The week in investor relations: Biden against buybacks, Ackman swears off short-selling and Shanghai lockdown sees traders camp out
– CNN reported that the Biden administration wants to discourage stock buybacks, which critics say allow executives to manipulate markets while funneling corporate profits into their own pockets instead of into the economy. Last year, companies in the S&P 500 repurchased a record $882 bn of their own shares. That number is on track to reach $1 tn in 2022, according to data from Goldman Sachs.
The White House has proposed new rules intended to curb stock buybacks as part of its budget plan. The plan would require executives to hold on to shares for a certain number of years and prohibit them from selling shares for a certain amount of time after a planned buyback. The White House did not specify the exact number of years. Executives sell more stock in the eight days following a buyback announcement from their companies than at any other time, according to SEC data. These repurchases have made up an increasingly large chunk of corporate profits over the past decade.
– Investor Bill Ackman said he will no longer take part in vocal activist short-selling campaigns, CNBC reported. ‘Despite our limited participation in this investment strategy, it has generated enormous media attention for Pershing Square. In addition to massive amounts of media hits, our two short activist investments managed to inspire a book and a movie,’ Ackman wrote in his annual letter. ‘Fortunately for all of us, and as importantly for our reputation as a supportive constructive owner, we have permanently retired from this line of work.’
Ackman continued in the letter: ‘We exited because we believed the capital could be better deployed in other opportunities, particularly when one considered the opportunity cost of our time. The aphorism that you ‘don’t need to make it back the way you lost it’ has always resonated with us.’
– Banks, brokerages and asset management firms in Shanghai rushed to call staff into the office before a 5.00 am lockdown on Monday, with some asking employees to stay for days to keep operations going as the city grapples with its worst Covid outbreak since early 2020, according to Bloomberg (paywall). Bank of Communications, Huatai Securities and HFT Investment Management were among firms alerting employees to make it back to the office to avoid being caught in the lockdown, the news agency said, citing people familiar with the directives.
Many called on staff to prepare to sleep in the office, as Shanghai announced on Sunday that it would lock down the city of 25 mn people in two phases to conduct mass testing. The city is suspending public transport and car-hailing services, and barring residents from leaving their homes. Pudong district, home to ‘a bevy of domestic and international financial institutions as well as the Shanghai Stock Exchange’, went into lockdown in the first phase.
– In related news, the South China Morning Post reports that more than 30 companies listed in Hong Kong failed to submit even unaudited financial results by yesterday’s deadline, even after the stock exchange made special provisions for the coronavirus pandemic. The 32 companies include casino and hotels operator Macau Legend Development, drug company CStone Pharmaceuticals and media firm Bison Finance, as well as several property management companies such as Roiserv Lifestyle Services. The paper said the firms blamed the pandemic and sudden lockdowns in mainland Chinese cities such as Shanghai and Shenzhen for their failure to prepare full-year results, according to filings made with the exchange on Friday.
– The Financial Times (paywall) reported that HSBC repeatedly edited its analysts’ research publications to remove references to a ‘war’ in Ukraine, as the UK bank ‘resists pressure to follow rivals by closing its business in Russia’. HSBC committees that review all external-published research and client communications amended multiple reports to soften the language used on the subject, including changing the word ‘war’ to ‘conflict’, said the paper, citing two people with direct knowledge of the matter. The changes in language triggered internal debate and strong complaints from some staff, they added. When approached by the FT, the bank declined to comment, referring the paper to a previous statement that read: ‘Our thoughts are with all those impacted by the continuing conflict in Ukraine.’
– In other Russia-Ukraine news, Citywire reported that Fidelity soft-closed a mid-sized emerging markets fund due to the war in Ukraine. The Emerging Europe, Middle East and Africa Fund stopped accepting new investments on March 22 due to liquidity issues as a result of Russia’s invasion of Ukraine. The closure means no new money can be invested in the fund. Current investors can sell their positions, but will be unable to make new subscriptions. The fund’s factsheet for February showed it had 8.6 percent exposure to Russia, while Russian energy giant Gazprom was one of its top holdings. Its performance has been badly hit by the Ukrainian war, said the publication, with its own analysis showing the fund as down 37.3 percent over the three months to the end of February, ranking it last in the 292-strong Global Emerging Markets category.
