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State Street’s asset-management unit manages nearly $4 trillion in assets

Invesco Ltd. IVZ -2.58% is in talks to merge with State Street Corp.’s STT -0.99% asset-management business, people familiar with the matter said.

A deal isn’t imminent, and the discussions might not result in an agreement, the people said. It isn’t clear what the terms of a potential deal would look like, but it would likely be one of the industry’s biggest in recent memory, given State Street’s asset-management unit manages nearly $4 trillion in assets.

State Street is one of the world’s largest custody banks, providing accounting and administrative services to other investment managers.

The firm’s own investing unit, State Street Global Advisors, remains a leading seller of exchange-traded funds, the low-cost investing structure the firm pioneered.

Invesco oversees $1.5 trillion in assets and manages a large ETF business.

It has a market value of about $11 billion, compared with roughly $32 billion for State Street.

In a sign of potential investor enthusiasm for such a tie-up, Invesco shares rose more than 8% in after-hours trading Thursday after The Wall Street Journal reported on the talks. State Street shares rose more than 1%.

Investors’ appetite for lower-cost funds have thinned profit margins across the asset-management industry. While the stock-market rally has helped mask some of these challenges, firms continue to feel pressure to lower expenses and cut investment management fees, which can be accomplished by combining forces. Many asset managers, large and small, are contemplating where they stand in an investing world reshaped by technology and are examining deals with rivals.

Consolidation in the industry has picked up precipitously in recent years, and both Invesco and State Street have been active deal makers. Invesco snapped up several other asset managers, including OppenheimerFund Inc. and Guggenheim Partners’s ETF business. State Street expanded its asset-servicing arm, adding financial-data firm Charles River Systems Inc. Earlier this month, the Boston-based bank agreed to acquire Brown Brothers Harriman & Co.’s investor-services unit for $3.5 billion in cash.

State Street hired Goldman Sachs Group Inc. to review options for its money-management arm, the Journal reported in December.

As the firm weighed those options, State Street executives decided the business needed to get bigger to remain competitive. They determined that merging the asset-management business with a rival was the unit’s best path forward, the Journal reported. State Street reached out to several potential partners, including UBS Group AG.

State Street’s plan drew interest from UBS, and the two banks worked toward a tie-up of their investing businesses. For a time last year, an agreement seemed likely. State Street and UBS had even settled on roles for some of the venture’s top executives and were considering names for the new stand-alone manager, the Journal reported. A deal didn’t materialize.

Meanwhile, Trian Fund Management LP took big stakes in Invesco and fellow asset management Janus Henderson Group PLC last fall. The New York shareholder activist aimed to push the companies to grow through deal making to better compete with the world’s largest asset managers, such as BlackRock Inc.

Roughly a month later, Trian struck a settlement agreement with Invesco, receiving seats on its board for two of its founders, Nelson Peltz and Ed Garden. Trian owns a roughly 8% stake in the asset manager worth over $900 million, according to FactSet.

Trian also has a history with State Street: It took a position in the company in 2010, after noticing it was trading poorly following the financial crisis, according to Trian’s website. Among other changes, Trian called on State Street to improve its margins. Trian sold the position in 2013 after the company’s performance improved.

Selling spree from chief executive’s dad highlights corporate structure that benefits family

Aside from Jeff Bezos, Mark Zuckerberg and members of Walmart Inc.’s Walton family, no individual has earned more from selling stock in their company over the past year than a used-car magnate from Arizona.

Company filings show Ernie Garcia II, the father of Carvana Co.’s chief executive officer, has sold more than $3.6 billion of stock since October. The sales amount to 16% of his holdings in the company. He has benefited from an ownership structure that confers benefits on him and his family and allows them to maintain control of the business, according to company filings. Some of these benefits can come at the expense of other shareholders, according to the filings, a lawsuit, and corporate governance and tax analysts.

The company was founded in 2012 by Mr. Garcia’s son, Ernie Garcia III, inside his father’s chain of used-car dealers. Known for its car towers and home delivery, the online car dealer was spun off and taken public in 2017. Though Mr. Garcia II’s holdings allow him effective control of Carvana, he doesn’t hold a formal role at the company.

When Carvana’s shares took off three years later, Ernie Garcia II cashed in. Since the start of 2020, only the founders of Amazon.com Inc. and Facebook Inc. and the combined scions of Walmart founder Sam Walton profited more from selling off stakes of their companies, according to insider trade analytics firm InsiderScore.

