Carl Icahn is looking for some representation on the board of directors of Transocean Ltd. (NYSE: RIG), and ISS agrees with a couple of his choices.  Transocean strenuously objects to ISS’ nonobjections:

“Transocean strongly disagrees with ISS’s decision to reject only one of Icahn’s three nominees, particularly due to their lack of relevant experience and their affiliations with Mr. Icahn. Transocean does not believe that Icahn or his nominees have offered a plan or strategy for the company other than the extraction of an unsustainable dividend that the company believes would be detrimental to shareholder value, and which ISS sensibly rejected.”

In addition, Transocean “firmly believes that Mr. Ichan’s nominees would contribute no value.”  They seem to feel strongly about this.

By way of comparison, Transocean’s board and management “are committed to executing the company’s strategy to maximize long-term shareholder value” by doing a bunch of stuff they probably haven’t been doing, otherwise Icahn would probably be leaving them alone.

The meeting will be held on May 17, 2013.  Should be fun until then.

Thumper providing advice. An exercise in futility.

Mobile is where things are heading, as we have discussed in depth here and in our PRO Reports.

Thus, it comes as no surprise to see another mobile app “startup” [Ed.: they’ve been around for a few years and have millions of users] get some capital, particularly with a view towards what the business types refer to as “monetization.”  It is what everyone else refers to as “getting paid” as opposed to “giving away free stuff and hoping to find a way to make money in the future.”

Kik makes the “the fast, simple, and personal smartphone messenger that connects you to everyone you love to talk to.”  Kik announced a $19.5 million Series B round with investors picked for their experience in monetizing platforms.  In other words, they are going to try to figure out how to make money by opening up their software and granting access to their users to other developers.

Kik on iTunes
Kik on Android

Kik celebrates new funding with a song.

A change in the way the government accounts for the size of the U.S. economy will result in a 3% increase.  Did the economy expand?  Are more people working?  No, billions of dollars of intangible assets will enter the GDP calculations.  How does this happen?

At present, R&D counts as a cost of doing business, so the final output of Apple iPads is included in GDP but the research done to create them is not. R&D will now count as an investment, adding a bit more than 2 per cent to the measured size of the economy.

GDP will soar in small states that host a lot of military R&D, but barely change in others, widening measured income gaps across the US. R&D is expected to boost the GDP of New Mexico by 10 per cent and Maryland by 6 per cent while Louisiana will see an increase of just 0.6 per cent.

Is it all positive?  Well, in fairness,

Deficits in defined benefit pension schemes will also be included because what companies have promised to pay out will be measured, rather than the cash they pay into plans.

“We will now show a liability for underfunded plans, which particularly has large ramifications for the government sector, where both at the state level and the federal level we have large underfunded plans,” said Mr Moulton.

Gee, I wonder what the impact will be.  So do the government statisticians.

Steve Landefeld, BEA director, said it was hard to predict the overall outcome given the mixture of new methodology and data updates. “What’s going to happen when you mix it with the new source data from the economic census . . . I don’t know,” he said.

But he said the revisions were unlikely to alter the picture of what has happened to the economy in recent years. “I wouldn’t be looking for large changes in trends or cycles.”

A mystery.  What could the effects of adding intangible assets to the GDP calculation, even with an offsetting liability for underfunded plans.  That’s the beauty of adding R&D, it can be unlimited.  But doesn’t the pension calculation balance it out?

 The change with the most counterintuitive results is pension accounting. At the moment, the BEA counts what companies pay into a defined benefit pension as wages, and ignores whether the plan is in deficit or surplus. After the change it will measure what companies have actually promised to pay.

One odd effect will be an increase in GDP, estimated at about $30bn in 2007, because employers promised bigger pensions than they funded. Measured federal government spending will fall, because it has funded its plans better, while state and local government spending will rise because they have promised more than they paid.

There you have it.  Unfunded liabilities increase GDP.  The economy soars.  Money descends from the skies and the streets are paved with gold.

Despite hiring a seasoned public company CFO, Eventbrite will probably not go public before the end of 2013.  Getting a $60 million infusion from the likes of T. Rowe Price and Tiger Global Management helps.  According to the Wall Street Journal (subscription may be required), Eventbrite has raised $135 million and has no need for IPO funding any time soon.

