I’m delighted to report that the Liberty Fund has produced a three-volume collection of my dad’s oeuvre.  Fred McChesney edits, Jon Macey writes a new biography and Henry Butler, Steve Bainbridge and Jon Macey write introductions.  The collection can be ordered here.

Here’s the description:

As the founder of the Center for Law and Economics at George Mason University and dean emeritus of the George Mason School of Law, Henry G. Manne is one of the founding scholars of law and economics as a discipline. This three-volume collection includes articles, reviews, and books from more than four decades, featuring Wall Street in Transition, which redefined the commonly held view of the corporate firm.

Volume 1, The Economics of Corporations and Corporate Law, includes Manne’s seminal writings on corporate law and his landmark blend of economics and law that is today accepted as a standard discipline, showing how Manne developed a comprehensive theory of the modern corporation that has provided a framework for legal, economic, and financial analysis of the corporate firm.

Volume 2, Insider Trading, uses Manne’s ground-breaking Insider Trading and the Stock Market as a framework for many of Manne’s innovative contributions to the field, as well as a fresh context for understanding the complex world of corporate law and securities regulation.

Volume 3, Liberty and Freedom in the Economic Ordering of Society, includes selections exploring Manne’s thoughts on corporate social responsibility, on the regulation of capital markets and securities offerings, especially as examined in Wall Street in Transition, on the role of the modern university, and on the relationship among law, regulation, and the free market.

Manne’s most auspicious work in corporate law began with the two pieces from the Columbia Law Review that appear in volume 1, says general editor Fred S. McChesney. Editor Henry Butler adds: “Henry Manne was an innovator challenging the very foundations of the current learning.” “The ‘Higher Criticism’ of the Modern Corporation” was Manne’s first attempt at refuting the all too common notion that corporations were merely devices that allowed managers to plunder shareholders. Manne saw that such a view of corporations was inconsistent with the basic economic assumption that individuals either understand or soon will understand the costs and benefits of their own situations and that they respond according to rational self-interest.

My dad tells me the sample copies have arrived at his house, and I expect my review copy any day now.  But I can already tell you that the content is excellent.  Now-under-cited-but-essential-nonetheless corporate law classics like Some Theoretical Aspects of Share Voting and Our Two Corporation Systems: Law and Economics (two of his best, IMHO) should get some new life.  Among his non-corporations works, the classic and fun Parable of the Parking Lots (showing a humorous side of Henry that unfortunately rarely comes through in the innumerable joke emails he passes along to those of us lucky enough to be on “the list”) and the truly-excellent The Political Economy of Modern Universities (an updating of which forms a large part of a long-unfinished manuscript by my dad and me) are standouts.  And the content in the third volume from Wall Street in Transition has particular relevance today, and we would all do well to re-learn the lessons of those important contributions.

The full table of contents is below the fold.  Get it while it’s hot! (more…)

Today’s Wall Street Journal includes a terrific article explaining why insider trading should be deregulated. Following up on last week’s high-profile insider trading charges, George Mason economist Don Boudreaux, whose Cafe Hayek posts are essential reading, succinctly sets forth the deregulatory position (which was first and most famously articulated by Geoff’s dad, Henry Manne). Boudreaux explains that:

1. Insider trading leads to a more efficient allocation of capital by ensuring that stocks are accurately priced.

2. Insider trading protects investors against stock mispricing (a la Enron), which ultimately corrects itself and can cause huge investor losses. (On this point, Boudreaux quotes the senior Manne’s comments from a radio interview:

I don’t think the scandals [such as those at Enron and Global Crossing] would ever have erupted if we had allowed insider trading because there would be plenty of people in those companies who would know exactly what was going on, and who couldn’t resist the temptation to get rich by trading on the information, and the stock market would have reflected those problems months and months earlier than they did under this cockamamie regulatory system we have.

I made a similar point in this article.)

3. Insider trading encourages investors to diversify, which is generally a good investment strategy and will lead to fewer wipe-outs (and their accompanying social stresses).

