Junk Art: Some Public Firms Are Cashing In on It

Circle Fine Art, Dyansen Corp., and Martin Lawrence Limited Editions, 3 firms whose shares trade in the over-the-counter market, utilize mass marketing to sell “signed limited edition” prints and sculptures. These works, described as “fine art” and carrying very lofty retail margins, are sold by accommodating salespeople in chain art galleries, despite the nasty comments from the art cognoscenti. Martin Lawrence is the most successful and financially solid chain, with an average markup of almost 400%, projected 1989 sales of $48.8 million, and projected net aftertax profit margins of about 17% (Tiffany’s is only 9%). The financially stretched Circle Fine Art concentrates on limited-edition graphics, although its “Art to Wear” limited-edition jewelry now accounts for 30% of sales, projected at $35 million in 1989. Dyansen Corp. has fueled growth in its limited-edition sculpture market with debt; its 1989 sales should be about $40 million, compared to $10.4 million in 1984.
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Schiff, David

Full text: [Barron's National Business and Financial Weekly] Oct 30, 1989

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Federal Signal Corp: Acquisitions Fuel Growth, Build Strong

Federal Signal Corp., a diversified manufacturer of signs, signaling equipment, industrial tools, and service vehicles, has not noticed an economic slowdown. It has happily reported a record and still rising backlog of orders and prospects for solid earnings gains for 1989 and 1990. Much of Federal’s prosperity is a result of a successful acquisition program and strong market positions, as over 50% of sales and earnings arise from companies acquired in the past decade. The company set new records in 1988, with earnings of $18.6 million or $1.83 per share, up 24.7% and 28.9%, respectively, from 1987. Sales reached $375.4 million, up 17.3%, and earnings for 1989 and 1990 are expected to be $2.20 and $2.40 to $2.45, respectively. Return on equity was 17% in 1988 and the goal for 1991 is 18%. All 4 business groups are expected to report higher sales and operating earnings for 1989.
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Byrne, Harlan S.

Full text: [Barron's National Business and Financial Weekly] Oct 30, 1989

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Energetic Triton: A Little Prospector Is More Than Surviving

After crude oil prices crashed into the low teens, Triton Energy Corp. (Dallas, Texas) had only 2 profitable quarters from fiscal year 1986 through the first quarter of fiscal 1990. Firmer oil prices, stronger global demand, and some semblance of unity in OPEC have brightened Triton’s prospects, but Chairman William I. Lee does not expect significant profits for the next 2 years. Cash flow has mounted from $40 million in fiscal 1988 to $52 million in fiscal 1989 and should reach $66 million in the current year. Triton should break even in fiscal 1990 and record a profit of about 15 cents a share in fiscal 1991. Like other exploration and production companies, Triton has gotten less for what it produces and has had to write down almost $34 million worth of assets in the last 3 years. Triton expects no further writedowns and should rapidly build its reserves, both from producing projects in Indonesia and the North Sea and from new exploration projects in Colombia, the West African nation of Gabon, France, and Australia. Some nonenergy sidelines also are expected to add to growth.
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Wyatt, Edward A.

Full text: [Barron's National Business and Financial Weekly] Oct 30, 1989

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A Pox on Program Trading: Two Seasoned Pros Make the Case Against Index Arbitrage

Index arbitrageurs use sophisticated computer models to exploit the difference between the value of a futures index and the underlying stocks, a form of program trading blamed for gigantic short-term swings in stock prices. In an interview, James Coxon of Cigna Corp. and Robert Kirby of Capital Guardian Trust express their deep concern at the damage they believe program traders are doing to the market system. Coxon claims that the growth of financial derivatives hurts the equity market performance. Wall Street may not be able to survive because it has lost the confidence of the individual investor, and it is losing the confidence of the institutional investor and of the company whose stock is being traded in the first place. Kirby proposes that automatic circuit breakers be built into the market and that the Brady suggestion of having a single regulatory authority with power over all aspects of both the cash and futures markets be implemented.
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Full text: [Barron's National Business and Financial Weekly] Oct 30, 1989

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Anatomy of a dividend cut

MassMutual Corporate Investors has cut its dividend payout from 90 cents a share to 75 cents, pushing its stock price down 13%.
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Full text: [Barron's National Business and Financial Weekly] Oct 30, 1989

