Wednesday, December 23, 2009

Global Warming Science and DCF Models

The science behind the global warming hypothesis has always struck me as being a lot like the process of evaluating an M&A transaction. Both involve complex modeling in an attempt to predict future events, with the results used to support or refute an investment thesis.

One thing dealmakers know (or should know) is that the utility of a DCF model is constrained by the reliability of its inputs. For this reason, models should be given much more credence when evaluating stable, mature businesses than when modeling dynamic or new operations. For the latter, the "garbage-in, garbage-out" problem renders models little more than an exercise in involved guessing.

So - what to make of global warming science, where the task of modeling planet-wide systems is exponentially more complicated than that involved in even the most speculative of new businesses? Frankly, there's no way to call the conclusions drawn from this exercise, as many have, "settled science."

[As an aside, the concept of "settled science" in any field rings badly in the ear; the work of a scientist should always be to test, re-test and probe at various hypotheses and theories. The history of science is replete with examples of theories that "everyone" knew to be true being disproved.]

Complicating matters further is the curious and near-religious fervor of many GW scientists, complete with crushing of apostates and indications of thumbing the scale in favor of the desired outcome in the models. Modeling is not a precise science, and pretending it is so greatly impacts the credibility of those driving the science.

This doesn't mean the GW scientists are wrong. They could well be right, but does the state of the science - the value of the model - support the investment thesis? Many climate scientists and environmentalists would have us invest trillions of dollars in carbon reduction. Making that kind of investment (an investment which forecloses the opportunity to invest those dollars in other worthwhile endeavors, from disease elimination to feeding the starving to economic growth) absolutely requires rock-solid scientific support.

For now, the state of GW science probably supports tuck-in investment in incremental carbon reduction measures: greater efficiency, more trees, etc. It certainly doesn't support rushing headlong into policies that vastly transform our economy and way of life. Bottom line: If GW science were an M&A transaction, it would look, right now, like the worst case ever of deal fever.

Monday, December 07, 2009

The "Zero-Risk Era"

I could never work be general counsel of a bank - or at least, that's what I've got to conclude after reading this piece in Corporate Counsel about the global risk regulatory paradigm set up in the Basel II Accord. Under Basel II, financial institutions must do sweeping and detailed analysis of "operational risks," complete with meetings, analysis, documentation and record-keeping.

Put aside the process issues and garbage-in, garbage-out nature of this kind of program. Simply think about this: Operating a successful business is a continuous exercise in taking on "operational risk." Hopefully this risk is smart; hopefully it is vastly outweighed by opportunity on the other side. But it involves risks none the same -and working toward a "zero-risk era" is not only fraught with risks of its own, but also does a disservice to that which makes businesses great.

Thursday, September 10, 2009

Pfizer and "Compliance"

So Pfizer, which made a high profile GC hiring just a little over a year ago, has been slapped again for illegal marketing practices, agreeing to a $2.3 billion federal fine. That's brutal enough, but what interests me is one of the non-economic conditions the feds imposed on Pfizer (yes, it was a "corporate integrity agreement", but that's about as much an arm's-length contract as DOJ consent decree is).

Under this agreement, Pfizer's "chief compliance officer" must report to the CEO, not the GC. Now, given Pfizer's record, perhaps that's not such a bad idea; obviously, this is an organization that needs some additional focus on compliance. However, check out this quote from Lewis Morris, chief counsel for the inspector general's office:

"The lawyers tell you whether you can do something, and compliance tells you whether you should. We think upper management should hear both arguments."

Pfizer's issues aside, this is an awfully narrow view of how in-house counsel should behave. Good business counsel should be able to give risk-adjusted advice - that is, both what you can do and whether you should do it.

Tuesday, September 01, 2009

Ebay - Skype - Final Chapter

Almost 4 years ago to the day, I noted that "deal fever" had gripped Ebay and led it into an ill-fated $4.1B acquisition of Skype. 2 years ago, Ebay, took a massive $1.4B writedown on the acquisition, conceding that they had overpaid.

Today, Ebay announced the divestiture of a controlling interest in Skype in a deal that values the company at $2.75B. While the deal not working out is hardly shocking, it is somewhat surprising that Ebay was able to recover as much as it did, selling 65% of Skype for $1.9B in cash (of course, you can be sure that the private equity investors conditioned the deal on a long-term commercial relationship between Skype and Ebay; that deal may well include revenue commitments).

