Hershey Trust Reaches In-Principle Reform Agreement

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Reuters

@FortuneMagazine

July 23, 2016, 2:28 PM EDT

The board of the charitable trust that controls Hershey said on Friday it had reached an in-principle agreement with the Pennsylvania Attorney General’s office that would avoid a legal row in exchange for reforms in how it is run.

The settlement could provide stability to the trust following months of infighting and confrontation with the attorney general’s office. It could also offer the clarity needed for Mondelez International to make a new approach to acquire Hershey.

The $12 billion trust, set up by company founder Milton Hershey over a century ago to fund and run a school for underprivileged children, must approve any sale of the company. It rejected a $23 billion cash-and-stock offer for Hershey by Mondelez MDLZ , the maker of Oreo and Cadbury chocolate, last month.

The Pennsylvania Attorney General’s office, the trust’s sole overseer, had threatened legal action to remove trustees unless a settlement over its governance was reached by the end of July.

“We have reached an agreement in principle and are working on the final details in productive discussions with the Office of the Attorney General,” Kent Jarrell, a spokesman for the trust’s board, said.

“Yesterday, I met with board members and a lawyer for the Trust, along with our people, and I agreed on behalf of the Attorney General in principle to a series of changes that the Trust would implement,” said First Deputy Attorney General Bruce L. Castor Jr. “When that is reduced to writing, and if it is signed by us and them, Pennsylvania Attorney General Kathleen Kane will make the terms public.”

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The agreement will impose 10-year term limits on trustees, according to people familiar with the matter who asked not to be identified because the settlement’s details have not been announced. Three trustees – Joseph Senser, Robert Cavanaugh and James Nevels – will have to step down by the end of the year, the people said. Senser and Cavanaugh had been trustees since 2001, while Nevels has been a trustee since 2007.

Hershey Trust board Chairwoman Velma Redmond, who joined the trust in 2003, will stay on to ensure continuity, but will step down by the end of 2017, along with James Mead, a trustee since 2007, the sources added. Mead, Nevels and Cavanaugh are the trust’s three representatives on Hershey’s board of directors.

Caps on trustees’ compensation are also part of the settlement, though these exclude salaries of trustees at Hershey and other affiliates, the people said. The Pennsylvania Attorney General’s office will also be given a 30-day window to object to new trustees, the people added.

The agreement is unlikely to please many Milton Hershey School alumni that had been calling for deeper reforms, said Ric Fouad, a prominent alumnus and a board member for Protect the Hersheys’ Children, an organization that calls for significant changes at the trust.

“They have squandered the ability to get reforms. A broken oversight office can’t fix a broken charity,” said Fouad, referring to the fact that Attorney General Kathleen Kane has had her legal license revoked and will not be seeking re-election in November.

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The trust has been rocked by internal dissent and turnover since it last reached a reform agreement with the attorney general’s office in 2013. Trustee Joan Steel resigned earlier this month, following the departures of Richard Zilmer, John Fry and Stephanie Bell-Rose over the past year.

The trust normally has 10 board members.

Cavanaugh was the subject of an internal conflict of interest investigation stemming from his role in helping secure a summer internship for his son at one of the trust’s investment management firms. Cavanaugh, appointed to the board in 2001, was the trust’s chairman at the time.

This year, the trust fired its executive vice president, after he pleaded guilty to wire fraud associated with campaign contributions. It also fired its chief compliance officer, after placing him on leave, when a letter he wrote detailing the trust’s bitter feuds leaked to the public.

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Stability at the trust could make it more open to reviewing its ownership of Hershey. The trust owns close to a third of Hershey, but the company accounts for more than two-thirds of its investment holdings.

In 2002, the trust cited the need for diversification as a reason of putting Hershey HSY up for sale. Hershey then attracted a $12.5 billion offer by chewing gum maker Wm. Wrigley Jr. WWY . However, the deal was abandoned after Pennsylvania’s Attorney General successfully petitioned a court to block the offer amid opposition from the local community.

“This portfolio that is meant to rescue needy children is being exposed to needless risk that could be diversified away without compromising expected return.” said Robert Sitkoff, a Harvard Law School professor specializing in wills, trusts, estates, and fiduciary administration.

