Sunday, October 23, 2016
AT&T announced that it had agreed to purchase Time Warner for about $85 billion. Under the terms of the deal, Time Warner shareholders will receive $107.50 per share, half in stock and half in cash. The share price represents about a 20 percent premium to Time Warner's closing price on Friday. Even though the terms of the deal have been announced, Time Warner shareholders and the Department of Justice still must approve the deal, and the chair of the Senate subcommittee on antitrust said the committee would examine the deal as well. Of course this is not the first time that Time Warner has been acquired: In 2000, AOL purchased Time Warner for $160 billion in one of the worst deals in history. In fact, the company had a $99 billion loss in 2003 and things went so bad, the merged company eventually changed its name back to Time Warner.
Monday, October 3, 2016
The ratio of CEO pay to that of other workers has been a hot button topic and reports often peg the ratio at 300:1 or higher. A controversial part of the Dodd-Frank Act requires companies to begin reporting the CEO pay relative to the median compensation at that company. In a new survey of 117 companies, the majority of the companies reported a ratio less than 200:1. Surprisingly, the financial services sector, which has drawn considerable scrutiny for CEO pay, has a lower CEO pay ratio, in part because the wages in that industry are relatively high. Industries that have high CEO pay ratios tend to have mare part-time and less-skilled employees.
You may have noticed that there is not a lot of discussion of ethics in your textbook. A major reason is that from a financial view, if the market or society values ethical behavior, unethical behavior by a company will hurt its market value, thus defeating the goal of maximizing shareholder value. Consider the case of Wells Fargo, which is under fire for fraudulently creating up to 2 million deposit and credit card accounts. In addition to the fines paid by the company, last week, California announced that it was barring state transactions with Wells Fargo, including underwriting state bond issues. Today, Chicago announced that it was divesting $25 million that it has invested with Wells Fargo and next week Illinois plans to announce its plans to suspend Wells Fargo from the state investment network. So, while Wells Fargo may have temporarily increased value by fraudulent actions, these actions will now negatively affect shareholder value.
If you look at stock prices, you will see bid and ask prices that may only be different by a penny. What you may not realize is that this has only occurred since 2001. Prior to that, stock prices were quoted in eighths or sixteenths, so a price quote of 40 1/8 meant $40.125. Part of the reason for the change was that the bid-ask spread was the dealer profit, which also meant that investors were paying this difference. However, it has been argued that small cap stocks were hurt by decimalization because market makers have less incentive to trade less liquid small cap stocks and this has also lead to less research on small companies. Today, a pilot program was begun in which 10 small company stocks began trading on 5 cent tick sizes, meaning the smallest change in the stock price for these stocks is now a nickel. About 1,200 stocks will eventually be included in the test program, with three different groups with different trading rules. The goal of the study is to determine if increasing the tick size can lead to increased liquidity in small cap stocks.