Apollo Shareholders Rule

One trend in corporate finance is that many companies have moved to unequal voting rights. For example, Comcast, Alphabet, Facebook, Lyft, Pinterest, and many others have some type of dual class share structure, with different voting rights for each share class. Investment management company Apollo Global Management is feeling different. Recently, former CEO Leon Black proposed that the company move to one share, one vote. As Mr. Black stated:

Moving to a “one share, one vote” structure to ensure that the voting rights of our shareholders align with their economic interests by eliminating the Class C voting stock, as well as examining a move to a single class of common stock.

Apparently, Mr. Black feels that shareholders should be counted by the number of shares owned.

Organizational Charts

Organizational charts can have very different structures when comparing companies and an individual with the same duties in one company could have a different title in another company. Elon Musk certainly does. In a recent SEC filing, Musk has added a new job title of "Technoking of Tesla." And in a nod to Game of Thrones, CFO Zack Kirkhorn is now the "Master of Coin." Tyrion would be proud!    

Cash Versus Earnings

A recent article in the Wall Street Journal notes that banks sharply increased their loan loss reserves in 2020 in response to the pandemic. Increasing such reserves reduces a bank’s reported profit, and decreasing them improves the profit picture. By 2021, the loan losses had not emerged at the level the banks anticipated, so their profits will be rising as the loan reserves are decreased. According to the WSJ, “U.S. banks are sitting on a pile of cash that could turn into billions of dollars of profits.” There’s only one problem. Loan loss reserves are just accounting entries. Increasing and decreasing them impacts reported profits, but has no cash flow implications. As JPMorgan CEO Jamie Dimon said "It's ink on paper . . .we don't consider that earnings." We recommend a review of Chapter 2 for the WSJ reporter.

Supply Chain Issues

Increasing demand for products in the U.S. has resulted in supply chain problems for many companies. For example, shipping from one Chinese manufacturer, which was 30 days a year and a half ago, is now three months and shipping costs have increased 50 percent. U.S. ports are a major bottleneck and ships can sit offshore for weeks at a time. Overall, global delivery times are the second longest on record. Shortages are the most severe for semiconductors, as demand increased when workers bought electronics to create home offices. In fact, the German Association of the Automotive Industry announced that only 240,000 passenger cars were made in February, about half of the November output. The reason given was the shortage of semiconductors.

Mutual Funds Underpform...Again

In our discussion of market efficiency, one trait of an efficient market is that it is difficult for investors to outperform the market. The results for mutual funds for 2020 are in and it appears that the market won again. For large-cap equity funds, 57.1 percent underperformed the S&P 500, the 11th straight year less than half of large-cap funds outperformed the S&P 500. Over a 20-year horizon, only 4 percent of large-cap funds outperformed the index, while 10 percent of mid-cap funds and 6 percent of small-cap funds could make that claim. It appears that the market is tough to beat.

Women Outperform Men

Who are better investors, women or men? A recent interview with proprietary trader Kathy Donnelly discusses reasons why the evidence suggests that women tend to outperform men as investors.

LIBOR Termination Extended

The administrator of the London Interbank Offer Rate (LIBOR) has extended the termination of some tenors until mid-2023 to allow users more time to change to another reference rate. However, the 1-week and 2-month U.S. dollar LIBOR rates will end on December 31, 2021. In the U.S., SOFR appears to be the new standard, but SOFR is not without it's own issues. SOFR does not allow treasurers to estimate forward interest rates, a major drawback. Even with this shortcoming, companies need to transition from LIBOR before it runs out.

GE's Reverse Stock Split

General Electric, with a share price of about $13 and a market capitalization of $117 billion, currently has 8.8 billion shares outstanding. Given the large number of shares outstanding, the company has proposed a 1-for-8 reverse stock split. The stated purpose of the stock split is to reduce the number of shares outstanding to be more comparable to other companies with a similar market capitalization. Of course, the reverse stock split will also increase the share price by a multiple of eight.

SPACs Explode

Special purpose acquisition companies (SPACs) have grown dramatically in the past year and a half. The sole purpose of an SPAC is to go public, with the funds raised in the IPO being used to purchase a private company. In 2013, there were 10 SPAC IPOs. This number grew to 248 in 2020. But 2021 is a banner year for SPACs as the growth trend has accelerated. So far this year, there have been over 200 SPACs. During the last week of February, 50 SPACs filed preliminary paperwork for an IPO, implying an annual pace of about 2,000 per year. In fact, today there were 15 SPAC IPOs.

Buybacks Or Dividends?

The Oracle of Omaha has spoken again: Famed investor Warren Buffett, whose company, Berkshire Hathaway, which has never paid a dividend, spoke out on his preference for buybacks over dividends. Berkshire Hathaway spent $25 billion last year repurchasing its stock, or about 5 percent of its market value. His argument for buybacks is exemplified in Apple stock. Because Apple's buybacks have reduced its shares outstanding, Berkshire's ownership of Apple has grown 10 percent since Buffett first bought Apple stock back in 2016. Berkshire now owns 10 percent more of Apple's assets and future earnings than it did five years ago. This does not account for $11 billion in Apple stock that Berkshire has sold in the interim.   

Granting Credit

As with many other decisions in corporate finance, the decision to grant credit is industry specific. A recent survey indicates that the median company grants credit to about 30 percent of its customers. The 25th percentile company grants credit to 20 percent of its customers and the 75th percentile company grants credit to 50 percent of its customers. Car dealers grant credit about 83 percent of the time, while health care companies grant credit only 30 percent of the time. As with most decisions, remember the decision to grant credit is an NPV decision.