Abu Dhabi Merger to Create $175 Billion Banking Heavyweight

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Reuters

@FortuneMagazine

July 3, 2016, 12:18 PM EDT

National Bank of Abu Dhabi and First Gulf Bank won board approval on Sunday for a merger to create a banking heavyweight with $175 billion in assets, part of the emirate’s plan to revamp its economy hit by lower oil prices.

The newly-branded National Bank of Abu Dhabi will become one of the Middle East and Africa’s biggest banks when the tie-up is completed in the first quarter of 2017, rivaling Qatar National Bank, which has just purchased Turkey’s Finansbank.

The tie-up comes as the Gulf’s oil-rich countries take new steps to diversify their economies after two years of lower oil prices have weighed heavily on state revenues.

By creating a national banking champion, Abu Dhabi hopes to better service its own changing economy and those of the region, as well as take on global banking rivals at home and abroad.

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With a combined market value of $29.1 billion as of June 30, the new bank will overtake the likes of Britain’s Standard Chartered and Royal Bank of Scotland and France’s Credit Agricole.

“The proposed merger will create a bank with the financial strength, expertise, and global network to support the UAE’s economic ambitions at home and drive the country’s growing international business relationships,” the banks said in a joint statement.

The deal is one of two significant consolidation efforts currently underway in Abu Dhabi. Last week, the government ordered the merger of state investment funds Mubadala and International Petroleum Investment Company.

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Abu Dhabi’s efforts to reform the economy are considered slow compared with neighboring Saudi Arabia, which has adopted a much more radical approach to restructure the economy through a national transformation plan.

Even then, bank mergers are uncommon in the Middle East due to cumbersome regulation and an unwillingness by major shareholders to cede control, indicating significant government support for the deal between NBAD and FGB.

State investment funds Abu Dhabi Investment Council and Mubadala will hold 33.2% and 3.7 % respectively of the new entity, which will have assets worth 642 billion dirhams and a return on equity of 14.1% based on first-quarter figures.

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News of the approved tie-up sent shares in NBAD 4% higher to 10.05 dirhams on Sunday, while FGB’s stock rose 2% to 12.85 dirhams. Both have risen sharply since merger talks were confirmed on June 19, with NBAD some 25% higher.

Arqaam Capital called the deal a “dream merger,” estimating earnings per share over a three-year timeframe to gain 11.1% and 15.9% for NBAD and FGB respectively.

“Synergies should be very substantial, making the deal very attractive for shareholders of NBAD and FGB,” it said in a note.

The brokerage also said it expected further merger activity in the sector, including a deal between Abu Dhabi Commercial Bank and Union National Bank. Their share prices were 3.8% and 5.9% higher respectively on Sunday.

Still, David Tusa, managing director at consultants Alvarez & Marsal, said despite a compelling rationale for the NBAD/FGB merger, there could be significant practical challenges to overcome.

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The merger will be completed via a share swap agreement which would result in FGB shareholders receiving 1.254 new NBAD shares for every one FGB share they currently hold. The ratio would give them 52% of the combined bank.

Abdulhamid M. Saeed, a board member and managing director at FGB, has been named chief executive designate for the combined lender, with NBAD Chief Financial Officer James Burdett to assume the same role.

A new board and management will take over once the merger has been completed, while the existing CEOs—Alex Thursby of NBAD and Andre Sayegh of FGB—will continue to run the independent banks until then. There was no reference to their future roles in the combined bank in the statement.

Credit Suisse and UBS are acting as financial advisers to NBAD and FGB respectively.

7 economists worth their weight in gold

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Reuters

@FortuneMagazine

October 9, 2014, 11:27 AM EDT

To put it mildly, you can say that the financial crisis has shaken the public’s faith in economics.

After all, how useful could this science be if it couldn’t predict or save us from a calamity of that magnitude? That question has been asked by economists and the economics press ad nauseum since 2008, with no satisfactory answer in sight. In short, macroeconomic forecasting is really difficult to do, and we shouldn’t expect to be able to predict when economic convulsions will happen.

At the same time, macroeconomic forecasting is just one small slice of what economists do. In a new book Trillion Dollar Economists, author (and economist) Robert Litan attempts to honor the many economists throughout the decades who have focused on helping businesses reach their customers more efficiently or teaching average individuals how to invest more wisely, to name just two examples. While macroeconomic forecasters get a lot of attention from the press because of both the political implications of their ideas and the gravity of the tasks they undertake, Litan argues that it’s these lesser-known economists who actually make the biggest contributions to the profession.