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Good News For Thrifts

The stocks of thrift institutions have been staging a rally over the past 6 months. From March 28, 1989, to September 29, 1989, the SNL Thrift Index rose 18.1%, approaching its pre-crash high levels for the first time. This lagged slightly behind the 19.5% gain posted by the Standard & Poor’s (S&P) 500 Index. Nevertheless, it is good news for thrift investors, who have not seen a similar significant rise in value for over 2 1/2 years. If the thrifts in the Northeast had been excluded, the SNL Thrift Index would have significantly outperformed the S&P 500. The forces that have given energy to this quiet rally in thrift stock values include the current marketwide rally and changes in the operating environment caused by the passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. Reduced competition, a sanitized operating environment, and enhanced merger activity will contribute to the continuing good performance of selected healthy thrift stocks.
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Marks, James

Full text: [United States Banker] Nov 1989

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Sunburst: Buy Out Rumors, Bad Loan Result in Loss

Will Sunburst Bank be the target of an acquisition or merger? It’s happening all around. After all, NCNB has been expanding into Texas, Sovran and C & S have announced merger plans and, locally, Deposit Guaranty and Shreveport-based Commercial National Bank are working toward a combination. In addition, failed institutions such as Unifirst Savings Bank are being placed on the block for outsiders to study for access to the Jackson market and beyond. Rumors have abounded in recent weeks that Sunburst might also become a takeover target. Those rumors contributed to a run-up in the stock’s price. But is Sunburst an attractive takeover? Jon Burke, bank analyst with Robinson Humphrey of Atlanta, says, “My feelings are that Mississippi will not be a priority market for the super-regional banks, and that the odds for a large premium deal in the foreseeable future are modest at best.” Burke also states that Sunburst lacks a significant presence in Mississippi’s major markets to make it particularly attractive. (excerpt)
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Frascogna, Greg

Full text: [The Mississippi Business Journal] Nov 1989

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A Management Framework for Hedging Thrift Risk

The crisis in the Federal Savings & Loan Insurance Corp. has emphasized the need for thrift managers to manage risk more prudently. Other factors that support the need for risk management include: 1. rising and falling stock prices, 2. new capital requirements, 3. interest rate risk management, and 4. accounting for investment securities. An ongoing risk management program involves measuring interest rate risk exposure and earnings potential, identifying the level of acceptable risk and profitability, and implementing risk management strategies. Futures are a viable hedging alternative, although many financial institutions avoid using them. Futures hedging substitutes basis risk for interest risk; thus, a basis management system that adjusts the hedge ratio to minimize exposure to basis risk is necessary. A successful hedging program is based on a well-written policy that provides clear guidelines on what, when, and how to hedge.
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Lam, James C.

Full text: [The Bankers Magazine] Nov/Dec 1989

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The Cost Of Restricting Corporate Takeovers: A Lesson From

Recent experience with corporate takeovers has brought about various reforms designed to reduce takeover activity. An economic theory that treats the control of a firm as a valuable asset suggests that takeovers represent trades of this asset in a market for corporate control and that such market competition provides strong protection for the interests of shareholders. The daily closing prices of the Swiss stock market at 3 points in time – December 1985, July 1988, and December 1988 – are analyzed to determine whether restricting the market for corporate control affects the wealth of stockholders. Until November 1988, ownership restrictions on Swiss registered shares had prevented foreign citizens from competing for control of many Swiss firms. Analysis of data suggest that restricting competition in the market on corporate control can have serious adverse consequences on the wealth of shareholders. Since recent proposals to reform the takeover market in the US intend to restrict this activity, they will probably be counterproductive in protecting shareholder capital.
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Hermann, Werner
Santoni, G. J.

Full text: [Review - Federal Reserve Bank of St. Louis] Nov/Dec 1989

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The cost of restricting corporate takeovers : a lesson fromSwitzerland

Recent experience with corporate takeovers has brought about various reforms designed to reduce takeover activity. An economic theory that treats the control of a firm as a valuable asset suggests that takeovers represent trades of this asset in a market for corporate control and that such market competition provides strong protection for the interests of shareholders. The daily closing prices of the Swiss stock market at 3 points in time – December 1985, July 1988, and December 1988 – are analyzed to determine whether restricting the market for corporate control affects the wealth of stockholders. Until November 1988, ownership restrictions on Swiss registered shares had prevented foreign citizens from competing for control of many Swiss firms. Analysis of data suggest that restricting competition in the market on corporate control can have serious adverse consequences on the wealth of shareholders. Since recent proposals to reform the takeover market in the US intend to restrict this activity, they will probably be counterproductive in protecting shareholder capital.
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Hermann, W.
Santoni, G.

