FTC staff criticizes merger remedy

In an earlier post, (Will negotiating teams from the same firm compete with each other?), we questioned the remedy proposed as relief to the Evanston hospital merger as it required negotiators to act against their self interest. The FTC staff has just given the remedy a big thumbs down:

"We must respectfully remind the Commission, however, that a remedy along the lines proposed by ENH, and contemplated by the Commission's decision, will not likely solve the competitive problems caused by this unlawful merger.

This is bureaucratese for "no."

CEO Stock Options, Risk-Taking, and Performance

The latest issue of The Academy of Management Journal includes an interesting article on the impact of CEO stock options on company performance and risk-taking behavior. Here’s a short discussion of the article from one of the authors.

The authors find that “CEO stock options engender high levels of investment outlays and bring about extreme corporate performance (big gains and big losses), suggesting that stock options prompt CEOs to make high-variance bets, not simply larger bets. Finally, we find that option-loaded CEOs deliver more big losses than big gains.”

While stock options do appear to help align the CEO’s incentives with shareholders in motivating greater risk-taking, the finding of larger losses is troubling. The authors speculate that this result comes about “because option-loaded CEOs are focused on upside possibilities, with little concern for downside possibilities.” With options, CEOs benefit from share price increases but don’t pay a penalty for share price drops. The article suggests that grants of restricted stock, rather than options, might help address this problem.

Java Problems with MBA Primer

This post is for those whose students are using the MBA Primer in conjunction with the text. We have recently learned that the MBA Primer will NOT work with the latest version of Java. If your students have version 6 of Java installed, some or all of the Java applets will not function. To fix the problem, students need to uninstall version 6 and re-install version 5. Here are directions on how to do that:

• Click Start | Control Panel | Programs and Features
  
• If Java 6 is installed, select it and click uninstall to remove it.
  
• After the removal of Java 6 is complete, restart your computer.
  
• Go to http://java.sun.com/products/archive/j2se/5.0_12/index.html Click “Download JRE”, then select “Accept”. Click on the “Windows Online Installation” link and save the Java 5 installer to your desktop. When the download is complete, run the installer by double clicking the downloaded file on the desktop.
  
• Complete the installation wizard to install Java 5.
  
• Reboot. Note shutting down after the installation of Java 5 takes longer than usual.
  
• The MBA Primer site should now work properly.

Thanks to Jason Reusch at Vanderbilt for tracking down this problem and determining the fix.

Prices of presidential futures contracts

-------Republican nomination------------
41.3---- 2008.GOP.NOM.GIULIANI
26.9---- 2008.GOP.NOM.ROMNEY
10.0---- 2008.GOP.NOM.THOMPSON(F)
07.0---- 2008.GOP.NOM.MCCAIN
07.1---- 2008.GOP.NOM.PAUL
06.9---- 2008.GOP.NOM.HUCKABEE

-------Democratic nomination------------
71.0---- 2008DEM.NOM.CLINTON
12.6---- 2008DEM.NOM.OBAMA
08.4---- 2008DEM.NOM.GORE
04.0---- 2008DEM.NOM.EDWARDS

These prices are quoted in cents and payoff $1 if the candidate wins the nomination.

From intrade.com

What does real estate have to do with politics?

Virginia Postrel compares Dallas and Los Angeles:

The Dallas model, prominent in the South and Southwest, sees a growing population as a sign of urban health. Cities liberally permit housing construction to accommodate new residents. The Los Angeles model, common on the West Coast and in the Northeast Corridor, discourages growth by limiting new housing. Instead of inviting newcomers, this approach rewards longtime residents with big capital gains and the political clout to block projects they don’t like.
...
These differences also reinforce different norms and values—different ideas of what it means to live a good life. Real estate may be as important as religion in explaining the infamous gap between red and blue states.

Hat tip to Craig Newmark.

If you're so smart, why aren't you rich?

Ever wondered what would happen if your professors quit working on problems no one cares about (and publishing the answers in journals that no one reads), and entered the real word? Peter Klein has the answer.

Taking from the top 1% to give to the top 2-25%

This income redistribution proposal from Congressman Rangel seems like a parody.

• The bottom three-fourths of households, those making less than $75,000 a year, are not much affected. They each would receive a tax cut of about $100 per year.
• The next 24 percent, those making between $75,000 and $500,000, would receive much more substantial tax cuts. Those in the $200,000 to $500,000 range, who are in the 96 to 99 percentile of the income distribution, would get a tax cut of about $3,600 per year.
• The top 1 percent, those making over $500,000, would pay substantially more in taxes. Those making more than $1 million would see their tax bill rise by an average of more than $100,000.

Overpaying for Acquisitions

In a continuing theme from prior posts (see
When M&A makes sense and If merger is the answer, what is the question, here's more evidence of the difficulty firms face in making profitable acquisitions.

In late 2005, online auctioneer eBay bought the Internet phone service company, Skype for $2.6 billion. In October of this year, eBay admitted that it overpaid and took a $1.43 billion charge against earnings.

$1.4 billion dollars - that's some serious coin. Ouch! Details on the write-down available here.

Smoking workers get fired

Lansing, Michigan, (AP):

Okemos-based Weyco Inc., a medical benefits administrator, said its offer of smoking cessation classes and support groups helped 18 to 20 of the company’s nearly 200 workers quit smoking over the past 15 months. But the four who couldn’t — or wouldn’t — no longer had jobs on Jan. 1. “We had told them they had a choice, and they chose to leave basically before the policy took effect,” said Weyco chief financial officer Gary Climes. “We’re not saying you can’t smoke in your home. We just say you can’t smoke and work here.”
...
Some states protect workers who smoke, saying they can’t be discriminated against for that reason. But Michigan is one of 22 states that doesn’t have such a law, according to the Washington-based Bureau of National Affairs.

Useful management tool: future value

In Chapter 3 of our textbook, we show how EVA (Economic Value Added) and other EPP's (Economic Performance Plans) make visible the hidden-cost of capital, and lead to better investment decisions.

But EVA is not a panacea: it is a backward-looking measure, and fails to recognize actions that increase the future value of the enterprise. Today's WSJ recommends decomposing the market valuation of the firm into current value and future value so that managers can better "see" how the market is reacting to their actions. Here is how its done:

1. Calculate the enterprise value of the firm: Enterprise value is the sum of current stock market valuation (shares times price per share) plus the market value of interest-bearing debt.

2. Calculate the current value of the profit stream, assuming no profit growth: Divide current operating profit by the cost of capital.

3. Calculate the future value of the firm: Future value is enterprise value minus the current value

4. Track both future value and current value as a percent of enterprise value: This allows you to see how your current actions affect future vs. current value.

To understand how an analysis of future value can help executives shape business strategy, consider the big-box retailing sector.

For years, large retailers were rewarded with higher share prices for opening new stores at a breakneck pace. But growth through expansion may be nearing its limit for these retailers as their markets become saturated.

In our research on a select set of major retailers, we saw a downward trend for future value in the industry as a whole. From 1998 to 2006, most of the retailers continued to invest heavily in new-store openings, fueling an increase in the companies' current value. Future value, however, didn't keep pace with the growth in current value. In fact, future value as a percentage of enterprise value for the group as a whole declined from almost 75% to 30%, an indication that investors were losing faith in simple market-penetration and geographic-expansion strategies. Had these companies been tracking future value regularly, they might have recognized earlier that a strategy based on increasing scale was running out of room and begun investing differently for growth.