Lehman's Bankruptcy Worked Out Well For Intel, Anyway

from the action-reaction dept

One possible reaction to Apple’s gigantic tax-optimized share repurchase program is to think that spending a lot of time fiddling with how to optimize your share repurchase program might mean you’re out of better ideas. You can ponder whether this Intel share repurchase trade described in a Lehman Brothers bankruptcy lawsuit filed yesterday supplies any evidence on that question. Intel decided to buy back $1bn of its stock in August and September of 2008, and rather than just buy it in the market it entered into a pretty fiddly forward contract with Lehman like so:¹

• Intel gives Lehman $1bn on August 29.
• Lehman hands the $1bn back to Intel for safekeeping – it’s Lehman’s money, but Intel keeps it as collateral.
• On September 29, Lehman gives Intel some shares, based on the average price of Intel stock from August 29 to September 26.²
• The dollar amount of shares Intel buys is $1bn, if the average price is $21 or below, or $250mm, if the average price is $25 or above, or some amount linearly in between if the average price is between $21 and $25:

• If the dollar amount Intel buys is less than $1 billion, Lehman gives back the extra money.
• So in other words as the stock price goes up Intel buys fewer shares, and vice versa, which is kind of wrong-way for them³ but right-way for Lehman.
• In exchange for that risk Lehman agrees to give them a discount of 10.6 cents per share.⁴
• The number of shares Intel buys is equal to the dollar amount divided by the average price minus 10.6 cents:

• When they entered the contract, on August 1, Intel was at $22.35; on August 29, when the averaging started, it was at $22.87.

But then Intel’s stock price dropped rather sharply over the next two months, because all stock prices dropped rather sharply, because – well, among other things, because Lehman went bankrupt on September 15. So the average price ended up being $19.8872 and the number of shares was 50,552,943.⁵ But on September 29, when it was due to get the shares and give back Lehman’s collateral, Intel’s stock price was just $17.27, making those shares worth only about $873mm. That $873mm was less than the $1bn of collateral that Intel was holding for Lehman.

Intel, sensibly enough, decided it would rather have $1 billion of cash than $873mm worth of its own stock. So it decided to DK the trade and keep the collateral instead. This was not exactly sporting – it probably wasn’t exactly legal – but Lehman … I guess had bigger problems? In any case they seem to have been okay with this for five years, and only got around to suing about it yesterday.

Lehman’s basic argument is that it didn’t owe Intel $1bn, it owed 50.55mm shares, and so Intel had no right to seize its collateral instead of taking the shares. This is surely right. The question of damages is a harder one; basically Intel really ought to give Lehman back the difference between (1) $1bn and (2) the value of 50.55 Intel shares. But, when? On September 29, 2008, those shares were worth $873mm, so Intel should owe Lehman’s estate some $127mm. Lehman’s lawyers have a clever argument that Intel was required to cover its missing shares in the market, and that it couldn’t do so until November 2008 because it was in an earnings blackout, and if it had bought in the market over the course of November 2008 then it would have paid only $688mm for the shares and so I guess Intel owes Lehman $322mm.⁶ On the other hand, I suppose if I were Intel I’d say “okay, fine, we’ll give you back your $1bn with interest, you just give us 50.55 million Intel shares.” As of today those shares would seem to be worth about $1.2bn, making it basically a wash.⁷

We talk sometimes about how bad companies are at share repurchase and this Intel trade is no exception. Intel didn’t just decide to buy back a billion dollars of its stock six weeks before the market fell off a cliff in 2008:⁸ it decided to do so with a structured trade that amplified its risk, buying more stock if the market crashed and less if it went up. In exchange for this, Intel got a ten cent discount on its share price. It saved about $5 million – ten cents times 50mm shares – by entering a trade that ended up losing it $127 million.⁹

Or would have if it’d actually completed the trade. While Intel’s contract was sort of wrong-way – the lower the market goes, the more shares it buys back at an average price incorporating earlier higher prices – it had one, probably fortuitous but pretty important, right-way element. If the market went up, Intel would buy shares at the average price over the month of September, which would probably turn out to be a good price. If the market crashed, Intel would buy more shares at that average price, which would turn out to be too high. But if the market crashed and Lehman went bankrupt, then Intel would just take its billion dollars back and dare Lehman to sue it – saving $1bn that it would otherwise have spent buying back stock at pre-crash prices. So far that bet has worked out well for Intel.

