I spent a good portion of last week sifting through various articles about Tata’s purchase of the Jaguar and Land Rover marks from Ford. I was quite disappointed in what I read, mainly due to a lack of depth in analysis. Most of the articles I read extolled the virtues of Tata’s acquisition - hailing it as a wonderful play into the luxury segment of the market, or applauding Tata’s ambition in trying to become a truly global automaker.

I, quite frankly, think that this deal is destined to fail (I’ll come back to that in a minute).

For Ford, by contrast, this is an unambiguously good (and timely) outcome. In fact, that they received anything greater than $0 is remarkable to me. I wouldn’t have been surprised to see Ford pay someone to take both firms off their hands in much the same way that Daimler paid Cerberus to take Chrysler (see Divorced). Ford, after all, is a struggling giant, trying to do the best it can to survive in a competitive, mature, and low-margin industry. After a valiant effort and many attempts over the years, they could just not make Jaguar or Land Rover consistently profitable (although LR was marginally profitable on an operating basis this past year). The cost structure of Jaguar and LR (from a labor rate standpoint), their liabilities (from a pension perspective), and the demand for their products (with tired designs and out of favor models) were untenable for Ford in the long run. Ford really had no other option but to abandon ship.

That notwithstanding, Ford executives should be jumping for joy that they finally rid themselves of these two money pits, and ecstatic that someone actually paid them for the privilege.

For Tata, while bold, the deal just doesn’t make much sense. Aside from several luxury brands, an increased global presence, and some notoriety, I’m not sure what Tata gains. For example:

1. Where’s the synergy? Can Tata and Jaguar/LR share components, design, production, dealerships, or management? On its face, the synergies are just not there. But perhaps the investment was made for learning purposes, with Tata hoping to use Jaguar/LR capabilities to improve the quality and/or image of their existing automobiles. Possibly.
2. Can Tata rationalize Jaguar/LR’s production to make them more profitable? Actually, they cannot. They made pledges not to cut staff or close plants. And it’s unlikely that they would be able to reduce costs substantially by sourcing parts and supplies from India.
3. Can Tata right a ship that larger, more experienced, more formidable competitors had been unable to? In Jaguar and Land Rover, Tata is inheriting pieces of the old British Leyland Motors (Jaguar, Rover, Austin, Morris, etc.) that all tolled experienced (and continues to experience) more than 40 years of uncompetitiveness and underperformance. Quite simply, they are inheriting a lot of baggage (see Riding the Elephant for more background on British Leyland). It will be difficult for Tata to overcome this tremendous inertia.

Some analysts have argued that Jaguar and Land Rover were purchased on the cheap (at $2.3B minus $600M that Ford is throwing in to offset pension liabilities), and at the right time - when both Jaguar and Land Rover have a stable of new models about to hit the market (e.g., the Jaguar XF and the Land Rover LRX). These analysts point out that if these new models hit it big, it will make Tata’s acquisition look like a steal. However, this assumes that Tata can revive flagging sales at Jaguar and Land Rover in the middle of a downturn. Likewise, it assumes that Tata, by simply owning the brands, will not dilute their image. Finally, it assumes that the Jaguar and/or Land Rover brands can be revived after years of neglect and consumer dissatisfaction, and that consumers will once again be interested in buying relatively expensive, gas-guzzling cars and SUV’s (especially in the case of LR).

For all these reasons, I remain skeptical. In fact, I think this deal is DOA. The only question in my mind is how long before the Jaguar and Land Rover glide path to extinction.

Wow. I don’t know how many of you saw the news, but just today, the U.S. Department of Justice gave regulatory clearance for the Sirius-XM deal to move forward (see XM Satellite, Sirius Combination Approved). As Bloomberg reports:

There wasn’t enough evidence the merger “would substantially lessen competition or harm consumers,” he [Thomas Bennet, the Justice Department’s antitrust chief] said.

I agree with the DOJ on this one. As I wrote back in March of last year (see my original post The Sirius-XM Merger),

…they [Sirius/XM] do face substantial competition, not in the form of competitors in their existing space, but in the form of substitutes. They face threats from HD radio, traditional radio, iPod connectivity, internet streaming, etc. So this…will put a ceiling on their pricing power.

