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[ragnarisapirate]

 

It is good to know that we both valued the compensation package at about the same amount of an impairment to IV.

 

ragnarisapirate,

 

Firstly, apologies for the really late response to this. I'd meant to respond earlier.

 

Re. the impairment to IV as a result of Sardar's compensation arrangement, reason dictates that the most fundamental assumption in your (and all the detractors') valuation, albeit implicit, is incorrect. The future will show it.

 

Best,

Ragu

 

Ragu,

 

RespectfullyI am not incorrect here... This is a matter where we are probably working with a different set of underlying assumptions. Let me clarify:

 

I was working under the assumption that he was going to keep a pretty low salary, that wasn't going to move up so much. I also didn't peg Biglari for the type of guy who would sandbag shareholders in his allocations due to a lower salary (basically, I figured he would do the same job he is now, for less money). I also assumed that he wouldn't screw up very often and post operational shortfalls very often.

 

When the compensation package came out, it made the company worth less than the day before, as he got a HUGE pay raise, which is cash that can never get allocated for shareholders... Again, my (and likely others) assessment was based on the fact that we had no reason to think that he was going to turn the company into a glorified hedge fund.

 

That said, I don't blame Biglari for wanting to get rich and hold no grudge. I think the compensation package is a great incentive for him. I also think that BH will be worth a lot more in the future than it is now. There have been few people that will sing the praises of Biglari more than me. However, the compensation package did destroy IV. I hold no position in the company, because I think that it is fairly valued at the moment and can find better deals. If BH were (all things equal) to go to $200 bucks a share tomorrow, I would buy it in a big way.

[AZ_Value]

If I may, I think the question was never whether or not Biglari would have his personal interest and net worth tied to BH's performance. It is kind of obvious given that he will be controlling more and more of the company overtime.

 

I think the mistake you make in your reasoning is in this statement: "

So, irrespective of which side of the subjective fence you are on, the argument that Sardar, as a result of this transaction, willfully engineered a long-term impairment to IV doesn’t hold, let alone one that’s as high as 25%.

Your argument draws the direct correlation between Sardar's IV and everybody else's IV because Sardar's net worth is tied to how the company does. But this is wrong, Sardar and the rest of his shareholders don't have the same IV.

 

Sardar's IV is not impaired at all by the transaction... You're right on this.

But all the other owners of the company need to consider their IV impaired, permanently impaired, because through the incentive compensation, they will be transferring 25% of the increase in BV of their company to Sardar over time, and a portion of that will be done by transferring ownership to him because it will be in stock.

So I personally don't see how you can be an owner of BH (other than Sardar) and not consider your IV impaired since you know 25% of what belongs to you is sure to be transferred to him.

 

Like many said before me, there really isn't an argument to be made for this kind of compensation structure, if  the dude wants to be entitled to 25% of all future growth of the company then he should buy 25% of the company that's it!

[link01]

 

I hold no position in the company, because I think that it is fairly valued at the moment and can find better deals. If BH were (all things equal) to go to $200 bucks a share tomorrow, I would buy it in a big way.

 

considering current book val per share is about 280 i'd hold my nose & back up the truck too.

 

i think sardar has earned himself a permanent discount upon the sudden change in his tune concerning his repeated comments about his compensation views back in the western sizzlin days, that his modest salary meant that he wanted to get rich with shareholders he was invested along side of, not off them etc etc: that turned out to be a lot of empty self serving rhetoric. it was a very disconcertibg blindside to earlier shareholders who thought it was them & their kind sardar was seeking to cultivate in a way similar to WEB & his loyal berkshire shareholders.

[link01]

Sardar's IV is not impaired at all by the transaction... You're right on this.

But all the other owners of the company need to consider their IV impaired, permanently impaired, because through the incentive compensation, they will be transferring 25% of the increase in BV of their company to Sardar over time, and a portion of that will be done by transferring ownership to him because it will be in stock.

 

i think the transfer will be 25% after a 6% hurdle, if i recall. and at least for now its capped at 10mln a year?

