A very Happy New Year to all my readers. Hope you had a wonderful New Year as did I with good company and scrumptious bites to usher in the New Year.

 

I don’t know if anyone out there believes in New Year resolutions anymore, but for what its worth, here’s mine. KEEP THE BLOG ALIVE.

 

You will hear from me and the InvesGuard team more regularly. We have been busy with new features and new companies to analyze and we cannot wait to share all our companies that we have been busy researching, with you.

 

Spiling over from last year, is the continuing Kraft- Cadbury war.

 

Starting the New Year on a more persuasive note, Kraft increased the cash portion of its offer for Cadbury. After an unexpected reaction to this news from Berkshire Hathway, which warned Kraft against a ‘blank check’ on the deal, Kraft shares crept higher thus increasing the effective value of the bid reducing the difference between Cadbury’s share price and the offer price.

 

A detailed time line of the entire episode can be viewed on WSJ’s website here.

 

To add to all that’s already been analyzed and reported, InvesGuard has performed its own independent screening under its proprietory data model.

 

Kraft scores well on its Board of Directors and Senior Management. Its Internal Control Environment under InvesGuard’s model also scores high. Unfortunately, despite having a Board level committee to oversee all matters related to the company’s social and environmental programs, one would expect better reporting and well established environmental and social processes in place. In fact what we analyzed indicated inadequate publicly available information on Kraft’s efforts at encouraging minority and diverse suppliers. For instance, it would have been helpful to report the actual percentage of the company’s spend on such suppliers versus the total vendor spend. The company is also in the process of including different corporate responsibility elements (including those that address child labor) in its supplier contracts. Kraft expects this process to take ‘several years’.

 

Although it has scored relatively well on its Board of Directors and Senior Management, other processes in this area could use a little improvement. For instance, it does not appear that Kraft’s Governance Principles limit the amount of public company director positions that directors may hold. Consequently, few Kraft directors including some Audit Committee members were found to be on the boards of multiple public company boards. Serving on multiple company boards may reduce the amount and quality of time available to directors. Some directors are also CEO’s of other public companies which may contribute to overstretching directors. Other weaknesses in Kraft’s Board and Senior management may be found by looking up the Board of Directors and Senior Management tab under the Kraft analysis page. Don’t forget to click on the ‘Expand All’ button. This opens up even more details on individual datapoints.

 

On the positive front, Kraft has some good measures in place. Director stock ownership guidelines are in place that effectively align director and shareholder interests. ‘C’ level executives have been more or less steady and there appears to be no sign of any turnover. Directors on Kraft’s Board Finance committee who oversee major financial strategies and transactions appear to have relevant financial management experience.

 

Internal Control measures such as an Audit Committee charter, Board Audit Committee etc have scored reasonably well.

 

We are in the process of putting Hershey through our model and the results should be out soon. Keep reading and let us know how we are doing.

 

Have a great 2010.

 

Amidst much anticipation and anxiety, Bank of America (BOFA) completed its repayment of the entire amount it owed the American taxpayer under the government’s TARP program. Whether this was a well thought out and planned action or just a strategy to get away from the endless pay regulations and bloodthirsty cries of “break them (big banks) into smaller entities” , the deed is now done. Credit rating agencies such as Fitch have ‘upped’ bofa’s credit rating on this upbeat news…but isn’t this where all the problems started in the first place? Credit rating agencies hastily ‘upping’ credit ratings only to commiserate later?

 

Out of the $45 billion that BOFO owed on TARP, $18 billion is going to come from selling “common equivalent securities” which will get converted to common stock after shareholder approval. $4billion will be raised through asset sales. During the year, BOFA finalized a deal to sell First Republic Bank for $1 billion (expected value) that it inherited through its acquisition of Merrill. It also sold Columbia Management for $1 billion. As per the bank, it’s tier one common ratio was at a healthy 8.5% after taking into account the impact of all its capital actions stemming from the repayment. $1.7 billion is going to come from the issue of restricted stock to its associates as part of the year end incentive plan….now won’t Feinberg be pleased….aligning employee interests with those of shareholders and all that! Although it will be interesting to see what kind of stock is offered to SENIOR executives once the bank is out of Feinberg’s eagle eye.

 

Having already announced detailed repayment plans earlier this month, the board at Bank of America can now search for departing CEO Kenneth Lewis’ successor with renewed vigour and confidence. Or can they….?

 

In May of this year, BOFA was informed by Treasury that it was one of the banks that had failed the “stress test” in a major way. It needed to address a $34 billion capital shortfall. It is hard to understand the sudden change of pace….earlier in the year, the bank is the focus of a $35 billion shortfall in capital, and by the end of the year, it is ready to repay $45 billion from a mix of cash and $19 billion raised from sale of securities.

 

In addition, even before a detailed repayment plan was announced, analysts expressed disappointment over near future earnings estimates for Bank of America due to “high level of credit losses and uncertain revenues”.

 

To add to this, Bank of America’s Chief Risk Officer and potential successor to the CEO role, is under scrutiny by New York ‘s Attorney General Andrew Cuomo regarding his role in the bank’s merger with Merrill. Mr Curl is supposed to have ‘no recollection’ of a call he had with company lawyers about a key conversation concerning the merger with Merrill and to which he testified earlier in the year.

 

The sudden positive swing of bank of America’s fortunes reminds me of a pendulum….its too quick, too steep, wonder when its going to swing back?