TheChek News Flow

Ruling in Dell case casts doubt on popular tactic of seeking higher post-deal prices

A recent court ruling involving the $24bn buyout of Dell could mean “game over” for hedge funds that have profited from asking US judges to boost the prices of takeovers after they have closed.

Hedge funds such as Merion Capital and Magnetar have raised a total of more than $1bn from investors in recent years to fund lawsuits in which they challenge the fairness of the price paid to acquire public companies. These “appraisal” cases seek to profit by convincing judges in Delaware, where most US companies are incorporated, to give them a higher payout.

The funds initially scored a series of high-profile wins, pushing up the buyout prices paid to dissenting shareholders in deals involving Dell, Dole Foods and Cox Radio among others.

But earlier this month, the Delaware Supreme Court threw out an award stemming from the 2013 acquisition of Dell, and ruled that the deal price should prevail when a sale process is demonstrated to have been competitive.

That ruling and similar ones in recent months are forcing appraisal-focused hedge funds to revisit their approach. One long-time investor in this area told the Financial Times that the Dell reversal means “game over” for the strategy. He said that the initial Dell victory in 2016, among others, had made it too easy to raise money for the strategy and that many funding sources would now pull the plug.

However, other investors predicted the strategy would survive as long as hedge funds became more selective about picking their targets.

Up to now, the strategy has proved very popular and lucrative. In 2016, one out of five eligible deals faced a hedge fund lawsuit seeking a higher “fair value” price, up from less than one in 20 a decade earlier.

While the hedge funds tended to win only small awards in most of their cases — in the Dell matter, Silver Lake and Michael Dell owed hedge funds led by Magnetar Capital roughly $20m — in some appraisal cases, judges have granted awards in excess of twice the deal price.

One recent study pegged the annualised returns of appraisal funds at 33 per cent.

Such success also spawned bigger bets, notably Merion Capital — created by shareholder attorney Andrew Barroway — took a $600m stake in the grocer Safeway during the buyout by rival Albertsons. The investment represented about 10 per cent of the total deal price. People familiar with that matter said that Blackstone’s hedge fund unit had invested $200m in Merion’s $1bn+ fund.

Companies targeted by the appraisal hedge funds pejoratively labelled their strategy “appraisal arbitrage”. They pointed out that Merion and some of the others typically acquired their shares in target companies after a transaction had been announced with an express plan to challenge the price in court.

The prevalence of the strategy also spooked some potential buyers. By early 2016, bankers and lawyers were noting that merger contracts were increasingly including “appraisal out” clauses that gave purchasers the option to escape a deal if too many shareholders challenged the price.

But the tide started to turn this year. Judges in both the Delaware Court of Chancery and the Supreme Court ruled against the appraisal funds in several cases, finding that the merger price or even a lower price constituted fair value in the acquisitions of such companies as Clearwire, Petsmart and DFC Global.

Now the Dell ruling has given buyers very clear guidance on how to avoid being second guessed on the deal price in the future, company advisers say.

In that case, Delaware vice-chancellor Travis Laster had used his own models to determine that Dell’s fair value per share was $17.62 rather than the $13.75 that Silver Lake Partners and Michael Dell had paid. He ordered the buyers to pay the difference.

But Delaware high court said earlier this month that Mr Laster had inappropriately dismissed the extensive sales process that Dell had undertaken.

“The recent Dell and DFC decisions indicate that it will be difficult for hedge funds to do better than market price where a deal had a strong sale process,” says Adam Gold, an attorney at Ross Aronstam & Moritz, a Delaware law firm that represents companies.

Appraisal investors and lawyers who work with them agree that the ground has shifted. Some of them complain that the Delaware judges have now become too deferential to companies and too willing to accept deal purchase prices.

“If Delaware wants to gut appraisal to be the most corporate-friendly jurisdiction in the world, that will have consequences which include fewer shareholder protections and lower valuations”, says Geoffrey Stern, who won an appraisal award connected to DFC Global, only to have it overturned by the Supreme Court.

But other investors who follow this strategy say they believe it can still survive.

Matthew Giffuni, a longtime appraisal investor at Quadre Investments, says the cases that have made it to court tend to be the weaker ones because companies are quick to settle the most compelling cases of undervaluation.

