In American Greetings Deal, Echoes of Larger Buyout for Dell

This is a tale of two management-led buyouts.

The first is the headline-grabbing $24.4 billion bid by Michael S. Dell and the private equity firm Silver Lake Partners to buy the personal computer maker that Mr. Dell founded. The second is the lesser-known $612 million buyout by the Weiss family of the American Greetings Corporation, the greeting card company they control.

Both deals illustrate the rising tide of shareholder power, as well as the devilish issues that emerge when management tries to buy a public company. And even though Dell’s board has changed the voting rules, both companies are being tested by shareholders who view the buyouts as undervaluing their companies.

At first glance, American Greetings, founded in 1906 by a Polish immigrant, may seem very different from Dell. The company, which owns the Strawberry Shortcake and Care Bears characters, is still controlled by its founding family and is the No. 2 paper card maker, after Hallmark. The Weiss family owns only 7.8 percent of American Greetings, but the family maintains high voting shares that give it 43 percent of the vote â€" a stake worth about $44 million. Through the magic of Wall Street, the Weiss family will take on debt and turn that $44 million stake into full ownership of the $650 million company.

It’s here where the deals start to look more alike.

Last September, the Weiss family offered to buy the company for $17.18 a share. American Greetings, like Dell, is what Wall Street analysts charitably call a melting ice cube, with a disappearing business. In Dell’s case, its PC manufacturing business is losing ground to tablets. As for American Greetings cards, electronic messages are eating away at the paper card business. American Greetings’ stock traded at a high of $53.75 in 1998, but in the last eight years, the company has had almost zero revenue growth. American Greetings’ stock was trading around $14 when the Weisses offered to buy the company.

What happened next also parallels the Dell case. Faced with a proposal by management to buy the company, the American Greetings board established a special committee of independent directors. By all accounts, the independent directors then proceeded to negotiate vigorously over the price. Once the Weisses lined up necessary financing from the Koch brothers (yes, those Koch brothers), the special committee’s demands for more than $20 a share kicked in. The Weisses resisted, and in March a deal was announced at $18.20 after the special committee compromised, saying no deal would be struck below $18 a share and the Weisses stated that they would pay “no more.” Although $18.20 was below the price the board first demanded, the Weisses still raised the offer twice before a deal was reached.

But as in the case of Dell, the announcement set off shareholder outrage. TowerView, the investment company headed by Daniel Tisch and owner of 6.2 percent of the company, has led the charge. TowerView appeared on the scene in October and has claimed that American Greetings was being bought just as its business was turning around, and that if it remained independent, American Greetings’ share price could rise above $21 to trade with what TowerView considered as the company’s peers.

In the wake of TowerView’s complaints, the Weiss family has been forced to raise the price to $19 a share, a 32.5 percent premium over the price before the first offer was announced. It may still not be enough. The proxy advisory service Glass Lewis, which recommended in favor of the Dell deal, has recommended against this transaction. Yet its bigger rival, Institutional Shareholder Services, has recommended in favor of the American Greetings transaction, largely for the same reasons it supported the Dell deal. In a note to its clients, I.S.S. stated that the “value certainty” of the American Greetings deal against the “negative secular trend in the industry” warranted a yes vote. In other words, I.S.S. is saying that this is indeed a melting ice cube and shareholders should not take the risk. Let the Weiss family do it.

American Greetings shareholders will vote on Wednesday. It will be a nail-biter. The main reason is the protections the special committee imposed. Like Dell, American Greetings has what is called a majority of the minority voting condition â€" in other words, it requires that a majority of shares unaffiliated with the Weisses’ vote for the deal for it to be approved.

But the American Greetings board, unlike Dell’s, has not fiddled with the condition to make the buyout easier to pass. In the American Greetings case, the majority of the unaffiliated must vote yes and abstentions and those shareholders who don’t vote count as no votes. The Dell board changed a similar rule last week to say that only shareholders who actually vote at the meeting are counted for purposes of the condition. This excludes nonvoting shares and will make it easier for the Dell buyout.

To be fair, the change in voting rules at Dell was supported by an offer of more money, and you could hardly blame the Dell board, because it also liked the lower offer. But the change appeared to put the board in conflict with its own shareholders, who are more than willing to push back.

In years past, shareholder power was a hollow one. Less than 1 percent of deals have been rejected by shareholders.

American Greetings will be the first test of this new shareholder attitude. Institutional shareholders like mutual funds own 76.44 percent of American Greetings, compared with 55 percent for Dell, according to Standard & Poor’s Capital IQ research. Will it be that these institutions finally step up and take the risk of running a business?

The American Greetings decision is in some ways harder for shareholders. Both the Weiss family and Mr. Dell are unlikely to desert their companies. But American Greetings is a smaller company without Dell’s billions in cash and therefore has less room to maneuver.

When these two deals were negotiated, it is likely that no one thought each would hinge on the condition of requiring a majority of the minority shareholder voting.

Still, management-led buyouts with these conditions have higher premiums even though management still benefits when it uses its power to initiate a deal, one study has found. And clearly, this condition is making the difference.

Even so, for far too long, management-led buyouts often read like scripts with definite outcomes. Boards go through all the right motions and assure shareholders that everything is all right. But the process has a Potemkin village quality about it, as inevitably a deal is reached with management. Indeed, Dell’s shift of the rules makes it appear to want to empower shareholders, but only so much as it allows for Mr. Dell’s deal to go through.

In both the Dell and American Greetings deals, we are seeing something quite rare: shareholders actually exercising their given power.

Yet if they succeed, the question becomes whether Dell’s or American Greeting’s shareholders will become the proverbial dog who caught the car, wondering what to do next.

