Friday, January 12, 2007

Allstate's Bad Karma In Mississippi

Allstate Corp (NYSE:ALL) has suffered a legal set back in the huge unresolved claims controversy in Mississippi. As reported by AP, Reuters and Wall Street Journal OnLine a Mississippi couple has been awarded $2.5 million in punitive damages because State Farm Fire & Casualty refused to recognize their claim from Katrina. The punitive award was jury decided. The judge has also awarded $223,292 to cover the actual property damages. This blog first alerted readers on Oct 11, 2006 about the seriousness of the issue.

AP quoted “Robert Hartwig, chief economist for the Insurance Information Institute in New York, said before the jury announced its decision that a punitive damage award would be "distressing" for insurers.”

If punitive awards are ten times the underlying claim Allstate has a very huge problem. The State of Mississippi Attorney General’s Jim Hood is attempting to negotiate overall settlements with the entire industry. There are approximately 600 lawsuits and thousands of disputed claims. Allstate and other insurance companies are looking at some very ugly numbers.

State Farm spokesman Phil Supple says he is disappointed in the ruling. State Farm plans to appeal.

It seems to me that the present value of settling the claim is much cheaper than the cost of litigation and the inevitable punitive damages that are piled on top. The insurance industry cannot screw an entire state and expect that this is just another disputed claim, which may go to litigation.

If as and when the settlements occur and are paid out expect significant building activity, housing starts, temporary labor shortages and consumer rip offs as a well-funded boom takes off. Which stocks are well positioned for this wave. Also next time your insurance agent wants to review your policy accept the appointment but make sure your lawyer is present.

Thursday, January 11, 2007

Global Gets The Leftovers

CanWest Global (NYSE:CWG) with GS Capital Partners are spending CDN$ 2.3 Billion to purchase Alliance Atlantis (AAC-A:TO). GS Partners will take the CSI franchise CanWest gets the rest. The purchase price will be allocated according to EBITDA. So it’s very difficult to determine the financial impact on CanWest.

GS Capital Partners clearly is taking the hot content property. CanWest is bulking up with more specialty channels and is making comments about how this will improve programming and help promotion. CanWest has a very traditional old school view of media given its concentration on TV Stations and Print Media. The internet offerings are anemic and internally costly.

At the same time you have Yahoo (NASDAQ:YHOO) and Akimbo announcing new video delivery deals. Google swallowing Youtube. CBS Corp. said Tuesday it will broadcast user-generated video from Google Inc.'s YouTube before the Super Bowl. Also CBS is partnering with Sling Media Inc. to allow users to post clips from TV shows on the Web and share them with friends. Furthermore on Tuesday, Apple's CEO Steve Jobs announced Apple TV that connects televisions to computers and the Internet.

CanWest still thinks it’s about the channels. CBS will now manage 100% of international distribution for CSI. CanWest is probably shooting its foot off.

Wednesday, January 10, 2007

D&B Mumbo Jumbo

D&B (NYSE:DNB) issued a jargon conflicted press release announcing its 2007 guidance. For a company with roots in financial and credit reporting the smoke screen is curious. The press release leads off with a bullet point “Outlines Plans to Create $80 million to $85 million of Financial Flexibility in 2007”. Just what is financial flexibility and why is it headlining the press release?

After explaining that “D&B does not provide guidance on a GAAP basis because D&B is unable to predict, with reasonable certainty…” (almost everything it seems), the press release attempts to describe the financial flexibility program. Included are initiatives in Organizational Design, Product and Technology Complexity and Sales Force Effectiveness.

There is a confusing promise that starts out creating $80 million to $85 million of financial flexibility. But it is modified with caveats about restructuring costs, taxes, transition costs and something called non-core charges. Then the real sauce bubbles to the surface and we find out that the re-engineering process will eliminate 400 jobs. But it’s all in the guidance they say. In the future they will be able to say “as previously announced” and act as if the issue has been thoroughly discussed.

If its time to restructure say so. If job losses are about to occur say so. If you want to issue guidance say so. This financial flexibility terminology indicates management confusion. Senior executives and the board probably did not understand the consultant’s presentation. Everyone was most likely too embarrassed to ask for clarification and now they are all stumbling forward. To the 400 about to lose their jobs: Right now it sucks but sooner than later you will be thankful.

