GLG News by Mr. George Pugh, President
GLG News is now G+ Insights
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G+ is a community for professionals, academics and entrepreneurs to connect through online discussions and in-person meetings. You will continue to see G+ Insights (formerly GLG News) here as well as on the G+ website, where you can share and discuss the G+ Insights you read.
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February 9, 2007
Money on the Lines | online.wsj.com
The US is beginning a major building cycle for electric transmission assets.
The increase spending on transmission assets roughly $ 8MMM per year is up 16% from last year and nearly 65% from 2003, which was the year of the big blackout. Part of the effort is simply catch-up as the investment has been a low priority for many years. Now the potential rates of return have increased under FERC regulation for certain projects, and because increased transmission will result in increased revenue on a fixed cost base. Neil Kalton of A. G. Edwards the author of the report predicts increased returns on equity for transmission plant which will be in 11-14% range.
Part of the increased spending will be for enhance reliability and improvement in the grid for greater flexibility. Other investment is to integrate green assets into the grid, and also to allow easier movement of power between pools.
These projects represent a real sea change for the industry. Until very recently, nobody thought that it would be possible to build any new transmission in certain areas, which will have them now.
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January 31, 2007
FASB to Implement Tax Changes Without Delay | www.msnbc.msn.com
Many companies and others are making strong arguments that the implementation of FIN 48 which modifies SFAS No. 109 be delayed. On January 17, 2007 the FASB said that implementation would not be delayed, but better guidance would be available in time for the first quarter 2007 filing date. See the following CFO article for more information:
http://www.cfo.com/article.cfm/8547954/c_8552964?f=TodayInFinance011807_h
It seems that everyone, the FASB and the SEC are in a hurry to begin implementation but the targets are not. Robert Herz, FASB chairman, said: "Investors we've talked to say this is needed information and it's needed now. The overall benefit to investors and the capital market of getting this done and getting it done in the time frame we've talked about is the overriding objective."
The speed in which this rule has been written and imposed will result in the need for much clarification, and evidence that any investors want this information in this way seems to very scant indeed.
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January 23, 2007
IASB, FASB Announce Working Group Members | accounting.smartpros.com
This piece is thin, considered alone, however there has been a lot written about what new rules might and should do. The paper is not due until 2008, though meetings will begin on the subject before that. The original documents are as follows:
www.fasb.org/news/nr071906.shtml FASB Formally Adds Project to Reconsider Lease Accounting
www.sec.gov/news/studies/soxoffbalancerpt.pdf Sec Staff Report On Off-Balance Sheet Arrangements Special Purpose Entities and Related IssuesThe issue refuses to die, however for that reason I will revisit some of the issues in an earlier article in a different way. http://news.glgroup.com/cm/Analysis/Logs.aspx?a=p&lid=7002&pid=3039
The following analysis explains why capitalizing operating leases is both illogical and contrary to fundamental GAAP.
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January 11, 2007
Grant Thornton LLP Supports Review of Lease Accounting Rules as FASB/IASB Working Group is Named | home.businesswire.com
Grant Thornton has gotten out in front of a very old issue, changes in lease accounting, which is now subject to a review by the Financial Accounting Standards Board (FASB), and the International Accounting Standards Board (IASB). This project has been in the works for a long time, with the first meeting for February 2007.
"The current lease standards need to be changed to give investors greater transparency in the reporting of financial information," said Grant Thornton LLP CEO, Edward Nusbaum, when asked "should lease accounting rules be revised to give investors more transparency." Though there maybe opposition, GT shows that 63% of senior controllers and CFOs agreed that "lease accounting rules need to be revised to give investors more transparency."
In the Grant Thornton presentation, however, people claim to speak for investor needs and desires, with no investor actually cited. The only implication is that for reasons of their own, some accountants want the rules changed, without an analyst in view. -
January 3, 2007
Insiders with a curious edge | yahoo.businessweek.com
The SEC under Rule 10b5-1 has created a safe harbor for executives to manage their portfolios without fear of insider trading violations. Under this rule, the plans must be set up when the executives have no insider information and have set dates or prices of the trades in advance. http://www.law.uc.edu/CCL/34ActRls/rule10b5-1.html provides the substance of the rule.
The best part of the plan is that the planner does not have to specify the number of shares, can stop and start plans at will or run multiple plans at once. Not only that, but the plans allow execs to trade around earnings announcements and other significant events which are normally "blackout dates."
The author cites a good deal of research to show that the plans have out performed the market, and that people have use the plans judiciously in the case of Aetna’s (Gen. Custer’s life insurer), management where they got out before a major share-price correction.