The WS believes this is part of a trend away from tech IPOs as private funding is more available at good valuations.  Other examples include:

• SurveyMonkey raising a total of $800 million through January [Ed.:  Really?  Seems like a lot for that company, but good for them]
• LivingSocial raising a $110 million round in February
• Facebook’s most recent private round prior to its IPO being underwater

Eventbrite said it expects to sell $1 billion of tickets this year, versus $600 million last year, but did not seem to mention its cut or costs.  Either way, prospective social media investors are looking toward a 2014 IPO.

Eventbrite. The early days.

We have been following the Timken/Relational-CalSTRS saga for a while now.

It is now in full proxy fight mode.  The latest is Timken’s launch against the dissidents with a letter that claims that Wall Street analysts disagree with the dissidents about the wisdom of splitting up the company.  They also claim that Relational-CalSTRS have been misleading in their pitch to shareholders.  Timken believes their proposal is bad news for the following reasons:

1. CalSTRS and Relational Investors have indicated there is no downside to supporting their proposal, and that they actually want a spin-off, not to just evaluation a spin-off.  However, we believe that Relational-CalSTRS have been pretty clear about that since the beginning.
2. CalSTRS and Relational Investors fundamentally misunderstand and mischaracterize the synergies between our businesses, stating that there are synergies in the steel and bearing business lines, but you have to look closely to see them.  Timken says they’ve been looking closely for many years.
3. CalSTRS and Relational Investors claim undue credit for the Company’s share price performance, which they claim was impressive even before Relational-CalSTRS came along and they rode a [Ed.:  seemingly unrelated?] market rise thereafter.  We will note that TKR has shown an increase of 16.8% since we added it to our Opps Tracker in December 2012, and was at an increase of 21.4% when we locked it down in late January.  It is down about 3.6% since then.  Anyone taking credit for that?
4. CalSTRS and Relational Investors are simply wrong in their assessment of the board structure and governance.  It is 75% independent and makes tough decisions for ALL [Ed.:  Emphasis in original.] shareholders.

Fletch on corporate governance: “Its all ball bearings nowadays.”

Lets see . . .

• Colorado corporation organized for a completely different business?  Check.
• Ridiculous capital structure with enormous number of outstanding shares?  Check.
• Grandiose name?  Check.
• Lack of assets and revenues?  Check.
• Late filings?  Check.
• OTC quotations in the pennies-per-share range?  Check.

Bonus points:

• Going concern qualification?  Check.
• Internal controls problems?  Check.

Ilustrato Pictures International Inc. filed its latest Form 10-Q.  We weren’t following the company or had any intention of looking too closely at its filings.  The name made us curious, so we took a look.

After a share exchange/reverse merger-type deal, Ilustrato went from a wine varietal/shell company to a movie company focused on using some contacts in China to finance and distribute its movies.  They claim to have partnerships, agreements, and plans with various Chinese movie production companies to fund and co-develop featured films in China.  They claim to have a couple of flicks in process which are [Cue ominous music] “subject to financing.”

We look forward to seeing their movies.  We wish them luck.  But we are suspicious of reverse merger companies with silly capitalization structures.

News flash:  Being “public” is a means, not an end.

Experts teach how to make a commercially successful movie.

Clinton Group, Inc., a stockholder of Stillwater Mining Company (NYSE: SWC), launched a proxy fight to replace the new board of directors for Stillwater.

Clinton claims that “on every metric” that Stillwater management used to demonstrate “strong performance” in a recent presentation, its results deteriorated, including:

• ounces of metal produced per worker have declined by 14%;
• EBITDA margins have been cut by one-third; capital expenditures as a percentage of sales are up 50%; and
• return on assets in the recycling business has been cut in half.

But, there’s a long-term strategy, right?  Only if that strategy involves losing money.  Clinton noted that to “execute on its vision:”

• Stillwater overpaid for two public companies and did inadequate due diligence;
• the stock is down 66% while the platinum group metals (“PGM”) basket price has gone up;
• CEO pay has topped $5 million for two years in a row;
• the Board reiterated its strategy of “identifying opportunities to establish a broader operating base, reducing the Company’s sole reliance on the Stillwater and East Boulder mine properties” by looking “around the world” for “various mineral exploration and development efforts” to acquire despite two over-priced, ill-conceived acquisitions; and
• Stillwater has spent more than $525 million outside the United States on “mineral exploration and development” projects and less than half that amount on capital expenditures on domestic core properties.

Clinton claims its directors would do better and points to its successes:

• Red Robin Gourmet Burgers (initial purchase of stock was at $16; at the time of the letter to stockholders traded at $44)
• Sabra Health Care ($10 and $29, respectively)
• Dillard’s ($18 and $80)
• Radian ($4 and $10)
• Sun Healthcare ($3 and the company sold for $8)
• Charming Shoppes ($3 and the company sold for $7)
• Collective Brands ($15 and the company sold for $21)
• Hot Topic ($5 and the company sold for $14)
• Select Comfort ($8 and $18)

We haven’t dug into those numbers to see how much of that performance is attributable to Clinton, but it is impressive.

The Stillwater Annual Meeting is on May 2.  We’ll keep an eye on this one.

The 2012 Stillwater Annual Meeting.

Links:
Clinton Group Proxy Statement
Clinton Group Presentation re: Enhancing Stockholder Value at Stillwater

We’ve been following the Emulex/Elliott saga for a while now and watched as one of our favorite hedge funds was working from the outside to create some value at Emulex, who was trying to complete an acquisition of another company and generally run its business.

However, when Elliott comes-a-knocking, you may not want to ignore it.  They have a history of unlocking value.  They also have a navy.

Elliott doubled the powder and shortened the fuse on their broadside cannons, and Emulex has agreed to increase its board to 11 members and added two Elliott-approved directors.

The Elliott entities “jointly and severely”* agreed to limit its holdings of ELX to 15% and to knock off any proxy/takeover-type tomfoolery until:

• March 2014 for some transactions;
• August 12, 2013 for other transactions;
• Emulex impairs Elliott’s ability nominate directors; or
• Emulex agrees with a third party resulting in more than 20% of its shares to be acquired by the third party.

As of this writing, ELX is closed at $6.37/share.  Elliott holds 8.9 million shares at an average purchase price of $7.36/share. [Ed. Subscription required for link.]
_________

*Ed.: They probably meant “severally”. We thought “severely” was kinda funny. Please don’t go through our writings looking for typos.

Elliott Associates negotiates board rights.

Links:
Form 8-K
Amendment No. 2 to Schedule 13D

When everyone thought the financial world was crumbling and threatening to suck Goldman Sachs down along with it, Warren Buffett stepped up to the table and invested $5 billion in a tranche of Goldman’s preferred stock and got warrants to purchase common stock if they paid another $5 billion.

We are a bit late to this party [Ed.:  Not really, see comments to this Forbes article, where we lay down some knowledge and ask about the correction ], but in March, Goldman Sachs and Berkshire Hathaway changed the terms of the warrants allowing for net cashless exercise of the warrants.  In other words, Buffett gets to pay for the shares by having Goldman Sachs withhold other shares that would have been deliverable upon exercise if Buffett would have actually exercised with actual money.  Here is the money quote:

“Payment of the Exercise Price for the Shares thereby purchased will be made by having the Corporation withhold, from the shares of Common Stock that would otherwise be delivered to the Warrantholder upon such exercise, a number of shares of Common Stock equal to the Aggregate Exercise Price divided by the Average Closing Price.”

In English, Goldman Sachs will issue the number of shares based on the amount by which the average closing price (based on the average of the 10 trading days preceding October 1, 2013) exceeds $115/share.

By the Numbers

GS is trading at $142.57 at this writing.  Here is the deal assuming Buffett exercises at the current market price:

*Technical term.
**Calculated as 43,478,260-((43,478,260*115)/142.57)

Paulson & Co., of multibillion dollar mortgage short fame, owns about 9.9% of the MetroPCS outstanding stock, making it the largest shareholder. Paulson sent some static over the wires in a letter to the MetroPCS (PCS) board opposing its announced merger with T-Mobile because:

• the deal structure packs on too much debt, more than double Verizon’s (VZ) debt as a ratio to estimated EBITDA
• the interest rate on the debt (7%) is too high. Sprint’s (S) 7% 2020 notes only yield 4.2%, which itself is double AT&T’s (T) 2020 notes
• the equity split with T-Mobile is unfair on the basis of MetroPCS’ contribution to the combined company’s value (42%) versus the MetroPCS shareholders stake in the combined company (26%). In addition, MetroPCS is doing well while T-Mobile is struggling

Paulson said they would support a restructured deal with less debt at a better interest rate.

P. Schoenfeld Asset Management LP, another large MetroPCS shareholder, has also opposed the merger and is soliciting proxies in opposition.

T-Mobile gets you fast songs. That should count for something.

Links:
Paulson & Co. Letter to MetroPCS
P. Schoenfeld Proxy Statement