Tuesday, January 09, 2007

BP So Bad It Might Be Good

BP plc (NYSE:BP) attempted to manage market expectations by announcing production declines for the sixth straight quarter. The tales of woe are primarily attributed to start-up delays in the Gulf of Mexico and reduced crude flow from Prudhoe Bay Alaska. Complete year-end financials will be available Feb 6, 2007 but in the meantime management thought that they would deal with some of the bad news.

The Prudhoe Bay and Gulf of Mexico problems are all reasonably well known. The industry is experiencing production declines and problems. The price of oil and gas is down. When prices were much higher it was not the time to deliberately shut down facilities for maintenance that local managers almost certainly knew were needed. (Produce now fix later.) Refinery safety and corroded pipelines are legacy problems rooted in decisions made decades ago. Current management will need to fix the problem. They should be judged on how well they address the problem not that it manifested itself on their watch.

The stock is near its 52 week low. Petroleum pricing is weak. BP has been experiencing problems (which are fixable). The industry has been experiencing similar problems. The business media is all quite negative. BP management is releasing bad news (Get it all out I say). Most problems seem to have a implied cap ex solution. Many publicly quoted analysts (investment cheerleaders) are all quite disappointed with BP. Its all so bad that it might be very good.

Monday, January 08, 2007

Apple's Option Worm

Apple Computer Inc (NASDAQ:AAPL) continues to whistle through the options granting grave yard. An internal probe cleared Steve Jobs in the backdating of stock options. The mantra seems to be he somehow knew about them but did not understand or benefit from them.

But they seem to have slaughtered a sacrificial lamb in the person of Wendy Howell, the former in-house Apple lawyer responsible for option paperwork. According to The Recorder, Ms Howell was quietly let go late last year. Ms. Howell is reportedly the author of fabricated meeting minutes that were used to support the controversial option grant being investigated.

With ongoing federal regulatory and criminal investigations Ms. Howell will probably have a great deal to say as either a defendant and or witness.

If Ms. Howell actually fabricated the meeting minutes and did all that bad stuff, the question becomes why. Why enrich your superiors and endanger yourself career wise and criminally? Corporate culture and internal pressure will surely be a factor. While arguably the top officers may not have financially benefited from the option there is the possibility that senior level hubris, which is measured through wealth, played a directing role in managing circumstances. Executing a relatively minor player seems to be inadequate on a great many levels. It all depends on how you take bites out of the Apple because you want to avoid the worm.

Sunday, January 07, 2007

Home Depot's Page 36 Thing

Home Depot’s David B. Sandor Vice President, Public Relations sent me an email saying “Please review the company’s 2006 Proxy Statement, along with each Proxy Statement from the previous four years. There you will find on Page 36 (2006 Proxy) the details of Mr. Nardelli’s employment agreement. It spells out the contractual obligations should he leave the company.”

It’s not about Page 36 in the proxy statement. It is definitely about the $210 million. Yes the proxy provides the arithmetic and mechanics. Somehow the mechanics of the proxy did not lead me to conclude that the exit package was going to be $210 million. Judging by the commentary in the financial press and marketplace the actual size of the settlement did knock quite a few heads back. The proxy also pointed out that Mr. Nardelli’s contract always had an extension clause that ensured there was always three year remaining.

The question becomes given the size of the actual settlement should it have been accentuated more or was page 36 in the proxy statement sufficient. Many other transactions of lesser financial impact would have been given a higher profile, announced separately, discussed on conference calls etc. etc. The page 36 approach may be a case where the circumstances are regulatory correct but investor toxic. $210 million for these results is tough to swallow.

Speaking of disclosure Home Depot’s investor relation’s page as at Sunday Jan 7, 2000 ET still had not posted any of the management changes. While we are at it what will the compensation arrangements be for the new guy? (Mr. Frank Blake) Will investors be directed to a soon to be released proxy statement issued well after the fact? Will the new guy have the same huge exit package? God help the Board if they do it again.

So far we know several things for sure. Mr. Blake does not have a retail background, which was also a major problem for Mr. Nardelli. They both came from GE and are therefore shaped by similar corporate cultures. They both have been appointed Chairman and CEO, which many governance experts view as inappropriate.