“Dissenters with strong facts have gotten companies to settle for favourable outcomes prior to trial but the public does not know the details,” he says. “Appraisal is not going away. There will always be deals unfair to shareholders.”

A One Time Super Bull Is Getting Worried About the Stock Market

Jim Paulsen is removing himself from the ranks of the stock market’s biggest bulls.

The Minneapolis-based chief investment strategist at the Leuthold Group has shifted his views in recent months and now expects a market correction of about 10% or 15% at some point next year. And he doesn’t see the buy-the-dip crowd rushing in at full speed when it’s over either, as he believes the stock market may not end 2018 higher than where it began.

Mr. Paulsen has been optimistic about the economic recovery and stock market for most of the eight-year-old bull market, even when many others were skeptical. The change stems in part from what he sees as rising market sentiment during a time of heightened valuations, as well the belief that slowly building inflation pressures could add a roadblock for stocks next year.

Mr. Paulsen’s views are notable at a time when investors are finally starting to show some enthusiasm about the stock market. At the end of a year in which the S&P 500 has defied expectations and climbed almost 20%, many see more gains in store as the economy picks up steam, earnings keep growing, and a Republican tax-code overhaul looks set to add to corporate profitability.

Analysts at Wall Street banks, for example, expect the S&P 500 to finish 2018 at 2854 on average, up 6.5% from Tuesday’s close of 2681, according to Bespoke Investment Group. Some see the benchmark index crossing above 3000. Mr. Paulsen, for his part, doesn’t dispute the traditionally positive shifts happening in the economy, but he believes their boost to the stock market may not play out as expected.

“There has been a lot of change in the attitude about how good or bad the economy is,” he said. “As you changed that attitude, it went through stocks and revalued them higher. It’s done.”

Mr. Paulsen, who spent two decades at Wells Capital Management before moving over to Leuthold this year, disputes that he’s always been a market bull. He notes that he turned bearish ahead of market crashes in 1987 and around the turn of the millennium, though he says he missed the 2008 market collapse and stayed bullish in its wake. More recently, he called for a market correction in 2014 around the time the S&P 500 crossed above 2000.

Mr. Paulsen’s more cautious tone in recent months reflects new challenges that he believes the market faces going into the new year. Here are some of them:

As economic data get stronger, economists’ expectations for those readings are getting higher as well, removing the potential for positive economic news to surprise the market and jolt it higher.

Financial liquidity, which supports economic activity, has been contracting recently, according to his measures of money supply relative to nominal gross domestic product.

Sentiment about the market is getting stronger, which can lead to the type of risky investment activity that often ends with a big market decline. He says: “I’m not saying people are giddily optimistic, but relative to what we’ve done in this bull, they are far calmer and more complacent compared to what they’ve been.”

Yields on benchmark Treasury notes, though they’re flat on the year, have risen a lot from record lows reached in the middle of 2016. Short-term rates have been rising as well as the Federal Reserve has been lifting rates. If borrowing costs rise much further, it could start to make stock investors concerned.

Inflation, the missing ingredient in the economic recovery and one reason rates are so low, is picking up. He points to rising producer prices, a gauge of prices that U.S. companies receive. He believes U.S. wages, which have been sluggish throughout the economic expansion, could rise more in 2018.

For decades Mr. Paulsen been offering up market commentary that regularly gets picked up by the financial press. The research that he presents to clients, which typically includes a mix of economic and market analysis, is often filled with extra exclamation points and question marks. It’s his way of making fun of the rules of the English language, he says, which he’s always thought to be random in ways that mathematical formulas are not.

This time, he isn’t calling for a recession or a bear market, typically indicated by a decline of 20% or more from a peak. That’s partly because he doesn’t yet see widespread signs of excessive behavior among investors. But he believes small shifts in markets and the economy could rearrange the optimistic narrative around the stock rally and send the market in the other direction.

“Most years, people start the year defensively,” he said. “This year it feels like people are in, waiting for it to go higher. There’s a difference in risk in the stock market for those two attitudes.”

When Mr. Paulsen started working at Leuthold, he joined forces with his old friend Doug Ramsey, with whom he’s shared lunch regularly for years. Their views are often at odds with each other, with Mr. Paulsen taking the more optimistic outlook in recent years and Mr. Ramsey taking a more cautious view.