Justice Sues Bank of America Over Mortgage Securities

The Justice Department sued Bank of America on Tuesday, accusing the bank of defrauding investors by vastly underestimating the quality of mortgage backed securities.

The lawsuit is the latest action by President Obama’s federal mortgage task force that has vowed to hold Wall Street accountable for misconduct in the packaging and sale of mortgage securities during the housing boom.

Bank of America, the Justice Department said, cloaked the risk associated with $850 million worth of securities backed by residential mortgages. In a corporate filing last week, Bank of America said it was bracing for the action.

Eric Holder, the United States  attorney general, said the lawsuit was “the latest step forward in the Justice Department’s ongoing efforts to hold accountable those who engage in fraudulent or irresponsible conduct.”

As Bank of America assembled securities in 2008, the government claimed, the bank ignored that more than 40 percent of the mortgages included did not meet underwriting guidelines. Even though Bank of America knew about the troubled mortgages, the government said, the bank sold the securities anyway.

Unlike other lawsuits, this  case zeros in on prime mortgages, rather than the subprime loans-mortgages that became a hallmark of the 2008 financial crisis.

The lawsuit also takes aim at Bank of America’s own mortgage operations, rather than those of Countrywide, the troubled subprime lender that has created vast mortgage headaches for the bank since it was acquired.

Justice Department’s lawsuit against Bank of America

Justice Sues Bank of America Over Mortgage Securities

The Justice Department sued Bank of America on Tuesday, accusing the bank of defrauding investors by vastly underestimating the quality of mortgage backed securities.

The lawsuit is the latest action by President Obama’s federal mortgage task force that has vowed to hold Wall Street accountable for misconduct in the packaging and sale of mortgage securities during the housing boom.

Bank of America, the Justice Department said, cloaked the risk associated with $850 million worth of securities backed by residential mortgages. In a corporate filing last week, Bank of America said it was bracing for the action.

Eric Holder, the United States  attorney general, said the lawsuit was “the latest step forward in the Justice Department’s ongoing efforts to hold accountable those who engage in fraudulent or irresponsible conduct.”

As Bank of America assembled securities in 2008, the government claimed, the bank ignored that more than 40 percent of the mortgages included did not meet underwriting guidelines. Even though Bank of America knew about the troubled mortgages, the government said, the bank sold the securities anyway.

Unlike other lawsuits, this  case zeros in on prime mortgages, rather than the subprime loans-mortgages that became a hallmark of the 2008 financial crisis.

The lawsuit also takes aim at Bank of America’s own mortgage operations, rather than those of Countrywide, the troubled subprime lender that has created vast mortgage headaches for the bank since it was acquired.

Justice Department’s lawsuit against Bank of America

Sony Brush-Off Leaves Daniel Loeb With Few Options

The tussle over Sony may be the most courteous shareholder battle ever. Back in May, hedge fund manager Daniel S. Loeb respectfully suggested the company spin off a stake in its entertainment arm. Now the Japanese group’s board has politely rejected the idea. But the activist appears to be digging in for the long haul.

Mr. Loeb had argued that a partial listing of Sony Entertainment would improve its performance and help finance Sony’s electronics businesses. But the company concluded a spinoff would throw up barriers between the media and electronics units at a time when content and devices are supposed to be increasingly seamless. Sony’s advisers also cast doubt on the financial logic for a listing. Past experience suggests that the parent company’s shares tend to underperform following a spinoff, while most subsidiaries are eventually re-absorbed by the parent.

The civil brush-off from Sony appears to leave Mr. Loeb with few options. Even in a country more receptive to activist investors than Japan, it would not be easy to force a company to list a subsidiary against its will. Sony’s shares fell 5 percent on news of the board’s decision, suggesting investors expect Mr. Loeb to walk away. However, he does not appear to be giving up just yet. Though Mr. Loeb’s Third Point fund said it was “disappointed” by the board’s decision, it welcomed Sony’s commitment to greater transparency - and promised further ideas for creating value.

There are some encouraging signs for Mr. Loeb. Even after the latest sell-off, Sony shares are still 8 percent higher than when he started his campaign: the broader Topix index is up just 2 percent over the same period. Moreover, Sony has shown itself more willing to listen to unwanted advice than some of its Japanese peers. The only discordant notes so far have come from actor and director George Clooney, who declared Mr. Loeb a “carpet bagger” and the “single least qualified person” to be making judgments about the movie business.

Mr. Loeb has a reputation for writing caustic letters to his activist targets. In that respect, his courteous exchanges with Sony are unusual. But Sony C.E.O. Kazuo Hirai and the rest of Sony’s board cannot breathe a sigh of relief just yet

Peter Thal Larsen is Asia editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

After Tourre Decision, UBS Pays $50 million to Settle

UBS agreed on Tuesday to pay $50 million to settle federal accusations that it misled investors about a complex mortgage security, a transaction that loomed over the government’s recent legal battle with a former Goldman Sachs trader about his role in creating a similar security.

The Securities and Exchange Commission’s case against UBS, the giant Swiss bank, made a cameo appearance in the trial of the former Goldman trader, Fabrice Tourre, whom a jury found liable on six counts of civil securities fraud last week. ACA Management, a company that helped structure the mortgage securities in 2007 for both Goldman and UBS, linked the two financial crisis-era cases.

In Mr. Tourre’s case, the former trader was blamed for not warning ACA that a hedge fund involved in picking assets for the deal was also betting it would fail. Two former top ACA executives testified on the S.E.C.’s behalf, contending that Mr. Tourre kept them in the dark about the hedge fund’s conflict of interest.