Those other companies posted combined profits of more than $106 billion over the past six quarters. Carvana reported net losses of roughly half a billion dollars over the same period, and posted its first quarterly profit of $45 million this spring.

A Carvana spokeswoman said the company has robust governance, operates in accordance with all rules and regulations and has delivered more than 2000% returns to its investors since its public offering.

Both Garcias declined to comment.

When Carvana shares tumbled at the start of the Covid-19 pandemic, Mr. Garcia II bought Carvana stock in a private offering below the market price. When the shares doubled in two months, disgruntled shareholders sued the company. A complex tax agreement means Carvana is potentially on the hook to pay Mr. Garcia II the lion’s share of $1.1 billion, according to company filings.

“The existing structure has allowed them to run this $60 billion public company as if it’s a family firm and for the family’s benefit,” said Daniel Taylor, a professor of accounting at the Wharton School who heads the school’s Forensic Analytics Lab. “It’s amazing,” he added.

The company’s securities filings warn investors about the structure. “The interests of the Garcia parties may not in all cases be aligned with your interests,” the company said. Carvana said its chief executive and his father, its largest shareholder, might try to boost their profits at a risk to shareholders.

Like the shares of many digital retailers, Carvana’s soared during the pandemic, rising fourfold from March to September 2020. The next month, Mr. Garcia II started his recent string of sales. His first sale netted roughly $388 million, company filings show.

Mr. Garcia II began selling 30,000 shares a day in November under an automated share-sale program known as a 10b5-1 plan that he filed in June. These plans allow insiders to create predetermined selling plans to avoid appearances of trading on nonpublic information. On Nov. 4, he modified the plan, a filing shows. He sold another chunk of stock worth $478 million on Dec. 2, and for most of the month sold 50,000 shares daily as the modified plan took effect and the company’s share price topped $250.

In May, the 10b5-1 plan was modified again. As the company’s stock soared above $300 this summer, the selling increased to 60,000 shares on most days.

Historically, frequent modification of these plans has been concerning for regulators because it raises the chance that their owners are reacting to inside information, Mr. Taylor said. “I’ve studied 20,000 10b5-1 plans,” he said. “I can’t recall another of this size where there are modifications every six months.”

These 10b5-1 plans have long been controversial. Securities and Exchange Commission Chairman Gary Gensler has said the agency is drafting revisions to the rules governing the plans, including limiting the number of possible cancellations or modifications.

Mr. Garcia II became embroiled in one of the biggest financial scandals in recent decades when he took out a loan and facilitated a real-estate transaction that benefited Charles Keating’s Lincoln Savings & Loan Association before it collapsed. In 1990, Mr. Garcia II pleaded guilty to one count of bank fraud and was sentenced to three years probation.

In a 2013 securities filing Mr. Garcia II said he pleaded guilty after facing severe financial pressure and received a minimal $50 fine due to his cooperation with the investigation.

Soon after the guilty plea, he bought a used-car dealership called Ugly Duckling and grew it into a sizable chain of “buy here, pay here” car lots that both sold cars and financed its own loans, usually to shoppers with poor credit.

The company went public in 1996. The stock tripled in its first year but later struggled. Mr. Garcia II took it private in 2002 and renamed it DriveTime Automotive Group. The company aborted another planned IPO in 2010.

In 2012, his son, Mr. Garcia III, started Carvana as a subsidiary of DriveTime focused on online sales. It was spun off, and went public in 2017.

The family’s stake gives it almost complete control over the company because of Carvana’s dual-share structure—in which each share held by the Garcias counts for 10 votes compared with those available to the public. Even after selling billions of dollars worth of stock, Mr. Garcia II and his son control more than 85% of the company’s voting shares.

Despite selling more than 24 million shares since the IPO, Mr. Garcia II still controls, or shares control with his son, Carvana shares worth more than $23 billion, according to company filings.

Large, publicly traded companies controlled by a small group of founders or early investors have become more common. About one in 10 companies on the New York Stock Exchange is a controlled company by the exchange’s definition, according to an assessment by ISS Corporate Solutions, an analytics firm providing corporate governance data to companies.

When Carvana went public, it also created an arrangement called a tax receivable agreement that can benefit founders and early investors. These arrangements are common among certain types of IPOs, in which tax assets are created, the Carvana spokeswoman said.

