Value of FFH culture

[StubbleJumper]

 

What's the value of a culture that screws minority owners of ORH?  Seriously, Prem screwed us on taking it private.

 

 

Remind me what happened here? I don't think I paid much attention to this transaction.

 

 

Oh, this one was 8 or 9 years ago when Prem wanted to take Odyssey Re private.  So, right after the depths of the financial crisis when stock prices were low, he low-balled minority shareholders by offering a price that was roughly equivalent to book value for a company that was the second best sub (the best sub has generally been Fairfax Asia, or I believe it was called Falcon at the time).  The interesting trick about it is that the low-ball offer came right before quarter's end and FFH characterized the offer as being something like 1.16x BV, when Prem as an insider should have known full well that ORH was shooting out the lights and its quarterly earnings were high enough to make that low-ball offer roughly equivalent to book.  We all knew that ORH was shooting out the lights and was cashing in on the CDS, so we suspected we were getting screwed, but we didn't have the numbers for another 6 or 7 weeks when the quarterly came out.  FFH then bumped its offer by another 8 or 9 percent, but frankly that was still a pittance for ORH (by the time we actually got our money, another quarter had elapsed but I don't recall ever seeing the quarterly report that showed an updated BV).

 

So, read the principles of FFH's operations.  It's described as "Fair and Friendly" acquisitions.  What's fair and friendly about offering your partners 1.16x BV when you as an insider should have known that BV was soaring?  What's fair and friendly about 1.16x BV for something like ORH to begin with?  It was ridiculous, but fully legal.

 

 

SJ

[petec]

 

What's the value of a culture that screws minority owners of ORH?  Seriously, Prem screwed us on taking it private.

 

 

Remind me what happened here? I don't think I paid much attention to this transaction.

 

 

Oh, this one was 8 or 9 years ago when Prem wanted to take Odyssey Re private.  So, right after the depths of the financial crisis when stock prices were low, he low-balled minority shareholders by offering a price that was roughly equivalent to book value for a company that was the second best sub (the best sub has generally been Fairfax Asia, or I believe it was called Falcon at the time).  The interesting trick about it is that the low-ball offer came right before quarter's end and FFH characterized the offer as being something like 1.16x BV, when Prem as an insider should have known full well that ORH was shooting out the lights and its quarterly earnings were high enough to make that low-ball offer roughly equivalent to book.  We all knew that ORH was shooting out the lights and was cashing in on the CDS, so we suspected we were getting screwed, but we didn't have the numbers for another 6 or 7 weeks when the quarterly came out.  FFH then bumped its offer by another 8 or 9 percent, but frankly that was still a pittance for ORH (by the time we actually got our money, another quarter had elapsed but I don't recall ever seeing the quarterly report that showed an updated BV).

 

So, read the principles of FFH's operations.  It's described as "Fair and Friendly" acquisitions.  What's fair and friendly about offering your partners 1.16x BV when you as an insider should have known that BV was soaring?  What's fair and friendly about 1.16x BV for something like ORH to begin with?  It was ridiculous, but fully legal.

 

 

SJ

 

Did minorities have a choice to accept or not? If so I'm not massively bothered by this. Personal opinion.

[petec]

There is nothing wrong with bringing your kids into the business, and we have all kinds of examples in Canada's business dynastys. But they all work their way up, and they cut their teeth in the board positions of subs first. Elevating family too quickly isn't fair on them, your partners (shareholders), or the people that elevation displaced.

 

 

In fairness putting them on the board doesn't trigger these issues. They can be an observer without taking executive responsibility, they have limited power to do dumb stuff, and they don't displace anyone because the board isn't really on the career pathway for most operating execs, and can be as big as you like anyway.

 

Playing devil's advocate, I could argue that this is a better way than "working your way up" the organisation, given that there will always be question marks over whether you received a helping hand in that process.

 

Howard Buffett became a director of Berkshire at 38 and has been pinged to succeed his father as Chairman. Is this all that different? I have a bigger issue with the non-disclosure of Ben Watsa's fund management terms, and the fact that the multiple voters don't become ordinary voters on Prem's death, than I do with Ben being on the board.

[StubbleJumper]

 

What's the value of a culture that screws minority owners of ORH?  Seriously, Prem screwed us on taking it private.

 

 

Remind me what happened here? I don't think I paid much attention to this transaction.

 

 

Oh, this one was 8 or 9 years ago when Prem wanted to take Odyssey Re private.  So, right after the depths of the financial crisis when stock prices were low, he low-balled minority shareholders by offering a price that was roughly equivalent to book value for a company that was the second best sub (the best sub has generally been Fairfax Asia, or I believe it was called Falcon at the time).  The interesting trick about it is that the low-ball offer came right before quarter's end and FFH characterized the offer as being something like 1.16x BV, when Prem as an insider should have known full well that ORH was shooting out the lights and its quarterly earnings were high enough to make that low-ball offer roughly equivalent to book.  We all knew that ORH was shooting out the lights and was cashing in on the CDS, so we suspected we were getting screwed, but we didn't have the numbers for another 6 or 7 weeks when the quarterly came out.  FFH then bumped its offer by another 8 or 9 percent, but frankly that was still a pittance for ORH (by the time we actually got our money, another quarter had elapsed but I don't recall ever seeing the quarterly report that showed an updated BV).