 

 

[bookie71]

Ah, but Bigliar changes his comp package as his mood changes.  I hope you folks make a fortune with him, because I won't. There are other stocks I feel more comfortable with.

[ragu]

ragnarisapirate,

 

No disrespect was intended in my original reply.

 

which is cash that can never get allocated for shareholders...

 

Here's a hint regarding the assumption that I believe will be shown to be incorrect: Never say never.

 

Best,

Ragu

[racemize]

ragnarisapirate,

 

No disrespect was intended in my original reply.

 

which is cash that can never get allocated for shareholders...

 

Here's a hint regarding the assumption that I believe will be shown to be incorrect: Never say never.

 

Best,

Ragu

 

how would shareholders get money that he keeps?  I don't think he'd just give it back?

[link01]

ragnarisapirate,

 

No disrespect was intended in my original reply.

 

which is cash that can never get allocated for shareholders...

 

Here's a hint regarding the assumption that I believe will be shown to be incorrect: Never say never.

 

 

Best,

Ragu

 

lol, i dont ever remember you as being so cryptic, ragu.

 

the only way isee any possibility that at least some of sb's 25% take above that 6% hurdle will be given back to other shareholders is if (big if) sb uses that comp windfall to purch BH shares thru the lion fund & shareholders thus reap a share of the growing asset fees on a growing asset base.

 

[ragu]

lol, i dont ever remember you as being so cryptic, ragu.

 

link,

 

Heh. I just think the incentive agreement is a puzzle worth solving.

 

the only way isee any possibility that at least some of sb's 25% take above that 6% hurdle will be given back to other shareholders is if (big if) sb uses that comp windfall to purch BH shares thru the lion fund & shareholders thus reap a share of the growing asset fees on a growing asset base.

 

Nope. In fact, the holding of BH stock through the Lion Fund makes me uncomfortable.

 

Best,

Ragu

[maxprogram]

And to channel Occam's Razor: the simplest explanation is usually the best.

 

Biglari decided that he wanted more of the pie for himself, and he took it. This unquestionably leaves a smaller percentage of the pie for other owners. The question is now whether he will make the pie bigger than it would have been had he not enacted the compensation agreement (and in turn leave other owners better off on an absolute basis).

 

That could turn out to be the case. But beyond a certain point, more incentives aren't correlated with better performance. In fact, many studies have shown the opposite to be true. 

 

On a positive note, Sardar may use the other half of his performance bonus to buy Steakburgers in bulk. That way shareholders, employees and suppliers will eventually get some of the money back.

[Parsad]

Biglari decided that he wanted more of the pie for himself, and he took it. This unquestionably leaves a smaller percentage of the pie for other owners. The question is now whether he will make the pie bigger than it would have been had he not enacted the compensation agreement (and in turn leave other owners better off on an absolute basis).

 

I think any intelligent and rational individual should stop at the end of the first sentence above, and then ask him or herself..."Does anything else he does matter after this point?"  The answer is obvious, but many seem too beholden to the possibility they may enrich themselves alongside him. 

 

The fatted pig who walked the path with the chicken and the wolf was laughing after the wolf ate the chicken.  Unfortunately he was too busy laughing to realize he was next!  Cheers!

 

[ragnarisapirate]

ragnarisapirate,

 

No disrespect was intended in my original reply.

 

which is cash that can never get allocated for shareholders...

 

Here's a hint regarding the assumption that I believe will be shown to be incorrect: Never say never.

 

Best,

Ragu

 

I am really curious as to how money that is paid to Biglari could ever get to shareholders... The only situation that I can see, is that a percent of his compensation has to go to buying shares (irrespective of the price of BH), so, I guess that some of the money does go back to shareholders in that sense... I guess I was in error, in that sense. However, other than that (which, to some extent can be quantified) I am curious as to what can happen.

[ragu]

how would shareholders get money that he keeps?  I don't think he'd just give it back?

 

racemize,

 

I don't expect that he'd give back any money that has already been paid him and my apologies for a hint that wasn't quite right.

 

Here's another one and I'll try not to goof up this time: Currently, Sardar's personal stake in BH is small enough (9263 shares that the market values at about $3.75 million) that the amount of incentive payment he receives is meaningful relative to the value of the shares he holds.