In the UBS case, ACA provided the bank with about $23 million in upfront cash payments related to the mortgage deal. UBS pocketed the $23 million rather than sweeping it into the mortgage security, known as a collateralized debt obligation, or C.D.O. UBS marketed the deal, according to the S.E.C., “using materials that omitted any reference to its retention of the upfront payments,” making it an “undisclosed fee.”

“UBS kept $23.6 million that under the terms of the deal should have gone to the C.D.O. for the benefit of its investors,” George S. Canellos, the S.E.C.’s co-director of enforcement, said in a statement.

UBS did not admit or deny wrongdoing. In a statement, the bank said it was “pleased to put this investigation behind us, which involved a legacy business that was closed almost five years ago.” The bank further noted that the S.E.C. did not cite it for intentional or reckless misconduct.

For UBS, which spent much of the last five years cutting big checks to the government, the $50 million penalty appears as something of a rounding error.

Last month, the bank paid $885 million to a federal housing regulator that accused it of selling toxic mortgage securities to Fannie Mae and Freddie Mac, the government-controlled housing finance giants. That penalty came on top of a $1.5 billion fine the bank paid last year to authorities around the globe to resolve its role in an interest-rate manipulation scandal. The bank also agreed to a $780 million fine in 2009 with the United States authorities to settle charges that it helped American clients avoid paying taxes.

The settlement with the S.E.C. is nonetheless another black mark for the bank. The S.E.C.’s civil order, citing internal UBS e-mails and documents, portrays the bank’s zealous pursuit for profit that came at the expense of investors.

The problem stemmed from 2007, the eve of the financial crisis, when the bank was creating the deal. Almost immediately, UBS employees working on the deal pursued upfront cash.

“Let’s see how much money we can draw out of the deal,” the head of the bank’s United States C.D.O. group said at the time, according to the S.E.C.

In May 2007, according to the S.E.C., UBS employees debated how to keep the $23 million upfront cash payments it obtained through ACA. After consulting a UBS lawyer, the employees decided to retain the cash without disclosing it to investors, a decision that the S.E.C. called “inconsistent with the industry standard.”

The S.E.C. argued that the deception continued when UBS, along with ACA, prepared a list of assets in the deal. The list provided to investors “did not contain any reference” to the upfront payments. Instead, the marketing documents mentioned a $10.8 million fee that the bank collected.

Despite ACA’s role in the deal, no one at the company has been charged, a fact that Mr. Tourre’s lawyers seized on at his three-week trial in Lower Manhattan.

The S.E.C. previously warned Laura Schwartz, one of the former ACA executives who testified against Mr. Tourre, that it might file civil charges against her. The agency, however, dropped the investigation weeks before Mr. Tourre’s trial.

Mr. Tourre’s lawyers have argued that the S.E.C.’s decision might have colored her testimony against their client. The judge in the case, Katherine B. Forrest, was receptive to that concern, allowing Mr. Tourre’s lawyers to introduce the S.E.C.’s decision as evidence.

“The timing I find just too close to preclude entirely,” she said.

Poor Record for Subsidiary I.P.O.’s a Factor in Sony’s Rejection of the Idea

Sony’s chief executive had a few numbers on his mind when he formally rejected a proposal by the activist hedge fund manager Daniel S. Loeb to partially spin off Sony’s entertainment unit.

Among them was the number of times that a company has listed part of a subsidiary on the public markets, only to regret the decision.

In a letter sent late on Monday, Sony’s chief, Kazuo Hirai, dismissed much of the rationale for a partial initial public offering of the business. Much of his argument revolved around keeping the Japanese icon together, reaping the benefits of having both an electronics and an entertainment arm under one roof.

“Sony’s entertainment businesses are critical to our corporate strategy and will be important drivers of growth, and I am firmly committed to assuring their growth, to improving their profitability and to aggressively leveraging their collaboration with our electronics and service business” Mr. Hirai wrote.

But advisers to Sony have also told the Japanese company that subsidiary initial public offerings have rarely succeeded. Over the past decade, 37 so-called “sub I.P.O.’s” took place, these bankers told the company’s board. Only six of them remain.

Of those six, some of them, like Clear Channel’s outdoor advertising business, are still publicly traded because their parent companies lack the capital to take them private again.

Listing a subsidiary is meant to raise capital, as well as break out the financials of that subsidiary and hopefully convince investors that there is more value in the business than previously believed.

But the problem, Sony’s advisers argued, is that sub I.P.O.’s ultimately create more headaches for the parent company. First, it creates potential conflicts, since the newly public subsidiary has its own board and own responsibilities to its shareholders. And the spinoff’s shares often trade above the parent’s, defeating the purpose of the separation in the first place.

Perhaps the most pertinent example for Sony was the News Corporation’s experiment with a sub I.P.O. In 1998, the media conglomerate announced plans to float nearly 19 percent of its Fox Entertainment unit in the public markets. Seven years later, News Corporation agreed to buy back that stake.

“The move underscores the simplification process: Mr. Murdoch’s drive to make News Corp. a simpler and more shareholder-friendly U.S. company,” Mario Gabelli, the well-known fund manager, said in 2005.

There’s also the case of Time Warner, which had spun off an 18 percent stake in its American Television and Cable subsidiary, only to buy it back in the early 1990s.

Sony did make one concession to Mr. Loeb, agreeing to disclose more information about the entertainment unit’s financials. A person close to Sony said that such a move would essentially remove the need for a more drastic step like a sub I.P.O.

In a statement late on Monday, Mr. Loeb’s Third Point hedge fund said only, “Although we are disappointed the board decided not to pursue a public offering of the entertainment business at this time, Third Point welcomes Sony’s commitment to greater transparency and expects this will foster a culture of accountability.”