Lehman v. Intel complaint [via Bloomberg]

• Exhibit 3 – forward confirm
• Exhibit 4 – CSA
• Exhibit 5 – termination letter
• Exhibit 6 – loss calculation

Lehman Brothers Sues Intel Over $1 Billion in Seized Collateral [Reuters]

1. Most of this is from the confirm helpfully filed with the lawsuit as an exhibit. Intel does not seem to have publicly disclosed it, since a $1bn share repurchase for Intel is kinda small.

Here in this footnote I’ll say what’s obvious to the, like, twenty people who do these trades, one of whom is sort of Harvey Schwartz: this is an “accelerated share repurchase” without the acceleration. Companies often do trades similar to this to accelerate the accounting benefit of buying back stock, as well as to buy shares at a discount to VWAP. Intel’s approach – which is intraquarter and collateralized, has no accounting benefit, and is done just for the discount – is somewhat less common. Of course if you did the normal sort of ASR with Lehman in August 2008, in which you prepaid the purchase price and Lehman didn’t post collateral, you got screwed.

2. Actually Lehman can end the averaging period as early as September 22, giving it a bit more optionality.

3. Why is this wrong-way? Simplistically, if you’re buying stock and your stock craters, you might decide to buy back more stock at the new, lower price – but not at the one-month average price that reflects all of those days when your stock was higher. This contract in effect says “if your stock crashes, you’ll buy more shares at the new lower price – but you’ll also go back in time and buy more shares at the old, higher price.” If you had a time machine you would not, on your own, choose to do that.

4. The discount is actually on a sliding scale but it turned out to be 10.6 cents per this letter from Intel also filed with the lawsuit.

5. Again from that letter. I get like 100 more shares than they do but I guess that’s rounding.

6. From the complaint:

Furthermore, Intel is subject to securities regulations in connection with purchases of its own stock and in accordance with Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, cannot trade in its securities while in the possession of material non-public information. Accordingly, Intel could not have purchased its shares from the open market on September 29, 2008 and for a certain “blackout period” thereafter while it was in the possession of material non-public information. On information and belief, this “blackout period” ended on November 4, 2008. Upon information and belief, Intel could have acquired 50,552,943 shares of its own common stock in a related trade over the period from November 5, 2008 through December 1, 2008, for approximately $688 million, far less than the $1 billion it seized.

That seems wrong but I still admire its cleverness.

7. Ooh I’m sure that’s not right either – not really how Loss works under ISDA – but, still, it’s what I’d say.

8. In all, Intel “repurchased 324 million shares of common stock at a cost of $7.1 billion” in 2008, for an average purchase price of around $22. Intel ended 2008 at $14.66, and didn’t see $22 again until March 2010. In 2009, when INTC was cheap, it bought back about 88 million shares, and all in the third quarter when it was less cheap.

9. On the simplest and probably most defensible math, just the amount Intel paid ($1bn) minus the value of its shares on delivery date ($873mm).

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• Bill To Make Banking Boring Actually Might Be Kind Of Fun

Filed Under: bankruptcy
Companies: apple, intel, lehman

Another Lawsuit Filed For Google Autocomplete 'Defamation'

from the suing-algorithms-for-fun-and-profit! dept

Another day, another lawsuit filed against Google for defamation-via-search-results. And, yet again, it's being filed in a country that has proven amenable towards plaintiffs who somehow feel a search algorithm has the power to defame.

This time the plaintiff is Guy Hingston, an Australian cancer surgeon. His complaint revolves around the fact that Google's autocomplete suggests he's all out of money.

Guy Hingston, an Australian cancer surgeon, sued Google in Federal Court.

"When an individual computer user types 'Guy Hin ...', into the Google search engine as a search, the words 'Guy Hingston Bankrupt' appears," the complaint states. "When the link(s) is clicked on, the article(s) to which the user is directed has absolutely nothing to do with a bankruptcy associated with Dr. Hingston. Dr. Hingston is not bankrupt." (Parentheses and grammar as in complaint).