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December 28, 2006
Vitesse Explains Firing of KPMG | www.cfo.com
On December 20, Vitesse Semiconductor issued an 8-K in which: "The Board of Directors has dismissed KPMG LLP based on its lack of independence. The Board is in contact with other independent public accounting firms and will work to engage a new independent public accounting firm as soon as practicable." This new found lack of independence is based on company plans to sue the auditor after an internal investigation found evidence of a broad range of accounting problems including option backdating.
Mr. Kiima wrote a delightful piece on the issue but I think that there are some things other than ‘shock and awe’ at the total silliness of the situation.
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December 27, 2006
Gilead Sciences Early Warning | www.auditintegrity.com
Audit Integrity believes that Gilead is at risk of both legal action and declining market performance.Audit Integrity rated Gilead Sciences ‘Very Aggressive’ with an AGR® (Accounting & Governance Risk) score was 21 for the 2Q 2006, its lowest score over 12 quarters based on signs of financial engineering related to investment and acquisition accounting.
Audit Integrity believes that the Gilead’s compensation structure places it at risk of declining market performance, law suits and enforcement actions, centered on the high level of merger activity and overly aggressive accounting, manifested in Gilead’s low AGR® score.
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December 8, 2006
Investors Sue 13 Private Equity Firms | www.cfo.com
"No matter whether the Constitution follows the flag or not, the Supreme Court follows the election returns."
-Peter Finley Dunne- LBO’s and their creators have been the object of perhaps envious scrutiny as long as these deals have been done. Similar complaints have been at new deals where private equity funds buy control, then upstream dividends, and resell the target at a profit (hopefully). This particular suit involves the former rather than the latter, though the attack rhetoric is generally much the same.
- On November 13, 2006, an investor group filed a class-action lawsuit against 13 private equity firms for bid-rigging which deprived the investors of the target company the full economic value for their holding. Justice has launched an informal investigation into alleged collusion covering LBOs. Bloomberg provides a more complete story at: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKTQ50WmoW6w
- What actually happened was that the suit, was specifically referenced to the HCA LBO.
- Further the 20-page complaint doesn't provide any details on how the firms allegedly fixed prices.
- The following describes the issues raised and whether they are particularly valid.
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Is NutriSystem Really Just a Bloater?
November 28, 2006
NutriSystem Early Warning | www.auditintegrity.com
This group has developed a following for being able to pick problem stocks out of the herd, with an emphasis on the likelihood of future litigation. For this particular company they record a number of areas of concern:
- Increased inventories relative revenue that is inventory turnover.
- High insider sales.
- Recent stock repurchase viewed as a sign of weak governance.
- Low score of 1 out of 5 from the firm’s equity model.
- High, 8.8% probability of a class action suit in the next year is 2.6X the probability of such a suit for similar companies.
Quite a list of troubles it would seem, but what really might the problems be?
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November 27, 2006
M&A Synergies? Don't Count On It | www.businessfinancemag.com
This article is based on a survey of corporate executives that states that there is evidence that M&A doesn’t necessarily greatly translate into shareholder value, but there are mergers that do, and that is why people keep at it. Of those surveyed only about half thought that there were either revenue or cost synergies. The strongest agreement in the poll was that it helped mergers helped retain the right people both for the buyer and seller, increased customer satisfaction.
Changes in the tax situation are important too, and were not noted in the article -
November 27, 2006
Lowering the Bar (on cost of capital) | www.cfo.com
- The author writes on declining Betas and the impact on share pricing and hurdle-rate selection. The author properly points out that falling Betas can be used to create hurdle-rates were just too low. The author further notes that Beta came back to historical levels for non-tech stocks.
- The author claims that these changes could be the result of either greater fluctuation in stock price or in broader market. The author further calls for caution in situations where the Beta declines to extremely low levels.
The following analysis will discuss what Beta actually represents, and how to use them more effectively.
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November 8, 2006
In Texas Energy Deregulation, Top Company Is a Big Winner | online.wsj.com
The author claims that Texas’s four–year-old deregulation has failed to bring expected benefits to the consumer and that TXU has manipulated the market. The article seeks to explain why the partial deregulation in question has not brought better and quicker results.
The analysis is better than the New York Times, on which I have written, but still, does not completely answer the question. Some of the author’s comments are relevant; others show some misunderstanding of Texas or the regulatory issues involved. A review of TXU’s SEC filings could have prevented some of the errors in the article.
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Electric Utilities: Reg? Dereg? or Rereg?
October 27, 2006
Competitive Era Fails to Shrink Electric Bills | www.nytimes.com
- This article is the first of a series discussing the decade long rearrangement of the electric utility industry. The underlying premise is that unlike other deregulated industries, such as trucking, airlines and telecommunications, time has not brought the decline in rates expected.
The problem with the premise and comparison is that the industry has not been deregulated, being under transitional rate protections which will not expire until next year.
