TheChek News Flow

The stock options suddenly were worth about $50 million — the latest instance of extraordinary good timing by corporate executives.

At the beginning of this week, the Eastman Kodak Company handed its chief executive 1.75 million stock options.

It was the type of compensation decision that generally wouldn’t attract much notice, except for one thing: The day after the stock options were granted, the White House announced that the company would receive a $765 million federal loan to produce ingredients to make pharmaceuticals in the United States.

The news of the deal caused Kodak’s shares to soar more than 1,000 percent. Within 48 hours of the options grants, their value had ballooned, at least on paper, to about $50 million.

The government loan is part of a broader federal effort to increase the country’s ability to respond to the coronavirus and future pandemics.

The options grant to Kodak’s executive chairman and chief executive officer, Jim Continenza, is the latest example of executives and board members at companies receiving such federal support to benefit from extraordinarily good timing. A number of those companies are involved in the hunt for vaccines and treatments for Covid-19.

Insiders at Vaxart, for example, received stock options shortly before the California biotech company announced in June that its potential coronavirus vaccine was being tested in a program organized by a federal agency, causing its shares to instantly double.

A Kodak spokeswoman declined to comment on the timing of the stock-options grants and emphasized that the value of the options could change before Mr. Continenza uses them to buy Kodak shares.

Kodak, best known for its iconic camera and film business, has been struggling for years to reinvent itself. The company emerged from bankruptcy protection in 2013, and its shares in recent years have mostly been trading at $2 or $3, giving it a market value of about $100 million.

Starting in May, Kodak began talks with the Trump administration about manufacturing the ingredients for pharmaceuticals, Mr. Continenza said in a television interview this week.

The deal was announced on Tuesday. President Trump said the federal loan from the U.S. International Development Finance Corporation would help reduce the United States’ reliance on other countries, in particular China and India, for the vast majority of ingredients used to make generic drugs. Mr. Trump called the Kodak deal “a breakthrough in bringing pharmaceutical manufacturing back to the United States.”

Kodak said it was creating a new pharmaceuticals division and will expand its facilities in Rochester, N.Y., and St. Paul, Minn. The division will eventually have the capacity to produce as much as 25 percent of the active ingredients used in generic drugs in the United States. Kodak has been in the chemicals business for more than a century and “has the facilities sitting there ready to go,” Mr. Continenza said in a TV interview this week.

It’s unclear whether the ingredients that Kodak makes will have any role in the fight against the coronavirus. Kodak will coordinate with the federal government and other manufacturers to figure out which ingredients to make, prioritizing those that are deemed critical to Americans and national security.

The day before the loan was announced, trading in Kodak shares surged, and its stock jumped about 25 percent, closing at $2.62 a share. That activity raised suspicion about improper trading ahead of the market-moving news, but The Wall Street Journal reported that it was apparently the result of reports by the media in Rochester, where Kodak is headquartered, about the pending announcement.

Around the time that Kodak began talking with the federal government this spring, Kodak insiders began receiving stock options. The pattern was first reported by Non-GAAP Thoughts, a digital newsletter.

On May 20, Kodak handed out 240,000 stock options to board members — an addition to its usual equity distribution in January.

The May stock options awarded to directors are now worth about $4 million. Those options are eligible to be exercised gradually over the course of this year.

Arielle Patrick, a spokeswoman for Kodak, declined to answer questions about why the directors were granted stock options in May.

On the same day that Kodak was alerting the local media to its about-to-be-announced deal with the Trump administration, the compensation committee of the company’s board voted to award Mr. Continenza 1.75 million stock options that allow him to purchase shares at prices ranging from $3.03 to $12.

By Wednesday morning, Kodak’s shares had soared as high as $60 each. They have since retreated to about $24, which means the stock options give Mr. Continenza the right to buy shares at a deep discount.

Mr. Continenza can exercise some but not all of the options immediately.

Ms. Patrick said that the rapid increase in the values of Mr. Continenza’s new stock options “are paper only. Mr. Continenza has not received any proceeds nor does he have any intention of selling.”

She added that Kodak’s board awarded the options to Mr. Continenza because when the company last year issued a type of debt that converts into equity, the value of the chief executive’s stock and options were diluted.

She said that Kodak received shareholder approval in May to issue additional shares, and that the compensation committee approved the options “at the first meeting of this committee since the annual stockholders meeting,” which was on Monday, July 27.

She declined to comment on why Kodak did not wait until after the White House announcement to grant the options.

The increase in Kodak’s shares this week also transformed some stock options that Mr. Continenza received when he became chief executive. They had been effectively worthless because of Kodak’s low stock price. This week, their value grew to about $59 million, Reuters reported.

