Filed under: Management, Cerberus Capital

H&R Block Inc. (NYSE: HRB) Chief Executive Mark Ernst this day resigned as his efforts to unloaded the company’s money-losing subprime mortgage business Option One Mortgage Corp. to Cerberus Capital Management LP nears collapse, according to Bloomberg News.

Former SEC Chairman and hedge fund manager Richard Breeden, who had long complained about losses at Option One and lead a proxy battle against the company, was named chairman and Alan. M. Bennett, a former CFO of Aetna Inc. (NYSE: AET), interim chief executive. H&R Block is conducting a search for a new CEO. Bennett has told the company he doesn’t wish to be considered as a candidate, the company said in a press release.

Cerberus agreed to pay H&R Block $800 million for Option One in April, well under the $1.3 billion the company had hoped to get. Cerberus may scuttle the deal entirely now given the continued uncertainty of the credit markets. It’s unclear what’s going to happen to Option One which Ernst had said H&R Block may close if it couldn’t find a buyer, Bloomberg stated.

Shares of Kansas City-based H&R Block, which have slumped more than 17% this year, rose in pre-market trading. It will be interesting to see if Breeden will be able to help turn around H&R Block now that he’s become an insider.

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Filed under: Management, Shareholders, Public or private?

On November 9th, I wrote about Trans World Entertainment Corporation (NASDAQ: TWMC) CEO Robert Higgins’ offer to acquire the company for $5 per share. On Friday, shares of TWMC shut at $5.25, indicating that investors anticipate that either Higgins will raise his offer, or a competing bidder will emerge. What happened?

Sherwood Investments, which owns 4.34% of the company, put out a press release containing a letter to Mr. Higgins and the board, voicing the view that the offer was “grossly inadequate”, and urging the company to solicit other offers.

Sherwood’s argument is pretty hard to dispute: At a price of only $8 per share the entire Trans World business would be valued at under $250 million or $259,000 per store (using the 963 stores reported as of August 4th, 2007) which is less than their replacement cost. Furthermore, $8 per share would represent less than the $11.81 per share of tangible equity on the most current balance sheet and half the cost of current inventory. Let us remind you that just last year Trans World paid $78.8 million for 335 Musicland stores from bankruptcy. That deal equated to $235,000 per bankrupt store and now you’re proposing to pay $161,000 per store for all the stores which represents a 31% discount, and Trans World is a going concern!

Why should shareholders accept $5 per share when liquidation should generate proceeds in excess of $8 per share? We are certain that in making a “preliminary proposal” you realize that significant additional consideration would need to be forthcoming in order to satisfy your minority shareholders.

The paltry valuation that Higgins is placing on the company with his offer is underscored when you take into account that Trans World actually shut 125 of the 355 Musicland stores that it acquired, according to the most current 10-K. Using the 210 stores from the Musicland acquisition that TWMC currently operates, it really paid more than $375 thousand per store — 2.3 times as much as Higgins is offering for Trans World.

Trans World’s board will in all probability have to solicit other offers to avoid a proxy fight and, if Sherwood is right, that auction process would make Trans World a screaming buy at its current price.

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Filed under: Management, Activist investing

Even Homer nods and so, apparently, does Carl Icahn.

Losses on WCI Communities (NYSE: WCI) and Lear (NYSE: LEA) have given his activist hedge funds their first quarterly declines in their 3-year history, according to Bloomberg News. The funds are only down 1.5%, and are are still up almost 20%, before fees, on the year. The funds manage $7.1 billion.

What’s interesting is that Icahn’s massive losses came on companies that he sought to acquire and saw his bids rejected by management. But given that WCI rejected Icahn’s $22 a share bid and the stock currently trades around $4, the failure of Icahn’s overtures is probably a boon to shareholders.

A 1.5% decline is pretty minor setback — and I would anticipate Icahn to recover. While his career has been a large success landing him in the upper echelons of the Forbes list, it’s also been marked by several high profile failures: Icahn’s blunders at the helm of TWA that led to its bankruptcy exposed his weakness as an operational manager.

