For those of you who have been following this blog, you know where I stand on Inbev’s bid for Anheuser Busch (see Ambush by Inbev?). Basically, my view is that although there are many reasons the two firms belong together, I would be surprised if the deal were to go through. It just seems to me that there are too many interested parties running interference.

My view hasn’t since changed, and it looks like Anheuser Busch will now make its first in a predictable (and myopic) set of moves by officially rejecting Inbev’s offer (see Anheuser Busch Plan Unlikely to Please Investors). Reuters is reporting that Anheuser Busch will instead offer it’s own plan to raise shareholder value that includes divesting non-core assets such as the theme-park business.

So assuming AB rebuffs Inbev (which looks likely), where do we go from here? The most likely scenario is that Inbev takes its case straight to the shareholders (another blunder) and turns this into a hostile affair.

Why would that be a blunder you ask? Because if you thought Anheuser Busch didn’t want this deal to go down, just wait until the politicians (and the mal-informed, misguided American public) get into the game and cry foul. All that will do for Inbev is raise its costs with little change in the end result - a failed bid for Bud.

At this point, if Inbev (and it’s bankers) were thinking about the best interests of its own shareholders, they would abandon the bid and move on. This is a no-win battle.

And even if by some miracle Inbev does win the fight, it still loses the war. If Inbev is able to wrestle Anheuser Busch away from AB’s shareholders, in the end the additional expense incurred during the bidding process, coupled with the many concessions Inbev would be forced to make as the owner of AB, will condemn their union to years and years of sub-par returns.

For Inbev then, the best response is probably just to walk away now.

Mish had an excellent post today on layoffs and the economy (see Job Cuts Increase Economic Stress). In that post he focused on the most recent spate of job cuts and what that means for our economy. I agree with Mish, and many others, who have pointed out that unemployment is a lagging indicator of recession. Therefore, not only can’t we rely on unemployment statistics to predict when we will enter a recession, but we can’t really look to unemployment statistics to gather insight into when we’ll come out of a recession.

However, that’s not what I’d specifically like to write about today. The focus of my post will be on how this recession has affected the job prospects of graduating MBA students, and how current students are likely to be affected moving forward.

Interestingly, few Stern students had difficulty finding jobs or had offers rescinded. In fact, most of them seemed to have weathered the storm just fine (for now at least). Nevertheless, I found the article Tips for College Graduates Seeking Work from yesterday’s Chicago Tribune fascinating. The column began:

It could be a long summer for college graduates looking for work…Although the college labor market could remain positive overall…some companies have rescinded offers. Other employers that delayed hiring may continue to hold off on recruitment through the summer.

I will not argue with the author of this article. I mostly agree. However, some of this information seems at odds with the data as I experienced them here at Stern. Let me explain why.

Earlier, I suggested that Stern students did just fine this year. And that’s true. In fact, none of my 150 or so students had a job offer rescinded, and most of those who were seeking employment found it relatively easily. But to understand why, you must understand the hiring cycles at Business Schools.

For the most part, the recruiting season begins in the Fall. It is usually finished by early Spring. So many of the students I had spoken with were locked in early on - they had accepted job offers in Fall 2007 and Winter 2008. By the time the real turmoil began (after the Bear Stearns collapse in March, 2008), most of my students had already been hired, as were, I suspect, graduates from most business schools.

But it’s true that it will be rough going for those who graduated without jobs, and even some of those who graduated with jobs (i.e., some will show up to start their new jobs only to find out that they don’t exist anymore). But the overall numbers for the graduates of 2008 will largely look ok. Unfortunately, they don’t tell the whole story. They are also a lagging indicator.

The students who will really, truly feel this recession are the graduates of 2009 (and maybe even the graduates of 2010). I expect the job market moving forward to be abysmal, and for the hiring season of 2008-2009 to largely be a bust.

In April, BusinessWeek published a wonderful section on the employment outlook for 2008 business school graduates (see Graduating Into a Recession, and especially the article It’s Looking Grim for New Grads). I’d encourage you to take a look - there are some neat facts in there about the earnings potential of those who graduate during recessionary periods. In the section they claimed that the goings would get tough for 2008 grads. Personally, I think they were slightly off on timing. We ain’t seen nothing yet.

So fear not for the grads of 2008, but for those of 2009, …and beyond.

Several months ago I promised to keep tabs on notable bankruptcies of 2008 (see More Failure for Fodder). Well, we’re nearly half-way through the calendar year, so I thought I’d continue to make good on that promise.