Not only that, but I thought the deal made sense because

there are some real cost saving opportunities to this merger. The synergies are real and tangible. Not only do the firms have the ability to economize on administrative costs (e.g., why do we need two sets of management to run these firms), but there are some obvious synergies in production (e.g., why do we need two sets of alternative rock stations when one will suffice).

…it [also] adds value for customers. Exclusivity contracts negotiated by these separate firms locked-in consumers. For example, fans of Major League Baseball were forced to choose XM while fans of Howard Stern only had Sirius as an option. Combining the firms allows fans of both to resolve issues of which service to choose…consumers who have chosen to wait for the uncertainty to resolve over which service would become the standard because they did not like having to choose between two options that are second-best (e.g., I want both Howard Stern and MLB, but I won’t choose until things get resolved) will no longer have to agonize over the decision of which service to select. With Sirius and XM merged…more consumers will likely opt for satellite radio.”

Although I initially extolled the virtues of this deal, I thought it would face some tough regulatory challenges. In fact, while I agree with the DOJ’s decision, this is not to say I wasn’t not surprised by it. In a subsequent post (see Lessons for Sirius from Whole Foods) I wrote:

Sirius could stand to learn a few things from the government’s initial reaction to the Whole Foods deal, whose case rests on similar justifications. If we can infer anything from the Whole Foods case, it is probably high time for Sirius to give up its pursuit of XM. Given Sirius’ stock price performance since Karmazin’s appearance before the House Judiciary Committee Antitrust Task Force on February 28 (from nearly $3.75 to $2.75), it seems the market already has.

Boy did I miss the boat on that one. I thought this deal was all but left for dead. I can’t help but wonder what brought about the change in sentiment on the part of the DOJ.

All that stands in the way of this marriage now is the approval of the FCC. Given the DOJ’s decision, I would be surprised if this deal were blocked at this point by Kevin Martin and the FCC.

But then again, for strategy folks like me, the real fun will begin after all the regulatory approvals fall into place - when the deal finally gets done. Then the integration scrutiny begins…

I know, I know, not another Bear Stearns article, right? I don’t know about you, but my eyeballs have gone crazy lately scanning headline after headline and reading article after article about the Bear belly flop and the JP Morgan bargain basement acquisition.

I’m so over it. So hopefully this is the last I’ll ever mention it.

With so much written about the topic, I was fairly convinced that someone would write a story exploring the following angle; however, I haven’t found any such article. So I’ll just throw this out there for consideration. Much of it will be speculation based on rumor and innuendo, but I think that we haven’t fully followed this path of reasoning - and I think it’s important.

Unfortunately, most of what I’ve read so far in the popular press either details Bear’s demise, praises JP Morgan’s (and Jamie Dimon’s) shrewd acquisition, or discusses the Fed’s reaction to the whole mess. Fairly little has been written about what this means for JP Morgan and why JP Morgan likely felt compelled to purchase Bear. And like Steve Randy Waldman at Interfluidity suggests, I think this acquisition raises more questions than answers (see More Questions than Answers on Bear).

But one question that has been answered unsatisfactorily in my opinion is why JP Morgan might want Bear in the first place. OK, so here’s my theory:

I’ve always firmly believed that in order to understand the behavior of economic actors (be they firms or individuals), one must understand their incentives. With that in mind then, we have to ask what JP Morgan’s incentives were to acquire Bear.

Much has been written about how JP Morgan was looking to acquire businesses in which Bear was strong (e.g., prime brokerage), and some even maintain that JP Morgan was looking to buy a regional bank.

This may be, but I believe that there is another explanation that has been little explored because, quite frankly, the data that would allow one to gauge this motivation are not publicly available.

Specifically, I believe that JP Morgan acquired Bear because they stood to lose the most from a Bear Stearns bankruptcy. For example, as Barry Ritholtz of the Big Picture points out (see here), JP Morgan has the greatest derivative exposure of any of the I-Banks. Now, I do not know how much of that exposure was to Bear Stearns as the counterparty, but I bet it was a fair amount (in fact, see Jesse’s Cafe Americain for information on Bear’s credit derivative exposure).