A tax receivable agreement is a financial transaction between the company going public and its early investors. Tax assets could be used by companies to reduce future tax bills. Under tax receivable agreements, early investors get most of the value of the tax assets. If the company uses the assets to reduce its tax bills, the company agrees to pay beneficiaries of the agreement 85% of that benefit in cash. As of June 30, the early investors would be owed $1.1 billion, mostly to Mr. Garcia II, under the arrangement, according to company filings.

Critics say these deals privilege those investors over public shareholders. “Ordinarily, these tax savings would free up money for the company to use for operations or to return to shareholders,” said Robert Willens, a longtime Wall Street tax consultant. “The only people that benefit are the founders who negotiate these arrangements.”

The mostly unprofitable Carvana has yet to pay any meaningful federal corporate income taxes. The company’s agreement, however, means the company could be on the hook for future tax asset payments.

“The structure creates a significant win for public shareholders by generating cash savings,” the company spokeswoman said.

The Garcias have also boosted their investments in the company, under favorable terms. When markets fell at the start of the Covid-19 pandemic, the company’s stock plunged and sales dropped for several weeks. In late March, the company sold $600 million worth of shares at an 8.2% discount to the market price at close the day before. The two men each bought $25 million of the private sale, which was open to certain other existing investors.

The direct sale was one of the largest such offerings by any company to date, according to Dealogic, and larger than each of Carvana’s three prior stock offerings. It boosted the outstanding publicly traded shares by 26%, diluting other shareholders.

As the economy quickly bounced back, the company said the pandemic was an opportunity for Carvana’s online business model. Less than two months after the offering, Carvana’s shares had largely recovered and the company said in a letter to shareholders it was again seeing strong growth. The company sold more stock, this time to the public, at double the price paid by the Garcias.

Shareholders filed suit in Delaware, alleging the earlier sale enriched the Garcias while cheating the company out of millions in fair value for their shares. “Carvana sold common stock at the worst possible time—and the Garcias benefited,” the complaint alleges.

The Garcias’ ownership of Carvana decreased in the offering because of dilution and therefore wasn’t beneficial to the Garcias, the company spokeswoman said.

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Railroad M&A: deal quirk leaves executives carrying risk

Regulatory ruling means KCS shareholders should get their money before the acquisition by Canadian Pacific is closed

It would be nice if executives shifted regulatory risk away from shareholders and on to themselves more often. This week the bidding war between two railroads, Canadian Pacific and Canadian National, for rival Kansas City Southern finally concluded. After first jilting Canadian Pacific for a higher offer, KCS signed a final deal with its original suitor. The transaction, valued at $31bn in total, is below the $34bn figure that Canadian National bid.

A preliminary regulatory ruling about the competition effects allowed KCS to quickly decide that the cheaper bid was better. A final verdict on the competition aspect of the deal may not come for another year. KCS shareholders will not care. A quirk of railroad deals will allow them to receive their $300 per share of cash and stock within months. That is well before the deal is officially closed.

Consolidation has left North America with just seven so-called “Class I” railroads. The smallest, KCS, is particularly attractive to its two Canadian rivals. A combination would create a transcontinental network from the great north all the way down to Mexico. Since railroad combinations are reviewed by multiple regulators, including the US Surface Transportation Board, acquirers can set up so-called “voting trusts”. The trusts, if approved by the regulator, are able to pay the target company’s shareholders first and then wait for full regulatory approval.

The trust approval process is a quasi-competition review. The Surface Transportation Board waved through Canadian Pacific’s voting trust. Canadian National’s rail lines overlapped with KCS in some US markets. Thus the regulator would not approve its trust. Even as it was offering more money, executives chose to shoulder any overhanging regulatory risk. Shareholders should get their money regardless of full approval by watchdogs.

KCS bargained well between the bidders. Shareholders receive a big premium and the deal risk goes to Canadian Pacific. This mechanism forces executives to think more about deal risk instead of forcing it on to stockholders. If only it was more widespread.

Once a white knight, the billionaire has become a great white shark

Like hunters in the deep seas, Vincent Bolloré often rises to his prey before it realises the danger. On Thursday, Bolloré’s media business Vivendi announced it will buy all of the Lagardère shares held by activist investor Amber Capital. Assuming competition authorities approve, a mandatory takeover will follow.

Lagardère scion and chief executive Arnaud Lagardère had allowed the business built by his father to drift into dangerous waters. Its share price has moved sideways for a decade. Amber Capital’s stake originally aimed to loosen Lagardère’s outsized control of the company through a commandite company structure. This enabled its CEO to maintain control despite a tiny 7 per cent stake.