In any event, it's always good to see a little dealmaking discipline - even when it's cleaning up the mess that deal fever can create.

Friday, July 24, 2009

AP Fires First Salvo in Losing Battle

The Associated Press is taking the novel position that even minimal references to its articles require a licensing agreement with the news organization that produced the piece. By way of example, the AP noted that the use of a headline and a link would violate a news organization's copyright. This, of course, is what one sees regularly on Google News and other sites, including blogs. For example:

Gates Faults U.S. on Data Privacy and Immigration

From a business perspective, it's strange to see anyone take a position that discourages linking. Linking is the lifeblood of the web, and it's how people find your content, both directly and via the "authoritative" benefit a site gets from most links. And from a legal perspective, there's no question whatsoever that any content owner who tries to enforce copyright to prevent standard linking will lose.

What of the headlines themselves? Sure, a headline is "expression" for copyright purposes, but it's hard to see how a news source can escape a fair use argument, given that a headline is a small portion of the overall piece of journalism and doesn't create an economic substitute for someone referring to the original piece. In fact, the opposite is true. Headlines are written to attract reader interest in the article; linked headlines drive traffic from a search engine, blog, etc. back to the original source to read the full piece.

It should also be noted that news outlets have, since time immemorial, referred to each other. News organizations on the one hand create content, and on the other hand avidly rely on content created by others. How often when reading media do you see a reference like "The New York Times reported today that . . . " or "according a CNN report . . ."?

The AP, like a lot of other traditional media outlets, is flailing about as its legacy business model slowly loses air. However, it's easy to see how this particular battle will end – an overreaching lawsuit or two that leaves egg on AP's face without vindicating its position. It may also see Google show some news outlets what a world without links to their content would look like – I suspect they would quickly find that is far worse than the way things stand today.

Tuesday, June 16, 2009

Why the Iranian Election is Like "Deal Fever"

Dealmakers know the symptoms of "deal fever" - the blowing past objections, rationalizing higher valuations, inflating synergies and discounting diligence items that comes once management has set their eyes on the prize. We try, not always successfully, to avoid it in our own work. Some shops even try to inoculate against deal fever, setting up incentives to kill deals. The idea is to be ever-vigilant against confirmation bias - looking for those things that confirm the direction we want to go, and avoiding/downplaying evidence that runs counter to our bias.

So, Iran. We loathe the sawed-off, anti-Semitic Ahmadinejad. We feel some glimmer of hope that the opposition represents Iranians finally embracing modernity. We imagine that anyone with a brain would vote for progress rather than the incumbent. So we side with the green-clad protesters and call the election a fraud.

Like deal fever, this represents confirmation bias writ large. Leading up to the election, there was little question that Ahmadinejad was going to win at least a plurality. The hope was that he would not win outright, and that in the run-off election Mousavi would have a better shot. However, like deal-hungry CEOs dreaming of industry domination, we've chosen to largely ignore this evidence and cling to anything that confirms our bias - the unsubstantiated rumors of ballot box burning; the images of thronging urban crowds representing the will of a people that remains largely rural, poor and conservative.

Completing a deal often means taking advantage of deal fever on the other side (some might call this selling). We should not be so naive as to believe that the opposition in Iran doesn't realize how its message plays in the West. So while we're right to ask that allegations of election fraud be investigated, and that votes be recounted, we can't accept uncritically any claims made by the opposition. Just as we sometimes have to walk from a soured deal, we sometimes have to accept that the price of democracy is a democratic outcome that we don't agree with.

Tuesday, May 12, 2009

"Deal Tact"

Terrific post today from John Jenkins at the blog titled "A Little 'Deal Tact' Goes a Long Way." John gets right to the heart of those factors I have consistently found key to successful dealmaking, whether you are the lawyer, financial advisor or principal: Acting respectfully to everyone in the process, not engaging in negotiating "games" or pissing matches, and always focusing on moving the deal forward.