If Bear were the counterparty (insurer) to JP Morgan on much of its mortgage-backed security portfolio, it then becomes transparent why JP Morgan had to step in. They would have had to step in to avoid a Bear bankruptcy so that they would not be forced to take toxic assets back onto their own balance sheet and avoid massive write-downs. Were JP’s exposure to Bear large enough, then JP Morgan itself could have been left significantly impaired.

This might also explain the Fed’s interest in Bear. For example, if it were only Bear at risk and their exposure was spread relatively evenly across counterparties such that many of the big, primary banks were not at risk as a result, the Fed would have had no interest in this event. Instead, it would have just let Bear fail. But the Fed could not let Bear bring down JP Morgan with it. So it stepped in to orchestrate an orderly wind-down of Bear while facilitating its acquisition by JP Morgan.

But this still doesn’t explain why JP Morgan ended up with a relatively “cheap” price for Bear. Here is the second part of my theory. Namely, that Bear was into JP Morgan so deep (on the bad side of so many counterparty trades with them), that the Fed effectively negotiated a price that would have made Bear more or less whole on its obligations to JP Morgan. This too could explain why many other suitors dropped out so early in the process - because the Fed was not prepared to offer the same deal to those other “interested” buyers.

So for Bear’s sins, JP Morgan gets the pieces of Bear’s businesses that it would have liked to acquire in the market someday; it acquires some talented bankers; it gets a building (Bear’s headquarters) that is worth considerably more than the total price paid for the acquisition; and it gets the Fed to backstop the toxic parts of Bear’s assets (up to $30 Billion - fairly generous).

All in all not a bad deal if you’re JP Morgan (as many have pointed out), and maybe exactly what they deserved if Bear truly “owed” them as much as I suspect they might have.

But in the end, the whole episode certainly makes you wonder whether the Fed’s move represents a rescue of Bear or an effective bailout of JP Morgan.

I’ve been writing for some time now about private equity firms, their questionable acquisitions, their untenable leverage positions, and the likely outcome for them, and their portfolio firms, as a result of the credit crisis (for background see Stupid Money Chasing Stupid Deals…). I was not surprised therefore to come across a recent New York Times article detailing their recent fate (see Buyout Industry Staggers Under Weight of Debt). Michael de la Merced writes:

With their big paydays and bigger egos, private equity moguls came to symbolize an era of hyper-wealth on Wall Street. Now their fortunes are plummeting. Celebrated buyout firms…are seeing their profits collapse as the credit crisis spreads through the financial markets.

If anyone thought that private equity acquisitions were driven purely by skillful strategists and financiers (alpha in their parlance), here’s your evidence to the contrary. Many such deals were a simple product of the times (fueled by the availability of cheap money and credit). This is not to say that some private equity players are not skilled, just that there are likely much much fewer of the skilled type than many of us had thought just as little as one year ago.

Frankly, I have expected this endgame for quite awhile now - one in which many of the private equity portfolio companies would go bankrupt, and potentially take a few of their parents with them (see Corporate Defaults and Bankruptcies).

But more than that, for me, these events officially mark the end of an era. We will likely look back at this period and eventually refer to it as the second LBO wave. In my opinion, there are now two identifiable, and distinct, LBO waves:

1. The 1980’s - the wave that most of us associate with the LBO heyday; driven by the break-up of conglomerates, culminating with the RJR Nabisco deal, and etched in our memories by the movie “Wall Street”
2. The 2000’s - the cheap money wave; fueled by excess leverage, cov-lite deals, financial engineering, and a dose of Sarbanes-Oxley compliance avoidance

This is not to say that I believe that private equity firms do not play a vital role in our economy. It’s quite the opposite. I firmly believe that they are an important part of a well-functioning capital market (see The Role of Private Equity…). It’s just that the latest private equity craze is now officially over.