"Dr. Hingston is a surgeon practicing in Port Macquarie, New South Wales, Australia," the complaint states. "Dr. Hingston's surgical practice focuses on breast cancer. Given his professional practice and position in his community, maintaining his good reputation is critical. Dr. Hingston has lost a number of patients and financiers who are refusing to associate and/or deal with Dr. Hingston as a consequence of the reference on Google to a bankruptcy."

While this may be true, it seems odd that potential patients and financiers wouldn't actually follow through with the search term, which lists one link related to bankruptcy. (At this point there's more, thanks to Hingston filing this suit -- something those filing these types of suits fail to consider.) Clicking through on that link brings up details on a bankruptcy filing by Eclipse Aviation. A commenter has reposted a Port MacQuarie news story that links Dr. Guy Hingston to bankruptcy -- via CoastJet Group, seven companies Hingston "principally controlled" that ceased operation when Eclipse Aviation went under.

Port Macquarie surgeon Guy Hingston bought the 19-year-old business 2½ years ago.

Dr Hingston said the main reason for CoastJet’s demise was the loss of a $2.8 million deposit on two new jets when American company Eclipse Aviation Corporation went into bankruptcy. The business was made more vulnerable, he said, by its heavy investment in a new partnership with Sweden’s Lund University School of Aviation.

He said CoastJet was preparing for its first intake of 24 students from Sweden at the end of March.

Dr Hingston said he and CoastJet’s staff were devastated. “We had two jets we were about to take delivery of, but with the manufacturer going bankrupt, we’ve lost everything,” he said.

The jets were destined to for CoastJet’s growing air ambulance service, Dr Hingston said, as well as for international airline pilot training and charters.

A later story appears at the same site, detailing the eventual sale of CoastJet to a Chinese investor, which again mentions bankruptcy and liquidation. Both of these stories make Hingston's claim that "Guy Hingston bankrupt" link leads to article(s) that "have absolutely nothing to do with a bankruptcy associated with Dr. Hingston" completely false. He may not like the perception the words "Guy," "Hingston" and "bankrupt" give when placed next to each other in an autocomplete suggestion, but there's nothing inherently defamatory about having those words appear next to each, especially when it produces relevant search results.

Hingston claims Google's automatic search result is defamatory, show him in a false light, and are "highly offensive to a reasonable person."

He claims Google was "was negligent in determining the truth of the information or whether a false impression would be created by its publication."

"This issue, and Google's continued failure to remedy this issue, despite numerous demands to do so, has caused significant harm and economic loss to Dr. Hingston in excess of the minimum jurisdiction of this court," the complaint states.

Hingston seeks at least $75,000 in damages for false light, and court costs.

But the search isn't "negligent" or "highly offensive," unless the person searching for Hingston does nothing more than stare at the completion suggestion and draw all their conclusions from that single, incomplete phrase. Hingston is the only person "offended" by this search suggestion, and any "negligence" is solely on the heads of financiers, etc. who are unwilling to perform even the slightest bit of due diligence when researching Dr. Hingston. Every other link for Hingston points you in the direction of his apparently successful practice and book sales/public speaking sideline. And it must be pointed out again that Hingston is suing over one autocomplete suggestion, rather than the results of those searches.

It's really hard to see how this will come down in favor of the plaintiff, but then again, if judicial systems didn't occasionally head off the deep end, lawsuits like this one would very rarely be filed. 

Filed Under: australia, autocomplete, bankruptcy, defamation, guy hingston, liability
Companies: google

Kodak's Legacy? Arms Dealer For The Patent Wars?

from the selling-off-the-pieces dept

As many people expected, Kodak has officially moved to sell off its patents to whoever can abuse them the most. Since the company is in bankruptcy, it needs permission to do this, but that's the easy part. These days, thanks to a totally broken patent and legal system, the patents are incredibly "valuable." Not because they represent any kind of actual innovation, but because they represent a magic tollbooth that lets the holder force other companies to pay. Of course, some of that magic wore off last month when the ITC noticed that one of Kodak's key patents -- one that it had used to score nearly a billion dollars in licensing revenue, was blatantly obvious and never should have been granted in the first place. Kodak claims it's going to appeal, but the patent sale will likely happen prior to any appeal going through. Either way, like other companies who failed to keep up with a changing market (hello, Nortel!), Kodak's final legacy may be supplying weapons to yet another battle in the era of technology patent nuclear war. It's not something to be proud of.