My favorite quote:

"I’m not suggesting that deal lawyers should always act like Clark Kent -- possessing a little deal tact doesn’t mean you shouldn’t play hard ball when appropriate. I’m just saying that Conan the Barbarian shouldn’t be our role model either. I mean, if you really believe that what is best in life is “to crush your enemies, to see them driven before you, and to hear the lamentation of their women,” you’d probably be much happier as a litigator anyway."

Wednesday, May 06, 2009

Commodity vs. Premium Legal Advice

A Financial Times piece titled "Law Firms Adapt to a Stark New World" notes:

"Many clients feel that it will no longer be acceptable for law firms to demand premium fees for legal advice that is not contextualised or couched in commercial language."

Amen. A mix of antiquated state bar regulation and attorney information-hoarding has allowed lawyers to charge high rates for what is effectively just legal issue-spotting (e.g., "doing x exposes you to a, b and c legal risks.") However, technological advances, alternative practice models and offshoring are rapidly reducing the value that lawyers can extract from this kind of commoditized counseling.

I've got very low tolerance for counseling which simply spots issues and doesn't weigh them in light of their relative risks. I am increasingly unwilling to pay anything for such advice. Technology has made it easy for me to either directly spot the issues or cheaply hire someone to do it. Those who can't contextualize their advice to my business opportunities won't be hired again.

On the other hand, I am highly insensitive to price when it comes to premium legal advice. Attorneys who understand how my business works and can provide tailored advice that weighs risk against opportunity - particularly on big ticket items - are pure gold.

Unfortunately, a lot of attorneys don't have the pragmatism and confidence to provide premium counseling (ironically, you often see the worst offenders when dealing with low-grade business problems). So, along with self-help legal products and automated solutions, I expect we'll see a continued evolution in the corporate legal world to a bifurcated structure: A small number of lawyers will be able to demand premium pricing, while a much larger cohort will find their legal work significantly devalued.

Wednesday, April 29, 2009

The Torture Memos, or the Lawyer as Factotum, Not Counselor

The hubbub over the "torture memos" - and particularly Judge Jay Bybee's defense of the memos he signed - illustrates a legal counseling issue deeply familiar to any corporate general counsel: A leader looking for an aggressive interpretation of existing law to support a planned course of action.

Second-guessing by ivory tower types aside, there's little doubt that the memos represent a legally-defensible interpretation of the state of the law in this area. However, in a well-functioning organization, with a strong GC and open communication, the memos would go beyond discussing the outer bounds of what is permissible under the rules to point out the potential downside versus the limited utility of these methods of interrogation.

Bybee's fault is that he's too much of a lawyer's lawyer, providing only the legal analysis and not wading into the risk/reward and policy analysis (to quote from his memo: "This memorandum expresses no view as to whether the President should decide, as a matter of policy, that the U.S. Armed Forces should adhere to lhc standards of conduct in those treaties with respect to the treatment of prisoners"). And of course, he worked within a tremendously dysfunctional structure not noted for its openness.

It's regrettable he couldn't be more of a leader at that uncertain time. However, while you might not want Bybee to be providing strategic guidance to your organization, he's certainly no criminal.

Wednesday, March 18, 2009

The AIG Bonuses - Pure Political Theatre

All hopes for moving beyond the banality of politics are out the window, as members of Congress stumble over themselves in populist indignation over the bonuses paid out by AIG.

Never mind that the government has known about AIG's comp structure since at least the time the insurer was bailed out last year.

If we believe that the bailout of AIG was necessary, we must also accept that those who crafted the bailout chose - wisely, I believe, given the stakes and time pressure involved - to focus on saving the patient and not to waste time on annoying-but-inconsequential details.

Look, there are lots of things about comp and benefits at Wall Street financial outfits that would make Main Street America's skin crawl. There are lots of ways any of these bailout details could have been handled with greater care and finesse. But in the pressure of the moment, we want those trying to save our economy to prioritize smartly. I just wish someone in our government would acknowledge this reality.

Monday, March 16, 2009

Good News! Businesses Cut Legal Costs

Because sanity dictates I look for silver linings anywhere I can in this economic meltdown, let me offer one up: According to a recent article in, corporate legal departments are going through an aggressive reduction in legal spend.