Below you can find a list of what I see as the “noteworthy” bankruptcies of 2008 (please note that this is not an exhaustive list):

• Aloha Airlines (airline)
• ATA (airline)
• Bear Stearns (banking)****
• Blue Water Holdings (auto)
• Buffets Holdings (restaurants)
• Education Resource Institute (insurance)
• Empire Land (real estate)
• Eos Airlines (airline)
• Fashion House Holdings (retail)
• Fortunoff (retail)
• Friedman’s Jewelers (retail)
• Fred Leighton Holdings (retail)
• Frontier Airlines (airline)
• Goody’s (retail)
• Legends Gaming (casino)
• Lillian Vernon (retail)
• Linens n’ Things (retail)
• Kimball Hill (real estate)
• Landsource Community Development (real estate)
• Matrix Development Corporation (real estate)
• PRC LLC (business services consulting)
• Propext (textiles)
• Quebecor World (USA), Inc. (office services/printing)
• Red Envelope (retail)
• Sharper Image (retail)
• Silverjet Airlines (airline)
• Sirva (moving services)
• Skybus (airline)
• Steakhouse Partners (restaurants)
• Tropicana (casinos)
• Wickes Furniture (retail)
• Vicorp (restaurants)
• Ziff Davis (media)

One thing that is clear about these 33 high-profile bankruptcies is that they have occurred in industries that are close to the struggling consumer. That is no surprise. But from here, I would expect bankruptcies to become more broad-based as this recession spills over to the broader economy.

From the previous recession, there were 289 total bankruptcies in 2000 and 383 in 2001 according to Bankruptcydata.com, …far more than this year’s projected 180 (if current numbers persist). I fully expect us to exceed 180 by year’s end. I do not expect us to reach 289 this year. My current estimate for 2008 calls for about 225 bankruptcies. However, I would not be surprised to see 2009 challenge the 383 mark from 2001.

In addition to the bankruptcies of 2008, I came across some interesting statistics from the Bankruptcy Insider (at the deal.com). The Bankruptcy Insider documents 475 cases of corporate distress since Jan. 1, 2008 (compared with 753 cases of distress for all of 2007). Cases of distress can provide a forward-looking estimate of bankruptcy.

So this is the state of the 2008 bankruptcy scorecard so far. Unfortunately, there’s likely many more to come.

When I first heard the rumors several weeks ago that Inbev was considering making a play for Anheuser Busch, I thought to myself, “no way, ain’t gonna happen.” So you can imagine my surprise at Inbev’s unsolicited bid on Wednesday for the largest brewer in the U.S. (see Inbev Makes Bid for Maker of Bud).

It’s not that I thought that such a marriage couldn’t work - there are some real distributional, and even some operational, synergies here. It’s not that I thought AB was too big to be bought, as many firms have the wherewithal. I just thought that in the current economic environment a deal of this size would be unlikely in the absence of the buyer putting up a significant amount of cash. After all, $46B is a non-trivial sum of money, and from all accounts Inbev plans to finance all but about $6B with debt. If the accounts I read in the press are correct, that makes for a 13% downpayment. Hey Inbev, it’s not 2005 anymore!

There are other forces working against Inbev in this deal. For one, it seems the Busch family does not want it to happen. It’s likely that they will take whatever measures they deem necessary to try to block it (witness their courtship of Modelo - see AB Approaches Modelo to Block Inbev). Add on top of that the newfound protectionist sentiment in the U.S. toward AB (see Hands Off Our Bud or Politicians Oppose Bid). I gotta tell ya, I never realized that AB was a source of national pride, and before yesterday I had no idea that brewing was considered a strategic national industry.

For all these reasons, and despite the fact that I think it’s not a half-bad combination (especially for BUD shareholders who would receive a 20-30% premium for their shares since rumors first circulated), I think this deal faces significant headwinds.

So my priors still haven’t changed - no way, ain’t gonna happen.

I don’t know how many of you have been following the Miller Coors story, but the Justice Department gave its blessing to the joint venture combining the U.S. operations of SABMiller and Molson Coors (see Justice Department Clears SABMiller-Molson Deal). The venture will be called Miller Coors.

The approval was not entirely unexpected. Although I am not an expert in antitrust issues, the consensus was that this deal would not vastly alter the competitive landscape. However, I will point out that Miller Coors and Anheuser Busch will now collectively control about 80% of the U.S. beer market (sounds fairly concentrated to me).

Antitrust issues notwithstanding, now the hard work begins - combining the two firms. For those of you who have followed my blog, you know where I stand on this deal (see Now Introducing Miller Coors, JV??? and Miller Coors JV for background).

I basically suggested that I thought the deal should have been structured as an acquisition rather than a joint venture, and that the joint venture structure would strain the union. Back in November I wrote:

In my opinion, a joint venture between SAB and Molson Coors in which each shares equally in the decision rights will run into many conflicts…Sharing power across firms in a joint venture can lead to conflicts over the appropriate way to go about running the new business, can result in delays in achieving synergies, can lead to greater staff defections, and can result in greater than necessary managerial costs. All this ultimately stands to hurt the performance of the new venture, and these kinds of deals can quickly devolve into an ugly power struggle between senior managers from two companies that don’t understand each other’s culture.

