Tuesday, May 8, 2012

The road to hell is paved with good intentions

...probably made of the paving materials supplied by Martin Marrietta Minerals.

The Strine (there should be a trademark symbol by the name) decision is necessarily interesting for its implication on what is the in-house lawyers' most well-rehearsed document: the NDA. The collective reaction is generally along the lines of "Shit!" Followed by the dawning realization that the crap one churned out by the merry dozen in the months past is actually important, and the digging up of the as-yet-unexpired NDAs to see how they handle the language that got MLM into ... an awkward pickle.

However, let's calm the excitement on that front. From the discussion of Nye MLM's CEO approach to the NDA negotiation, his in-house lawyers did exactly what was asked of them at the time. Trouble was: neither the lawyers nor Nye thought through what should happened if the tables were turned and if Vulcan were to present itself as an attractive acquisition target to MLM and not vice versa. As a result, the NDA, negotiated with a view to forestall any unwanted acquisition did exactly that and bit MLM in the ass. Let's leave it to each respective CEO and his GC to stare at each other lovingly and figure out whose job it should be in the future to think of every contingency. My guess -- and it is only a guess -- is that whatever the "deal" is initially, the GC looses this argument every time when shit hits the fan and his (her) boss suddenly goes all 20/20 hindsight on him (her).

But let's put aside the legal bits for the moment and focus on the meat of this, the juicy stuff, which, as Matt Levine says, is in the blow by blow of the MLM-VCM negotiations. And more specifically, what this tells us about the idea that corporations act to maximize shareholder value. More specifically yet, whether it's a good idea (ha!) and whether it works in practice (ha-ha!).

In reverse order, if you think the companies' management actually acts to maximize shareholder value you're one of the guys in the Geico commercial and have been living under a rock. I mean, this is plain as is gets: Nye tells Carr (the Goldman M&A matchmaker) that "CEO=0/ 20%= Nye". Meaning that (back in the time when MLM thought it'd get a premium in a merger): "Screw my shareholders if I get to be the CEO. Yeah, it's that important - got a problem with it?" Naturally, any board of directors worth its salt that is actually looking out for the shareholders would give Nye or his equivalent at their company a minimum of a stern "tsk-tsk" and at a maximum, fire the lad on the spot for being so blasé about shareholder value. Naturally, in practice a thing like that almost never happens, even when the CEO in question is actually pretty open about his selfish motivations. Most of the time, you see, they are nothing like so honest as Ward Nye and just plain lie about their own motivations for doing the deal.

Now, you can't really expect anything else from the CEOs themselves. They are people too! But you do expect something else from the boards. You know, fiduciary duty and all that. But the reality, of course, is that most major transactions which do in fact result in a major alteration of share value (and, more often than not, in the wrong direction) get reasoned to in an ass-backward way: first the CEO conceives of a nicer corner office with a better leather chair (see, e.g., Martin Marietta Minerals v Vulcan Materials at 9) and then... synergies! Personally, I'd be on board with trying to remedy the situation via random selection of board members from the mass of the company's shareholders for rotating terms as per Yglesias.

Oh yes, synergies - let's talk about those.  In MLM-VCM's case, the respective CEOs diverged in their estimation of deal synergies by some $250-300mm in the end: Nye and his CFO thought the combined company would save in the region of $300-350mm, where James (VCM's CEO) was comfortable only with $50mm. Who was right? Who the fuck knows?

You see, the savings came from two buckets: enterprise software update that Vulcan paid for and, in the event of the merger, MLM would get a free ride on and plain old cost cutting a.k.a. "let's fire a bunch of people". In the case of the former, MLM's CEO was rightly justified in calling it savings and Vulcan's CEO rightly resisted, because to him this was a sunk cost. In a stock for stock merger, the benefit to shareholders of a combined company is difficult to quantify.  Similarly, the "let's fire a bunch of people" strategy is something that James, not entirely without justification, thought he could do himself. Nye, on the other hand, had an arguably (ha!) misplaced belief in his own super-duper-CEO-ishness (a.k.a., "I can fire more people than you, old sport!")

And then we get to whether maximizing shareholder value alone should be the guiding principle for the management. All those people getting fired! It sucks! When you look at things through the macro-economy it's not at all clear why higher efficiencies at the cost of labor reductions are a good idea. What's the justification here? That we want companies to make more money? To what end? Isn't it more important that everyone makes more money (growing the pie) rather than that capital makes more money than labor in this game? Why did we stack the deck just so and then feign surprise at the diminishing returns to labor as a trend?

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