Author Topic: 25% of book value gains above 5% for Biglari?  (Read 39983 times)

link01

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Re: 25% of book value gains above 5% for Biglari?
« Reply #60 on: May 02, 2010, 05:50:51 AM »
You've got the math wrong!  Book goes up 10%...$40M.  His hurdle is 5%...$20M.  He gets 25% of the difference...$5M!

bh's book val was 297m as of last report. rounding up slightly, let's call it 300 mil. a 10% increase is 30m. less the 5% hurdle of 15m, his 25% of the difference would be 3.75m. which lease 26.25m of the original 30m increase accruing to the rest of bh's shareholders.


link01

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Re: 25% of book value gains above 5% for Biglari?
« Reply #61 on: May 02, 2010, 05:54:57 AM »
Now if it were an increase in book value per share, then I would have less of a problem.  But as far as I can see from the SEC filing, the incentive allocation is based on 25% of company book, not book value per share.

sanjeev, i believe the sec filing did say something about book val adjustments being made for share issuances & the like. all tho they could certainly have worded things more clearly by using "book value per share"!

link01

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Re: 25% of book value gains above 5% for Biglari?
« Reply #62 on: May 02, 2010, 05:58:57 AM »

I was mistaken about the SEC filing, the book value is adjusted for share issuance. This is stated in exhibit 2 in the SEC filings.

(ii)    “Book Value” equals the amount of Total Shareholders’ Equity as set forth in the Consolidated Statement of Financial Position of the Company, prepared in accordance with the accounting principles adopted by Company (as set forth in the Company’s Annual Report on Form 10-K for the applicable fiscal year), as of the applicable Incentive Compensation Calculation Date.  Book Value as of the applicable Incentive Compensation Calculation Date shall be determined by reference to the consolidated net income and other comprehensive income of the Company, and appropriate adjustments to such Book Value shall be made for any dividends, shares issuances or buybacks and other factors in accordance with Exhibit A hereto (but Book Value for the next succeeding Incentive Compensation Calculation Date shall not reflect such prior adjustments).  The computations and procedures required to calculate Book Value, including without limitation, any accounting procedures used to implement any adjustments, allocations and other matters, shall be made in such reasonable manner as the Company in good faith shall determine to be appropriate and in accordance with Exhibit A hereto, and shall be subject to the approval of the Governance, Compensation and Nominating Committee (the “Committee”) of the Board of Directors of the Company (the “Board”).

thnx, shalab. that's the section of the filing i was just referring to. i'm reading comments so quickly right now to catch up on things & adding my own 2 cents that i didnt see your own response to sanjeev in time  :(

link01

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Re: 25% of book value gains above 5% for Biglari?
« Reply #63 on: May 02, 2010, 06:04:14 AM »
My impression is that Biglari loves the money, not the business.


i disagree. i dont think its necessarily an either/or proposition. my impression is that Biglari loves the money, AND he loves the business. but i certainly wish he loved the money alot less that he seems to. a higher hurdle & lower bonus % would make me feel alot less twitchy

link01

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Re: 25% of book value gains above 5% for Biglari?
« Reply #64 on: May 02, 2010, 06:13:16 AM »
This development is both disappointing and fascinating at the same time. 

It's disappointing because the intrinsic value of BH is now less than when Biglari was only taking a 900K salary for running it.  However, it's fascinating because he has essentially gone from running an open-ended hedge fund (the Lion Fund) to a closed end fund (BH) and has increased his AUM ten-fold at the same time.  Furthermore, this publicly traded hedge fund is named after himself and has a compensation structure seemingly modeled after the Buffet Partnership. 

There are, however, some big differences between BH and a typical hedge fund.  First, Biglari has permanently locked up investor capital and no longer has to worry about the downside risk of having investors pull out money from his fund.  Second, Biglari now has the ability to increase AUM by a substantial amount over time through M&A, which will substantially increase his compensation if he can meet the hurdle rate specified (safe to say that he will be able to do this).  Third, Biglari is required to shovel 30% of his "bonus" back into the fund -- not sure if that's the case at other hedge funds.


very interesting take, txlaw.

what i'm wondering at the moment is: will this turn out to be some kind of seminal event if it its approved by shareholders? i mean, think about all the envy this might inspire among not only other ceo's, but among ambitious hedge fund & private equity types!

link01

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Re: 25% of book value gains above 5% for Biglari?
« Reply #65 on: May 02, 2010, 06:46:14 AM »
To criticize the compensation structure as proposed is to criticize pretty much all hedge fund compensation structures, including the Buffett Partnership and any funds modeled after that partnership.  Not an unreasonable criticism if we're talking about matching up compensation with societal value.  But is this really any different than the way that the Pabrai Funds or other hedge funds are structured?

Yes. 