4. The ban on insider trading can reach only decisions to trade on the basis of material non-public information, not undetectable decisions to refrain from trades one otherwise would have made. As Boudreaux explains:

This bias is not only a source of prosecutorial unfairness; its existence casts doubt on the assumption that insider trading is so harmful that it must be treated as a criminal offense. After all, if capital markets continue to function as well as they do given that many investment decisions potentially influenced by inside information are unstoppable because they are undetectable, why believe that the detectable portion of investment decisions influenced by inside information would be harmful if they were legal?

5. Insider trading may, in fact, harm a company’s business by, for example, thwarting a value-enhancing transaction that otherwise would have occurred. The classic historical example is the insider trading in the Texas Gulf Sulphur case, where the company had discovered a valuable ore deposit and was trying to buy up land around the deposit at favorable prices. Insider purchases of TGS stock and call options drove up the price of TGS stock, tipped off neighboring landowners that they should demand a higher price for their property, and thereby harmed the corporate enterprise.

6. Corporations can protect themselves (and their investors) against harmful trading on the basis of material non-public information by creating their own insider trading policies.

7. Capital market pressures will lead corporations to adopt insider trading rules that maximize the value of the enterprise and thus provide the best possible outcome for investors. Corporations themselves, responding to the specific conditions of the capital and labor markets in which they participate (I mention labor markets because the ability to engage in insider trading can be an element of one’s compensation), are more likely than centralized regulators to achieve a value-maximizing policy.

Boudreaux has mastered the art of saying a lot, very clearly, in a small number of words. His article is terrific weekend reading.

TOTM is very pleased to announce a new permanent member, J.W. Verret (George Mason).  J.W. has been blogging at Volokh Conspiracy recently, but he’s been a guest over at The Conglomerate, and the Harvard Law School Corporate Governance Blog.  Quite frankly, it would be difficult to miss him if you’ve been following the recent events in the world of financial regulation.  Professor Verret has been talking about financial regulation and corporate law every where from The NewsHour with Jim Lehrey, to CNN Money, ESPN.com, The American Lawyer, Forbes, and of course, testimony before various House and Senate Committees regarding the Obama Administration’s 2009 financial regulatory reform proposals.

J.W. received his JD and MA in Public Policy from Harvard Law School (where he was an Olin Fellow under Lucian Bebchuk) and the Harvard Kennedy School of Government, respectively, in 2006.  Professor Verret then served as a law clerk for Vice-Chancellor John W. Noble of the Delaware Court of Chancery. Prior to joining the faculty at Mason Law, Professor Verret was an associate in the SEC Enforcement Defense Practice Group at Skadden, Arps in Washington, D.C. He has written extensively on corporate law topics, including a recent paper, Delaware’s Guidance, co-written with Chief Justice Myron T. Steele of the Delaware Supreme Court. His academic work has been featured in the Yale Journal on Regulation, The Business Lawyer, the Delaware Journal of Corporate Law, the University of Pennsylvania Journal of Business Law, and the Virginia Law and Business Review. Professor Verret was recently selected by the Northwestern Law School Searle Center on Law, Regulation, and Economic Growth for a 2009-2010 Searle-Kaufmann Research Fellowship.

J.W. will be finishing up his stint as a visitor at Volokh this week, but we’re happy to give him a permanent blogging home here at TOTM thereafter.

My colleague JW Verret is blogging over at Volokh on his new paper Treasury, Inc.: How the Bailout Reshapes Corporate Theory and Practice.  Here’s an excerpt from his first post to get you started:

Most of the debate over the bailout has been whether we should have bailed out the finance and automotive sectors in the first place, done something else, or done nothing at all.  Fascinating question, and it is fun watching the economists fight that one out, but that’s not the question that interests me.  My focus is the tectonic shifts in corporate theory and practice that result as companies have given the Treasury and the Federal Reserve equity stakes in exchange for TARP bailout money.  To sum up my position: the theory and practice of corporate and securities law are unprepared for the presence of a control shareholder, like the government, that also enjoys sovereign immunity from the federal securities laws and state corporation law.