We can now get back to our regularly scheduled programming - watching their enablers (the I-Banks like Bear Stearns) implode under the weight of their own bad debt.

In my last post I blogged about executive pay and the credit crunch (see The Credit Crunch and Executive Pay). In that blog I suggested that the the issue of excessive executive pay was an economy-wide problem, and not specific to firms that were party to the credit crunch. Mike Barnett, my colleague from the University of South Florida, called my attention to a recent article that married the two issues quite nicely. I invited him to blog on the topic. Here are his comments…

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I buy the mantra that if CEOs captain their firms to big paydays, then they deserve a sizeable chunk of that payday. This is how we justify the astounding rates of CEO pay. After all, the daily earnings of a CEO often exceed the annual earnings of the average employee. We often forget about the other side of this arrangement — when the CEOs captain their firms to big losses, then they deserve a sizeable chunk of that loss. As the bottom is falling out of the market, we get a chance to see how well this downside sharing holds up in practice; bottom line — it doesn’t.

According to an article from March 5th’s WSJ (see WaMU Board Shields Executives’ Bonuses), when the going gets tough, the tough rewrite the rules to favor their executives:

“The board of Washington Mutual Inc. has set compensation targets for top executives that will exclude some costs tied to mortgage losses and foreclosures when cash bonuses are calculated this year. The move, approved last week and disclosed in a securities filing late Monday, essentially shields the pay of chairman and chief executive of the thrift, Kerry Killinger, and more than 100 other executives from the continuing mortgage fallout.”

WaMu reported a $1.87 billion loss in the fourth quarter and in the past year its share price dropped about 70%. And yet we’re talking about bonuses here that top executives will receive — on top of substantial base salaries that are supposed to compensate them for, …um, doing their jobs.

The article concludes by quoting another CEO, who said that “the board was being realistic” in rewriting the rules:

“It might not be politically correct, because the captain’s supposed to go down with the ship. But in the real world, that’s not how it works.”

No, apparently it doesn’t — in the real (contrived) world, when the ship is sinking, the execs get to hop onto their life yachts, while the shareholders sink.

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Michael Barnett is an Assistant Professor at the College of Business Administration at the University of South Florida and a Research Fellow at the Kiran C. Patel Center for Global Solutions.

Approximately one year ago I blogged about excesses in executive pay (see Revisiting Executive Pay). Executive pay has been a hot-button topic in recent years, with the remuneration of top executives exceeding that of average workers by more than 150 times between 1995-2005 (compared to a long-run average of around 50 times between 1950-1990).

Since August of 2007, executive pay has taken a bit of a back seat to other, more salient topics (e.g., anything with the words “credit” or “crunch” in it). So I was surprised to learn about a recent inquiry into executive pay on Capitol Hill, …until I learned that the words “credit” and “crunch” were also involved (see 3 CEO’s made $460 Million). Angelo Mozilo, Stanley O’Neal, and Charles Prince were called in to testify today in front of the House Committee on Oversight and Government Reform about their “out-sized” pay packages in the midst of the credit crunch.

Back in March of last year, I suggested that there were several factors contributing to “out-sized” pay:

1. The nature of the shift over time in shareholder profiles (from a traditional long-term individual investor to a more short-term institutional trader)
2. The fundamental misalignment in incentives created by the differences between the accounting view of the firm (infinite lifespan) and the tenure of the average CEO (less than 4 year lifespan), and the inability of stock options to alleviate this short-term/long-term incentive problem (see especially my post A New Approach to Executive Compensation)
3. Poor (or at the very least disinterested) governance on the part of the board members in general (and the compensation committee specifically)

With respect to Mozilo, O’Neal, and Prince, the relevant question then becomes - were their pay packages so outrageous or significantly excessive when compared to their peers (other CEO’s) such that they would constitute criminality? My hunch is that the answer to that question is - No.

Now don’t get me wrong, I’m not condoning their pay. Those pay packages, although not exactly criminal, were certainly in bad taste. What I am suggesting however, is that to the extent that we have a problem of excessive executive pay (and I do think we have a problem), the problem is a general, economy-wide problem, not a problem specific to Countrywide, Citigroup, or Merrill Lynch.

