Making Bets on U.S. Supreme Court Decisions

If I ever earn a spot on a game show like Jeopardy, answering questions about sports will be a challenge. I recognize that, unlike me, there are serious fans who spend more than a few hours each week, vetting all sorts of statistics and data points about what team is likely to win and by how much. At family gatherings, I hear nephews and in-laws waxing poetic about games such as Fantasy Football. According to the Fantasy Sports Trade Association ("FSTA"), only skilled parties need apply, adding that there is no gambling.

Big money is at stake. According to "Industry Demographics: At A Glance," nearly 34 million individuals, mostly men, played fantasy sports in the United States in 2013. Canada counts roughly 3.1 million fantasy sports players. Over a twelve month period, aggregate league fees for fantasy games tallied $1.71 billion. For information materials, the spend was $656 million. It was $492 million for challenge games. (For us neophytes, what is a challenge game?) Decade-long performance reflects "explosive absolute growth" of 241 percent or an annualized growth rate of 13.1 percent for 2008 through 2018. See "Top 10 Fastest Growing Industries" (April 2013).

So here I am, sitting at my computer, researching certain ERISA litigation matters, and lo and behold, what do I find? You guessed it - FantasySCOTUS. According to its dedicated website, over 20,000 lawyers, law students and "other avid Supreme Court followers" have opined as to how they believe cases will be decided. Click to view a short video about this Harlan Institute initiative.

For those who are waiting with bated breath for commentary about stock drop cases, fear not. Of 53 predictions, as of today, 23 votes are for affirmation by the U.S. Supreme Court and 30 votes are for reversal. There is even a breakdown of votes as to how each justice is expected to respond to the April 2, 2014 hearing about prudence. Click to check out the Fifth Third Bancorp v. Dudenhoeffer roster of votes. Click here to download a transcript of the hearing.

What will they think of next?

Pensions Going Postal

Pension issues are hard to miss these days. What is notable is that pension plans influence corporate finance activity in several ways. First, they are collectively and, in some cases, individually, large and hard-to-ignore investors. Second, benefit economics can sometimes mean the difference between a deal such as a restructuring or merger or acquisition moving forward or getting stalled.

The over subscribed Initial Public Offering ("IPO") of the venerable postal system organization known as the Royal Mail Group, Ltd. ("Royal Mail") is a good example of pension plan sway.

Listed on the London Stock Exchange and trading under the ticker of RMG.L, Bloomberg reports that Royal Mail equity climbed nearly forty percent on its first day of trading with active volume early on. (See "Royal Mail Stock Jumps 38% on First Trading Day After IPO" by Kari Lundgren and Thomas Penny, Bloomberg, October 11, 2013). As a result of what most market participants call a successful launch, critics reiterated their plaint that Royal Mail should have gone for much more. Certainly the topic of pricing surfaced only to be met with concern about whether institutional investors would support the equity issue at a higher price. (See "Government tried to raise Royal Mail IPO price" by Himanshu Singh, CityWire Money, October 12, 2013). As it turned out, interest was strong and fears about a weak debut were ill-founded. According to Chief Business Correspondent for The Telegraph, Louise Armitstead, only 300 out of 800 pension fund and life insurance companies were able to get shares in Royal Mail with "the institutional offer [being] 20 times oversubscribed." (See "Royal Mail: 500 institutions miss out on shares amid record demand," October 10, 2013).

A few days later, those buyside squeaky wheels must be happy indeed. According to "Landsdowne grabs huge stake in Royal Mail sell-off" (October 11, 2013) by CNBC business editor, Helia Ebrahimi, sovereign wealth funds and hedge funds were each allocated about 50 million GBP and "that not enough stock was given to U.K. pension fund managers." Moreover, union workers continue to have questions about the economics of a proposal to limit Royal Mail employee benefits. In "Unite members vote against Royal Mail pensions cap," Professional Pensions reporter Taha Lokhandwala writes that the "announcement outraged unions as the scheme was in surplus at the time." Keep in mind that, the Royal Mail pension assets of 27 billion GBP and liabilities of 37.5 billion GBP were transferred to the U.K. treasury in 2012 in order allow Royal Mail a chance to better compete. See "Government to take over Royal Mail pension scheme deficit from next month," Out-Law.com, Pinsent Masons, March 23, 2012.

