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Reuters - Stock index futures fell slightly on
Tuesday, reflecting caution before data on the vast U.S.
services industry and the biggest day of voting in U.S.
primaries to select presidential candidates for November's
election.
When the New York Times broke the story last week that Eli Lilly & Co. was in confidential settlement talks with the government, angry calls flew behind the scenes as the drug giant's executives accused federal officials of leaking the information.
As the company's lawyers began turning over rocks closer to home, however, they discovered what could be called A Nightmare on E-mail Street, a pharmaceutical consultant told Portfolio.com. One of its outside lawyers at Philadelphia-based Pepper Hamilton had mistakenly e-mailed confidential information on the talks to Times reporter Alex Berenson instead of Bradford Berenson, her co-counsel at Sidley Austin .
With the negotiations over alleged marketing improprieties reaching a mind-boggling sum of $1 billion, Eli Lilly had every reason to want to keep the talks under wraps. It was paying the two fancy law firms a small fortune to negotiate deftly and quietly.
If and when it did settle the allegations, that it had improperly marketed its most profitable drug, Zyprexa, for schizophrenia, it would certainly want to announce the news on terms carefully negotiated with the government.
"We usually try to brace for that [kind of] story," a Lilly staffer said.
So when The Times' Berenson began calling around for comment, and seemed to possess remarkably detailed inside information about the negotiations, Lilly executives were certain the source of the leak was the government.
As it turned out, one of Eli Lilly's lawyers at Pepper Hamilton in Philadelphia wanted to e-mail Sidley Austin's Berenson, about the negotiations. But apparently, the name that popped up from her e-mail correspondents was the wrong Berenson.
Alex Berenson logged on to find an internal "very comprehensive document" about the negotiations, the consultant said, and on January 30, Berenson's article, "Lilly in Settlement Talks with U.S." appeared on the Times' website. A similar article followed the next day on the front page of the New York Times.
Those who knew the real story must have had a chuckle—or shed some tears—over Lilly's statement to the Times that it had "no intention of sharing those discussions [with the government] with the news media and it would be speculative and irresponsible for anyone to do so."
When reached for comment, Alex Berenson told Portfolio.com, "I can't say anything. I just can't."
A spokeswoman for the U.S. Attorney's office in Philadelphia, which is spearheading the Zyprexa investigation, declined to comment, as did a spokeswoman for Eli Lilly.
However, the Lilly spokeswoman called back to add that the drug maker would continue to retain Pepper Hamilton. Phone calls to Sidley Austin and Pepper Hamilton were not returned.
And sadly, no confidential e-mails with further scoops were received in error.
Reuters - Dutch office supplies firm Corporate
Express said Tuesday it was not in talks to be bought
by U.S. rival Staples , denying a newspaper report and
halving a sharp rise in its shares.
Reuters - Diversified manufacturer Tyco
International Ltd reported higher quarterly profit on
Tuesday on demand from energy and industrial markets and an
improving performance at its ADT security division.
Reuters - Toyota Motor Corp reported a 7.5 percent
rise in quarterly profit as it sold more cars in fast-growth
emerging markets from China to Russia, but it kept a cautious
outlook due to a weak U.S. auto market and a firmer yen.
It's the start of a new month in what's still a new year, so it's time once again to speculate about a Citadel public offering. Did its founder Kenneth Griffin see his shadow Saturday morning or do we have six more months with no I.P.O.?
News that the firm spun off its options-trading unit from its fund business at the start of this year has renewed suspicion that it's laying the groundwork for an I.P.O. Bloomberg speculates that the move "may be a prelude to a public offering" because it removes any appearance of a conflict of interest in the eyes of public investors. It's one less obstacle on the road to Wall Street.
Rumors about Citadel's imminent I.P.O. have circulated for nearly three years. Indeed, Griffin himself told Condé Nast Portfolio nearly a year ago that an I.P.O. is "a strategic option we consider."
But while it's quite clear that the business media is itching for an offering, there's no indication the public markets are.
Look no further than the stock charts of alternative investment firms that took the plunge last year. Shares of Fortress Investment Group are trading for less than half of what they did on their debut last February. Investors in the Blackstone Group have been rewarded with a 40 percent drop in share price since its I.P.O. last summer. And Och-Ziff Capital Management Group has dropped 28 percent since its debut just three months ago.