But as an activist investor and bottom-fisher, Mr. Icahn is virtually unparalleled. His publicly traded company Icahn Enterprises (NYSE: IEP) continues to be an extremely strong performer, even as virtually everything else touching real estate has floundered.

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Filed under: Management, Venture capital industry

2007 Nobel Prize Winner and 2000 Presidential election winner Al Gore has another notch on his belt — partner at Silicon Valley’s most prestigious venture capital firm — Kleiner Perkins. (Thanks to the Supreme Court, Gore — who won the 2000 Presidential vote — did not serve.)

But he handled the disappointment well. His work on the documentary An Inconvenient Truth — easily the highest payoff PowerPoint presentation ever made — has helped make the world aware of the threat it faces from global warming and what people can do about it. Gore insightfully points out that climate change is a matter of war and peace. It has created conflict — the drying up of a lake in Sudan contributed to genocide there and the melting of the polar icecap has set off an international sea grab at the top of the world.

So what’s the deal with Gore at Kleiner Perkins? According to the New York Times, President-elect Gore’s part-time job at Kleiner will be to assess the potential of substitute energy companies and to opine on whether Kleiner Perkins should invest in them. Gore plans to donate his salary from the venture to the Alliance for Climate Protection, a nonprofit policy foundation. But he wasn’t clear about whether he’d get the partner’s share of the 2% of assets under management and 20% of the profits from successful “exits.”

He was clearer about his political aspirations — noting “I don’t expect to be a candidate again.”

Peter Cohan is President of Peter S. Cohan & Associates. He also instructs management at Babson College and edits The Cohan Letter.

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Filed under: Deals, Management

With the pain of the real estate plunge, Restoration Hardware (NASDAQ: RSTO) has had a hard time (the company is a specialty retailer of bath ware, furniture and so on). But is it really a good time to sell out?

Well, the company’s management thinks so. Late last week, Restoration Hardware announced a going-private transaction for $267 million or $6.70 per share. The buyer is Catterton Partners, which has quite a bit of experience with retail deals.

The premium comes to about 150%, which is nothing to sneer at. Yet, keep in mind that a variety of institutional investors are keeping their shares (yes, they are betting there could be a nice turnaround).

In fact, Restoration Hardware has already been making some restructuring moves (such as slicing jobs). But, as a private company, I suspect the actions will be even more substantial.

More importantly, this might be a sign that other specialty retailers may seek an exit, such as Pier 1 Imports Inc. (NYSE: PIR). And if so, I think managements will point to the super premium on Restoration Hardware’s deal.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar On the web Guide to Decoding Financial Statements

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Filed under: Management, Engagements, Public or private?

Shares of Trans World Entertainment Corporation (NASDAQ: TWMC) were up large this day for the first time in a long time. CEO Robert Higgins handed the company’s board a “preliminary proposal” seeking to take the company private for $5 per share in cash. Mr. Higgins already controls about 40% of the company’s stock, and the board is evaluating the offer.

Shares of TWMC soared more than 27% to close at $4.96 — so close to the “preliminary proposal” that it indicates that investors expect that the company could well sell for a higher price.

Here’s what makes this interesting. According to the company’s latest proxy statement, Mr. Higgins has been CEO for a tiny more than 5 years, even though he founded the company more than 30 years ago. The chart at right shows how the stock has performed during that period. In early 2005, shares of Trans World were trading well over $14 per share — Mr. Higgins’ offer is for just over a third of that.

What has happened since then? Trans World is in the CD and DVD business, with stores including FYE, Strawberries, Sam Goody, and Suncoast, some of which were acquired by the company out of bankruptcy. Of course, the internet has made those industries sluggish at ideal, and declining same-store sales and profitability have sent the stock tumbling.

Does Higgins deserve all the blame for the company’s woes? Of course not. But as an executive in the industry, he should have seen the changes coming and made adjustments. He didn’t, and now he is looking to take the company private at a fire-sale price, way below the company’s book value.