Not surprisingly, some variation of this theme is exactly what those folks claimed in their testimony today (see Puzzling Pay Packages or Top Bank Executives Defend Pay). My guess therefore is that this line of inquiry will be short-lived. Quite frankly, it has little teeth.

What would be more consequential, however, is if Mozilo, who when he sold $150 million of his Countrywide stock back in 2006, did so while possessing material, non-public knowledge of an imminent credit crunch and its probable impact on Countrywide. But then that would not be an issue of excessive executive pay, but rather, one of insider trading.

In June of 2007 I blogged about Tesco (the British supermarket, and the world’s third largest retail firm) and its entry into the U.S. (see Tesco’s American Foray for background). At the time, I expressed some serious reservations. I suggested that Tesco would have difficulty in the U.S. market for several reasons:

1. Tesco would have trouble convincing customers to come to stores that offer more convenience simply because they are smaller. I suggested that American consumers actually prefer the variety that larger supermarkets have to offer.
2. Tesco would likely end up in a classic “stuck in the middle” trap because they were targeting the middle-market (not the mass consumers and not the upscale consumers). As a result, they would have trouble appealing to the top portion of the middle market that prefers to shop at the upscale chains, and the bottom portion of the middle market that prefers to shop at the downscale, mass market outlets. In trying to broadly appeal to the middle market, they therefore wouldn’t satisfy any niche adequately. For this reason, I argued that Tesco would find itself squeezed on both sides by the likes of competitors such as Whole Foods and Wal-Mart.
3. Tesco would face difficulty precisely because they were foreign. Foreign firms face difficulty because they often don’t speak the language, don’t know the culture, lack local operational experience and infrastructure, and don’t know how to navigate the legal and regulatory environment. All of this results in increased costs for foreign firms, and places them at a competitive disadvantage vis-a-vis their domestic counterparts.
4. Tesco is competing as a foreign entrant in an industry with razor thin operating margins, so there’s little room for error.

Interestingly enough (you had to know this was going somewhere), I came across this article from last week’s edition of the OC Register (see Tesco’s Fresh & Easy Off to Rocky Start). This article seems to suggest that Tesco is facing many of the difficulties I identified. These issues have manifest as worse than expected results. As Nancy Luna details:

…despite developing a loyal crop of fans since launching in November under huge fanfare, Fresh & Easy [Tesco’s U.S. stores] faces some not–so-easy problems, critics and industry experts say.

This week, a Piper Jaffray analyst said Fresh & Easy sales are falling short by at least $30,000 a week. The report comes only days after a Florida-based supermarket consultant told a group of British investors that Tesco has miscalculated the needs of American shoppers with its confusing grocery concept. Prevor [the Florida-based supermarket consultant] estimates that stores are generating average weekly sales of $50,000. The Piper Jaffray report was much more generous, predicting revenue of about $170,000 a week – just below Fresh & Easy’s sales goal of $200,000.

…industry watchers say Fresh & Easy has missed the mark. Among the chief problems: shoppers are put off by labels…Many also complain that the stores are bare bones with very few brand selections. “Fresh & Easy is trying to be an easy store,” said Jim Prevor…”It’s hard to be convenient, if people don’t feel (stores) meet their needs.” As a result, the 10,000-square-foot stores are often described as ghost towns with eager to please clerks often outnumbering shoppers…many [consumers] are bothered by [Tesco’s] Fresh & Easy’s confusing labeling system…”It’s a catastrophe for them”…

It’s not all bad news for Tesco. In all fairness, we certainly can’t attribute all of their poor results to mis-management. We can chalk a portion of it up to poor timing - it’s not as if the middle of a credit crunch is the best time to enter the U.S. retail business. Unless, of course, you consider poor timing a result of mis-management. But I guess that ultimately depends upon whether you believe the credit crunch was forseeable to Tesco’s managers ex ante. I’d like to give them the benefit of the doubt. Nevertheless, I still believe that Tesco faces some serious headwinds in the U.S. market (a market that already faces some serious headwinds of its own).