Some argue that the shares in this group have fallen too far, and their stock is undervalued. Maybe so, but public investors would still be forced to measure Citadel's worth by comparing it to its public peers. "We think our competitors are undervalued" isn't exactly the kind of pitch a banker wants to take on an I.P.O. road show.
In fact, Barron's argues that there may still be room for shares of the Blackstone Group to fall further if certain deals fall through.
Couple this with the still shaky credit markets, an uncertain economy, and the increasing influence of sovereign wealth funds abroad, and it looks like a Citadel I.P.O. anytime soon would be a long shot.
Of course, Griffin isn't afraid of taking risks. He jumped at the chance to invest in E-Trade when it hit turbulent times last November. Its shares are down 20 percent since then.
About the only thing that Citadel did publicly disclose yesterday is that it took a 5.5 percent stake in the software firm MicroStrategy.
And how did the market like hearing that one? So much, evidently, that they sent its shares down more than 5 percent.
For mergers and acquisitions lawyers, the January 31 letter that Microsoft C.E.O. Steven Ballmer sent to Yahoo's board -- an unsolicited offer to buy the company for $44.6 billion, a 62 percent premium -- was the first step of a very carefully choreographed dance.
Ballmer's offer, a "bear hug" in M&A parlance, was the first step. The letter ended with a mix of conviviality and (not so) veiled threat that suggests what might come next.
"My leadership team and I would be happy to make ourselves available to meet with you and your Board at your earliest convenience," he writes. "Depending upon the nature of your response, Microsoft reserves the right to pursue all necessary steps to ensure Yahoo shareholders are provided with the opportunity to realize the value inherent in our proposal."
Translation: Let's have a proxy fight!
If the Yahoo board digs in its heels, reject Microsoft's offer, and resorts to its "poison pill"—an anti-takeover maneuver to dilute the value of a hostile bidder's stake in the company—Microsoft's next shot would be to file a tender offer and nominate a new slate of independent directors. This is otherwise known as throwing the bums out.
Under Yahoo's bylaws, the notice for such a proposal and new slate of directors must be issued by March 13—enough time for the Yahoo directors to consider Microsoft's offer, while each side burns through some very high-priced legal advice, and Microsoft heads toward a possible proxy fight.
But if, let's say, you are Jerry Yang, Yahoo's chief executive officer, you might be rethinking the company's approach to corporate governance at this moment. For you see, Yahoo does not have a "staggered" board, so every director will stand for re-election—and could be voted out—at the next annual meeting. (The date of the 2008 meeting has not yet been set. The 2007 meeting was in June.)
In other words, should Microsoft succeed in winning over the hearts and wallets of Yahoo's biggest shareholders, the deal would be done almost regardless of what Yahoo's founders or current directors think.
Lawyers who advise corporate boards view staggered boards as yet another negotiating device when a company becomes a target. It can allow the company to hold out on an acquisition through at least one annual meeting, or press for a better price. Shareholder activists, however, see them as another means by which management can entrench itself at the expense of shareholders.
"Not having a staggered board reduces the likelihood of remaining independent in the face of a premium offer," says Lucian Bebchuk, a professor of corporate governance at Harvard Law School.
In 2002, the Stanford Law Review published a study in which Bebchuk showed that a staggered board nearly doubled the odds of a company remaining independent in the face of a premium offer from a hostile bidder.
"For Yahoo to be able to resist this, they would have to convince its shareholders there is value in continued independence," says Bebchuk. That is a tall order, considering that Yahoo last month said its profit fell more than 12 percent last year, even as revenue rose 8 percent.
Over the weekend, according to news reports, Google—the one company that absolutely cannot offer to buy Yahoo to rescue it from the hostile bid, because even today's relaxed antitrust regulators would probably reject such a deal—apparently reached out to Yahoo.
Google's lawyers certainly have been blogging about antitrust issues with Microsoft's bid.
Could the Yahoo board reject the Microsoft bid based on their concerns that the combination would not pass muster with antitrust regulators, either here or in Europe?