Filed Under: bankruptcy, itc, patent troll
Companies: kodak, nortel

EMI Adds Insult To Bankruptcy In Misguided Gloating Over MP3Tunes Demise

from the time-poorly-spent dept

We already wrote about EMI's success in bankrupting MP3Tunes via overly aggressive litigation. But, now the company has decided to add insult to bankruptcy with a bizarrely gloating statement provided to News.com's Greg Sandoval.

Since November 2007, EMI Music and EMI Music Publishing have been engaged in a lawsuit with MP3tunes and its principal, Michael Robertson, in connection with Mr. Robertson's facilitation of widespread copyright infringement on MP3tunes.com and Sideload.com. These sites have built their businesses on the unauthorized distribution of music, at the expense of EMI's songwriters and artists.

Here, they're simply lying. The court ruling in the MP3Tunes case stated explicitly: "MP3tunes did not promote infringement." To claim otherwise is to ignore what the court stated flat out.

Now on the eve of trial, and after an ongoing press campaign claiming that MP3tunes would fight to vindicate its 'right' to infringe, Mr. Robertson has filed for bankruptcy protection for MP3tunes in the Southern District of California. After four and a half years of Robertson's bluster and rhetoric, it is apparent to EMI that Robertson has finally realized that his case has no merit.

While Robertson may believe that MP3tunes will be able to escape liability in the upcoming trial through this bankruptcy, Robertson himself is still a named defendant in the case and the Court has already determined that both he and MP3tunes have infringed EMI's copyrights. As such, he is facing personal liability both for infringements that the Court has already determined have occurred and for the further alleged infringements that will be addressed at trial. Accordingly, EMI will continue to pursue its case against Robertson, to ensure that its songwriters and artists are properly compensated for their creative work.

This makes no sense, and is even self-contradictory. As they state above -- and which everyone here knows -- filing for bankruptcy does not get you out of a copyright damages award. Thus, there is no reason whatsoever for the company to file for bankruptcy "to escape liability." That's impossible. The only reason to file for bankruptcy is because the company is out of money from fighting the damn lawsuit. And it's bizarre for EMI to claim that Robertson realized his case has no merit, considering that he mostly won the original lawsuit. Yes, there were a few key points that he lost on, which may turn out to be expensive if he loses on appeal and depending on the damages calculation, but the key elements of the case were won by Robertson and MP3Tunes.

It seems here that EMI is simply insulting Robertson out of spite. In the meantime, Robertson has pointed out that EMI spent $10 million suing him -- or more than the entire cost to build and run MP3Tunes. Remember that some exploration into how much EMI makes from Katy Perry's hugely successful album showed that the label probably ended up with about $8 million? Yeah, so basically it spent more suing Michael Robertson than it got from Katy Perry. Perhaps that money could have been better spent. No wonder the company was taken over by a bank and then sold off in pieces. Its priorities are a complete mess.

Filed Under: bankruptcy, competition, innovation, michael robertson
Companies: emi, mp3tunes

EMI Kills Off More Innovation: MP3Tunes Declares Bankruptcy Due To 'Withering' Legal Costs

from the innovation-must-die dept

We've noted how frequently the entertainment industry -- especially the big record labels with the help of the RIAA -- seem to sue innovative upstarts. They usually do this as part of a two-part plan: they either want to kill off the innovation, or they use the lawsuit as the opening gambit in trying to get a big chunk of the equity of the startup (which they then stifle and kill). News broke recently that online music storage locker MP3Tunes, one of the first of its kind, filed for bankruptcy in large part due to the years-long legal attacks from EMI. The thing is, MP3Tunes basically won its case, showing that the basic service was completely legal. In fact, what MP3Tunes provides is basically the same service that Amazon and Google now offer with their music lockers. MP3Tunes was one of the pioneers in the space... and for its troubles, it gets sued into bankruptcy, despite being legal.

