25% of book value gains above 5% for Biglari?

[investor99]

The more I think about this the more I think this is a joke or a way to manipulate the stock price in the short term.  I mean lets think about it.  Biglari Holdings comes to a company he want to buy and says hey guys I want to buy you.  I want to give you a 2% premium over yesterdays closing price of  your stock and then I want to take around 25% of your cash flow after the first 5% over your book value as a personal bonus for the lifetime of your company's future.  

 

Who in the world would do such a thing?  There is no company in the world who would say yes to such an offer.  Let's see what Advance Auto Parts has to say about this.  Absolutely ridicuous.  Sounds like a thief to me!

 

If it was April Fool's Day I would understand this but this is the most outrageous thing I have ever heard of.  All from a guy who says he is aligned with shareholders.

 

Are you serious??  Unbelievable!

[valuecfa]

 

 

and before any one yells "DILUTION", think again. if your percentage stock ownership in a co is reduced or "diluted" by say 5% or whatever but the per share value has increased by 10% have you really suffered dilution?  

 

 

err, Yeah.

 

you see it differently? why?

 

 

Well, that is what dilution is isn't it. Your ownership in the business is forever diluted away (ex share repurchases).

 

You own a business. You sell some of it to your other partners. It increases a bit in value (or doesn't). You own less of it. You are diluted from your previous ownership, regardless of whether or not your business increases in value or not in the future. It is pretty straight forward.

 

 

Using your example of the per share value increasing 10%:

 

Assuming the company is now worth 10% more. Would you rather own your original percentage of the company, or would you rather own 5% less?

[investor99]

I just don't think Sardar is that stupid.  He knows this will make shareholder's very angry and cause a huge sell off.  There is a reason for all of this.  He must also know that there is no way the shareholder's are going to go for this.  He is doing this for a reason. 

 

Also, did the board really approve this already?  I can't believe it.  Carl Icahn will be all over this.  He has enough to buy the company outright.  And remember, Sardar did get rid of the poison pill that the old SNS board put in place so he know he has to keep shareholders happy or an Icahn will step in and give Sardar a taste of his own medicine.  They would love to have SNS in its current condition.

 

I'm telling you, there has to be something more to this.  Shenanigans I tell you.

 

Just my opinion.

[valuecfa]

I mean lets think about it.  Biglari Holdings comes to a company he want to buy and says hey guys I want to buy you.  I want to give you a 2% premium over yesterdays closing price of  your stock and then I want to take around 25% of your cash flow after the first 5% over your book value as a personal bonus for the lifetime of your company's future.  

 

Who in the world would do such a thing?  There is no company in the world who would say yes to such an offer.  

 

There is a really good point in there. BH obviously plans to purse many mergers/share swaps in the future. Mgmt's of firms attempting to be acquired usually give an opinion to shareholders. This new compensation scheme will now provide legitimate firepower to firms Biglari attempts to acquire.  I can already see firms recommending to their shareholders to turn down any offer, and site this valid example as a reason why they would not want to be a part of BH. This alone would decrease the value of BH incredibly over the years, as most of the assumed value would come from future acquisitions.

 

Not only is he taking an obscene amount of Biglari Holdings' future retained earnings away (at the expense of common shareholders), he is also likely decreasing the value of the company due to the reasons mentioned above.

 

 

Edit: If you can't tell...This kind of corporate behavior really burns me up (and i'm not even a shareholder)

[investor99]

How about firepower for Fremont and Michigan's state rep's to pass this law. 

 

There is no better argument for Fremont's position than this. 

 

Absolutely, ABSOLUTELY UNBELIEVABLE. 

 

I can't get over it. 

 

UNBELIEVABLE!!

[link01]

Using your example of the per share value increasing 10%:

 

Assuming the company is now worth 10% more. Would you rather own your original percentage of the company, or would you rather own 5% less?

 

well, i may own five percent less but the over all value of my holdings (and yours, if any) is 5% greater than before even with the 5% decrease in 'ownership' % terms.

 

so if you owned a certain percentage of stock valued at $10,000 that was reduced (diluted) by 5% but the per share value increased by just under 10% the new value of your percntage ownership 'diluted' shares is now $10,450.

 

which do you 'value' more? your diluted ownership percentage or the unambiguous increase in the total value of your per share investment?

[txlaw]

Tx your arguments are mad in my opinion. I know you are playing devils advocate, but this situation really shouldnt have an advocate.

 

What does buying 1.5% of a company and getting 25% of all of its future gains (above an extremely low hurdle rate) have to do with a hedge fund. If he wants the compensation of a hedge fund money manager, then he should open up a hedge fund and raise the assets.