The six central theories of corporate law, which at times stand in mutual and vigorous opposition, all break down in the presence of an immune control shareholder.  Debates about whether we should give more power to shareholders to maximize shareholder wealth, give more power to directors to do the same, or abandon wealth maximization as our paradigm and take a progressive view toward stakeholders, all lose their usefulness in the chaotic presence of a controlling immune shareholder.

The corporate practitioner’s view is equally problematic.  We will need to rethink everything we know about insider trading, securities class actions (for which Treasury may end up serving as a lead plaintiff), and state law fiduciary duties for control shareholders.  A Board’s ability to approve transactions may be endangered.  Finally, the government may obtain the right to nominate candidates for the Board of Directors of public companies under the SEC’s new proxy access rule at TARP recipients in which the government owns a mere 1% stake.

To defend this idea, over the next week I will need to answer a few questions first.  Is the government really a control shareholder, and in which firms?  Do Treasury and the Federal Reserve enjoy complete sovereign immunity in their exercise of shareholder power?  And is there any way to limit the fallout going forward?  We will also take a look at a bi-partisan bill from Senator Warner and Senator Corker to which I have contributed language that may limit some of the damage, the TARP Recipient Ownership Trust Act of 2009.

Go check out the whole thing.

Between the various power grabs and dubious regulatory proposals (each more dubious than the last!) from the likes of Geithner, Bernanke, Frank (.pdf), Dodd, etc., etc. you’d be excused for thinking the financial news from Washington (remember when financial news used to come from New York?) was all bad and growing only worse.

But there is a bright spot in this sad state of affairs:  SEC Commissioner Troy Paredes.  Appointed shortly before Bush left office (with one hand he gave us Troy Paredes; with the other he gave us import duties on Roquefort cheese. I leave it to you to assess the net), Troy is a once and presumably future law professor, treatise author, and all-around sound thinker on issues of corporate governance, corporate law and securities regulation.

Troy has voted against the SEC’s misguided proxy access proposal (see his official comments on the topic here), and he has made impassioned speeches evidencing an otherwise absent understanding of basic corporate governance explaining why the proposal (and others in the same vein) are problematic.  Fundamental to his approach are an understanding of  the role of risk, a humility born of his appreciation for the complexity of markets, and a constant emphasis on data and evidence-based regulation.

For example, here are some essential points from an excellent speech on the overall regulatory response to the crisis. You’ll never here the likes of Barney Frank, Tim Geithner or Larry Summers (the government incarnation) saying these things:

My basic point is this: Even in times of crisis and hardship, when the benefits of regulation seem apparent and there is pressure to “do something,” we cannot overlook the risk of overregulating. It is essential for the government to retain a healthy respect for the role of markets; and we must appreciate that there are limits to what we can and should expect from regulation.

* * *

Regulating to avoid excessive risk is not costless, whatever the benefits may be of securing the financial system and protecting investors and others from misfortune. Some risks simply are worth it if avoiding them is too costly because legitimate, wealth-creating enterprises and transactions are stifled. In other instances, efforts to clamp down on certain practices and activities may have unintended adverse effects, some of which could exacerbate the concern the regulation targets. This includes the prospect that government action may foster moral hazard. When properly framed, then, the regulatory objective should be to achieve the optimal degree of risk, not necessarily to minimize risk. Achieving the optimal degree of risk involves making tough tradeoffs, netting costs against benefits.

* * *

But I am more troubled by “how” systemic risk might be regulated. Identifying a market failure does not necessarily tell us what the appropriate government response should be. Even when there is a market breakdown, it remains possible for the government’s response to do more harm than good.