We keep hearing people insist that the record labels are adapting. And it's true that they've been pulled, kicking and screaming, into parts of the 21st century. But the second that anyone comes along doing anything remotely interesting and which provides real value, they freak out and sue. And it goes beyond that. As Robertson describes in his blog post about this, EMI apparently went to great lengths to destroy MP3Tunes, even if it was legitimate:

At every opportunity EMI dragged out the legal process making it costly and burdensome. One example is the interrogation of company employees in all-day inquisitions called depositions where attorneys try to trick people into making admissions. In our case, they deposed not just management but nearly everyone in the company all the way down to clerical help and customer support personnel. They even paid $25,000 to get an ex-employee to agree to a deposition. For management they deposed everyone - some multiple times with me getting deposed 3 separate times.

The legal pressure was not just confined within MP3tunes. EMI sent legal demands to existing partners and potential partners were told they could not work with MP3tunes or risk losing their license to sell EMI music. More than one digital company told us they wanted to work with us, but were prohibited from doing so by EMI. They used their government-granted copyright monopoly to get MP3tunes blackballed in the industry.

EMI spent an estimated $10 million dollars with multiple law firms to arm their attack against MP3tunes in an attempt to thwart unlicensed personal lockers. They know it's difficult if not impossible for startups to fight long costly legal battles. Their hope is that the startup cannot fund a protracted legal battle and they win by default. This happened with the music search engine Seeqpod, Muxtape, Favtape and many others that have quietly faded away. They know that even if the digital upstart prevails in court, they will be terminally weakened. Veoh won multiple rounds of their copyright battle outright only to be forced into bankruptcy after spending $7 million on legal bills.

As Robertson notes, fighting the legal battle was one thing, but blocking the company from partnering and building out its business was the really deadly part. Robertson, of course, has been outspoken in his criticism of the RIAA over the years, and has been through previous legal battles with them as well. In part, some of EMI's infatuation with this case appeared to be personally vindictive (they sued Robertson directly as well as the company). Whether or not MP3Tunes could have succeeded may be an open question. But it seems clear that the company had no chance at all given the barriers that EMI put in its place. Of course, during this same period we've witnessed the collapse and sale of EMI (in pieces) as well. Perhaps, instead of suing the innovations that would help move it into a modern digital era, it should have been looking for ways to embrace them.

Filed Under: bankruptcy, competition, innovation
Companies: emi, mp3tunes, riaa

Kodak Planning To File For Bankruptcy In Order To Sell Off Its Patents

from the what-a-legacy dept

We've noted that Kodak, as its business prospects have continued to dim, has become much more aggressive in suing over patents. This is a traditional path for failing legacy businesses. When you're young, you innovate. When you're old, decrepit and tied to an outdated technology/mode of business... you litigate (and legislate). However, with the valuation of patent portfolios rocketing up over the last year (see Nortel & Motorola for examples), there have been rumors for a long time that the best thing Kodak could do for its investors (if not the general public or the economy) is to give up the ghost and sell off its patents to the highest bidder. And, that appears to be the plan. Lots of reports are claiming that the company is about to declare bankruptcy to make it possible to sell those patents. Apparently some potential buyers were worried about how there might be problems buying the patents without a bankruptcy:

Some potential bidders for the patents are wary of proceeding because a purchase may amount to a so-called fraudulent transfer if Kodak is insolvent, said the people, who asked not to be named because the talks are private. Kodak confirmed that it hired Jones Day to advise it on considering options and said it doesn’t plan to seek bankruptcy protection.

While that article quotes someone at Kodak saying no decision has been made, other reports suggests that it's only a matter of when, not "if." I have no doubt that Kodak's patents will sell for quite a bit. Having seen what happened with Nortel, it wouldn't be surprising to see a similar insane bidding war, in which various tech companies feel compelled to waste a ton of money that could have gone towards actually innovating and developing cool new products, to buy these patents to lump into a portfolio either to protect against other patent suits, or to use aggressively against other companies. I fail to see how any of this helps innovation in any way. It seems to reward failure.