Because the potential for synergies, the opportunity for pricing power, and the ability to create a more formidable competitor vis-a-vis Anheuser-Busch are all so great between Miller and Coors, centralized ownership (with one firm and one set of managers calling the shots) would be a more effective way to achieve those benefits. I therefore have this uneasy feeling that “management problems” will plague this joint venture in the months and years to come.

So congratulations Miller Coors, …and good luck!

After last week’s post on auction-rate securities (see Déjà Vu All Over Again?), one reader sent me a copy of a recent study conducted by his firm, Pluris Valuation Advisors. It’s important to understand that the material was sent to me by a gentleman who works for that firm, so the standard caveat that this is part scientific inquiry and part sales pitch apply, but I’m pretty sure that most readers of this blog understand that.

I am neither endorsing the study, attesting to the veracity of the data, nor advocating the services of the firm; however, I must say that to the extent that the information is factual, there are some thought-provoking nuggets in there.

It provides some interesting “Who woulda thunk it” information about the largest holders of ARS (e.g., Berkshire Hathaway), plus some caveats about when those holders actually acquired their positions (e.g., in the case of Berkshire Hathaway, after the market seized up in February).

Striking a more sober note, the study also provides some substantiation to my claim that more write-downs are yet to come, …and given the write-downs acknowledged to date, they have the potential to be even greater than the 20-30% that I previously predicted.

You can download a copy of their study here: Auction Rate Securities Holders

I’d love to hear your thoughts. Enjoy!

As if the past week didn’t provide enough déjà vu moments - e.g., rumors about another investment bank in distress (Lehman), trouble brewing at large commercial/retail banks (WaMu and Wachovia), monoliners on the ropes again (Ambac and MBIA), and Countrywide making the media rounds once more. As if that weren’t enough, now it seems auction-rate securities have reared their ugly heads again.

For those of you following this blog, several months ago I posted about the trouble that auction-rate securities pose to public corporations that have been holding them as short-term investments (see Where’s the Stuff Buried?).

As as a scholar who’s interested in firm strategy, I’m less interested in the fact that the auctions have been failing (and we all know that they have). Likewise, I’m not all that interested in the impact on those institutions (be they municipalities, non-profits, or other corporations) that raised funds using such variable-rate instruments. Rather, I have been interested in their impact on the investors/holders of these instruments, especially the large public corporations with which they were so popular.

Back in February, after Bristol Myers revealed that it would be forced to take a write-down of some $275M as a result of its investment in auction-rate securities, I wrote:

I do not mean to single out Bristol-Myers. Their only fault is that they just happened to be among the first firms to acknowledge the problem, thereby drawing attention. Come to think of it, maybe we should actually be applauding BMY for being proactive in recognizing the problem and writing-down those assets as quickly as possible in an effort to move past it. As such, they are likely ahead of the curve. Should that be the case, we certainly shouldn’t be surprised to see others follow in their wake…

Given what I had written back then, I was not surprised to see a recent Wall Street Journal article detailing additional stress in the auction-rate security market (see Auction-Rate Securities Give Firms Grief). In fact, according to that article:

…hundreds of U.S. companies still are struggling to clean up the problems caused by auction-rate securities. A review of first-quarter earnings reports showed that more than 400 companies, including Google Inc., Bed Bath & Beyond Inc. and Starbucks Corp., held at least $30 billion in the securities, instruments they once thought were as dependable as cash.

The securities also are creating an accounting problem for businesses not used to pricing complicated securities. While some companies have written down the value of their auction-rate holdings, many others haven’t, even though market prices have fallen substantially.

…402 public companies disclosed that they held variations of auction-rate securities. Half had written down the value of their holdings. Of those that did, the average markdown was 13.2%…

Given the absolute seizure in that market and the level of insolvency of the underlying assets, my sense is that the average markdown will likely increase. My best estimate at this point would be for write-downs in the neighborhood of 20-30%.

Back in February, I also wrote that I thought that many corporate treasurers were not aware of the risks involved with such securities when they were purchased. Moreover, corporate finance staffs were (and are) likely ill-equipped to value them. In fact, I was quoted in an Associated Press article expressing similar sentiment:

Still, Robert Salomon, a professor at New York University’s Stern School of Business, said many executives likely were unaware of what they were buying. “I would expect to see corporate treasurers raise the question of: well, what the heck is in our portfolio?” he said.

Consistent with my view was the following nugget from the Wall Street Journal article:

“There is not a CFO in the world that hasn’t had a significant lesson on what auction-rate securities are this year,” says Dario Sacomani, chief financial officer at Sunnyvale, Calif., semiconductor company Spansion Inc., which held $122 million in such illiquid securities that it hadn’t marked down at the end of the quarter.

Given how much further there is yet to go with the write-downs, and how many companies still have yet to recognize their losses, I still think this story has a little more to play out.

More déjà vu to come????