In contrast to the appearance of a financial home run for the Royal Mail deal, with respect to excess demand for stock and a clean-up of the nearly 10 billion GBP unfunded pension deficit, The Deal reports a third missed contribution to the U.S. federal mail system's pension plan as it falls "behind by another $5.6 billion." In "U.S. Postal Service skips third pension payment" (October 6, 2013), author Lisa Allen quotes union representative Sally Davidow as blaming the 2006 Postal Accountability and Enhancement Act for "an onerous requirement that the service prefund 75 years' worth of retiree health benefits in 10 years, without allowing the agency to increase postage rates above inflation or offer new services to offset the added costs." With the price of a first class stamp soon to rise to 46 cents, and another hike for three cents more in the works, one wonders if the American mail service should look to its English counterpart and consider a pension transfer and privatization that might, if well structured, advantage employees and taxpayers alike.

Pension Plan Economics and Corporate Finance

Just published is an article I wrote about the urgent need for appraisers and deal-makers to make sure that they have adequately assessed the economics associated with defined benefit plan funding. Entitled "Pension Plans: The $20 Trillion Elephant in the (Valuation) Room" by Susan Mangiero (Business Valuation Update, July 2013), the objectives of this article are threefold: (1) shed light on the magnitude of the pension underfunding problem and the possible dire impact on enterprise value; (2) remind appraisers of the need to thoroughly understand and evaluate pension plan economics or engage someone to assist them; and (3) explain the adverse consequences on deal-making and corporate strategy when pension plan funding gaps are given short shrift. CEOs, Chief Financial Officers, private equity, venture capital, merger and acquisition and bank lending professionals will want to read this article as it showcases this timely and urgent topic.

Click to read my article about pension plan valuation.

In a related post, ERISA attorney Stephen D. Rosenberg wrote a commentary on his "Boston ERISA & Insurance Litigation Blog" (June 17, 2013) about why he believes that appraisers should not be designed as ERISA fiduciaries. He expresses doubt about whether imposing a fiduciary standard on appraisers will "improve the analysis provided to plan fiduciaries." He suggests that such a move by regulators could create a reluctance for valuation professionals to assume the liability associating with appraising a company with an ERISA plan.

For those who missed our program about appraiser liability, visit the Business Valuation Resources website to obtain a copy of "Valuation and ERISA Fiduciary Liability: Traps for the Unwary Appraiser." The program took place on May 14, 2013. Speakers included myself (Dr. Susan Mangiero), ERISA attorney James Cole with Groom Law Group and Mr. Robert Schlegel with the Houlihan Valuation Advisors.

BP Investments - The Role of Ethics and Risk Management

The current situation with British Petroleum ("BP") raises a bevy of thorny questions, not the least of which is how pensions and other types of institutional investors should deal with the asset allocation fallout.

Let's start with the facts about institutional ownership of BP. According to Yahoo Finance and as excerpted in the table below, over 1,000 institutions owned stock in BP as of late March 2010. A relatively high dividend payout rate and dividend yield likely held great appeal for organizations seeking stability.

Things have changed materially, leaving large owners of BP stock to determine whether they should short, double up for a long-term play or exit altogether. Those that outsource their money management function rightly ask whether third party traders did enough to vet the issues associated with energy sector exposure. Additionally, one now deals with the question as to whether BP and similar types of stocks should be analyzed in the context of socially responsible investing. One organization - Fair Pensions - wants Shell and BP board members to beef up their disclosure about oil sands project risks. Lawsuits loom large too. According to "New York Pension Fund Considering Suit Against BP" by Jillian Mincer (Wall Street Journal, June 17, 2010), the New York State Common Retirement Fund owns 17.5 million shares indirectly, via its index fund allocation.

At the same time, anything that further erodes the price of BP shares could put parent company employees, gas station owners and related vendors out of work.

The oil spill in the Gulf is an environmental tragedy of major proportions. It may soon become a further financial debacle as well.

Wall Street Retirement Nest Eggs - Splat

According to GoEnglish.com, to "put your all your eggs in one basket" is "to risk losing all at one time." This notion is oft-touted in the mainstream press for the benefit of non-financial readers. Logically speaking, one would expect the maxim to resonate with investment banking staff who should, by the nature of their work, have a good command of diversification principles.