Filed Under: bankruptcy, innovation, patents
Companies: kodak

If Righthaven Declares Bankruptcy, Expect Lawyers To Go After Stephens Media, Media News, And Righthaven Principals

from the limited-liability? dept

There are lots of rumors swirling about a possible Righthaven bankruptcy, but that doesn't seem to worry those pushing for class action lawsuits against the company. Lawyer Todd Kincannon, whose been leading the charge against Righthaven on that front, apparently told law professor Eric Johnson that he'll keep going after other parties:

“I always knew Righthaven would file bankruptcy if things got rough,” Kincannon told me by e-mail. “They were set up as a limited liability company just so they could do that. Fortunately, Stephens Media, MediaNews Group, Sherman Frederick, Steve Gibson, and Dickinson Wright all seem to have plenty of money.”

Of course, Righthaven, being a limited liability company, may make that more difficult. And as awful a company as I think Righthaven has been, I'm a bit wary of breaking down the walls of a limited liability company. If it can be shown that Righthaven was set up by folks knowing that the effort was fraudulent, and that the sole purpose of Righthaven was to protect those who knew that what they were doing was illegal, that may open the window for pursuing other parties further. But, if they honestly believed that this was a legit operation and setup, I'm really not convinced that the pursuit should go beyond Righthaven -- especially to folks like Steve Gibson. I could see going after Stephens Media and MediaNews Group as one could argue they were really the driving forces behind the lawsuits. But taking on individuals seems like going too far.

Filed Under: bankruptcy, corporate veil, todd kincannon
Companies: medianews, righthaven, stephens media

End Of The Road For SGI

from the blip dept

Big tech companies never completely fade away. At some point, they get acquired for pennies. But, even so, SGI is one of the "big names" that really came about as close to simply fading away as any I can remember. Just this past weekend, I got into a discussion with someone who asked if SGI was even around any more... and just like that, comes the news that SGI filed for bankruptcy protection (yet again) just as it announced that it's being acquired by Rackable for just $25 million. For a company that was once considered a massive darling of Silicon Valley, it's quite a quiet ending. At least the company didn't go into full-on patent litigation as it had threatened to do a couple years ago...

Filed Under: bankruptcy
Companies: sgi

Congrats, Recording Industry: You May Now Have Killed Seeqpod Too

from the shut-'em-down dept

The record labels' animosity towards Seeqpod has never made much sense. Seeqpod is a basic search engine that seeks out music files online. Some of these files are, undoubtedly, unauthorized copies, but Seeqpod has always been focused on streaming the music rather than letting you download the tracks. Seeqpod, itself, has no way of knowing whether the tracks are illegal or not, just as a search on Google using "filetype:mp3" doesn't distinguish between illegal and legal files. Yet, of course, the major record labels have decided that there can be no innovation without the record labels owning a piece of it, and so both Warner Music and EMI (two labels, by the way that have been the loudest in insisting that they've changed and are no longer anti-innovation) sued Seeqpod for daring to run a search engine.

And, now, thanks to mounting legal bills, the company has filed for Chapter 11 bankruptcy protection, and is cutting off some developers who were using its API. It seems like yet another example of the major record labels stamping out innovation through lawsuits. Of course, others will rise in their place (most likely in foreign countries where it's harder for the labels to sue). But, it's pretty sad that the labels have been so successful in using questionable lawsuits to make sure that no one can innovate without their stamp of approval.

Filed Under: bankruptcy, innovation, lawsuits, music
Companies: emi, seeqpod, warner music

Buggy Whip Newsprint Maker Looks To Avoid Bankruptcy

from the it's-what-happens dept

It's common to point to "buggy whip" makers as an example of a business that was eventually (mostly) destroyed by a new technology -- though, to be fair, the buggy whip makers were secondary victims. It was the horse-carriage industry that was knocked out by automobiles. The buggy whips were a second order casualty. The same thing may now be happening with newsprint paper makers. While newspapers are struggling left and right, one of the major newsprint suppliers is now struggling to avoid bankruptcy as well.

Filed Under: bankruptcy, newsprint