“Right now I don’t think we’re that far apart,” Mr. Ramsey said.

Apple, Google and Facebook will continue to dominate as Alibaba and Tencent rise

If you are wondering what the biggest business stories in the tech world will be next year, forget driverless cars, augmented reality goggles and computers that respond to the human voice.

Those inventions generate eye-catching headlines, but the main engines of growth for the biggest tech companies in 2018 are ones that have already become a deeply ingrained part of business life: digital advertising, ecommerce and the wholesale move of global IT to the cloud.

It is always dangerous to put too much faith in extrapolation, but some trends in digitisation are hard to ignore. They are driven by the emergence of a pervasive technology infrastructure and a preference among users for the convenience of digital services. They also reflect the willingness of more businesses to operate on platforms built by companies such as Google, Facebook and Amazon — as well as China’s emerging tech giants Alibaba and Tencent.

Consider advertising. About 40 per cent of global ad spending is currently devoted to digital channels — only a slightly higher proportion than accounted for by TV. The superior targeting and potential for interactivity of digital networks should continue that shift.

Advertising has also become the prime example of digital platform dominance. Just two companies — Google and Facebook — account for almost all of the net increase in digital ad spending over the past two years. The pace of digitisation will slow if couch potatoes cling to their TV habits, and others may carve off a bigger slice of the video advertising pie, but the underlying shift feels inexorable.

A lower share of the world’s retail sales has found its way online, leaving plenty of room for growth. Ecommerce accounts for about 14 per cent of sales in the US and 9 per cent in western Europe, according to Goldman Sachs. In China, the figure is 22 per cent.

As with the leading advertising platforms, Amazon has been exhibiting some of the winner-takes-all characteristics that come with digital dominance. Its growth rate has accelerated as it has grown, not slowed.

Meanwhile, a recent Goldman survey found that only about 19 per cent of the computing workloads carried out by large multinational companies have moved into the cloud. The sunk cost of the existing IT infrastructure will mean that the transition to cloud computing will take many years to play out. But with global IT spending set to reach $3.7tn next year, according to Gartner, the size of the business opportunity is massive.

The US platform companies that have positioned themselves to ride these waves are ending 2017 as the world’s five most valuable groups: Apple, Google, Microsoft, Amazon and Facebook. And even with Apple expected to show barely any revenue growth in 2018, these companies are forecast to add $100bn in sales between them next year — a collective growth rate of 14 per cent.

So what are the main risks? It may be that, in 2018, intimations of mortality will become more apparent. Apple has struggled to show where it will find growth beyond the smartphone. Google has yet to repeat its search advertising success in other markets. Microsoft still has one foot planted in the old PC world.

FT Forecasts 2018: Big tech to face regulatory pressure

The most immediate threat could be external. European regulators and courts have led the way in pushing back against the power and wealth of the tech giants, from last year’s €13bn penalty over Apple’s preferential tax position in Ireland to this month’s ruling that Uber should be regulated as a transport company. In between came a record antitrust fine against Google.

The spotlight has now shifted to Washington, thanks in no small part to the political outcry over Russia’s use of Facebook to influence last year’s US presidential election. Privately, all the big tech companies are braced for regulatory action, though in the current febrile US political climate, it is hard to see exactly what form that will take.

The gathering political clouds in the US should also help to accentuate the rise of China’s tech leaders. These companies have succeeded in aligning themselves closely with the interests of their state and enjoy a domestic market that is largely insulated from foreign competition.

They have yet to step fully on to the world stage, despite recent investments in Snap and Spotify among others. But by the end of 2018, there is a good chance that their global aspirations will have become much more apparent.

China's Oppo smartphones to debut in Japan next spring

Handset giant to pitch SIM-free phones to Japanese telecoms companies

TOKYO -- Consumer electronics manufacturer Oppo, the company holding the largest share of China's smartphone market, will start selling SIM-free phones in Japan in the spring.

The company's phones will be sold online and at home appliance retailers. The Chinese company will enhance marketing activities in the hope of pitching to NTT Docomo and other major telecom companies.

Oppo

Governments need to step up and help the insurance industry cover growing threats from cyber attacks, the head of reinsurer Swiss Re has said.

Christian Mumenthaler said governments around the world need to provide a backstop in case of huge attacks, much as they do for terror incidents. “You need the same here, otherwise the public market cannot really develop fully,” he told the Financial Times in an interview.

