Video"Actions Speak Louder Than Words" reads the title of a just-released article from Standard & Poor's. It suggests that some corporate executives are not only trying to beat the earnings-estimate game for the third and fourth quarters — they're projecting a gloomy economic outlook for 2003 so they can pick up bargains in the equity arena.
"Although reluctant to predict improving conditions," says the article, "corporate executives are buying assets to benefit from the expected upturn." The article also argues that the often-bearish predictions of U.S. corporate honchos are less than heartfelt, especially given the earnings recently reported by a number of companies.
Indeed, despite the cautious words of CEOs and CFOs and the "corporate carefulness [that] has caused stock prices to retreat," executives are increasingly stepping up to the plate and making investment decisions that are anything other than bearish, according to the ratings agency.
Take mergers and acquisitions. True, only 4,100 U.S. deals had been announced through July 17, compared with 4,481 for the same period last year, according to M&A tracking service FactSet Mergerstat. But the biggest deals are increasing in number; June alone saw announcements of 18 mergers and acquisitions in the United States and Europe that were worth more than $1 billion apiece.
These big deals strongly indicate that, cautious pronouncements notwithstanding, the corporate world has confidence in the eventual rebound of the economy, continues the article. Unlike the all-stock deals of the late 1990s, most mergers these days are being done primarily for cash or a mixture of cash and stock. "This requires some level of conviction on the part of the acquiring company that the pact will be beneficial," says the article. "After all, that cash could be used to pay a dividend or buy back the company's own shares."
Money Managers at the Superstore?
Should nonfinancial companies take advantage of investor discontent? Two professors from New York University's Stern School of Business believe that the time may be ripe.
Roy Smith and Ingo Walter, writing in the Financial Times, note that the relationship between directors and shareholders has lately come under close scrutiny, and that "boards are not being held accountable by those they are supposed to represent."
Smith and Walter see this as an especially glaring problem among institutional investors, who have displayed a conspicuous lack of muscle given that they control 60 percent of all traded stocks and 80 percent of trading volume in the United States. Mutual funds were among the biggest investors in Enron, WorldCom, and Global Crossing, note the professors. They add that managers of mutual funds, which in the United States held close to $3 trillion of equities as of the end of last year, are technically supposed to be beholden to "independent" directors, but these directors enjoy "exceptionally lucrative conditions of employment" — often sitting on several related boards at the same time.
All this conflict, or the appearance of conflict, has contributed to a sharp drop in the flow into equity mutual funds so far this year, according to Smith and Walter, who propose the following business model.
"A non-financial company with a trusted name — Wal-Mart, say, or General Electric, could set up a fund, with respected business professionals as directors," they write. The job of these directors would be to select the best money managers and commit to the cost-effective long-term allocation of client assets, fully exploiting the fund's market power and economies of scale and promoting disciplined corporate governance.
A related problem in search of a solution, note the professors, is that companies managing mutual funds have increasingly exposed themselves to conflicts "not too dissimilar from those facing the securities industries." This has become particularly true as those companies have become more and more involved in pension plan asset management, they argue. By 2001, mutual funds' share of U.S. pension assets had grown to 21 percent of total mutual funds assets, up from 5 percent in 1990, making "it less likely that mutual fund managers will object to flawed compensation arrangements, risky merger strategies or excessive leverage in capital structures." In Smith and Walter's proposal, managers would steer clear of pension fund management to avoid conflicts of interest.
"Money market funds developed because banks and their regulators exploited the retail deposit market, opening the doors to competitors from the securities industry," note the professors. They maintain that their business model is nothing more than an example of "the way free markets are supposed to work, after all."
Execs Skeptical of Anti-Discrimination Pledge
Whether or not Wal-Mart opens new vistas for funds management as professors Smith and Walter propose, most executives say they don't think the retailer's recent decision to include gays and lesbians in its anti-discrimination policy will open opportunities.
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