Second article in series
- "In Deregulation, Power Plants Turn Into Blue Chips", David Cay Johnston. New York Times October 23, 2006
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Capitalizing Operating Leases is not GAAP
October 17, 2006
New Leasing Rules Could Add Assets | www.cfo.com
There has been a lively debate over the last fifty years or more on whether a long-term lease obligations should be capitalized. Dr. Miller is certainly adamant in his belief that all long-term lease obligations should be..
The FASB and its predecessors have disagreed with Dr. Miller, giving very short shift to his views in SFAS No. 13. I will go to the APB and ARB pronouncements and see if I can’t whistle up a proper answer.
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Morgan Stanley Strikes Back! Firm returns to the private equity market
October 11, 2006
Morgan Rejoins Private Equity | www.thestreet.com
Wall Street loves symmetry, especially when it involves a lot of trees growing right up to the sky: as a group they are optimistic and like penguins, if the first penguin off the ice is not eaten, the rest follow right along for a swim.
The question for Morgan Stanley is why return now after such a short time out of the water?
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One Public Utility IPALCO, made it work
October 11, 2006
Stock Buybacks at 'Unprecedented Level' | www.cfo.com
Many commentators have discussed buybacks based on recent activity. To help the quality of debate, I will show the results of a well-planned buyback program, how it increased shareholder value, and finally how this program shows the weakness of some buyback efforts.
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September 29, 2006
What Lies Behind Those "Rational" Decisions? | www.cfo.com
This book, Behavioral Corporate Finance: Decisions That Create Value, presents three decision-related sources of error.
- The first are just raw biases: excess optimism, overconfidence and confirmation bias, that is, ignoring data that doesn’t support the desire outcome.
- The next is heuristics rules of thumb or shortcuts that feed bias. This is a very important point and bears repeating. The tools we use reflect our biases and reinforce them. Frequently these foibles are used in place of proper analysis.
- The way an issue is framed and even the venue can influence how decisions are made and can be influenced by non-rational factors.
The author offers descriptions of how to remove personal and institutional bias from the process. The one process the review mentions asked the critical questions needed to see if a project is failing and should be terminated, frequently a difficult decision to make.
"In any given case," he concedes, "it's always possible that the person was acting in a way consistent with rational decision making." But the probability that biases drove the person's behavior is "high," he adds.
It appears that the book offers an ex-post study of bad decision making that though useful, may raise more questions than it answers.
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A Wal-Mart Industrial Bank: Threat or Menace?
September 18, 2006
FDIC delays Wal-Mart bank decision. Mratorium for at least six months on industrial loan company ownership rules | www.marketwatch.com
Wal-Mart has applied to the FDIC for deposit insurance on its bank in Salt Lake City, Utah. Wal-Mart said it only wants to process its own credit and debit applications by opening an industrial bank. But the banking industry fears that Wal-Mart will take the next step and compete for customers through a retail operation. The FDIC announced on July 28, a six month moratorium on any decision "…to provide time to assess developments in the ILC industry, to determine if any emerging safety and soundness or policy issues exist involving ILCs, and to evaluate whether statutory, regulatory or policy changes need to be made in the oversight of these charters."
The clearest objections came from Rep. Barney Frank (D-MA). "Chairman Bair has taken the right step in giving Congress the ability to consider the implications of the increasing efforts to use ILC charters to avoid the long-standing separation of banking and commerce." Rep. Frank had introduced legislation that would only give FDIC insurance to companies that earn 85% of its revenues in financial services, also praised the FDIC's decision to delay.
This moratorium will give the time for a proper consideration of what the ultimate direction of the banking industry will take. Will the separation between banking and commerce hold, or will Depression era practices fall by the way side?
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SFAS 13 Lessees Capitalization and Retail
September 18, 2006
FASB Formally Adds Project to Reconsider Lease Accounting | www.fasb.org
There has been a great deal of comment on the need to change the rules, capitalizing, most, if not all, operating leases. Research into the SEC report, SFAS No. 13, IAS 17 from the IASB suggest that no change in lease capitalization may be foreseen and further, there may be changes in the rules that might actually make it easier to treat an arrangement as a operating leases.
As will be seen in the following, expanding lease capitalization has been repeatedly rejected, FASB and by extension the IASB, for good and excellent reasons relating to passage of ownership, and ownership attributes, including tax benefits. -
Which Witch for High Tech Options
September 18, 2006
Upside Down View | www.auditintegrity.com
There are two views on option back-dating: one from Daniel Warmenhoven, CEO of Network Appliance, and the other from James A. Kaplan Chairman, Audit Integrity, Inc. The first claims that back-dating options is a non-issue, and the second, that the arguments presented by the CEO are nothing but a rationalization of wrongdoing.
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