According to "Wall Street Lays Egg With Its Nest Eggs: Retirement Lessons of the Dumb Moves by 'Smart Money',"  it appears that the lessons of Enron and other costly examples of excess concentration have been lost on some. (Wall Street Journal, September 27, 2008). Pundit Jason Zweig regales readers with a litany of bad news bears, including the following:

  • "At the end of 2006, Merrill employees had 27% of all of their retirement money in Merrill shares" with losses this year close to $400 million.
  • Morgan Stanley employees have "lost some $500 million on their 401(k) holdings of company stock in 2007."
  • "At Lehman Brothers Holdings, employees saving for retirement lost 'only' about $200 million on their shares" in the last 18 months.
  • "Twelve out of every 100 people whose 401(k)s can hold company stock have at least 60% of their retirement money riding on it."

Generally speaking, employees should heed "excess" concentration that could take several forms, including, but not limited to:

  • Company stock in 401(k) plan
  • 401(k) company match in form of company stock
  • Company stock as part of profit-sharing plan
  • Company stock match as part of a dividend reinvestment plan ("DRIP")
  • Company stock options
  • Career risk tied to fortunes of employer
  • Employee ownership via an ESOP
  • Company stock in defined benefit plan ...

Wall Street firms are not alone in encouraging employee ownership and that is not necessarily bad, as long as everyone fully understands the risks.

According to the National Center for Employee Ownership, statistics updated in February 2008, suggest that:

  • $1.5 million participants were tied to 748 401(k) plans that were "primarily invested in employer stock" with an estimated value of $133 billion
  • 10,000 ESOPs and stock bonus and profit sharing plans were "primarily invested in employer stock," with an estimated value of plan assets exceeding $928 billion and impacting 11.2 million workers
  • 3,000 broad-based stock option plans encompass 9 million participants
  • 4,000 stock purchase plans cover 11 million workers.

What are you doing to track your diversification potential, or lack thereof, as relates to your current employment situation?

Omelette anyone?

Lehman and Pensions

Thanks to our good friends at Knowledge Mosaic, a search of SEC filings suggests that at least several pension plans may still own stock in Lehman Brothers. While we do not have evidence that holdings were sold before Lehman filed for Chapter 11 protection, there is certainly that possibility. Numbers shown below may not reflect actual exposure as of the bankruptcy filing date and do not reflect a value at which stocks can be traded. Note that ASP refers to Average Share Price. Share counts are estimates only.

  • Teacher Retirement System of Texas with 1.062 million shares and a $37.64 ASP
  • NY State Common Retirement Fund with 4.195 million shares and a $19.81 ASP
  • State Treasurer State of Michigan with 0.751 million shares and a $19.81 ASP
  • Texas Permanent Schools Fund with 0.516 million shares and a $19.81 ASP
  • NY State Teachers Retirement System with 2.141 million shars and a $19.81 ASP
  • California Public Employees Retirement System with 1.786 million shares and a $19.81 ASP
  • Public Employees Retirement System of Ohio with 0.89 million shares and a $19.81 ASP
  • California State Teachers Retirement System with 0.940 million shares and a $19.81 ASP

In all cases cited above, the equity exposure to Lehman Brothers Holdings Inc. is reported as representing less than a fraction of one percent of respective plan assets. 

For an article on the giant Texas pension plan, click on "TRS takes a hit on Lehman Brother's stock holdings" by Robert Elder, September 16, 2008, Austin American-Statesman.

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Glitz and Glam or "Stodgy" Fundamental Investing?

When I was a young MBA pup (New York University), an investment professor asked students to purchase "Security Analysis" by Benjamin Graham and David Dodd. Not an unusual choice until one noticed the 1940 copyright. My reaction at the time was to think that this scholar needs to retire soon if he can't find a more modern text. Alas, the marvels of youthful ignorance, heh?

This flashback came to mind in reading the flurry of newspaper articles about the intended $23 billion purchase of Wm. Wrigley Jr. & Co. by private candy giant Mars Inc. Helping to finance things is no other than Warren Buffett who negotiated an approximate 10 percent of the deal for Berkshire Hathaway. With a stake in Sees Candy and the Coca-Cola Company, this uber value investor is familiar with beverages, salty snacks and sweets. (Note that Thomson Financial News, via Forbes.com, reports that Moody's Investors Service has put some of the Chicago gum giant's debt ratings under review as a result of the proposed structure.)