* * *

My principal concern turns on the potential scope of the systemic risk regulator’s authority. As a threshold matter, I still have not heard a satisfying definition of what constitutes a systemic risk. Systemic risk is easy enough to conceptualize in theory, but it is much more difficult to identify in practice. What does it mean for a firm to be “too big” or “too interconnected” to fail? A sort of “I know it when I see it” approach to regulating systemic risk is untenable. Such open-endedness accords the regulator too much discretion and is too unpredictable.

Moreover, Troy has made a basic, fundamental argument that I have heard from literally no one else in Washington in all of the debates surrounding executive compensation:  While managers may take on too much risk, they also may take on too little (an argument I have also recently made here):

In large part, the disclosure amendments respond to the potential that companies will take excessive risks. As regulatory reforms are proposed to address excessive risk taking, it is important not to overlook that just as a company can assume too much risk, a company also can be overly cautious. Placing undue emphasis on mitigating downside risk can be costly if it chills enterprises from taking the kind of prudent business risks that drive competition, innovation, and entrepreneurism. Our dynamic economy — marked by a constant stream of cutting-edge goods and services and an ever-expanding set of opportunities — depends on the willingness of individuals to take risks.

Most recently he has spoken about the impending Jones v. Harris case in the Supreme Court (on which see this essential post by Josh), and made some sensible remarks concerning the risks of intrusion (by courts as well as regulators) into well-functioning (and, to be fair, already-regulated) market transactions:

First, adequate market discipline can obviate the need for more exacting and burdensome regulation, including demanding judicial scrutiny of advisory fees. One can conceive of the section 36(b) fiduciary duty as compensating for a lack of competition in the mutual fund industry. Put differently, the legal accountability of section 36(b) can be thought of as substituting for a lack of market-based accountability. The industry, however, has changed since section 36(b) was adopted in 1970 and Gartenberg was decided in 1982. To the extent the industry has become more competitive, it may argue for greater judicial deference to the bargain the adviser and the fund strike. In the face of sufficient market forces that constrain advisory fees, the need for courts to monitor as strictly the adviser/board fee negotiations is mitigated.

Second, courts are not well-positioned to second-guess the business decisions that boards and others in business make in good faith. Judges may exercise expert legal judgment, but not expert business judgment. A judge may be equipped to monitor a board’s decision-making process, but should steer clear of the temptation to override substantive outcomes. These sensibilities cut against reading section 36(b) as implementing a sort of substantive limit on fees and instead recommend that courts focus on the process by which the fees were determined.

Of course I would be more strident and incautious in my remarks, but then I am not a public official with a need to ensure I don’t marginalize myself (a fact that may be endogenous to my stridency and recklessness, come to think of it).

There is more from Troy (find his speeches and statements here (scroll down)), and I expect we will see much more to come.  I know that there are many of us in the legal and academic communities who welcome these views, and I hope we will do whatever we can to ensure that they gain as much currency as possible.  I harbor no illusions about Troy’s ability to redirect Barney Frank’s steamroller, but I am delighted that he is out there, at the highest ranks of the government, fighting the good fight.

I have been asked a few times today to opine, as a corporate and securities law scholar, on President Obama’s nomination of Judge Sonia Sotomayor for the Supreme Court.  (Cnn.com has a couple of quotes reflecting my thoughts.)

I have three main comments:

First, this is a pivotal time in American securities and corporate law jurisprudence.  Any appointment to the Supreme Court has the potential to significantly influence the evolution of corporate and securities law.  The Supreme Court has recently granted certiorari for a couple of big-ticket securities and corporate law cases, and there is every reason to believe, particularly in light of the SEC’s recently announced rulemaking and Senator Schumer’s recently proposed Shareholder Bill of Rights Act of 2009, that the Supreme Court will continue to handle important business matters like these in the near future.  Federal preemption, Securities and Exchange Commission rule-making authority, corporate governance reform, damages, and the reach of federal securities laws are all incredibly important topics that are certain to come before the Supreme Court in the next few terms.