At the moment, he said, governments are not willing to take on the risks: “At the current stage the appetite of governments to engage in such a dialogue is zero.”

Cyber insurance is one of the fastest-growing parts of the industry as companies try to protect themselves from attacks such as WannaCry and NotPetya, both of which disrupted businesses this year.

Insurers are worried about what they call accumulation risk: the possibility that a large number of their clients could be hit at the same time by the same attack, creating huge potential payouts.

“You need diversification,” said Mr Mumenthaler. “If you have accumulation, if you have scenarios that hit everything at the same time, one of the principles of insurability is actually put out of play.”

He added: “If you take natural catastrophe they won’t happen at the same time so I can write tonnes of natural catastrophe [insurance].”

Mr Mumenthaler said Swiss Re’s response to cyber accumulation risk has been to take a cautious approach to the market. “We can write a little bit of cyber but we don’t want to be overweight in this risk field. We want to be underweight.”

Some governments are slowly taking steps to provide a backstop for cyber attacks. Last month, Pool Re, a government-backed terror insurer in the UK, said it would add material damage and direct business interruption caused by cyber terrorism to its cover.

Elsewhere, insurers are bringing in government expertise to help them manage the risks. In September, Hiscox appointed Robert Hannigan, the former director of UK intelligence agency GCHQ, as an adviser on cyber security.

Cyber is not the only area of technology where Swiss Re is taking a different approach from many of its large peers.

Mr Mumenthaler is also sceptical of the growing trend for insurers to buy up stakes in start-ups, often via specially created venture capital funds. Allianz, Axa and Munich Re are among those to have taken that approach.

Swiss Re is steering clear. “If we see a start-up that can help us, either it’s very strategic and then we would buy them 100 per cent or copy what they do, or if it’s not that strategic then I think we can collaborate with them. But investing 10 per cent, 15 per cent, 20 per cent in them, I can’t make a case. We’re not a VC fund. I don’t see why my investors would prefer me to do that versus them making it,” said Mr Mumenthaler.

He added that, while he sees a lot of potential for technology to make a big difference by making the process of buying insurance and making claims cheaper and easier, the changes could take longer than some people expect. “There is a lot of hype. There’s a lot of noise in it. A lot of over-expectation.”

--> B4B GY / CEC GY could move on that ...more fights to come...

Media Markt co-founder Kellerhals died: On the first Christmas holiday

Erich Kellerhals is dead. He died at Christmas at the age of 78 with his family.

December 28 (Frankfurter Allgemeine) - false

The co-founder of the electronics chain Media Markt, Erich Kellerhals, is dead. "We can confirm that Mr. Kellerhals died on December 25 in the company of his family," said a spokesman for his asset management company Convergenta this Thursday. Previously, several media had reported on the demise of the billionaire. Kellerhals was 78 years old.

The native of Ingolstadt had made headlines because of his

Enduring feud with the Metro Group, to which Media-Saturn once belonged. Since the merger of the retail giant in the summer of this year, the electronics markets are located under the umbrella of the holding Ceconomy.

The roots of Media-Saturn go back a long way. In 1963, Kellerhals and his wife Helga opened a shop for coal stoves and oil stoves as well as bicycles in Ingolstadt. Over the years, more shops were created, mainly selling radios and TVs.

Together with the partners Walter Gunz and Leopold Stiefel, the pair Kellerhals opened in 1979 in a Munich

The dispute between Kellerhals and the Metro leadership ignited under the former CEO Eckhard Cordes and was also continued under his successor Olaf Koch. Essentially, it was about who has the shots at Media-Saturn. Kellerhals saw his life's work threatened. Both parties met regularly in court. Most recently, a mediator was turned on to mediate between the brawlers. An official agreement did not come anymore.

There are now more than 1,000 media

and Saturn markets. The parent company Ceconomy made a good 22 billion euros in sales in the past fiscal year.

The billionaire Erich Kellerhals was involved in the electronics chains Media Markt and Saturn with a good 21 percent. With the main shareholder Metro and later with their separation Ceconomy he was for years in the dispute over the business policy. Recently, representatives of its investment company Convergenta had not signed off the annual financial statements in a shareholder meeting of Media-Saturn.