Poor Record for Subsidiary I.P.O.’s a Factor in Sony’s Rejection of the Idea

Sony’s chief executive had a few numbers on his mind when he formally rejected a proposal by the activist hedge fund manager Daniel S. Loeb to partially spin off Sony’s entertainment unit.

Among them was the number of times that a company has listed part of a subsidiary on the public markets, only to regret the decision.

In a letter sent late on Monday, Sony’s chief, Kazuo Hirai, dismissed much of the rationale for a partial initial public offering of the business. Much of his argument revolved around keeping the Japanese icon together, reaping the benefits of having both an electronics and an entertainment arm under one roof.

“Sony’s entertainment businesses are critical to our corporate strategy and will be important drivers of growth, and I am firmly committed to assuring their growth, to improving their profitability and to aggressively leveraging their collaboration with our electronics and service business” Mr. Hirai wrote.

But advisers to Sony have also told the Japanese company that subsidiary initial public offerings have rarely succeeded. Over the past decade, 37 so-called “sub I.P.O.’s” took place, these bankers told the company’s board. Only six of them remain.

Of those six, some of them, like Clear Channel’s outdoor advertising business, are still publicly traded because their parent companies lack the capital to take them private again.

Listing a subsidiary is meant to raise capital, as well as break out the financials of that subsidiary and hopefully convince investors that there is more value in the business than previously believed.

But the problem, Sony’s advisers argued, is that sub I.P.O.’s ultimately create more headaches for the parent company. First, it creates potential conflicts, since the newly public subsidiary has its own board and own responsibilities to its shareholders. And the spinoff’s shares often trade above the parent’s, defeating the purpose of the separation in the first place.

Perhaps the most pertinent example for Sony was the News Corporation’s experiment with a sub I.P.O. In 1998, the media conglomerate announced plans to float nearly 19 percent of its Fox Entertainment unit in the public markets. Seven years later, News Corporation agreed to buy back that stake.

“The move underscores the simplification process: Mr. Murdoch’s drive to make News Corp. a simpler and more shareholder-friendly U.S. company,” Mario Gabelli, the well-known fund manager, said in 2005.

There’s also the case of Time Warner, which had spun off an 18 percent stake in its American Television and Cable subsidiary, only to buy it back in the early 1990s.

Sony did make one concession to Mr. Loeb, agreeing to disclose more information about the entertainment unit’s financials. A person close to Sony said that such a move would essentially remove the need for a more drastic step like a sub I.P.O.

In a statement late on Monday, Mr. Loeb’s Third Point hedge fund said only, “Although we are disappointed the board decided not to pursue a public offering of the entertainment business at this time, Third Point welcomes Sony’s commitment to greater transparency and expects this will foster a culture of accountability.”

Billionaires’ Battle Over LightSquared Breaks Into the Open

The hedge fund tycoon Philip A. Falcone may be down, but he’s not out, taking on the satellite television mogul Charles W. Ergen in a bankruptcy brawl.

Their months-long fight took a new turn on Tuesday as Mr. Falcone filed a lawsuit accusing Mr. Ergen of colluding with another hedge fund in a “fraudulent scheme” that prevented his broadband wireless company LightSquared from emerging out of bankruptcy.

Mr. Falcone’s complaint comes just over a week after Mr. Ergen, the chairman of both Dish and EchoStar, raised a bid for LightSquared to $2.2 billion from $2 billion.

The lawsuit, filed in the United States Bankruptcy Court for the Southern District of New York, is the latest salvo fired by Mr. Falcone, who is fighting Mr. Ergen for control of LightSquared’s assets. It has the feel of a cowboy style showdown between the two billionaires.

Mr. Falcone, who made billions through his Harbinger Capital Partners hedge fund betting against subprime mortgage market in 2007, claims Mr. Ergen secretly acquired most of LightSquared’s debt through the hedge fund Sound Capital. This allowed Mr. Ergen to bypass the company’s credit agreement which prohibits a competitor from buying LightSquared’s debt, Mr. Falcone contends.

By acquiring most of LightSquared’s debt, the complaint says, Mr. Ergen stymied efforts by Harbinger to work out with creditors a plan to pull LightSquared out of bankruptcy. The complaint also accuses Mr. Ergen of making a “low-ball, bad-faith bid” for LightSquared’s wireless spectrum through his Dish subsidiary L-Band Acquisitions.

Mr. Falcone and his Harbinger Capital Partners are seeking damages of more than $2 billion.

Mr. Ergen was not immediately available for comment.

SAC Prosecutor Hits the Media Trail

Since Preet Bharara’s appointment in 2009 as the United States attorney in Manhattan, his office has racked up more than 70 insider-trading convictions. The press-savvy Mr. Bharara is also racking up the media appearances.

Mr. Bharara appeared on “CBS This Morning” on Tuesday to discuss the indictment of SAC Capital Advisors, the hedge fund owned by the the billionaire Steven A. Cohen. Speaking publicly about the case for the first time since his press conference on July 25 announcing the charges, Mr. Bharara talked about why his office indicted SAC and not Mr. Cohen.

“Sometimes it’s the case that individuals can be charged and that’s how you can get accountability,” Mr. Bharara said. “And sometimes, and we’ve charged a number of people at that particular place, and sometimes it’s the case that conduct is so pervasive and there’s so much that shouldn’t be going on that is going on, that the only way that justice can be done is by indicting the entire institution.”

Appearing live in the CBS studio and seated in front of a big screen that read “Wall Street’s Top Cop,” Mr. Bharara was interviewed by the show’s hosts, Charlie Rose and Norah O’Donnell. Last year, Mr. Bharara sat for an hourlong interview with Mr. Rose on his PBS show. And last month, just a week before bringing the SAC case, Mr. Bharara gave an interview to Jim Cramer at a conference sponsored by CNBC.