Second, it is difficult to gauge where exactly Judge Sotomayor falls on the spectrum of pro-management versus pro-investor jurists.  Is she a shareholder primacist, does she defer to the invisible hand of the market, does she interpret Section 10(b) of the Securities Exchange of 1934 broadly or narrowly?  These are questions to which Judge Sotomayor’s judicial writings provide no clear answers.  Sotomayor was nominated to the federal bench by President Bush, so one might have suspected that she would embrace ardent pro-management leanings.  However, the business and securities opinions she has penned have not evinced such a bent.  For example, she penned the Second Circuit’s relatively recent shareholder-friendly opinion in Merrill Lynch v. Dabit (a detailed summary of the case is available here).  Indeed, upon reflection, one recalls that Sotomayor was viewed as a less conservative Bush nominee (proposed by Moynihan) when she was appointed, and it was President Clinton who elevated her to the Second Circuit.  Yet Judge Sotomayor has dismissed numerous cases in favor of management despite her more liberal affiliations.

Third, Judge Sotomayor has a strong background in sophisticated corporate and securities law cases, as she comes from the Second Circuit, a jurisdiction that generates a significant number of these cases (given that Wall Street falls within the jurisdiction of the Second Circuit).  This bodes well, in that pundits often query whether Supreme Court jurists fully appreciate the complex business nuances arising in many securities and corporate matters.  That Judge Sotomayor has been both a district court judge and an appellate judge in a jurisdiction where these difficult business cases arise delights me, and I think she would add a valuable perspective on the Supreme Court.

Taking off the “corporate and securities law scholar” hat, and putting on the “Chair of the American Association of Law Schools Section on Women in Legal Education” hat, I can say that I am thrilled that President Obama has nominated a woman to the Supreme Court.  I was disheartened that Justice O’Connor’s seat was not filled by a woman, but I remain optimistic that someday the number of women on the Supreme Court will mirror, as a percentage, the number of women in the average law school entering class. 

Of course, given that, in the almost 30 years since a woman first ascended to the United States Supreme Court, we appear to have reached a plateau, with only two women serving at any one time over the past 16 years, perhaps my optimism is misplaced.  I remain optimistic nevertheless.

The Law Market, Larry Ribstein’s new and important book with Erin O’Hara looks great and is available here from Oxford University Press.  The book description from the website sets the stage:

Today, a California resident can incorporate her shipping business in Delaware, register her ships in Panama, hire her employees from Hong Kong, place her earnings in an asset-protection trust formed in the Cayman Islands, and enter into a same-sex marriage in Massachusetts or Canada–all the while enjoying the California sunshine and potentially avoiding many facets of the state’s laws.
In this book, Erin O’Hara and Larry E. Ribstein explore a new perspective on law, viewing it as a product for which people and firms can shop, regardless of geographic borders. The authors consider the structure and operation of the market this creates, the economic, legal, and political forces influencing it, and the arguments for and against a robust market for law. Through jurisdictional competition, law markets promise to improve our laws and, by establishing certainty, streamline the operation of the legal system. But the law market also limits governments’ ability to enforce regulations and protect citizens from harmful activities. Given this tradeoff, O’Hara and Ribstein argue that simple contractual choice-of-law rules can help maximize the benefits of the law market while tempering its social costs. They extend their insights to a wide variety of legal problems, including corporate governance, securities, franchise, trust, property, marriage, living will, surrogacy, and general contract regulations. The Law Market is a wide-ranging and novel analysis for all lawyers, policymakers, legislators, and businesses who need to understand the changing role of law in an increasingly mobile world.

Professor Bainbridge offers a very detailed analysis of the complaint in the SEC’s case against Dallas Mavericks owner Mark Cuban.

David Zaring cuts to the chase.