 

As the CEO he nothing more than an employee of a company. A hedge fund Manager is a hedge fund Manager. This guy just runs the company for now. Why should he get 25% of all the companies future gains when he owns only 1.5% of the company. He is taking a highly disproportionate share of the earnings and that is simply greed. No better then the guys he replaced at SNS or the guys he is trying to replace at Fremont. If he wants 25% of all future earnings then he should buy 25% of the company.

 

Buffett is no saint, and is greedy. But he is fair and honest and looks out for the shareholders.

 

He wants the best of both worlds, At least with Greenlight Capital Insurance this was the goal all along and owners werent mislead.

 

 

Myth, I'm actually not advocating on behalf of Biglari.  I think that has gotten lost in my analogizing this move to converting SNS into a publicly traded hedge fund.  You should read the bottom part of the last comment I posted on this thread.  

 

In no way am I defending Biglari's new policy.  I am pointing out that Biglari has done through shareholder activism what many hedge fund managers (including value managers) would salivate at -- he has obtained a permanent capital base that he can increase at will through the issuance of new shares.  If he can meet his absurdly low hurdle rate, he can increase his net worth at a rate much greater than his shareholders.

 

That is how the money management business works.  And that sort of mentality has been spreading to the corporate world for some time now.  Now days, both investment managers and CEOs get paid more by simply bringing more assets under management.

 

And it is in no way commendable.  If WEB had kept the same sort of compensation policy that he had at the Buffett Partnership with Berkshire, we wouldn't be so fond of him today.  He could have effectuated such a policy in the same way that Biglari has.  Or WEB could have set up a stock options policy that would be just as bad -- or worse.  There are tons of public companies that have compensation schemes that are much worse than the one we see at BH.  

 

I agree with the comments that have been posted regarding how things are terribly wrong with the corporate world.  So, again, I'm not defending this move.

 

Now, if people are pissed off because they didn't realize that something like this would happen, I can understand that.  I certainly didn't see this coming.  I gave Biglari the benefit of the doubt on the name change.  But it turned out he not only wanted the name change, but that he basically wanted to convert SNS to a closed end hedge fund.  

[investor99]

I think as a part of the agreement Biglari needs to be evaluated by a psychiatrist for possible Delusional disorder before proceeding with the incentive pay.

 

Sorry for all the posts but I just got back into town and read the boards and just can't Imagine this!

[valuecfa]

Using your example of the per share value increasing 10%:

 

Assuming the company is now worth 10% more. Would you rather own your original percentage of the company, or would you rather own 5% less?

 

well, i may own five percent less but the over all value of my holdings (and yours, if any) is 5% greater than before even with the 5% decrease in 'ownership' % terms.

 

so if you owned a certain percentage of stock valued at $10,000 that was reduced (diluted) by 5% but the per share value increased by 10% that value of your % ownership 'diluted' shares is now $10,450.

 

which do you 'value' more? your diluted ownership percentage or the unambiguous increase in the total value of your per share investment?

 

The unambiguous increase in the total value of your per share investment.

 

I honestly can not follow your point.

 

Assuming a company increases in value by 10% percent, i will always choose the value with no dilution. Wouldn't you?

 

Are you trying to say that the company is worth 10% more b/c of the dilution?

 

 

 

[bookie71]

About two weeks ago I got rid of all but a couple of shares, because he was reminding me of a local investor of about 20+ years ago who had a big ego and later crashed and burned and took a lot of investors with him (luckily I only had a small amount as i was just getting started).  the only reason i kept a couple of shares was to get the annual report etc.

The company may do well and I hope it does, but it will without me.

jmho

[investor99]

I don't understand what merging BH with The Lion Fund does for BH.  I and really don't understand why doing so should give Biglari the huge incentive bonus that he is asking for.  This only severely hurts BH shareholders.  It does not help the shareholders out in ANY way that I can see.  Biglari will still be allocating the capital of the Lion Fund the same as he was before and this somehow means to Sardar that he is entitled  to a huge bonus.  What has he done differently.  He is obviously trying to offset a loss in income that he won't get from the Lion Fund anymore.  But the new bonus will more than offset this especially in the future, probably by hundreds of times more.  

 

I am very disappointed and feel that this may permanently damage BH and Biglari and their reputations.  I think that the best thing to do at this point is for BH to take back the offer and let Sardar continue to manage the Lion Fund.  I have no problem with this as a BH shareholder.

 

It just doesn't make sense any other way.  Makes no sense at all for the shareholders of BH.  None at all.  I would like to hear Gabelli's opinion on the matter.  

 

I guess another option is to have a much simpler and smaller incentive.  Like 10% over a 10% increase in book value or something like that.  It would make much more sense.  But 25% over a 5% increase in BV?  No sense at all.