Full text: [Review - Federal Reserve Bank of St. Louis] Nov/Dec 1989

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The Best Defense: Takeover Talk Continues, but Dayton Hudson Protects Itself From Raiders Through Improved Performance

In the desks of dozens of institutional investors, trust account managers, and stock analysts are files labeled “Dayton Hudson Takeover.” By now, most of those files have grown pretty thick. Among the documents stuffed into them are copies of Minnesota’s anti-takeover law, which lawmakers approved at the behest of Dayton Hudson Corp. lobbyists in June 1987. That was when it looked as if the Dart Group of Maryland was about to launch a bid for the company. (In 1969, the Detroit-based J.L. Hudson Co. merged with Dayton’s to form the Dayton Hudson Corp. All stores in both chains were combined under the Dayton Hudson Department Store Co. in 1984, which retained a major retailing presence in Michigan with 17 stores statewide employing around 10,000 workers.) (excerpt)
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Schafer, Lee

Full text: [Michigan Business] Nov 1989

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Probing 10-Year Stock Market and Operating Performance

Wilshire Associates, an institutional investment consulting firm, conducted a diversification study on 2 groups of companies. The first group consisted of industrial companies with a market capitalization of more than $50 million in 1978. This minimum capitalization requirement was increased by $5 million per year until it reached $100 million for companies screened in 1988. A 2nd group of utility companies (excluding telecommunications) was formed consisting of all those available on a utility database and for which market data were available. Diversification, market performance, and operating performance measures were calculated for each company each year. The relationship among the measures was analyzed to evaluate the relationship between diversification and corporate performance.
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Nesbitt, Stephen L.
King, Randall R.

Full text: [Mergers and Acquisitions] Nov/Dec 1989

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Is Beta Better?

Modern portfolio theory still is regarded with suspicion by many financial analysts, stock brokers, and finance directors. Modern portfolio theory recognizes 2 different types of risk: 1. diversifiable risk, and 2. nondiversifiable risk. It is possible to eliminate specific risks by holding portfolios of shares. Beta is measured broadly by comparing the change in share price for a period of time with that of a general stock market index. Betas have 2 main uses: 1. to design portfolios to match the risk preferences of clients, and 2. to enable financial managers to estimate the cost of equity capital using the capital asset pricing model. Most companies have a beta of nearly one, and most companies’ cost of equity is very close to 18%. Betas should not change dramatically from one period to another without good reason because this would make them useless in estimating the cost of equity.
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Fielding, John

Full text: [Management Accounting] Nov 1989

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Influence of Foreign Ownership on Long-Term Incentive Compensation

As the growth in the foreign company presence in the US continues, the competition among overseas firms for quality US executive talent is focusing new attention on the structure of compensation packages at US affiliates. Foreign-owned firms repeatedly demonstrate marked differences in compensation practices when compared to their US-owned counterparts. Some of the differences between US and foreign practices are: 1. Pay expectations are greater in the US. 2. Long-term incentive compensation in the US is often necessary to supplement the broad-based retirement income program. 3. The US mentality is inherently short-term focused. 4. Executive turnover is substantially higher in the US. The role of stock in compensating employees is one key issue that is strongly affected by the fact that the parent firm is domiciled overseas. Typical problems connected with using stock as compensation concern: 1. stock registration, 2. remoteness of the stock price, 3. trading obstacles, and 4. currency translations.
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Jones, Michael B.
Hyman, Jeffrey S.