Larry Ribstein is organizing the upcoming AALS session of agency, partnerships and LLCs and has posted the following call for papers:

The Section on Agency, Partnerships and Limited Liability Companies is calling for papers for the 2009 AALS Annual Meeting in San Diego. We are interested in presentations on the application of modern theories and empirical methods of business associations to agency and unincorporated firms. The program has two goals: First, to show how these theories can be enriched by taking them outside the “box” of corporate law; and second, to show the relevance of agency and unincorporated firms to the mainstream of corporate theory and empirics. A non-exhaustive list of possible topics includes the nature and function of fiduciary duties, agency theory, the role and enforcement of contracts, jurisdictional competition and choice of form, the relationship of federal and state law, jurisprudence, international and institutional comparisons, and legal and economic history. Please email either a draft paper if available, or if not an abstract and outline, to Larry E. Ribstein, University of Illinois College of Law, ribstein [at] law.uiuc.edu by no later than September 1, 2008.

If you’ve got a paper that falls into this category, and want to head to San Diego for the 2009 AALS meeting, send the paper, abstract or outline to Larry at the email address in the post.

The Searle Center on Law, Regulation and Economic Growth at Northwestern University School of Law is continuing its excellent run of conferences with an event on June 18th-19th organized by Daniel Spulber centering around some new (and very interesting looking) papers on economic and legal issues involving entrepreneur and discuss high quality research relevant to the economics and law of the entrepreneurship.  Panels cover research on Venture Capital and the Entrepreneur; Entrepreneur Law; Economic Growth and Development; Innovation and the Entrepreneur; and The Social Context of Entrepreneurship.  The agenda (and links to the papers) is available here.

The Financial Times reported yesterday that an embarrassed GE CEO Jeffrey Immelt had to tell GE shareholders that the 10% growth in earnings for 2008 that he had promised analysts in March was not going to be possible.  GE missed its quarterly forecasts and halved its 2008 forecast to 5% growth in earnings (as opposed to the 10% growth promised).  The Financial Times article mentioned a “sense of shock among the investor community” and noted that one analyst, after Immelt’s downward revision, “compared GE’s promise of long-term improvements to the Chicago Cubs, the US baseball club that hasn’t won a championship in 100 years.” 

Upon reading this FT article this morning, I thought “oh, dear God.  Do we remember none of the lessons learned just a few years ago about the perils of over-promising results to analysts?”  Why, exactly, does Immelt feel the need to promise a 5% increase in earnings for 2008 when (a) we are in a credit crunch, (b) GE is likely going to have to do more write-downs this year, (c) the cost of inputs is increasing, if not skyrocketing, (d) inflation is high, and (e) the economy is weak (among other things)?  Why is Immelt promising *growth* in earnings when the reality is that just achieving positive earnings for 2008 is likely to be good thing?  Why is Immelt putting pressure on himself and his officers to produce growth? 

Memo to Immelt:  Earnings do not have to grow each year.  In some markets, in some economies, in some industries, in some “downturns,” simply having earnings – any positive earnings – is a good thing.  Matter of fact, sometimes earnings should NOT be growing each year.   Were I a GE investor, I would not want Immelt promising 5% growth for 2008 because I would figure that the only way he can promise to hit that number in such an uncertain market and gloomy economy is by commiting to fudge year-end 2008 numbers if needed.  And, as we learned several years ago, fudging year-end numbers tends to catch up with companies, and, when it does catch up, the valuation fall-out is worse than if the forthright disclosure (e.g. “2008 earnings might be flat”) had been made initially. Am I the only one who remembers back to the not-so-distant past, when unrealistic promises made to analysts by corporate officers led to companies cooking their books at year end to make the numbers?  As I recall, things did not always work out so well in those cases.  Enron, anyone? 