 

Over time however, this equation will be reversed and the value of BH stock that Sardar holds will become increasingly dominant relative to the amount of incentive compensation he receives. At the risk of channeling Charlie again, we'll ask the most important question of them all: And then what?

 

Best,

Ragu

[ragu]

[...]I am curious as to what can happen.

 

The incentive agreement will be rescinded, thereby ending the payments to Sardar. BH will, of course, continue to be entitled to the incentive fees based on the performance of the Lion Fund.

 

Best,

Ragu

[ragu]

And to channel Occam's Razor: the simplest explanation is usually the best.

 

maxprogram,

 

Keyword being usually. This is an unusual enough plan that additional thought is warranted.

 

Biglari decided that he wanted more of the pie for himself, and he took it. This unquestionably leaves a smaller percentage of the pie for other owners.

 

Actually, what is unquestionably true is that it is not in Sardar's best interests to propose a plan that dents BH's long-term intrinsic value, let alone one that is substantial. I'd be happy to hear reasoned arguments otherwise.

 

Ultimately, this transaction boils down to the evaluation of the following two things:

 

a. The cash flows that represent the performance fees of the Lion Fund (that Biglari gave up)

b. The cash flows that represent the incentive payments to Biglari (that BH shareholders pay)

 

For this transaction to be neutral/advantageous to BH shareholders, the present value of (a) must at the very least be the equal of (b). The conditions governing (a) and (b) are roughly similar (25% payout with a 5% hurdle rate for the Lion Fund vs. 6% for Sardar).

 

Now, BH's equity is many times the size of the Lion Fund's limited partner interests. So, as of today, (b) will be much higher than (a). This will likely remain true for as long as there are payments to Sardar under this scheme.

 

Therefore, in order for the present value of (a) to catch up (and exceed) that of (b), the payments to Sardar under this incentive agreement need to end. And, in time, they will.

 

Best,

Ragu

[Parsad]

And to channel Occam's Razor: the simplest explanation is usually the best.

 

maxprogram,

 

Keyword being usually. This is an unusual enough plan that additional thought is warranted.

 

Biglari decided that he wanted more of the pie for himself, and he took it. This unquestionably leaves a smaller percentage of the pie for other owners.

 

Actually, what is unquestionably true is that it is not in Sardar's best interests to propose a plan that dents BH's long-term intrinsic value, let alone one that is substantial. I'd be happy to hear reasoned arguments otherwise.

 

Ultimately, this transaction boils down to the evaluation of the following two things:

 

a. The cash flows that represent the performance fees of the Lion Fund (that Biglari gave up)

b. The cash flows that represent the incentive payments to Biglari (that BH shareholders pay)

 

For this transaction to be neutral/advantageous to BH shareholders, the present value of (a) must at the very least be the equal of (b). The conditions governing (a) and (b) are roughly similar (25% payout with a 5% hurdle rate for the Lion Fund vs. 6% for Sardar).

 

Now, BH's equity is many times the size of the Lion Fund's limited partner interests. So, as of today, (b) will be much higher than (a). This will likely remain true for as long as there are payments to Sardar under this scheme.

 

Therefore, in order for the present value of (a) to catch up (and exceed) that of (b), the payments to Sardar under this incentive agreement need to end. And, in time, they will.

 

Best,

Ragu

 

What?!  :o  Why would he terminate the incentive agreement at any point?  Over time, if the $10m cap is removed, he will continue to own more and more of the company...simple.  It's no different than Berkowitz's share in Fairholme getting larger because other investors redeemed at the low, and he will enjoy more of the gains going forward as his slice of the pie got bigger.  The incentive has little to do with it. 

 

The $10m cap right now keeps Sardar from getting more and more of the company, but once he has enough votes, do you think he will really retain the cap after the behavior he has shown in the past already?  Greed and power know no bounds!  He suckered shareholders into believing the name change was necessary for acquisitions.  He then pushed an incentive plan that originally had no cap because he felt that was the best way to incentivize him.  But that is history.  Let's see what he does going forward.  Cheers!