Wily Bolloré bought an initial stake under the guise of backing Lagardère’s efforts to maintain control. Any hint of friendliness evaporated as Bolloré increased his stake, eventually forming an alliance with Amber. Once a white knight, Bolloré became a great white shark instead. 

A deal to dissolve the commandite in April gave Lagardère another five years as chief executive. But it also signalled the opportunity for a takeover. The decision of LVMH founder Bernard Arnault to convert a stake in Lagardère’s holding company into listed shares suggested his support for the status quo has also dissolved. 

Vivendi will pay €24.1 per share for 17.9 per cent of Lagardère’s shares or a 24 per cent premium to the current share price. Upon completion of the regulatory review, expected by December 2022, Vivendi will hold 45 per cent of the shares. A tender to remaining shareholders will then go ahead at the same price. At only €2 per share above Lagardère’s five-year average, it is hardly generous. Kepler Cheuvreux puts the fair value at €27 per share excluding a takeover premium. 

With his large stake, Bolloré can afford to circle his prey slowly. What he seeks is Lagardère’s publishing businesses, which include book publisher Hachette and politically important titles such as Paris Match and the Journal du Dimanche. Weaker swimmers within France’s media waters beware. Bolloré is on the hunt.

Lagardère nears defeat in the fight for his family empire

If anyone needs a reminder of the French billionaire industrialist Vincent Bolloré’s mastery in corporate battles, look to the latest developments at Lagardère. 

Vivendi, which is controlled by Bolloré, announced this week that it would buy out the activist investor Amber Capital’s 17.9 per cent stake in Lagardère as agreed under their surprise alliance. 

That paves the way for Vivendi to make a takeover offer for Lagardère (if regulators approve) because the deal with Amber will take its holding to 45 per cent — past the threshold requiring a mandatory offer for the rest of the company.

The moves will effectively end a five-year battle for control of the French media and travel retail group that has captivated the Paris business elite. 

Ignore the polite press releases — this is Bolloré delivering the coup de grâce to Arnaud Lagardère. Despite his desperate manoeuvring, the family heir will see the company fall under Vivendi ownership. 

We imagine his father, the legendary businessman Jean-Luc Lagardère, who built the defence-to-media conglomerate before his son dismantled most of it, is turning in his grave.

For Amber founder Joseph Oughourlian, the exit will be an honourable end to a bloody saga. 

With Vivendi offering €24.10 a share, Amber has made money on its investment in Lagardère. Its cost price for the shares ranges from €15-€20 given that it added to its position last spring, when the pandemic had beaten down the company’s stock price. 

Bolloré has also arguably outplayed LVMH chief Bernard Arnault, who came to the rescue of Arnaud Lagardère in 2020 and still owns a roughly 10 per cent stake in the group. 

The key moment came in August last year when Bolloré made an alliance with his one-time opponent Amber, which gave him right of first refusal on the activist’s stake when it wanted to exit. People familiar with the matter told the FT’s Leila Abboud that Arnault was first offered a similar deal by Amber last year, but chose not to act.

Perhaps the luxury magnate simply didn’t want the Lagardère assets enough to commit more capital, or he thought his position was secure without Amber. After all, the official story is that Arnault bought into the French group to help the younger Lagardère out of loyalty to Jean-Luc’s memory. 

But he was also said to be interested in its media assets — the influential Journal du Dimanche, the celebrity magazine Paris Match and Europe 1 radio. Those titles are on their way to Bolloré’s Vivendi now. 

Weaker French media players ought to be looking over their shoulders, the FT’s Lex column warns, as Bolloré’s influence reaches new heights.

New research shows growing network of hackers sharing data leaks on encrypted messaging app

Telegram has exploded as a hub for cybercriminals looking to buy, sell and share stolen data and hacking tools, new research shows, as the messaging app emerges as an alternative to the dark web.

An investigation by cyber intelligence group Cyberint, together with the Financial Times, found a ballooning network of hackers sharing data leaks on the popular messaging platform, sometimes in channels with tens of thousands of subscribers, lured by its ease of use and light-touch moderation.

In many cases, the content resembled that of the marketplaces found on the dark web, a group of hidden websites that are popular among hackers and accessed using specific anonymising software.

“We have recently been witnessing a 100 per cent-plus rise in Telegram usage by cybercriminals,” said Tal Samra, cyber threat analyst at Cyberint.

