Right Angle Club: 2015
The tenth year of this annal, the ninety-third for the club. Because its author spent much of the past year on health economics, a summary of his latest book on the topic takes up a third of this volume. The book I published in 1980 is now selling on Amazon for three times its price when new, so be warned that at one time, the subject used to improve with age. George Fisher
Interest rates as signs of the future.
The news section of the New York Times relates that Karthik Romanna, an Associate Professor at Harvard, has introduced an entirely novel idea about stock market economics. (The reason to emphasize the news section, is the Times rule that the Sunday Book review only prints reviews during the first week after publication release dates, a major reason for the pedestrian quality of that particular section. Reviews appearing in other sections, at still later times, may suggest experts in an obscure field have slowly waked up to something of significance.)
Even CPAs regard the work of the Financial Accounting Standards Board (F.A.S.B.) as boring beyond belief. But this 75-person non-profit organization in Norwalk CT makes the rules for what accountants do, and Romanna decided to take the time to figure out why corporations so regularly overpay to merge with other corporations. This looked like the place to poke around in the incentive system which FASB creates. After all, the price the acquiring stockholder pay is very large, and the fees investment banks pay to advise the participants are well-known to be generous. Both of these incentives push the price higher, but then the price the acquired company is paid pushes the price downward. A system of kickbacks paid to the acquired directors for cooperation would certainly be a factor, but perhaps not the dominant one. Romanna feels the standards for what corporations state is their earnings after the merger, may be more important. And perhaps there is also some momentum from the days of evaluating factories and heavy equipment, which once was fair, but now require a different standard of fairness for service companies with human services more to be reckoned in a sale price. Nevertheless, it creates uneasiness to hear that half of typical sale prices is now viewed as goodwill, allegedly based on projected future income. That sort of thing can quickly walk out the door in a recession, and seems likely to affect the opinions (and bids) of activist investors.
To settle the question of a fair price is above the pay grade of this reviewer. But it does seem entirely appropriate to challenge the present system and its rule-makers to make their reasoning clearer. And for shareholders of merger victims to demand to know why they should not be paid better. It is not satisfying for a pricing system which ought to be in constant tension, to remain too boring to discuss.