Mr. Rose asked Mr. Bharara about whether he had enough evidence to indict Mr. Cohen, who has not been criminally charged but has been accused in a civil action brought by federal securities regulators of failing to supervise his employees.

“As I said when we announced the charges, the investigation is ongoing it is not closed,” he said. Mr. Bharara added, “The case remains open.

Mr. Rose and Ms. O’Donnell pressed Mr. Bharara on the question of why he did not bring a case against Mr. Cohen.
“Wow,” she said. “It must have bothered you that you couldn’t indict him.”

“Nothing bothers me,” Mr. Bharara said, smiling.

“Nothing bothers you?” Ms. O’Donnell asked.

“Very little,” Mr. Bharara said. “Except that I went to the wrong college apparently.”

Mr. Bharara â€" a Harvard graduate and inveterate quipster â€" was referencing an earlier segment about a new ranking of the country’s top party schools.

Ms. O’Donnell continued to push Mr. Bharara on whether it was appropriate to indict a company without charging its owner. “Where’s the body?” she asked.

“There are a lot of bodies,” Mr. Bharara replied. Noting that six former SAC employees had pleaded guilty to insider trading, Mr. Bharara said, “the scope and the pervasiveness of the insider trading that went on at this particular place is unprecedented in the history of hedge funds.”

“When you have that kind of activity,” Mr. Bharara said, “an indictment of the entire institution seems appropriate.”

Responding to a question about the relevance of the the government’s insider trading campaign to the broader public, Mr. Bharara said, “I think people are very tired of there being people who have lots and lots of money, sometimes billions of dollars, who don’t play by the same rules as everyone else.” He added: “The rules are the rules.”

Mr. Bharara has been mentioned as a possible successor to Attorney General Eric Holder should he step down. Would Mr. Bharara want the job, Ms. O’Donnell asked.

“I like the job I have now,” he said. “I have a great job.”

Pension Reform Could Disrupt Investment Funds

Detroit’s financial woes, exacerbated by underfunded pension liabilities, have brought renewed scrutiny to public pension plans. Senator Orrin Hatch, Republican of Utah, and others have suggested overhauling these plans to shift more responsibility to the private sector. Private insurance companies would assume responsibility for these defined benefit plans, offering annuities to beneficiaries in exchange for employer-paid premiums.

Proponents argue that privatization could reduce the risk of municipal bankruptcy and federal bailouts. One downside is the possible increase in fees associated with external management of retirement savings; it creates another way for Wall Street to extract wealth from Main Street.

Merits aside, overhauling the public pension system would cause some interesting and presumably unintended consequences.

First, phasing out public pension funds could cut off an important source of financing for venture capital and private equity. Pension funds like the California Public Employee Retirement System, or Calpers, and the Teachers Retirement System of Texas are among the largest and most powerful institutional investors in venture capital and private equity.

Eliminating a chief source of capital could leave a gap in the fund-raising landscape. Venture capital and private equity funds seek investors with longer time horizons who are willing to accept illiquidity for a premium return. Pension funds now contribute as much as a half of all capital to venture capital and private equity funds, although that estimate includes private pension plans.

Private insurance companies also have long investment horizons and would be as well suited, in theory, to serve as limited partners. But insurance companies have not historically participated as actively in venture capital and private equity, and it might take some time for insurance executives to develop the institutional knowledge and capacity to do so well. Only the top quartile of venture capital and private equity funds historically outperform equity markets, and many insurance companies would not have access to top funds.

A second unintended consequence has to do with the tax status of public pension funds: they are tax-exempt. The legal infrastructure of funds would have to continue to accommodate tax-exempt investors, which include other sources of capital like foundations and university endowments.

But a shift toward taxable investors could change some negotiating dynamics around structuring decisions. Currently, most fund investors, because they are tax-exempt, are mostly indifferent to the tax consequences of the fund structure. At the fund level, fees are mostly paid in the form of carried interest, which allows managers to pay tax at low capital gains rates. Taxable investors might prefer to instead pay incentive fees that are economically similar but may generate ordinary tax deductions for investors and ordinary income for the manager.

At the portfolio company level, fund managers might organize more portfolio companies as pass-through entities to allow for the flow through of tax losses to investors. While tax-exempt public pension funds don’t care about the flow-through of losses, insurance companies might.

While it is too early to predict the outcome of public pension legislation, it is not too soon for deal lawyers to start planning to accommodate more taxable investors into fund structures.

Victor Fleischer is a professor of law at the University of San Diego, where he teaches classes on corporate tax, tax policy, and venture capital and serves as the director of research for the Graduate Tax Program. His research focuses on how tax affects the structuring of venture capital, private equity, and corporate transactions. Twitter: @vicfleischer

Morning Agenda: Bezos Buys a Landmark in Washington

Jeffrey P. Bezos, the founder of Amazon.com, has agreed to buy The Washington Post for $250 million in cash, in a deal that has shocked the newspaper industry. Donald E. Graham, chairman and chief executive of The Washington Post Company, said he and the publisher “decided to sell only after years of familiar newspaper-industry challenges made us wonder if there might be another owner who would be better for the Post.” The sale is expected to be completed within 60 days.

The purchase price is a pittance for Mr. Bezos, a technology mogul with an estimated fortune of more than $25 billion. “But the deal was still an astonishing move for a magnate who has kept a low profile in politics and has said almost nothing about his interest in newspapers, except that he reads them,” Nick Wingfield and David Streitfeld report in The New York Times. “I am happily living in ‘the other Washington’ where I have a day job that I love,” Mr. Bezos wrote to the newspaper’s employees.