“Its encrypted messaging service is increasingly popular among threat actors conducting fraudulent activity and selling stolen data . . . as it is more convenient to use than the dark web.”

The rise in nefarious activity comes as users flocked to the encrypted chat app earlier this year after changes to the privacy policy of Facebook-owned rival WhatsApp prompted many to seek out alternatives.

Launched in 2013, Telegram allows users to broadcast messages to a following via “channels”, or create public and private groups that are simple for others to access. Users can also send and receive large data files, including text and zip files, directly via the app.

The platform said it has more than 500m active users, and topped 1bn downloads in August, according to data from SensorTower.

But its use by the cyber criminal underworld could increase pressure on the Dubai-headquartered platform to bolster its content moderation as it plans a future initial public offering and explores introducing advertising to its service.

According to Cyberint, the number of mentions in Telegram of “Email:pass” and “Combo” — hacker parlance used to indicate that stolen email and passwords lists are being shared — rose fourfold over the past year to nearly 3,400.

In one public Telegram channel called “combolist”, which had more than 47,000 subscribers, hackers sell or simply circulate large data dumps of hundreds of thousands of leaked usernames and passwords.

A post titled “Combo List Gaming HQ” offered 300,000 emails and passwords that it claimed were useful for hacking video game platforms such as Minecraft, Origin or Uplay. Another purported to have 600,000 logins for users of the services of Russian internet group Yandex; others for Google and Yahoo.

Telegram removed the channel on Thursday after it was contacted by the Financial Times for comment.

Yet email password leaks account for only a fraction of the worrisome activity on the Telegram marketplace. Other types of data traded include financial data such as credit card information, copies of passports and credentials for bank accounts and sites such as Netflix, the research found. Online criminals also share malicious software, exploits and hacking guides via the app, Cyberint said.

Meanwhile, links to Telegram groups or channels shared inside forums on the dark web jumped to more than 1m in 2021, from 172,035 the previous year, as hackers increasingly direct users to the platform as an easier-to-use alternative or parallel information centre.

The research follows a separate report earlier this year by vpnMentor, which found data dumps circulating on Telegram from previous hacks and data leaks of companies including Facebook, marketing software provider Click.org, and dating site Meet Mindful, among others.

“In general, it appears that most data leaks and hacks are only shared on Telegram after being sold on the dark web — or the hacker failed to find a buyer and decided to share the information publicly and move on,” vpnMentor said.

Still, it dubbed the trend “a serious escalation in the ongoing surge of cyber crime”, noting that some users in these groups appeared less tech savvy than a typical dark web user.

Telegram said it was unable to verify the vpnMentor findings because the researchers had not shared details identifying which channels these alleged leaks were in.

Samra said the transition for cybercriminals from the dark web to Telegram was taking place in part because of the anonymity afforded by encryption — but noted that many of these groups were also public.

Telegram is also more accessible, provides better functionality, and is generally less likely to be tracked by law enforcement when compared to dark web forums, he added.

“In some cases, it’s easier to find buyers on Telegram rather than a forum because everything is smoother and quicker. Access is easier . . . and data can be shared much more openly.”

Hackers are less inclined to use WhatsApp both for privacy reasons and because it displays users’ numbers in group chats, unlike Telegram, Cyberint said. Encrypted app Signal remains smaller and tends to be used for more general messaging among people who know each other rather than forum-style groups, it added.

Telegram has long taken a more lax approach to content moderation than larger social media apps such as Facebook and Twitter, attracting scrutiny for allowing hate groups and conspiracy theories to flourish. In January, it began shutting down public extremist and white supremacist groups — for the first time — in the wake of the Capitol riots amid concerns it was being used to promote violence.

The Cyberint research — particularly the uncovering of public, searchable groups for cybercriminals — raises further questions about Telegram’s content moderation policies and enforcement at a time when chief executive Pavel Durov has said the company is preparing to sell advertisements in public Telegram channels.

It also comes as the company prepares to head for public markets after raising more than $1bn through bond sales in March to investors including to Mubadala Investment Company, the Gulf emirate’s large sovereign wealth fund, and Abu Dhabi Catalyst Partners, a joint venture between Mubadala and the $4bn New York hedge fund Falcon Edge Capital.

Telegram said in a statement that it “has a policy for removing personal data shared without consent”. It added that each day, its “ever growing force of professional moderators” removes more than 10,000 public communities for terms of service violations following user reports.