Wirecard scandal will drive supervision overhaul, says EU economy chief

Previous failed attempt to reinforce EU watchdogs was a ‘missed opportunity’, says Dombrovskis

The Wirecard scandal will galvanise efforts by Brussels to upgrade EU level financial supervision, according to one of the bloc’s top officials, who said the company’s downfall showed the need for stronger defences against fraud. 

Valdis Dombrovskis told the Financial Times that the German payment group’s collapse had reinforced his belief that a previous thwarted attempt by Brussels to reinforce EU financial watchdogs had been a “missed opportunity”, and that another push was necessary. 

“We are looking at how we can strengthen the system to avoid that kind of situation happening again,” he said. “It’s clear we are dealing with a case where investors were not given the truthful information about the state of play of the company.”

“It needs to be investigated and conclusions drawn from the concrete case,” he said.

The European Commission’s executive vice-president for economic policy also said that Brussels was exploring how to reinforce the role of audit committees at listed companies to make sure they do sufficient due diligence. 

Wirecard was forced to file for insolvency in late June after admitting that €1.9bn of its cash probably did “not exist”, in one of the biggest corporate scandals in the EU’s history. It later emerged that its auditor, EY, had failed to check some of the company’s bank balances for more than three years, but German regulators have also been accused of failing to supervise the business adequately. 

The European Securities and Markets Authority, an EU agency based in Paris, announced in July that it would probe the work of BaFin, the German financial regulator, and FREP, a private-sector body that monitors company accounts. 

The investigation, requested by Mr Dombrovskis, will examine whether German authorities were lax in enforcing EU rules on sound financial reporting at listed companies. 

Brussels sees the Wirecard case as particularly troubling because it breached three lines of defence that should normally protect EU investors: regulations and corporate governance requirements to ensure companies present sound accounts; the work of auditors, an EU regulated industry; and the existence of sound supervision by public authorities. 

“Wirecard’s failure potentially raises issues at all three levels of defence and this is why we are now looking at those issues comprehensively to draw all lessons that need to be launched and take necessary actions,” Mr Dombrovskis said. 

Brussels is “looking also at the role of audit committees” to see if stronger EU rules are needed there, he said, adding that it was part of a “comprehensive assessment”.

In 2017, Mr Dombrovskis spearheaded an effort by Brussels to reform Esma, an authority tasked with overseeing the implementation of EU financial-market regulations, and its sister agencies for banking and insurance in a bid to make them more effective in policing national watchdogs’ work

In order to dilute the influence of national authorities on the three agencies’ work, he proposed to make them more financially independent, with new decision-making structures given to full-time staff with executive power, and some reinforced responsibilities. At present, ESMA’s work is led by a board of supervisors largely made up of representatives of national agencies. 

But many of his proposals were watered down by national governments in the EU Council, which had a binding say on the plans, out of concern that too much power was being drained away from member states. 

The final result was “much more limited than the initial commission proposal,” Mr Dombrovskis said. 

“Certainly it is something that we will have to look at again and see how to enforce, straighten supervision also at EU level,” he said, adding: “We have not arrived at the conclusions yet.”

Barron’s Weekend Summary: SPACs are growing in popularity as big names increasingly deploy them, but individual investors should proceed with caution

* Cover story: Special purpose acquisition companies, or SPACs, “have gone into overdrive, fueled by rock-bottom interest rates, a volatile stock market, and an insatiable appetite for new public growth companies,” but investing in them requires caution, knowledge of complex details, and a willingness to study SEC filings; Individual investors need to be choosy, judging SPACs on how shareholder-friendly their terms are and how comfortable they are piggybacking on an experienced deal maker such as Pershing Square’s Bill Ackman, the biggest name to start a SPAC this year.

* Tech Trader: There are contrary ways to think about the strong results from AAPL, AMZN, FB, and GOOGL after their chief executives testified in Washington—one argument is that the results prove the tech giants are getting too big and need more supervision, but they also demonstrate why federal and state regulators should leave the companies alone: they create products consumers want, and make tons of money for investors.

* Trader: Large technology companies overall are stuck just like the rest of the market—with some up and some down, the average gain was basically zero for the 280-plus large companies in the sector reporting earnings—a sign something is spooking investors.

* Profile: Alex Umansky, manager of the $1.2B Baron Global Advantage fund, favors unique businesses with sustainable competitive advantages and very large addressable markets that are well positioned for the realities of a Covid-19 world (top 10 holdings: BABA, AMZN, FB, WIX, MELI, TAL, GDS, SPLK, TWLO, VEEV).