“If it wasn’t clear that newspapers have become trophies for the wealthy with an interest in journalism or power â€" or a combination of both â€" it should be now,” Andrew Ross Sorkin writes in the DealBook column. In addition to the sale of the Post, The Boston Globe was sold on Friday for $70 million and Newsweek was sold over the weekend for next to nothing. The deals “don’t make financial sense,” said Ken Doctor, an analyst at Outsell, a research and consulting firm for the publishing industry.

Based on the math, the $250 million valuation for The Washington Post seems hard to justify, Mr. Sorkin writes. But the newspaper was not just a business. “If journalism is the mission, given the pressures to cut costs and make profits, maybe (a publicly traded company) is not the best place for The Post,” Katharine Weymouth, the publisher, said in an interview with the newspaper. A running joke on Twitter on Monday was expressed by Ben Popper, the editor at the Web site the Verge: “Jeff Bezos has reputation for building great companies with little to no profit, perfect guy to own a newspaper.”

The bank behind the sale of the newspaper was Allen & Company, which spoke to a “half-dozen” possible buyers before settling on Mr. Bezos, according to the Post’s own report on the deal. “Mr. Graham and Mr. Bezos were both at Allen & Company’s annual conference in Sun Valley, Idaho, last month,” Michael J. de la Merced writes in DealBook. “The high-powered gathering of media and technology moguls may have lent cover for the two to cement the deal.”

SONY REJECTS LOEB PROPOSAL FOR BREAKUP  |  Sony said late on Monday that it planned to keep all of its entertainment arm, rejecting a proposal by the activist hedge fund manager Daniel S. Loeb. “The decision, announced in a publicly disclosed letter to Mr. Loeb, raises questions about whether he will stage a public fight with Sony,” Mr. de la Merced writes in DealBook. The letter came after a meeting between Mr. Loeb and Sony’s bankers on July 17 in Manhattan.

The chief executive of Sony, Kazuo Hirai, wrote in the letter that the company had considered Mr. Loeb’s proposal of spinning off part of the entertainment unit in a public offering. But he said that after consulting with its financial advisers, Sony believed that owning all of the business would let it better mesh with the core electronics operations, without the legal complications of a partial spinoff.

BANKERS’ PAY DEFERRALS ARE TOUGHER IN EUROPE  | Four years after international regulators proposed an overhaul of Wall Street’s lush pay packages that was supposed to apply equally to employees of American investment banks and their big European rivals, “Europeans might be forgiven for wondering what happened to the American effort,” DealBook’s Peter Eavis writes.

“A central theme of the overhaul was to make bankers wait for a significant portion of their pay, so they would have less of an incentive to take the sort of short-term risks that led in 2008 to crippling losses. Today, however, European firms appear to be holding back, or deferring, substantially more of their top risk-takers’ pay than American banks. European banks like Barclays and Credit Suisse are deferring as much as 70 percent of the compensation granted to top employees, according to an analysis by The New York Times of the banks’ annual reports. American firms, by contrast, generally appear to be deferring about half.”

ON THE AGENDA  | 
Dish Network and Michael Kors Holdings report earnings before the market opens. The Walt Disney Company and Zillow report earnings in the evening. A report on the international trade gap for June is out at 8:30 a.m. Sheila C. Bair, former chairwoman of the Federal Deposit Insurance Corporation, is on CNBC at 8 a.m. Ashton Kutcher, who is performing the role of Steven P. Jobs in an upcoming movie, is on CNBC at 4:40 p.m.

NEW YORK CRACKS DOWN ON ONLINE LENDERS  | “Government authorities are homing in on a lucrative loophole that allows online lenders to offer short-term loans at interest rates that often exceed 500 percent annually, the latest front in a crackdown on the payday lending industry,” Jessica Silver-Greenberg and Ben Protess report in DealBook. “New York State’s financial regulator joined the effort on Monday as he sent letters to 35 of the online lenders, instructing them to ‘cease and desist’ from offering loans that violate local usury laws, according to documents reviewed by The New York Times. The regulator, Benjamin M. Lawsky, ordered the lenders to halt the ‘illegal’ loans within two weeks.”

Mergers & Acquisitions »

Alliant Techsystems Said to Be in Talks to Buy Bushnell  |  Alliant Techsystems, the giant ammunition maker, “is in advanced talks to buy Bushnell Outdoor Products” in a deal that could be worth around $1 billion, Reuters reports, citing two unidentified people familiar with the matter. REUTERS

With New Acquisition, BMC Software Opens App Store  |  BMC Software, the enterprise software company that recently agreed to sell itself to private equity investors, announced on Tuesday a new app store called BMC AppZone, which the company said it acquired through its purchase of Partnerpedia. BMC SOFTWARE

Hellman & Friedman in Deal for Insurance Brokerage Firm  |  Hellman & Friedman funds are acquiring Hub International, a global insurance brokerage firm, in a deal that values the company at $4.4 billion. DealBook »

Airlines Secure European Approval for Merger  |  US Airways and the parent company of American Airlines agreed to give up a slot at Heathrow Airport in London and foster competition in the London-Philadelphia route, The Associated Press reports. ASSOCIATED PRESS

Disney Magic May Not Have Worked on Pixar  |  A Breakingviews analysis suggests the studio’s value to the Magic Kingdom falls short of the $7.4 billion purchase price, Jeffrey Goldfarb of Reuters Breakingviews writes. REUTERS BREAKINGVIEWS

INVESTMENT BANKING »

Standard Chartered’s First-Half Profit Fell 24%  |  The British bank Standard Chartered reported that profit fell 24 percent, to $2.1 billion, in the first half of the year, as the firm took a $1 billion charge related to its operations in South Korea. DealBook »