 

So, read the principles of FFH's operations.  It's described as "Fair and Friendly" acquisitions.  What's fair and friendly about offering your partners 1.16x BV when you as an insider should have known that BV was soaring?  What's fair and friendly about 1.16x BV for something like ORH to begin with?  It was ridiculous, but fully legal.

 

 

SJ

 

Did minorities have a choice to accept or not? If so I'm not massively bothered by this. Personal opinion.

 

 

Of course minorities accepted.  Information was asymmetric.  The insiders knew the value of the CDS that were being cashed out and they should have known that BV was growing at a rate of 20% annualized.  Outsiders were left guessing.

 

So, as I said, it was completely legal.  But, go back and read FFH's guiding principles.  There's that nice one that says that honesty and integrity will be the hallmark of their relationships.  And then there's the actual name of the company, Fair and Friendly Acquisitions (Fairfax).

 

1) How do you feel about the fairness of offering 1.16x BV when the intrinsic value is obviously higher? 

 

2) How do you feel about the honesty of describing a tender offer price as 1.16x BV when you, as an insider, should know that the quarter which you have pretty much finished had such good results that the actual offer was more like 1x BV?

 

 

So, as far as I can tell, it certainly wasn't illegal.  But, it was definitely opportunistic.  Turning full circle the original post, in which the question was raised, "What's the value of FFH's culture?", I would say that the perception of the ORH buyout (to say nothing of Abitibi/Fibrek) has considerably lessened the "value" of FFH's culture.  They chucked their partners under the bus and that reputation will follow them.

 

 

SJ

[SharperDingaan]

Arguably it really comes down to FFH not being 'his' company anymore, but treating it as though it were.

Sadly it's not that unusual, as the folks at the former Toronto Street post office found out a while back.

 

We wish them luck.

 

SD

 

[petec]

 

1) How do you feel about the fairness of offering 1.16x BV when the intrinsic value is obviously higher? 

 

2) How do you feel about the honesty of describing a tender offer price as 1.16x BV when you, as an insider, should know that the quarter which you have pretty much finished had such good results that the actual offer was more like 1x BV?

 

 

The entire foundation of value investing is paying less than IV! The sellers knew:

1) What the portfolio was invested in and

2) that the buyer had inside information.

 

You said yourself that the sellers had a pretty good idea it was a great quarter.

 

Matter of opinion but I am not as exercised about this as you clearly are.

[gary17]

Prem tried to do the same with blackberry before !

[StubbleJumper]

 

1) How do you feel about the fairness of offering 1.16x BV when the intrinsic value is obviously higher? 

 

2) How do you feel about the honesty of describing a tender offer price as 1.16x BV when you, as an insider, should know that the quarter which you have pretty much finished had such good results that the actual offer was more like 1x BV?

 

 

The entire foundation of value investing is paying less than IV! The sellers knew:

1) What the portfolio was invested in and

2) that the buyer had inside information.

 

You said yourself that the sellers had a pretty good idea it was a great quarter.

 

Matter of opinion but I am not as exercised about this as you clearly are.

 

 

Not "exercised" about ORH but I also don't drink Prem's koolaid.  When someone comes on the board touting all of the BS about the culture having some mystical value, I'm more than happy to set the record straight from my perspective.  Buy the shares if you think they offer value, buy them for the collective brains at FFH, but don't put Prem up on a pedestal.  On too many occasions he has failed to live up to the standards that he himself has set.  That's okay, but the end result is that we should not take the proclaimed values as given and we should not accept that the culture is any better than that which prevails at other companies.

 

Cheers

 

SJ

[Viking]

I was very happy when FFH purchased ORH in 2009. Prem telegraphed the purchase in advance and I think there was a lengthy discussion on this board speculating that a buyout was possible/likely. I think a number of investors made a lot of money. Could the final price have been higher? Sure. Was the final price for ORH at the time fair? My view was yes. Investors in ORH also had the opportunity to roll their money into FFH shares.

[StubbleJumper]

I was very happy when FFH purchased ORH in 2009. Prem telegraphed the purchase in advance and I think there was a lengthy discussion on this board speculating that a buyout was possible/likely. I think a number of investors made a lot of money. Could the final price have been higher? Sure. Was the final price for ORH at the time fair? My view was yes. Investors in ORH also had the opportunity to roll their money into FFH shares.

 

 

Viking,

 

I'm not too sure what tax regime that you are working under, but there was no opportunity to do a share exchange which would have enabled a rollover to FFH shares at the ORH adjusted cost base under Canadian tax laws.  Obviously, anyone could have taken the cash, paid whatever taxes were due, and then used the proceeds to buy FFH shares.

 

On the question of whether we made money, you are right.  Most of us made money despite the fact that an asset which was worth 1.3x or 1.4x BV was bought at nearly BV.  Keep that in mind if in the future you are ever a minority share owner with the partner that paid you book for something that was obviously worth a great deal more.  The institutional owners voted yes to the transaction, and the deep value guys got screwed.

 

 

SJ

 

[Cigarbutt]

Did not spend time around investment Boards then but held both FFH and ORH common shares.

With the privatization transaction, I felt no significant change on a net basis.

I remember that the game plan was to buy back the ORH public float at some point.

I submit that a way to see an investment in ORH then was, conceptually, like holding callable equity at any time with the pricing schedule "determined" by the market quotation.

So, I was OK with the ORH transaction.