[maxprogram]

Behold the 4-step strategy of "see what I can get away with":

 

Step 1: Pursue specific power-grabbing initiative X

Step 2a: If other parties remain complecent, continue

Step 2b: If other parties revolt, restart with less potent version of X

Step 3: Wait (from a few months to a few years)

Step 4: Repeat steps 1-4

 

Works great at finding where the line in the sand is drawn. Plus over time, the line is moved as the strategy attracts more people who are okay with the power-grab.

[bargainman]

Actually, what is unquestionably true is that it is not in Sardar's best interests to propose a plan that dents BH's long-term intrinsic value, let alone one that is substantial. I'd be happy to hear reasoned arguments otherwise.

 

There is a difference between denting BH's overall IV, vs denting Biglari's potion of BH's IV, vs denting the minority shareholder's portion of BH's IV.

 

Your statement holds when applied to the first and the second, but not to the third of those.  We can only invest in the third, so that is what we have to evaluate.  Note that given the incentive structure, the third shrinks as the second grows.

[ragu]

 

What?!  :o  Why would he terminate the incentive agreement at any point?

 

Because, as I've tried to show with some of my posts on this thread, reason dictates it. And, Sardar is nothing if not rational.

 

Of course, in my subjective opinion, Sardar is no cheat either, but you don't have to share this opinion in order to arrive at the conclusion about the incentive agreement.

 

Best,

Ragu

[racemize]

 

What?!  :o  Why would he terminate the incentive agreement at any point?

 

Because, as I've tried to show with some of my posts on this thread, reason dictates it. And, Sardar is nothing if not rational.

 

Of course, in my subjective opinion, Sardar is no cheat either, but you don't have to share this opinion in order to arrive at the conclusion about the incentive agreement.

 

Best,

Ragu

 

Would you mind spelling out exactly how "reason dictates it" and what you think he will change that will suddenly be better for the minority shareholders?  Overall, these posts seem very cryptic and I simply do not follow the implications about which you seem to be convinced.

[rkbabang]

Would you mind spelling out exactly how "reason dictates it" and what you think he will change that will suddenly be better for the minority shareholders?  Overall, these posts seem very cryptic and I don't simply do not follow the implications about which you seem to be convinced.

 

I'd like to know too. My reasoning is that Mr. Biglari is a greedy person who does not care about the interests of his minority shareholders, nor is he able to put his short term greed aside to even do what is in his own long-term best interests.  He will increase his control over the company and that will not insentivize him to reduce his compensation plan or to treat his minority shareholders well, but just the opposite will likely be true.  You can't change a person's character.  Sadar will do what's best for Sadar today.  He has already damaged his reputation enough that he has hurt his ability to get himself on the boards of companies and harmed BH's ability to acquire companies outright.  I don't know why he will suddenly have a change of heart, start thinking long term, and doing what's best for BH's other shareholders at some point in the future as Ragu thinks he will.  That seems more of a leap of faith than a dictate of reason.

 

Also one of the largest reasons that I am no longer a BH shareholder is the situation with the Lion Fund.  I just can't get over a company owning a subsidiary who's largest holding is the parent company's stock.  I don't even know what you call that (Recursive Earnings?) Something funny is going on there which I am not comfortable with.  He should have closed the Lion Fund, cashed out to its partners and had the company buy and retire all BH stock it held (or distribute the stock to the partners).  That would have been the ethical thing to do, which apparently isn't an approach Mr. Biglari is comfortable with.

 

[Parsad]

 

What?!  :o  Why would he terminate the incentive agreement at any point?

 

Because, as I've tried to show with some of my posts on this thread, reason dictates it. And, Sardar is nothing if not rational.

 

Of course, in my subjective opinion, Sardar is no cheat either, but you don't have to share this opinion in order to arrive at the conclusion about the incentive agreement.

 

Best,

Ragu

 

I totally agree with you that Sardar is no cheat.  He's smart and he's good at what he does.  But Sardar will always do what is in Sardar's best interest...shareholders be damned.  Cheers!