Credit Agricole’s Profit Soars After Bank Leaves Greece  |  The French bank said its second-quarter profit rose more than 12 times, to $922 million, from the period a year earlier, after it sold Greek and Italian units that had weighed on its results. DealBook »

Amid Disappointing Growth, Goldman Sachs Rethinks Brazil  |  Goldman Sachs has changed its plans for an expansion in Brazil after the economy grew less than expected, Bloomberg News reports. The report continues: “About a quarter of Goldman Sachs’s roughly 45-person Brazil investment-banking division have left, people familiar with the matter said, asking not to be identified because the bank hasn’t announced the departures. Five managing directors, four from the eight-person executive committee, are no longer at the firm, the people said.” BLOOMBERG NEWS

Wealth Management Firm Targets a New Generation  |  Ascent Private Capital Management, a new unit of U.S. Bancorp, increased its assets under advisement in 2012 by 96 percent, according to Bloomberg Markets magazine. The firm’s president said it is trying to “appeal to the new billionaire.” BLOOMBERG MARKETS

Staff Turnover at Deutsche Bank’s Prime Finance Unit  |  The unit of Deutsche Bank that works with hedge funds has experienced accelerating turnover in recent months, Absolute Return reports. ABSOLUTE RETURN

PRIVATE EQUITY »

Piling on Debt, Paying Out Dividends  |  The Wall Street Journal reports: “Private equity firms are adding debt to companies they own to fund payouts to themselves at a record pace, as fears mount that the window for these deals will close if interest rates rise.” WALL STREET JOURNAL

HEDGE FUNDS »

Hedge Fund Manager Rejects Comparisons  |  Paul Singer of Elliott Management wrote in a letter to investors, according to Absolute Return: “The last thing we want to hear when we hit a soft patch (and the least helpful when trying to dig our way out) is a question about our performance relative to someone else’s.” ABSOLUTE RETURN

Pershing Square Said to Stumble in July  |  Pershing Square Capital Management, the hedge fund run by William A. Ackman, was down 2.2 percent in July, but it remains up 3.8 percent year-to-date, Reuters reports, citing an unidentified investor familiar with the numbers. REUTERS

Hedge Fund Urges EADS to Sell Dassault Stake  |  EADS, the parent company of Airbus, confirmed on Monday that it had received a letter from the London-based TCI urging it to sell its 46 percent stake in Dassault Aviation. DealBook »

I.P.O./OFFERINGS »

Neiman Marcus Said to Hire Banks for I.P.O.  |  The development is “the latest sign that the high-end department store is leaning toward a listing over pursuing an outright sale,” Reuters reports, citing two unidentified people familiar with the matter. REUTERS

Third Point Reinsurance Fund Arm Seeks Up to $370.6 Million in I.P.O.  |  The reinsurance arm of Third Point, the hedge fund run by Daniel S. Loeb, disclosed on Monday that it was seeking to raise up to $370.6 million from its forthcoming initial public offering. DealBook »

VENTURE CAPITAL »

A Study Bolsters Twitter’s Advertising Strategy  |  Nielsen has found in a study that an increase in Twitter commentary about a television show can increase the show’s viewership as it airs, AllThingsD reports. The study “will be seen as validation for a pitch Twitter has been making to TV networks and advertisers for a couple years.” ALLTHINGSD

LEGAL/REGULATORY »

Chicago Sees Pension Crisis Brewing  |  “A crushing problem lurks beneath the signs of economic recovery in Chicago: one of the most poorly funded pension systems among the nation’s major cities,” The New York Times writes. NEW YORK TIMES

F.B.I. Finds Flaws in System Controlling Economic Data  |  The Wall Street Journal reports: “The Federal Bureau of Investigation has discovered vulnerabilities in the government’s system for preventing market-moving economic reports from leaking to traders before public release.” WALL STREET JOURNAL

The Gray Line of ‘Confidential’ Information  |  The insider trading case against an analyst who tipped off a portfolio manager at SAC Capital Advisors in 2009 is not typical because he also shared the information with others, Peter J. Henning writes in the White Collar Watch column. White Collar Watch »

The Changing State of Smartphone Competition in China  |  A look at the competition from Chinese makers to Apple’s iPhone, which is no longer the most sought-after phone in the country, and the state of the government’s effort to stabilize economic growth, Bill Bishop writes in the China Insider column. DealBook »

Fed Official Says More Names Being Considered for Chairman  |  “Not all the names you’ve read about are all the names being considered,” Richard Fisher, president of the Federal Reserve Bank of Dallas, said after a speech, according to Bloomberg News. BLOOMBERG NEWS

Standard Chartered’s First-Half Profit Fell 24%

LONDON - Standard Chartered reported a 24 percent fall on Tuesday in its profit during the first half of the year, as the firm took a $1 billion charge connected to its operations in South Korea.

Although the bank is based in London, its businesses are spread across emerging markets in Asia, Africa, and the Middle East, where the financial crisis is starting to take a toll.

Standard Chartered said that it had generated net income of $2.1 billion in the six months through June 30, compared to $2.8 billion in the same period last year.
When adjusted for one-off costs, the firm’s pretax profit rose slightly, to $4.1 billion, over the same period, in line with analysts’ estimates.

The firm’s bottom line suffered from a $1 billion one-off charge to its South Korean business, which has been hit by an increasing number of delinquent loans, poor domestic economic conditions and stringent local regulation.

Standard Chartered had announced in June that it would take a charge on its South Korean business. The British bank had expanded its operations in the Asian country after acquiring Korea First Bank for around $3.3 billion in 2005.