To some, this might be akin to hiring a carpenter to renovate your house, watching him trash it, and then receiving an offer from him to purchase it — at a small fraction of its value before he went to work.

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Filed under: Management, Activist investing, Value and lack thereof

As BEA Systems (NASDAQ: BEAS) management attempts to justify its decision not to let shareholders decide the fate of their company with regard to a takeover offer from Oracle (NASDAQ: ORCL), CEO Alfred Chuang has taken an uncommon step.

He has given shareholder and vocal opponent of his strategy, Carl Icahn, confidential information that purportedly shows that Oracle’s bid “significantly undervalues the company.”

No word yet on King Icahn’s reaction, but he probably isn’t buying it. In an October letter to the company, he wrote that “I view your public declaration of a $21 per share ‘take it or leave it’ price as a management entrenchment tactic, not a negotiating technique.”

He’s probably right. Some of the most trenchant analysis of the BEA situation comes from our own Georges Yared, who stated this:

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Filed under: Management, Engagements, Shareholders

BEA Systems (NASDAQ: BEAS) was able to get Goldman Sachs (NYSE: GS) to suggest that the company is worth $21 a share. The stock has not traded that high in over four years. But, Oracle (NASDAQ: ORCL) has made a bid of $17, and the BEAS board wants to see if it can get more.

The plan does not appear to be working out. Oracle stated that it would not pay extra money for the smaller company and will simply take its case to shareholders.

Reuters writes that “Oracle said BEA’s price represented an 80 percent premium to its shares before activist shareholders started pushing for a sale of the company, and almost 11 times BEA’s revenue from software maintenance services in the last 12 months.” If the BEAS shareholders do not push its board to take the offer, Oracle has threatened to move on.

BEA Systems has a problem. The number it has picked for valuing the company is arbitrary. The company’s stock price before the Oracle offer does not support it. Shares changed hands in the $13 to $14 range. And, no other company has come along to even match? Oracle’s $17 offer.

The BEAS board might be dooming a buyout and that would probably send shares back to their pre-offer lows. That kind of behavior often brings shareholder lawsuits and trouble that the company’s management does not need.

BEA Systems ought to wise up and take the money on the table.

Douglas A. McIntyre is an editor at 247wallst.com.

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Filed under: Management, Engagements, Investments, Value and lack thereof

BEA Systems (NASDAQ: BEAS), received a proposal on 10/12/07 from Oracle (NASDAQ: ORCL) to be acquired for $17 a share in cash. ORCL announced on 10/23 “ORCL has no interest in a long, drawn-out process to acquire BEAS. If the BEAS board refuses to execute an acquisition agreement and refuses to let their shareholders vote, then our $17 per share proposal to acquire BEAS will expire at 5 p.m. on Sunday, October 28, 2007.” BEAS overall option implied volatility of 23 is below its 26-week average of 39 according to Track Data, suggesting decreasing risk.

Daily M&A Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

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Filed under: Management, Rumors, Engagements, Shareholders, Value and lack thereof

CSX(NYSE:CSX) is a transportation company operating in two segments: rail & intermodal. CSX is recently trading at $43.50 in pre-open trading above its close of $42.42. Children’s Investment Master Fund, a shareholder of 4.1% of CSX, is urging CSX Board of Directors to act immediately & voluntarily to improve CSX corporate governance and business performance. CSX is expected to report EPS on 10/17. Unconfirmed chatter has recently circulated CSX might break itself up. CSX has a market cap of $18.7 billion and long term debt of $5.7 billion. CSX November option implied volatility of 42 is above its 26-week average of 36 according to Track Data, suggesting larger price risks.

Saks(NYSE:SKS) is recently trading at $19.88 in pre-open trading, above its close of $18.72 after The Independent stated “rumors re-emerged that Icelandic Investment group Baugur was set to bid for SKS, with an offer worth between $26 and $30 a share imminent.” SKS is expected to report EPS on 11/20. SKS overall option implied volatility is at 59 according Track Data.

Daily M&A Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

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