As I've noted before, there are benefits to a limited-resource approach when providing corporate legal guidance - whether this approach is driven by design or necessity:

- Rethinking how "goldplated" routine legal work needs to be (resulting in more responsive client service).
- Forcing inhouse teams to prioritize around where they can add the most value at the lowest cost (instead of just trying to button up every risk).
- Reducing stupid legal tricks like taking a scorched-earth approach to anything that even has a whiff of a potential trademark of copyright violation.
- Requiring inhouse attorneys to be more creative and engaged with actually driving value in their businesses.

Thursday, March 12, 2009

The Virtues of Half-Assed Legal Work

What do felony trials and bet-the-company litigation have in common? You don't want to cut any legal corners on either one - no stone can be left unturned in maximizing one's legal position. There is too much at stake to worry about the cost of all of that legal brainpower.

But not all legal work must be gold-plated. Indeed, the business world absolutely requires that attorneys be comfortable routinely doing a less-than-complete job.

Legal work is expensive. The vast majority of business legal issues don't involve fights for freedom or corporate survival - they're about opportunity and money. The legal work thrown against any issue must be justified by the stakes in play.

Lawyers have counseled businesspeople from time immemorial that investing in legal work upfront is a wise move. Absolutely true. However, and related to my earlier post about lawyers and risk aversion, the point of diminishing returns for legal work in business is often reached very quickly.

Does it make sense to negotiate a low-dollar contract the same way you negotiate a high-dollar deal? Should you aggressively ramp your defense on potential litigation that has no reasonable chance of denting your bottom line, even if everything goes wrong? What about an exhaustive review of compliance options and processes, when the need for compliance is uncertain and the consequences for non-compliance easily manageable?

I'll repeat - legal work is expensive. And there are costs to dithering and over-lawyering in lost opportunities and inability to prioritize. Marshall your legal resources and focus them on the big risks and opportunities. As for the rest of the stuff, "good enough" will almost always be just that.

Friday, March 06, 2009

Whole Foods - A Rare Post-Closing Consent Decree

I've dealt with divestiture trusts on several occasions, both as a buyer and as a seller of assets that federal regulators required to be sold under consent decrees authorizing mergers. While these sales are concluded after the larger deal has closed, the agreement and trust has always been established prior to closing.

So this is a first - Whole Foods, which bought the Wild Oats chain in 2007, has, over 18 months after closing the deal, entered into a consent decree with the FTC to sell the "Wild Oats" name and 32 locations. As I wrote at the time, I thought both the merger AND the FTC's objections to it were out to lunch. When the FTC lost a court battle to obtain a preliminary injunction blocking the merger, Whole Foods quickly closed the deal, despite the fact that the FTC appealed the PI denial. The FTC ended up winning that appeal, and now we have this settlement.

From the perspective of Whole Foods, this settlement is no big deal. There's little chance they ever planned to use the "Wild Oats" name, and the divestitures represent little more than 25% of the total locations acquired. On the other hand, this smells strongly of face-saving by the FTC. The "Wild Oats" name has little value, and of the 32 locations in the divestiture, over half (19) have already been shuttered by Whole Foods.

Wednesday, February 25, 2009

Lawyers and Risk

For those running businesses, here’s a little secret about lawyers: Many of us aren’t very good when it comes to risk.

Sure, we can find risk – most lawyers can identify risks all day long. That’s what law school trains our already-skeptical minds to do. Spot the issues; identify any ways risk arises in a course of action. But balancing those risks against opportunity? Not so good.

Successful businesspeople know that you win by taking smart risks – risks that are outweighed by opportunities. These risks can be competitive, personal, financial, social or, yes, legal. The problem for most businesspeople is that the law is complex, and attorneys have done a good job making themselves its gatekeepers. How can the non-lawyer businessperson determine the size of the legal risk that lurks on the other side of an opportunity?

Your average business attorney will have little trouble assessing the potential for liability in almost any scenario. With some prodding, they will strive to give you the likelihood that liability will actually come into play. However, it can be like extracting teeth to get many attorneys to combine the element of likelihood of a risk with the likely consequences should that risk materialize.

Why is this important? Because – and I can’t emphasize this enough – legal risks are not created remotely equally. A legal risk may mean a vendor is likelier to send you a pissy letter. It may mean an increased likelihood of being sued. Or it may mean the feds raiding your office with a warrant for your arrest.