* Interview: Brad Safalow, founder and chief executive of subscription service PAA Research, has a largely institutional clientele, which he supplies with ideas on a variety of small and midsize companies; clients who followed his stock recommendations would have outperformed the market by 50 percent on his longs and 30 percent on his shorts since 2010.

* Features: 1) Robo advising, which began as a nascent category of start-ups focused on optimizing investment portfolios, has become a ubiquitous service offered by many of Wall Street’s largest firms; Barron’s fourth annual ranking of the best robo advisors looks at criteria such as access to advisors, financial planning, transparency and conflicts, features, and customer experience, and includes SigFig, TD Ameritrade, Fidelity Go, Vanguard, E*Trade Core, Betterment, Ellevest, Wells Fargo, Wealthsimple, SoFi, and Maximum; 2) Positive on GLD, INIVX, IAU, GDX, GDXJ, NEM, GOLD: Though some investors shun gold, its recent surge is refuting critics, and there could be more room for it—and gold-mining stocks—to advance, with inflation-adjusted US rates negative and the US government running enormous deficits; 3) Positive on AN, GPI, KMX: Though consumers are increasingly buying cars online, especially during the pandemic, traditional dealerships still have some spark, and they offer a compelling play on a recovery, even a bumpy one; AutoNation and Group 1 are contrarian ideas, while CarMax has tailwinds from growing demand for pre-owned cars; 4) China’s economy is starting to rev up again as the country fights COVID-19 outbreaks with testing and contact tracing; It is the only major economy forecasting growth this year, and its recovery offers reason for optimism as the US strives to get its health and financial crises under control.

* European Trader: Positive on Halfords Group: Britain’s leading bicycle retailer has been hurt recently by poor sales from its higher margin auto repair and accessories business, but a new service-focused strategy in which Halfords provides engineers to fit the parts it sells onto customers’ bikes and vehicles gives it an edge over online vendors.

* Emerging Markets: “Brazil is showing a pulse, economically and politically, after a calamitous collision with COVID-19—but the beat looks too faint to power much of a recovery in a depressed stock market.”

* Commodities: “Investors have focused on a rise in record prices for gold, but silver’s up nearly 25 percent in July—the metal’s second-biggest monthly gain on record—and it’s still undervalued compared with the yellow metal.”

* Streetwise: Columnist Jack Hough attempts to understand the rise in Bitcoin, and says that the cryptocurrency, recently at $11,300, will settle back below $10,000 by year’s end—though many investors believe the rally will continue.

Kodak - A day before govt deal, the board granted the Chairman options for1.75M shares as part of an 'understanding' that was not previously included in his employment contract or made public - press

- Last Monday the board granted the options to Chairman Jim Continenza to shield his overall holdings in the company from being diluted by a $100M convertible bond deal announced in 2019 to keep the company afloat. The informal grant of options is legal but is unusual.

- Eastman Kodak spokesperson says Chairman Continenza had no comment, and that Continenza "is a strong believer in the future of the company, and has never sold a single share of stock."

Varian To combine w Siemens Healthineers AG for $177.50/shr cash in $16.4B deal (42% premium)

- VAR (SP500 Index component) today announced that it has entered into a definitive agreement to combine with Siemens Healthineers AG (Frankfurt: SHL) in an all-cash transaction valued at $16.4 billion on a fully diluted basis. Under the termsof the agreement, which has been unanimously approved by Varian's Board of Directors, Siemens Healthineers will acquire all outstanding shares of Varian for $177.50 per share in cash, representing a premium of approximately 42% to the 30-day volume weighted average closing price of Varian's common stock as of July 31, 2020.

- The combination will create a multi-disciplinary global healthcare leader with the most comprehensive cancer care portfolio in the industry. The combined company will offer an integrated platform of end-to-end oncology solutions to address the entire continuum of cancer care, from screening and diagnosis to care delivery and post-treatment survivorship. By bringing together the highly complementary diagnostic tools, imaging, radiotherapy and AI capabilities across both companies, Varian and Siemens Healthineers will lead the digital transformation of oncology healthcare, enabling more efficient diagnosis, increased treatment quality and access, personalized precision cancer care, and improved outcomes for millions of patients worldwide.

- Transaction is expected to close in the first half of calendar year 2021, subject to approval by Varian shareholders, receipt of regulatory approvals and other customary closing conditions.

- Varian has established strong brand recognition, and expects to continue to operate under the Varian name as an independent company within Siemens Healthineers following the completion of the transaction.

Big tech presents a problem for investors as well as Congress

Strong earnings and rocketing stock market performance has created risk for shareholders

A strong year for the largest five US stocks despite the worst recession the country has faced in decades has further expanded their influence on equity markets.

Apple, Microsoft, Amazon, Alphabet and Facebook now represent more than a fifth of the S&P 500. Not since the 1980s have the biggest five companies had such a large share of the index, according to S&P Dow Jones Indices.

