, who are actively hostile to the missions of the agencies they run to start the roll back of public protections from within [...and that P]rofessor Rao's nomination to head OIRA is another piece of the Trump deregulatory agenda."

The degree to which the administration will achieve its overarching aims, i.e., tax reform, deregulation, and infrastructure modernization, and the time line to do so, remains to be seen.  Although the President last month touted the "just-about record-setting pace" his administration has set, the sluggish rate of staffing it has surely hindered the implementation of its agenda so far.  By May 20th, President Trump had sent only 94 nominees to Capitol Hill, 35 of whom had been confirmed by the Republican-controlled Senate.  At a similar stage of Barack Obama's first term, the Democrat-controlled Senate had confirmed 130 of the 219 of the nominees sent its way.  There are over 550 key positions requiring Senate confirmation.  To enable governance, some Republican senators have suggested installing temporary or "acting" officials who could serve without Senate approval for up toe 210 days or, in some cases, for up to 420 days, per the Congressional Research Service.  Sen. James Inhofe (R-OK) believes that temporary appointees may be more willing to implement Mr. Trump's ambitious agenda than more moderate appointees who would be able to withstand the scrutiny of the Senate confirmation process.

Since it has lately picked up the nomination pace, there's no indication at this point that the Trump administration intends to embark on such a course.  By the end of June, Mr. Trump had formally submitted 178 nominees for Senate consideration, 46 of whom had been confirmed.  On average, the Senate has taken 43 days to confirm candidates from formal receipt of their nominations, a longer period than for the previous four presidents.  Perhaps part of the explanation for the slow pace is that the Trump administration is selecting candidates from a broader pool than was the case for the Obama administration.

Back in 2009, at the outset of the Obama administration, Michael Cembalest, J.P. Morgan Asset Management's chief investment officer analyzed the composition of presidential cabinets dating back to 1900 when the Secretary of Commerce position was created.  He assessed the prior private-sector experience of all 432 cabinet members, focusing on those positions most pertinent in this regard: Secretaries of State; Commerce; Treasury; Agriculture; Interior; Labor; Transportation; Energy; and Housing & Urban Development.  Many of the individuals filling these positions, he notes, started a company or ran one, with first-hand experience in hiring and firing, domestic and international competition, red tape, recessions, wars and technological change.  Their industries included agribusiness, chemicals, finance, construction, communications, energy, insurance, mining, publishing, pharmaceuticals, railroads and steel - a cross section of American commercial activity.  His analysis makes clear that the Obama administration, compared with past Democratic and Republican ones, marked a departure from the traditional reliance on a balance of public- and private-sector experience.

Mr. Cembalest pointed out that it was no surprise at the time that private-sector engagement struck some as pointless, if not counterproductive.  The prevailing sentiment was captured by one of Treasury Secretary Tim Geithner's deputies: "Why would we consult the very executives who got us into this mess?"  With his trademark combative flair, House Financial Services Committee Chairman Barney Frank added: "The private sector got us into this mess.  The government has to get us out of it."  Mr. Cembalest conceded that, to a large extent, this cynicism was a byproduct of the colossal mismanagement of many financial and automotive firms.  Nevertheless, mainly because critical U.S. job creation would have to come from the private sector Mr. Cembalest saw as detrimental the shortage of private sector experience in the Obama administration, i.e., 21% versus 52% for the G.W. Bush administration and 46% for the Clinton administration.  The Trump cabinet registers approximately 50% on the private-sector scale.

The Trump administration has sketched out promising policies for improving the business climate for corporate America, which would perhaps boost lagging GDP growth over time.  Despite the slow pace of staffing the administration, there has been an uptick in appointees with private-sector experience, and specifically publicly-traded company executives, who bring to the table their perspective on policy making.  In lieu of legislation, President Trump has aggressively issued executive orders advantageous to certain commercial interests, e.g., directives to advance oil pipeline construction and to reconsider automobile fuel standards.  Moreover, on January 30, the President signed Executive Order 13771 requiring that two regulations be eliminated for every new one issued by federal departments or agencies; as yet, there's no known instance of this so-called 2-for-1 order put into practice.  At this point, however, a clear-eyed assessment reveals minimal headway made on broader policy objectives important to corporate America.

Robert Stead