Surely it is enough for a company in some years to produce returns that are merely equal to the prior year’s, as opposed to “besting” the prior year’s earnings. Didn’t we learn this lesson several years ago?  Investors are supposed to invest for the long term and diversify.According to the FT, one of the reasons why GE missed its quarterly numbers recently is because GE was unable to close “$900m-worth of real estate asset sales,” which the FT referred to as “a traditional way for GE to boost quarterly returns.”  If I were a GE investor, I would be peeved to read this.  I would rather GE just do the real estate deals when they make the most sense, when the market is most favorable for the deals at issue, regardless of when the gain/loss woulbe be booked.  If that means GE misses its numbers sometiemes due to the lack of a crystal ball regarding the best time to sell the assets, and I take a short-term valuation hit (on paper) as a GE investor, so be it.   It doesn’t create long-term value for shareholders if GE rushes through real-estate transactions just to make the numbers if the timing is not sensible for the transactions and waiting a little bit of time would garner value for shareholders.(The FT reports that “GE slashed its 2008 earnings forecast from $2.42 per share to $2.20-$2.30 – still an increase of as much as 5 per cent from last year.”  Slashed?  Slashed?  Are you KIDDING me?  “Slashed” implies something negative.  Earnings of $2.20-$2.30 per share for a year that is not likely to shape up particularly well  would be good.)

Tulane’s annual “Corporate Law Institute” is coming up!  The conference – widely viewed as the must-attend deal conference of the year is April 3 and 4 (only two weeks away).

The roster for this year’s conference reads like a who’s who of the deal world, with a range of Delaware jurists, investment bankers, top lawyers, and Wall Street media on the two days worth of panels.

The conference, which is organized by practitioners (not Tulane folks), was started twenty years ago by former Delaware jurist and Tulane Law alum former Justice Andrew Moore.  (As you corporate law wonks know, Justice Moore wrote several of the big takeover opinions from Delaware in the mid-1980s.  Many in the corporate law world were scandalized when Justice Moore was not reappointed when his term expired, but, based on the takeover opinions he penned, those of us who are cynical about just how political and pro-defendant Delaware tries to be were not surprised.)  Justice Moore will be making an appearance on the 20^th year retrospective panel at the Tulane conference.

The conference should be stupendous, and I hope those of you who are reading this and will be attending the conference will make it your business to introduce yourselves to me.  I will be on the private equity panel on Friday, but I will be attending both days of the conference in full.

The specifics of the conference are here.

Microsoft has made a bid for Yahoo, and the Yahoo board of directors is anticipated to use the Nancy Reagan “Just Say No” defense.  I feel like I’m back in the 1980s merger boom. 

Several thoughts:

1.  Rumor has it we are in a recession.  It is likely then that Yahoo stock is currently trading at a price that is not its highest.  Indeed, Microsoft’s bid for Yahoo is basically a big fat memo to Wall Street, in bolded all caps, indicating it (Microsoft) thinks Yahoo is a good buy.  How long before other bidders get the clue and come knocking on Yahoo’s door?

2.  Debt is cheap these days.  Super cheap.  Cheaper than it was in the 1980s when we saw a wave of debt-financed takeovers.  If Yahoo really is a bargain at its current price, other bidders will appear, using a good chunk of debt-financing, if necessary, to make their bids.

3.  If other bidders show up, can the Yahoo board members continue to “just say no” without violating their fiduciary duties?  At least for now, I am of the view that the Yahoo board can easily continue to keep the door to bidders closed.  Yahoo stock traded around $27-ish over the past year, and Microsoft is now offering $31 per share.  Given that, back in Jan. of ’06, when the S&P 500 and the DJIA were both weaker, Yahoo was trading in the vicinity of $40 per share, I have no problem thinking the Yahoo board can embrace their inner Nancy Reagan until a bidder steps forward with an offer well over $40 per share.

4.  Yahoo’s dance with Google is an interesting defensive move, making me think of the white knights, crown jewels, and lock-ups of the days of yore.

5.  Am I the only one who finds it *very* ironic that Microsoft is making a bid for Yahoo only days after AOL Time Warner has made clear it is going to try to undo its mega-merger from seven years ago between AOL and Time Warner?  Note to Microsoft:  It is important to have very specific business justifications – and related business plans – before indulging your urge to merge.

The M&A world seems to be flashing back to the 1980s.  Debt is cheap, private investors are bold, and some mega-mergers from the late 1990s might be perfectly situated for bust-ups.  It is just a matter of time before everyone is wearing parachute pants again.  You heard it here first.