This concentration was further strengthened on Friday when Apple, Amazon and Alphabet, Google’s parent company, continued their steady march towards recent stock market highs, following bumper earnings on Thursday.

The strong share price performance came in the same week that top executives from these and other tech giants were pressed by US lawmakers about the darker practices that have helped them to dominate their industries. One such critique has been their aggressive acquisition strategy of buying up smaller rivals. In a 2012 email, Facebook chief executive Mark Zuckerberg acknowledged that he planned to acquire the photo app Instagram in order to “neutralise” it.

Elizabeth Warren, the US senator from Massachusetts and former Democratic presidential hopeful, said “Big Tech thinks they’re too big to be held accountable — and with gutless antitrust enforcement, they are”, in a Twitter post.

Yet criticism has done little harm. The strong showing in the stock market this year has recast the tech giants as defensive corners in equities through the global pandemic, helping the S&P 500 erase its losses for 2020 so far. The S&P 500 would be down 5 per cent if it did not include those stocks.

The greater sway over the market has come with a risk. When the shares in these top fives companies decline, it can squash the gains from an otherwise robust broader market. On one trading day last month, almost three-quarters of companies in the S&P 500 posted a gain, but the index rose just 0.2 per cent, weighed down by all the top five stocks losing value on the day.

Yet criticism has done little harm. The strong showing in the stock market this year has recast the tech giants as defensive corners in equities through the global pandemic, helping the S&P 500 erase its losses for 2020 so far. The S&P 500 would be down 5 per cent if it did not include those stocks.

The greater sway over the market has come with a risk. When the shares in these top fives companies decline, it can squash the gains from an otherwise robust broader market. On one trading day last month, almost three-quarters of companies in the S&P 500 posted a gain, but the index rose just 0.2 per cent, weighed down by all the top five stocks losing value on the day.

Corporate profits for companies across the S&P 500 fell by a third in the second quarter, according to Refinitiv estimates based on results from about half the index that have reported for the period.

Apple, Microsoft and Amazon are also among the most popular stocks held by users of Robinhood, one of the retail trading platforms that have had a surge in activity this year, drawing in new everyday investors to take part in the stock market rally that began in March.

“Clearly some of these valuations for growth stocks have gotten to very high levels,” said Andrew Slimmon, senior portfolio manager for Morgan Stanley Investment Management. “The differential for value stocks and growth stocks is so extreme — you have to wonder if they are being pushed by speculation.

Yields sink and prices rise as investors pile into risky corporate debt

Investors in US junk bonds had their best month in nearly nine years in July, as continued market support from the Federal Reserve bolstered yield hungry investors’ confidence in more precarious companies.

Rising prices and their flipside, falling yields, led to a 4.78 per cent return for the asset class — the best outcome since October 2011, according to Ice Data Services.

The average junk bond yield fell from 6.85 per cent at the start of the month to 5.46 per cent at the end, the biggest monthly drop since May 2009 when financial markets had just begun to rebound from the financial crisis.

Despite the decline in yields, they remained attractive to investors starved of income in safer corners of the bond market, where the average yield on investment-grade US corporate bonds fell below 2 per cent last month.

Expectations of widespread corporate defaults have moderated in the months since the Fed announced sweeping measures to support credit markets, although the number of defaults and bankruptcies has increased. With debt markets remaining open, companies have been able to raise record amounts, strengthening their ability to navigate the economic impact of a wave of Covid-19 infections in the US.

Junk-rated companies have raised more than $150bn through debt markets since the start of April, according to Refinitiv data.

John McClain, a portfolio manager at Diamond Hill Capital Management, said confidence had been rebuilt since the early days of the crisis, when the Fed stepped in. “I did not expect to be here in March. I didn’t expect to be here in April,” he said. “As we got through May it started to feel like the medicine that was administered to the market was effective.”

The market recovery has been so strong that high-yield bond returns are now only marginally negative for the year.

Investors have poured nearly $60bn into funds that buy US high-yield bonds since late March, according to data from EPFR Global, erasing withdrawals of more than $20bn up to that point in the year.

“We are having a lot of conversations with clients about whether they have missed the opportunity,” Mr McClain said. “I don’t think so . . . Governments across the world want to make sure credit is working properly.”

The long-term survival of many companies remains in question, however, particularly as some state and local governments reverse reopening plans, John Dixon, a high-yield bond trader at Dinosaur Securities, said.

“Although the capital markets have been incredibly accommodating to the airline, cruise line and cinema sector, enabling many companies to raise significant liquidity, it may prove for naught should social distancing remain into 2021,” he said.