– For years, something strange kept happening on Wall Street, noted The Wall Street Journal (paywall), publishing the findings of a new investigation. Before a big shareholder could carry out plans to sell a slug of stock, the price dropped. In fact, it found that share prices fall ahead of 58 percent of large sales and regulators are now investigating. ‘It was as if other investors knew what was coming,’ said the paper.
It happened when Bain Capital sold shares of Canada Goose Holdings, ‘the maker of trendy parkas’; when 3G Capital sold stock in Kraft Heinz; when Apollo Global Management sold shares of Norwegian Cruise Line Holdings; and when Alaska’s state oil fund trimmed its stake in an artificial intelligence software firm. These transactions, known as block trades, are supposed to be a secret between the selling shareholders and the investment banks they hire to execute the trades.
– The SEC dealt a ‘big blow’ to special purpose acquisition companies (Spacs), according to Institutional Investor. The hype around Spacs – and the investor losses that have resulted since the Spac boom began to fizzle a year ago – has ‘led the SEC to issue harsh new Spac rules and amendments that go beyond what many originally envisioned,’ noted the publication. The changes are seemingly so ‘onerous’ that Hester Peirce, the lone commissioner who opposed them – and the only Republican commissioner at the SEC – said in a hearing on Wednesday that the rules ‘seem designed to stop Spacs in their tracks’. According to SEC chairman Gary Gensler, however, the commission is simply trying to protect investors and erase the arbitrage that exists between initial public offerings and Spacs, which is often to the detriment of investors.
– An SEC proposal that would mandate strict climate reporting from public companies could dramatically increase the exposure of these businesses to costly securities litigation, according to the WSJ. Lawyers who represent companies and investors said the proposal could be a potent source of securities fraud litigation, which targets companies over alleged lies or even half-truths told to the investing public.
The underlying premise is simple. Require a company to disclose more information in mandatory disclosures such as annual reports and you are more likely to catch it in a mistake that could prove lucrative for plaintiffs’ lawyers. ‘The plaintiffs’ lawyers are waiting in the wings,’ said Craig Marcus, a partner at law firm Ropes & Gray. ‘Get some disclosures, settlement and collect a fee? Yeah, absolutely.’
The rule is meant to bring consistency to what has been uneven climate reporting by different companies. Instead of voluntary sustainability reports using handpicked metrics, companies would have to disclose in much greater detail how much carbon they emit and how they plan to address climate risks.
– In related news, the UN announced the members of an expert group that will scrutinize corporate pledges to achieve net-zero emissions in an effort to prevent greenwashing as private sector climate plans proliferate, Reuters reported. UN Secretary-General António Guterres said the group of 16 experts will analyze the net-zero plans of companies, investors, cities and regions in order to develop stringent and transparent standards to ensure they deliver their promises.
‘Despite growing pledges of climate action, global emissions are at an all-time high,’ Guterres said. ‘Tougher net-zero standards and strengthened accountability around the implementation of these commitments can deliver real and immediate emissions cuts.’ The group’s formal launch, first announced at COP26 last November, comes as environmental groups sue companies that lack details about their net-zero plans and as regulators begin to scrutinize the climate commitments made by major companies.
– Buyout deals in Asia surged to a first-quarter record, said the FT, as private equity groups scooped up assets in the region, though it added that investors are warning the ‘hot streak’ may not last due, in part, to intensifying coronavirus lockdowns in China. The value of private equity deals in Asia reached $46.5 bn in the first three months of 2022, up 340 percent from the same three-month period last year, said the paper, citing Refinitiv data. That marked a first-quarter record as the region continued to offer a range of targets for acquisitions despite tumult elsewhere in the world.