Full text: [Journal of Compensation and Benefits] Nov/Dec 1989

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Fall’s Trendiest Fashion: Equity

London’s Euro-equity underwriters seem to be back on a secular surge. S. G. Warburg & Co. statistics show 104 international equity issues worth slightly less than $5 billion floated through late September 1989. The pace is picking up so fast that issues by private firms in 1989′s last quarter could be double that, spurred by a nearly $900-million Euro-equity issue to finance Walt Disney Co.’s $3-billion theme park near Paris. Furthermore, the massive L7-billion privatization of the UK’s water companies could bring the year’s Euro-equity total close to 1987′s record $20.2 billion. While layoffs still threaten whole divisions of City firms, top underwriters like Warburg, Nomura, Deutsche Bank, Merrill Lynch, and Shearson Lehman Hutton International are hiring equity analysts and syndicators. The course of stock prices remains the key variable worldwide. If the UK and the US manage to achieve a soft landing by spring 1990, the base will be in place for a surge in equity multiples.
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Full text: [Institutional Investor] Nov 1989

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UAL: Inside the Fiasco of the Decade

The collapse of the $7.2-billion United Airlines (UAL) buyout loan is a story replete with errors, greed, and tarnished reputations. A consortium comprising UAL senior managers and employees and British Airways offered $300 per share for UAL, dictating the structure of the loan to the 6 New York banks that were invited to bid. There was no mezzanine layer in the financing, and the forecasts for UAL’s profits, prepared by Salomon Brothers and Lazard Freres, were wildly optimistic. Even UAL’s closest banks did not support the deal; only Citibank and Chase Manhattan were overaggressive enough to take on the loan. Then, they completely mispriced the transaction and never indicated the deal was struggling. Investors in UAL stock suffered greatly when the loan collapsed and the share price plummeted. The Japanese banks, concerned about several aspects of the deal, stayed away, only to be unfairly blamed for pushing world stock markets to the edge of collapse by not bailing out the loan.
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Lee, Peter

Full text: [Euromoney] Nov 1989

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Gilts – Down but Not Out

The London gilts market has been contracting as the UK government increased its short-term financing through Treasury bills and began buying back gilts. Some of the smaller market makers already have been squeezed out, with more expected to follow; however, the big players are expected to stay. Many observers predict a resurgence of the gilt market, partly because of an expected weakening of the economic environment and a consequent flight to quality from equities, and also because the UK infrastructure is so poor that the government, some 2 years away from a general election and trailing in popularity, will have to spend heavily on that infrastructure and other visible projects. Foreign demand for gilts will be affected primarily by the performance of sterling, which in turn will be influenced by the stance of the UK government into the European Monetary System. Another influence will be the growing tendency of the Japanese to use the continental European markets for long-term buying.
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Moore, Philip

Full text: [Euromoney] Nov 1989

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Money, Credit, and Security Markets: Common Stock Prices and Yields

Statistics from 1981 through Dec 2, 1989.
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Anonymous

Full text: [Economic Indicators] Nov 1989

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The Good Work On ‘Bad’ Banks

A “bad” bank is a borrowing and lending institution created by a bank holding company to absorb the troubled loans of one or more of its affiliated banks. The bad bank finances the purchase of these troubled loans by selling stock in itself and by issuing low-grade bonds and notes. Eventually, the bad bank will be liquidated after it has collected what it can on any loans purchased. In theory, it seems that there are several advantages to bad banks. The operating expenses of the “good” bank that sold its troubled loans can be reduced. The good bank also may find a reduction in its deposit and nondeposit borrowing costs. One problem with bad banks is that a hoped-for improvement in profits and stock price after setting up the bad bank and the elimination of the good bank’s problem loans will not necessarily occur.
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Rose, Peter S.

Full text: [Canadian Banker] Nov/Dec 1989

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The Good Word on “Bad” Banks

A “bad” bank is a borrowing and lending institution created by a bank holding company to absorb the troubled loans of one or more of its affiliated banks. The bad bank finances the purchase of these troubled loans by selling stock in itself and by issuing low-grade bonds and notes. Eventually, the bad bank will be liquidated after it has collected what it can on any loans purchased. In theory, it seems that there are several advantages to bad banks. The operating expenses of the “good” bank that sold its troubled loans can be reduced. The good bank also may find a reduction in its deposit and nondeposit borrowing costs. One problem with bad banks is that a hoped-for improvement in profits and stock price after setting up the bad bank and the elimination of the good bank’s problem loans will not necessarily occur.
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Rose, Peter S.

Full text: [Canadian Banker] Nov/Dec 1989

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