Here are seven examples of economists working in the private sector who helped transform how business is done in America:

1. Julian Simon: Simon helped revolutionize the airline industry by popularizing the idea that carriers should stop randomly removing passengers from overbooked flights and instead auction off the right to be bumped by offering vouchers that go up in value until all the necessary seats have been reassigned. Simon came up with the idea for these auctions in the 1960s, but he wasn’t able to get regulators interested in allowing it until the 1970s. Up until that time, Litan writes, “airlines deliberately did not fill their planes and thus flew with less capacity than they do now, a circumstance that made customers more comfortable, but reduced profits for airlines.” And this, of course, meant they had to charge passengers more to compensate.

By auctioning off overbooked seats, economist James Heins estimates that $100 billion has been saved by the airline industry and its customers in the 30-plus years since the practice was introduced.

2. Hal Varian: As Google’s chief economist, Varian joined a company that was already keen on using ideas from academic economics to make money. Google famously made use of the Dutch Auction for its 2004 IPO, and sold its ads using an auction style first designed by economist William Vickery, which caused the winner to pay one penny more than the second-highest bid, in order to encourage bidders to not fear overbidding. Varian helped fine tune these auctions as an adviser to the company in its early days, and when he joined the firm full-time he helped develop the Google Trends tool and the use of A/B testing to improve the launch of other new services.

3. Vernon Smith: An economic iconoclast, Smith won the Nobel Prize in economics in 2002 for his contributions in helping economics become a more experimental science that relied on laboratory testing to understand human behavior. As Litan writes:

It is difficult to overstate the extent to which Smith’s work was long viewed to be out of the mainstream by the rest of the profession…. The notion that lessons could be drawn from a laboratory setting where individuals were given play (or even small amounts of real) money and then tasked with spending it or using it in some fashion or for purposes designed by the experimenters was … looked down on by many mainstream economists—until Smith was awarded the Nobel Prize, of course.

Smith’s ideas have influenced business leaders, who have used his ideas in focus group settings. Energy companies around the world have also used Smith’s work. His experiments proved that through careful deregulation of energy markets, electricity companies could become more efficient and still sell energy at fair prices. Such reforms were introduced in New Zealand and Australia in the 1990s, and by Ohio Edison in the U.S.

4. Frank Ramsey: One of the most important concepts in economics is the demand curve, which is basically a series of numbers describing what different people are willing to pay for the same product. When plotted on a graph, the demand curve usually slopes downwards, showing that more people are willing to buy a product when the price is low. In the 1920s, economist Frank Ramsey formally proved that rather than charging one price, firms ought to discriminate against customers based on where they fall on the demand curve. In other words, companies should charge the most any particular customer is willing to pay, rather than one price for all.

The results of the insight are seen everywhere in business today. One of the most salient examples of price discrimination is in the airline and hotel industries. These companies use all kinds of methods, like the time you purchase your seat or room to what sort of computer you’re using making the purchase, to estimate where on the demand curve you reside.

5/6. Lloyd Shapely and Alan Roth: These 2012 Nobel Prize winners were honored for their contribution to what economists call “market design.” As any businessperson knows, the market is a great way to match buyers and sellers of a product. But what is not necessarily apparent at first glance is that some marketplaces are much better than others. Shapley and Roth spent their careers working on how to design markets to attract enough buyers and sellers, to give those participants enough time and information to make rational choices, and to do it in a way that prevents fraud or the leaking of confidential information. Shapley and Roth’s work in market design has helped revolutionize the way we match buyers and sellers in many different markets, from the matching process of doctoral residents at hospitals, to pairing kidney donors with patients.

7. Burton Malkiel: Conventional financial wisdom holds that investors do better when they diversify. But this idea wasn’t always so widespread. In the early part of the 20th century it was often thought that successful investors picked one or two companies to invest in and then learned everything they can about those businesses. But as the decades wore on, financial economists worked to prove that an investor is better off diversifying. It wasn’t until economists and op-ed writer Burton Malkiel published the best-selling “A Random Walk Down the Street” that the idea really started to catch on.

Malkiel inspired entrepreneurs like Jack Bogle, the founder of Vanguard, to write his senior thesis at Princeton on index funds, thinking that they would be a cheap way for the average investor to diversify. Bogle launched his first fund in 1976, and nearly 40 years later, index funds now play a major role in everyday investors’ portfolios.

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