“Korea continues to be our most difficult market,” Standard Chartered’s chief executive, Peter Sands, said in a statement on Tuesday. “We expect that the second half will also be very difficult.”

Shares in the British bank, which generates around 90 percent of its earnings from emerging markets, rose 2.7 percent in morning trading in London on Tuesday.

The firm also said that loan impairments across its global operations had risen 27 percent, to $730 million, as the British bank added that it was not on target for “double-digit income performance for 2013.”

Last year, Standard Chartered agreed a $327 million settlement with federal and state prosecutors in the United States related to allegations that it had illegally handled money for Iranian banks and corporations.

Credit Agricole’s Profit Soars After Leaving Greece

Paris â€" Crédit Agricole, the big French bank, said on Tuesday that its second-quarter profit grew more than 12 times compared to the same period last year following its exit from Greek and Italian units that had weighed on its results.

The bank, based in Paris, reported a net profit of 696 million euros, or $922 million, for the April-June period, up from 56 million euros in the same three months a year ago and better than the roughly 500 million euros that analysts had been expecting. The year-earlier figure was restated from a previously reported 111 million euro profit. Revenue slipped 0.9 percent to 4.4 billion euros.

The latest quarterly showing marked a sharp contrast with the same period a year ago, when a loss of 370 million euros on its Emporiki Bank business in Greece and 427 million euros on its stake in Intesa Sanpaolo of Italy held back earnings. Those investments soured when the euro crisis led to a run on the bonds of “peripheral” euro zone governments.

Crédit Agricole’s shares, which have more than doubled over the last 12 months, rose 1.4 percent in Paris morning trading on Tuesday.

Jean-Paul Chifflet, Crédit Agricole’s chief exeuctive, said in a statement that the results confirmed that the bank “has changed its profile and is adapting to the prevailing context and the new regulations.”

The corporate and investment banking unit’s net profit rose 38 percent, to 277 million euros, as it focused its efforts on debt markets. Crédit Agricole also said that its domestic retail business posted a 3.4 percent increase in revenue, despite the “persistently lackluster” French economy.

The bank also said that its capital position had improved. For the Crédit Agricole Group, which is larger than the Crédit Agricole S.A. business that trades on the stock exchange, the capital ratio, a measure of its financial resiliency, rose to 10 percent on a “fully loaded” basis by June 30 according to the Basel III Common Equity Tier 1 standard from 9.6 percent at the end of March. The group’s leverage ratio - capital divided by total assets - was 3.5 percent on that date, it said. The bank did not break out either figure for the listed company.

Jon Peace, an analyst with Nomura in London, wrote in a research note that the results would probably lead to a modestly positive reappraisal of the bank among investors, and he praised its “much improved risk profile.”

The strong earnings follow Crédit Agricole’s sale of Emporiki and and its stake in Intesa Sanpaolo last year. The two units contributed to Crédit Agricole’s annual loss of 6.5 billion euros last year, its largest ever.

Continuing its retreat from the international expansion, the bank last week announced the sale of the remaining 80 percent of CLSA, its Asian investment banking business, to Citic Securities, the Chinese investment bank, for $841 million. The proceeds of that sale would be booked as part of third-quarter results, it said.

Credit Agricole’s Profit Soars After Leaving Greece

Paris â€" Crédit Agricole, the big French bank, said on Tuesday that its second-quarter profit grew more than 12 times compared to the same period last year following its exit from Greek and Italian units that had weighed on its results.

The bank, based in Paris, reported a net profit of 696 million euros, or $922 million, for the April-June period, up from 56 million euros in the same three months a year ago and better than the roughly 500 million euros that analysts had been expecting. The year-earlier figure was restated from a previously reported 111 million euro profit. Revenue slipped 0.9 percent to 4.4 billion euros.

The latest quarterly showing marked a sharp contrast with the same period a year ago, when a loss of 370 million euros on its Emporiki Bank business in Greece and 427 million euros on its stake in Intesa Sanpaolo of Italy held back earnings. Those investments soured when the euro crisis led to a run on the bonds of “peripheral” euro zone governments.

Crédit Agricole’s shares, which have more than doubled over the last 12 months, rose 1.4 percent in Paris morning trading on Tuesday.

Jean-Paul Chifflet, Crédit Agricole’s chief exeuctive, said in a statement that the results confirmed that the bank “has changed its profile and is adapting to the prevailing context and the new regulations.”

The corporate and investment banking unit’s net profit rose 38 percent, to 277 million euros, as it focused its efforts on debt markets. Crédit Agricole also said that its domestic retail business posted a 3.4 percent increase in revenue, despite the “persistently lackluster” French economy.

The bank also said that its capital position had improved. For the Crédit Agricole Group, which is larger than the Crédit Agricole S.A. business that trades on the stock exchange, the capital ratio, a measure of its financial resiliency, rose to 10 percent on a “fully loaded” basis by June 30 according to the Basel III Common Equity Tier 1 standard from 9.6 percent at the end of March. The group’s leverage ratio - capital divided by total assets - was 3.5 percent on that date, it said. The bank did not break out either figure for the listed company.

Jon Peace, an analyst with Nomura in London, wrote in a research note that the results would probably lead to a modestly positive reappraisal of the bank among investors, and he praised its “much improved risk profile.”

The strong earnings follow Crédit Agricole’s sale of Emporiki and and its stake in Intesa Sanpaolo last year. The two units contributed to Crédit Agricole’s annual loss of 6.5 billion euros last year, its largest ever.

Continuing its retreat from the international expansion, the bank last week announced the sale of the remaining 80 percent of CLSA, its Asian investment banking business, to Citic Securities, the Chinese investment bank, for $841 million. The proceeds of that sale would be booked as part of third-quarter results, it said.