Morton A. Pierce, chairman of the mergers and acquisitions practice at Dewey & LeBoeuf, says it's possible, but not likely. "It becomes difficult in the face of a 62 percent premium to say I am just going to ignore this because I think there's an antitrust problem," says Pierce.
Ballmer's letter was an appeal to Yahoo's independent directors. If that fails, expect a campaign for the hearts and minds of its big institutional shareholders. But Microsoft is forbidden to woo them until the Yahoo board formally rejects Microsoft's offer. "They can't solicit people without the appropriate document on file, so I am assuming they are waiting for the board to respond," says Pierce.
Microsoft has turned to some very experienced counsel in the hostile M&A game: Charles I. "Casey" Cogut of Simpson Thacher & Bartlett, head of the firm's M&A practice, counsel to Kohlberg Kravis & Roberts, and a character in the 1980s hostile takeover book Barbarians at the Gate.
Yahoo is represented by a team from Skadden, Arps, Slate, Meagher & Flom, led by Palo Alto corporate partner Kenton J. King.
What is the French expression for "closing the barn doors after the horses have fled"?
France's finance minister, Christine Lagarde, is calling for tighter bank controls after a single trader caused Société Générale to lose more than $7 billion.
"Very clearly, certain mechanisms of internal controls of Société Générale did not function, and those that functioned were not always followed by appropriate modifications," Lagarde said to reporters after submitting her report, according to the BBC.
It is the first government report on the trading scandal. The Bank of France is also investigating, while the independent directors of Société Générale are conducting their own inquiry. Meanwhile, Paris prosecutors are continuing a criminal investigation.
And those aren't all. Kara Scannell of the Wall Street Journal reports that the United States Securities and Exchange Commission is investigating some $140 million in sales of Société Générale shares by Robert Day, investment manager of the Trust Company of the West, and two foundations associated with him. The stock was sold in the second week of January, before the trading scandal broke.
The United States attorney has also begun an investigation related to Société Générale, the Journal says, "although its precise focus wasn't immediately clear."
A spokesman for Day told the Journal that the trades were permitted under the bank's policies and that all disclosures were made. "No inside information was used in any way with respect to these sales," the spokesman said.
In the finance minister's report, Reuters points to what appears to be "the most damning conclusion": Last year, inspectors from the Bank of France found Société Générale's securities procedures lacking.
Lagarde also called for greater penalties for fraud.
Still, she said that it was not certain that the unwinding of positions by Société Générale was responsible for the sharp slide in European markets on January 21.
President Bush will unveil a spending plan today that breaks the $3 trillion mark for fiscal year 2009, raising defense spending, freezing domestic programs, and projecting budget deficits of about $400 billion for this year and next.
The $3.1 trillion 2009 budget proposes a 7.5 percent increase in funding for the Pentagon, to $515 billion, with war costs additional. The Energy Department would gain another $21 billion for nuclear weapons programs, while $70 billion would go to the wars in Iraq and Afghanistan as a "bridge fund" while the president considers strategy options.
The budget deficits Bush forecasts—$410 billion for the fiscal year 2008 and $407 billion for fiscal 2009, nearing 2004's all-time high of $413 billion—come largely as a result of increased defense spending and economic stimulus efforts while taxes are being cut.
Bush calls for an 11 percent increase in homeland security programs, with a 19 percent increase for border security and immigration enforcement efforts. The Food and Drug Administration would receive a $2.4 billion increase to improve food and drug safety efforts.
Bush will also begin an effort to double the size of the State Department over the next decade with a request for funds to hire 1,100 new diplomats.
As Zubin Jelveh notes on his Odd Numbers blog, "The more important issue is that — regardless of how much of the budget will be passed — with the growing national mood for change as voters turn out in record numbers, President Bush opted to stick to his guns and promote the types of initiatives that were a highlight of his presidency."
Indeed, Democrats are already attacking the proposal for freezing funding for domestic programs, which would remain at current levels, with most services being cut after inflation and population growth are factored in.
Medicare and Medicaid programs will see almost $200 billion in cuts over the next five years, freezing reimbursement rates for health-care providers for three years and cutting payments to hospitals that serve large numbers of the uninsured poor.
Health and Human Services Department funding would be $2 billion and funding for the National Institutes of Health would be frozen, while education programs would remain at $60 billion.
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