According to "Mars to Buy Wrigley’s for $23 Billion" by New York Times reporter Andrew Ross Sorkin (April 28, 2008), Wrigley's sales revenue just topped $5 billion. The National Confectioners Association reports that "gum sales continue to surge growing 9.3% over the latest fifty-two weeks" with the "key growth engine" being "seasonal confectionary products."

This news item is interesting but even more so after reading "Inside Citi, a Hedge-Fund Push Blows Up" wherein Wall Street Journal reporter David Enrich describes sales enthusiasm gone amuck. Having sold interests in "safe" fixed income hedge funds Falcon and ASTA/MAT to retail clients, global wealth management staffers are wrestling with a lawsuit, unhappy brokers and disgruntled investors. The article continues that Citi sold "only to clients with large, diversified portfolios." As litigation ensues (assuming it does), more will be known about sales practices and representations made to clients, existing and prospective.

Will an ordinary stick of gum pave the way for riches and leave certain "exotic" alternatives in the dust? One wonders - shades of the tortoise versus the hare? What are the lessons for retirement plans as billions of dollars are making their way into non-traditional securities?

Editor's Note: Here are a few fun facts about the confectionary industry.

4P's - Pensions, Private Equity, Performance and Placement

As 2008 rolls in, uncertainty is on the minds of many. Will there be a recession? Will market volatility persist? Will asset prices continue to converge, making it more difficult to diversify? One question in particular is oft-discussed, notably the issue of strategic asset allocation for defined benefit plans. In a December 17, 2007 news release, the California Public Employees’ Retirement System Board of Administration announced its intent to invest nearly 70 percent of its $250 billion under management to stocks. Private equity will account for 10 percent, up from 6 percent. According to Charles P. Valdes, Investment Committee Chair, “These revised allocation markers reflect the promise of our private equity, real estate, and asset-linked investment classes."

In stark contrast, the Pension Benefit Guaranty Corporation went in the opposite direction a few years ago, now bearing the burden of a positive equity risk premium. In a December 20, 2007 article entitled "The $4 billion trade-off: PBGC misses out by eschewing stocks in favor of LDI," Financial Week reporter Doug Halonen points out the perils of allocating a high percentage of assets to fixed income. He rightly points out "the irony" that numerous companies are seriously investigating the economics of adopting a liability-driven investing strategy which almost always entails a shift away from stocks to bonds and/or interest rate derivatives.

Importantly, the decision to invest in alternatives, including private equity, must reflect a careful analysis of the likely risk-return tradeoff, mapped to the objectives and constraints of a particular pension plan. A short-term focus could create upset for those exposed to holdings that more logically lend themselves to a long-term commitment. In today's "Wall St. Way: Smart People Seeking Dumb Money," New York Times reporter Eric Dash writes that investors in Ohio Public Employees Retirement System and Fidelity Investors "would have made more money this year investing in an old-fashioned index fund that tracks the S&P 500-stock index" rather than plunking down money for the IPO of "private equity powerhouse" Blackstone Group. Perhaps that's true but does it matter if their respective goals are to realize capital gain over the next five to seven years? (Note that this blog's author has no knowledge of the intent of either investor.)

Allowing for upside potential (and statistics do validate a big move into private equity by pensions, endowments and foundations), lack of liquidity and valuation difficulties are harsh realities. However, barriers are starting to soften. Barry Silbert, CEO of Restricted Stock Partners, operates the Restricted Securities Trading Network, a mechanism for trading insider stock options, convertible bonds and private investments in public equity. A recent venture capital injection is arguably a validation of this attempt to enhance fungibility of otherwise "infrequently traded" instruments. The PORTAL Alliance, brings together the Nasdaq Stock Market and leading securities firms to "create an open, industry-standard facility for the private offering, trading, shareholder tracking and settlement of unregistered equity securities sold to qualified institutional buyers ("QIBs")." If successful in allowing for ready buys and sells, institutions may be more open to kicking the private equity tires.

For further reading, these websites (a few of many) may be of interest: