↓ Expand ↓

Category → M&A

Berkshire Details Sokol’s Lubrizol Scandal

Berkshire Hathaway has put out a report on top exec David Sokol’s resignation in March over shares he purchased in Lubrizol before Berkshire’s takeover was announced.

At the time, I was wrong on this blog when I said:

“This seems to me a case of an appearance of conflict of interest rather than a real conflict of interest. Sokol thought Lubrizol was a good investment. He suggested that it would be a good investment for his company, too. Engineering an entire deal to make a tidy—albeit $3 million—profit would be the tail wagging the dog.”

Turns out, according to the report, there was more to the story than that:

He did not disclose:

* the amounts and timing of his purchases;

* the fact that he bought the shares after discussing Lubrizol with Citi and after Mr. Sokol had narrowed the bankers’ initial list of 18 chemicals companies to one, namely Lubrizol;

* the fact that Mr. Sokol had bought shares after Mr. Sokol (acting as a senior representative of Berkshire Hathaway scouting acquisition candidates) had asked for Citi’s help arranging a meeting with Lubrizol’s CEO to discuss Lubrizol and Berkshire; and

* the fact that Mr. Sokol bought shares after learning that Citi had discussed his request for a meeting with Lubrizol’s CEO, who told Citi that he would discuss Berkshire Hathaway’s possible interest in a transaction with the Lubrizol board.

Though, the report suggests that Sokol won’t have to exchange his pin stripes for prison stripes.

We appreciate that at the time Mr. Sokol traded, he did not know whether Mr. Buffett would support, or reject, the idea of an acquisition of Lubrizol. We also recognize that Mr. Sokol did not know how Lubrizol would respond to an acquisition proposal if Berkshire Hathaway were to make one. We recognize the view that those uncertainties might have kept Mr. Sokol’s information below the level of probability required to support a finding of materiality for purposes of finding a violation of federal insider trading law. But the Trading Policy requires a higher standard of conduct than what is required to avoid being charged with a federal securities violation.

I like the last sentence. It reminds me of the old Hebrew National commercials.

My take: Why would someone blow their chance to be Warren Buffett’s successor for a measly $3 million? Berkshire doesn’t disclose Sokol’s salary or stock holdings in its proxies. In any case, I’m sure he’ll land on his feet.

Berkshire Exec Resigns (Apparently) Over Lubrizol Bid

Some of you may have heard the news that Berkshire Hathaway executive David L. Sokol has resigned. Sokol bought 100,000 shares of Lubrizol and suggested to Buffett that Berkshire buy the whole company. Here’s the Lubrizol-related excerpt from Buffett’s statement about the resignation:

Finally, Dave brought the idea for purchasing Lubrizol to me on either January 14 or 15. Initially, I was unimpressed, but after his report of a January 25 talk with its CEO, James Hambrick, I quickly warmed to the idea. Though the offer to purchase was entirely my decision, supported by Berkshire’s Board on March 13, it would not have occurred without Dave’s early efforts.

That brings us to our second set of facts. In our first talk about Lubrizol, Dave mentioned that he owned stock in the company. It was a passing remark and I did not ask him about the date of his purchase or the extent of his holdings.

Shortly before I left for Asia on March 19, I learned that Dave first purchased 2,300 shares of Lubrizol on December 14, which he then sold on December 21. Subsequently, on January 5, 6 and 7, he bought 96,060 shares pursuant to a 100,000-share order he had placed with a $104 per share limit price.

Dave’s purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea. In addition, of course, he did not know what Lubrizol’s reaction would be if I developed an interest. Furthermore, he knew he would have no voice in Berkshire’s decision once he suggested the idea; it would be up to me and Charlie Munger, subject to ratification by the Berkshire Board of which Dave is not a member.

As late as January 24, I sent Dave a short note indicating my skepticism about making an offer for Lubrizol and my preference for another substantial acquisition for which MidAmerican had made a bid. Only after Dave reported on the January 25 dinner conversation with James Hambrick did I get interested in the acquisition of Lubrizol.

Neither Dave nor I feel his Lubrizol purchases were in any way unlawful. He has told me that they were not a factor in his decision to resign.

Dave’s letter was a total surprise to me, despite the two earlier resignation talks. I had spoken with him the previous day about various operating matters and received no hint of his intention to resign. This time, however, I did not attempt to talk him out of his decision and accepted his resignation.

This seems to me a case of an appearance of conflict of interest rather than a real conflict of interest. Sokol thought Lubrizol was a good investment. He suggested that it would be a good investment for his company, too. Engineering an entire deal to make a tidy—albeit $3 million—profit would be the tail wagging the dog.

A Good Take on Berkshire/Lubrizol

Peter Mycroft Psaras at Mycroft Research posted a great analysis of the Berkshire/Lubrizol deal on Seeking Alpha.

He uses Buffett’s favorite measure—owner earnings—to assess the deal. Mycroft points out that Lubrizol stands out as among the best in the chemical industry by that metric.

Observations About Berkshire/Lubrizol

Berkshire Hathaway is buying C&EN’s 2009 Company of the Year. C&EN has a Latest News with the main details.

Here are a few observations:

1) It doesn’t seem like the most expensive deal in the world. In fact, it seems like Buffett is comfortably in value territory with this one. Berkshire is getting the company for just under 13x earnings, including Lubrizol’s net debt, and less than 9X EBITDA.

2) The value doesn’t seem to imply that there was a bidding war for the company. Perhaps that makes sense. Lubrizol is a great company, but it is mostly in lubricants. That business, wedded largely to the future of the internal combustion engine, might not capture the minds of the large chemical firms that seek to diversify.

3) Word about the impending acquisition seems to have gotten out before the official announcement.

4) Buffett hinted that a big acquisition was in the works a couple of weeks ago with his annual letter to shareholders. In it, he said, “Our elephant gun has been reloaded, and my trigger finger is itchy.” Good metaphor, BTW. Way better than “loaded for quail”, an expression which never really made sense to me. Though, calling Lubrizol an elephant by Berkshire standards is stretching it a bit. It is more like an elk or something.

5) Berkshire helped Dow buy Rohm and Haas. Lubrizol kind of reminds me of Rohm and Haas, even though both companies mostly serve different sectors. Both are specialty firms that have the winds at their backs, perhaps for different reasons. Rohm and Haas was a bit more focused on technology. Lubrizol strength is being well managed.

6) Buffett thinks so, too. “Just keep doing for us what you have done so successfully for your shareholders,” he said to James Hambrick in the release. I’ve got a lump in my throat. Seriously, though, it is quite an endorsement.

7)  Hambrick has his accomplishments. The company came out of the downturn with strong earnings. He oversaw the acquisition and successful integration of Noveon, which helped diversify the company away from lubricants. This in an industry where large acquisitions towards such aims all too often are the parasites that consume the host.

Liveris Steps Down From The Citigroup Board

According to a recent Citigroup filing with the Securities and Exchange Administration, Andrew N. Liveris will not stand for reelection to Citigroup’s board in April. No reasons for the move were given.

I do remember that back in 2010, when the Dow CEO last stood for reelection, he faced opposition from CalPERS. The nation’s largest public pension fund said it would cast “withhold” votes for Liveris, as well as former University of Pennsylvania head Judith Rodin, because they served on Citigroup’s audit and risk committee before the financial crisis. Moreover, the California fund said Liveris served on an “excessive number of company boards.” He is chairman of Dow and is also an IBM director.

“In part for their accountability in the financial crisis” was actual wording CalPERS used in the release. Would anybody have listened to Rodin and Liveris if they predicted the financial meltdown and warned the world about it? Probably not.

At that meeting, more than 17 billion shares voted for Liveris. About 700 million voted against him. He won handily, though only two other directors former Alcoa chairman Alain Belda and Citigroup chairman Richard Parsons received fewer votes.

Also worth noting is that by that meeting, he had already moved from the audit and risk management committee to the personnel and compensation committee and the public affairs committee. (I’m not terribly sure what that latter committee does, but I’m pretty sure that Liveris would be pretty good at it.)

Though Liveris’ tenure at Citigroup was somewhat controversial, there doesn’t seem to be enough evidence to suggest that the dust up with CalPERS is the reason he’s leaving the board.

A Few Observations About DuPont/Danisco

This morning, DuPont announced a deal to purchase Denmark’s Danisco for $5.8 billion in cash plus $500 million in Danisco debt. Here are some thoughts:

1) DuPont is long overdue to make a large acquisition.

A decade ago, no chemical company was making as many deals as DuPont. An often quoted figure is that DuPont racked up a total of $60 billion in acquisitions and divestitures between 1998 and 2004.

It was early in Chad Holliday’s tenure as CEO and he wanted to leave his mark. He split off Conoco in 1998. (The oil glut is almost perfectly bookended by DuPont’s Conoco ownership.) He also sold off pharmaceuticals. And in 2004, DuPont divested its Invista fibers unit to Koch Industries.

In 1998, DuPont purchased Hoechst’s Herberts automotive paint unit. In 1999, it bought seed maker Pioneer Hi-Bred.

But since it purchased electronic chemicals maker ChemFirst in 2002, for only about $400 million, there’s hardly been a peep out of the company.

2) Valuation is a tough call.

Based on the $6.3 billion price tag and Danisco’s expectations for the full fiscal year ending in April, DuPont is paying 27.4x earnings and 15.4x EBIT. That strikes me as a good full valuation. It isn’t the full you feel on Thanksgiving when you doze off while watching the Lions; it’s more like Big Mac and fries at your desk full.

Looked at another way, DuPont is paying 7.7x book value (equity minus intangibles), which makes the deal seem a little more expensive.

3) There are deals in DuPont’s future

The primary motive for DuPont to buy Danisco is enzymes maker Genencor. The rest of Danisco is all about food. Under “Industry Events” on Danisco’s website the next event Danisco has scheduled is the Banff Pork Seminar, after that company officials are on to the Bread and Butter Tradeshow. (Check the links. These are both real things.)

How deep does DuPont want to get in the food industry? Outside of Genencor, Danisco’s three major units are enablers, which are the gums and emulsiers that go into food; sweeteners, fructose and the like; and cultures, as in probiotics. None of these seems to scream DuPont, though enablers sound like the best fit in DuPont because they are very chemistry oriented.

Worth mentioning: in recent years, Danisco has divested its sugar business and its flavor and fragrances unit.

UPDATE:

In the conference call, DuPont CEO Ellen Kullman argued that Danisco would complement DuPont’s health and nutrition business. In other words, probiotic cultures from Danisco would complement Omega-3 fatty acids and soy proteins from DuPont. Specialty food ingredients from Danisco such as emulsifiers and sweeteners would benefit from DuPont’s “application development skills”.

When Frant Mitsch of BB&T asked about “cleaving off” businesses, Kullman said “we just got this thing agreed to last night.” She added, “I am very excited about the prospects of what Danisco brings us.”

Airgas Slaps Air Products

Airgas has rejected Air Products’ “best and final” offer to purchase it for $70 per share. This marks the sixth offer that Airgas’ board has rebuffed.

The key line in the press release is this one:

“…the Board unanimously concluded that the $70 per share offer is clearly inadequate and that the value of Airgas in a sale, at this time, is at least $78.00 per share, in light of the Board’s view of relevant valuation metrics.”

What this means is that the three directors that Air Products nominated to Airgas board–and were elected largely by new, deal arbitrage shareholders at Airgas’ annual meeting in September—not only agreed to reject the offer but also recommended a price of $78 per share.

This is a blow to Air Products. I will be very surprised if Air Products does anything other than quickly withdraw its offer. How on earth could they raise the bid by $6 or $8 after putting a “best and final” stamp @ $70?

UPDATE: Air Products has responded. In the statement, Air Products CEO McGlade talks about how awesome his $70 per share offer is.  “Our offer expires on January 14,” he added. In other words, “I’m getting my coat. I’m putting my coat on. Now I’m putting my hat on. I’m walking for the door. I’ll turn around if you change your mind. I’m turning the doorknob…”

Is The BHP Bid In Trouble?

Stephen Harper may shoot the PotashCorp deal down

BHP Billiton’s $40 billion bid to purchase Potash Corporation of Saskatchewan is starting to give me a this-is-not-actually-going-to-happen feeling.

The Canadian Competition Bureau has issued a Supplementary Information Request for the merger. BHP has delayed the deadline for its $130 per share hostile tender offer by a month to November 18 to accommodate the request.

BHP has been saying that it would market potash independently of Canpotex, an export cartel of the three big Saskatchewan potash producers: PotashCorp, Agrium, and Mosiac. This has caused much pulling of hair and gnashing of teeth among Canadian officials who worry that this would cause potash prices to plummet. That the Canadian Competition Bureau might intervene to keep a cartel going is highly ironic.

And Canada’s Globe and Mail has added some specificity to reports, swirling since BHP unveiled its offer, that the Chinese government is interested in buying PotashCorp through Sinopec.

It makes sense that the Chinese government would be interested in doing this. When it comes to potash, China sips from a long and narrow straw. According to Potash One, a company that is developing a Canadian potash mine, China consumes 27% of the world’s potash. It has no significant potash production or potash reserves. Canada, on the other hand, produces 35% of the world’s potash and has more than half of global reserves.

The Canadian Prime Minister has let it be known that he isn’t terribly comfortable with the idea of foreign ownership for PotashCorp. Stephen Harper reminded Parliament that the government can block the merger. “This government’s position has not been to give a blank check to foreign takeovers,” he said.

As for BHP, it has been keeping the door to an exit ajar. The company has been indicated there is a limit to how much it would up its Potash bid. It might be noted that two years ago BHP walked away from its hostile bid for Rio Tinto.