Obviously, you don’t want to take a major legal risk for a minor opportunity. Just as obviously, you shouldn’t let a little legal hand-wringing over minor risks slow down your plans. You also wouldn’t want to take those risks that are likely to result in criminal liability, bet-the-company litigation or other such unpleasantness under most any imaginable set of circumstances. Due to the gatekeeping function lawyers play, you must have input from your lawyers to tell which risk is which.

Are you getting this input? Just as potential risks are easy for attorneys to assess, the likely range of potential damages is difficult to come up with. Assessing this range requires not only understanding the worst-case outcome, but also discounting from this scenario to account for the uncertainty of the situation, the circumstances of your counterparties and the likelihood that liability will even emerge as an issue in the first place. All in all, a complex and messy process - and attorneys, being risk-adverse creatures, are often loath to wrong-set your expectations.

Much of this analysis is based on experience and judgment, not modeling or mathematical analysis (there are some exceptions I will write about down the road). If you’re lucky, you’ll work with attorneys who possess these qualities and are willing to fully deploy them for you. Ask yourself – are your attorneys walking you though this way of looking at your risks, or do you get the sense that they believe every risk needs to be eliminated? If the latter, and if getting new counsel isn’t an option, at least try the “worst case” test: Always ask your lawyer what the worst thing that could possibly happen is. You may be surprised by how often even the “worst case” is of little consequence next to the size of your opportunity.

Wednesday, February 18, 2009

Facebook - What Happened to the Adult Supervision?

Last year, in an attempt to address the burgeoning growth and complexity of its business, Facebook brought in some experienced senior management in the form of COO Sheryl Sandberg, VP, Communications Elliot Shrage (both Google alums) and General Counsel Ted Ullyot (Justice Dept.). Sadly, this leadership has abjectly failed Facebook in its Terms of Use imbroglio.

Last weekend, Facebook changed its TOU in certain ways that covered the more expansive ways it needs to license user content. Not to "own" user content, as many of the more hysterical voices in the blogoshere contended, but rather to reflect the many ways users distribute their content via applications and the profiles of others.

The issues raised by those objecting to the TOU changes were similarly overstated for several other reasons: First, only a vanishingly small fraction of a percent of the content on Facebook has any financial value whatsoever. Second, even with respect to that small fraction, Facebook would have no incentive for seeking to monetize it via their license. They don't have exclusive rights, it's not their core business, and they'd face a riot from users. Finally, it’s well-understood that website terms of use are only enforceable to the extent they are reasonable. It's silly for people to take strained and aggressive readings of TOUs and argue that the companies involved would evetake those positions. Their lawyers are smart enough to know that courts won't accept overly-broad or unreasonable interpretations of TOUs.

So, the TOU changes: The problem is that, for a complicated web service like Facebook, it’s really hard to draft website terms of use that are both clear and cover all of the situations the company needs to cover. It takes a lot more time, just as it’s harder to write a short, concise letter than a long one. Sure, Facebook could devote the time and legal resources to making their TOU both a model of lay-person clarity and legal coverage, but – this blogosphere dust-up notwithstanding – the ROI on doing that is very low. Even a well-funded startup like Facebook has bigger issues its counsel should be focused on.

I thought Facebook had this all figured out and had made their TOU changes understanding that they would meet with some complaints. After all, Google faced similar issues last year when it made TOU changes as part of the Chrome browser launch, and those quickly blew over.

But here's where the adult supervision broke down: Facebook has now apologized and backtracked to their old TOU. What's shocking about this is the tacit acknowledgement that the company hadn't considered the tradeoff inherent in expanding their TOU this way, hadn't considered how to communicate the changes and hadn't considered the possibility of blowback. It also shows a level of pliability to a vocal minority that in't going to serve the company well should it ever go public.

Monday, February 02, 2009

Corporate Tool Re-Tooling

I've worked with a lot of lawyers in my career, and have even done a fair impersonation of one myself (kidding, state bars - I'm actively licensed. Sheesh.) Given the moribund M&A market, the focus of my current job on the legal market - and the fact that I've exhausted most of what I could say about corporate development - I've decided to reorient "Corporate Tool" around how businesses should think about the law, and how lawyers who serve businesses should think about their clients. All the old CT archives on M&A will remain intact, but I'll add new categories for this new focus.

First post soon, on one of my favorites subjects - risk.