- He didn't raise the capital. 
- He can use the shares to raise unlimited amounts of capital going forward. 
- The corporation covers all of his expenses including office, travel, food & entertainment, etc.
- He will never have redemptions. 


forgive me all these quick knee-jerk comments & counter comments. i'm reading this fascinating thread in chronilogical order.

[- He didn't raise the capital.] no, but he did rescue the co from the dead
 
[- He can use the shares to raise unlimited amounts of capital going forward.] if he does it in a way that decreases intrinsic value then he will be hurting his long term potentail gains as well
 
[- The corporation covers all of his expenses including office, travel, food & entertainment, etc.] there's little doubt at this point that his 'grasp' for monetary gain knows few bounds
 
[- He will never have redemptions.] well, no, but if bh loses value or even gets stuck with a perpetual discounted market multiple to intrinsic value it will impact his ambitions in a similar way 

link01

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Re: 25% of book value gains above 5% for Biglari?
« Reply #66 on: May 02, 2010, 06:49:58 AM »

He wants the best of both worlds, At least with Greenlight Capital Insurance this was the goal all along and owners werent mislead.



that does seem to be the case, unfortunately. btw, what is the compensation structure like at greenlight?

link01

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Re: 25% of book value gains above 5% for Biglari?
« Reply #67 on: May 02, 2010, 06:54:53 AM »
Feb. 11, 2008,

"I have made a personal commitment to you that I will spend all the time necessary to rehabilitate The Steak n Shake Company. Not only will I refuse extra remuneration for the time I intend to commit, but I also will not accept any stock options. The reason is simple: We are one of the largest shareholders; thus, we plan to make money with you, not off you. Our conviction is that now is the time to make Steak n Shake’s culture one of ownership — all the way from the board level to the store level.


yup. the manifest unintentional irony displayed here is one of my biggest disappointments   

link01

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Re: 25% of book value gains above 5% for Biglari?
« Reply #68 on: May 02, 2010, 07:01:17 AM »
To me it seems like Biglari is very young and he wants to be a billionaire. He only owns a puny portion of the company, so how will he increase it?  Either he gives himself a ton of options, or he comes up with this interesting scheme that will still allow him to get rich...  I don't know. I always knew that Biglari had it in for himself, and a giant ego.  He wants to get rich, and do it with shareholders, and sound like Buffet. I think this scheme is sure better than doing it through options and RSUs.  The problem is he got too far too fast.  He got control of a 300-500 million$ company without owning it..  That leaves him in a bit of a quandry because control without large ownership is kind of a hollow victory for a capitalist.  Biglari wants the money, it's in his blood.  I remember an old article pointing out how CEOs like Jack Welch made millions, even 10s/100s of millions.  But if you wanted to be a billionaire, you had to start the company, like Dell and Bill Gates.  Problem is Biglari wants to be a billionaire, but he's just a CEO.. This is his path to the B club...

thoughts?


good points, imo. but unlike you i didnt see his over-arching desire to get rich as quickly as possible. its almost as if, as much as he likes to find & buy under valued business/securities, he's equally loath to let himself & his ablities be similarly UNDER valued in the market place! this is where his lack of humility is both unfortunate & injudicious compared to a buffett or watsa. they both pay themselves ultra modestly vs their talents & the value they bring to the table of ther respective co's. the good will generated is an incalcuable long term factor in their success, i believe. all their star subsidiary managers get paid on much better terms than they while still earning attractive but less than egregious, glutinously outrageous  incomes. thus there's little reason for their managers to feel justifiable income envy compared to their bosses. sb is setting himself up for the opposite problem.
« Last Edit: May 02, 2010, 07:24:33 AM by link01 »

shalab

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Re: 25% of book value gains above 5% for Biglari?
« Reply #69 on: May 02, 2010, 07:47:09 AM »
[- He didn't raise the capital.] no, but he did rescue the co from the dead

Yes, otherwise the company would have gone bankrupt and would have emerged from bankruptcy with different management. It doesnt give lifetime guarantees to one employee to corner the organic profits generated by that business by repeatign some of the same mistakes made by Friendly's management.
 
[- He can use the shares to raise unlimited amounts of capital going forward.] if he does it in a way that decreases intrinsic value then he will be hurting his long term potentail gains as well
Increasing book value doesnt need to increase long term gain. He is looking to increase it by 5% to meet his hurdle. Buffett has increased book value by more than 20% for the last forty years. The business itself organically increases value by more than 5%. When you franchise the operations, it should become even more easier to increase the book value without decreasing the book value.
 
[- The corporation covers all of his expenses including office, travel, food & entertainment, etc.] there's little doubt at this point that his 'grasp' for monetary gain knows few bounds
Agree.
 
[- He will never have redemptions.] well, no, but if bh loses value or even gets stuck with a perpetual discounted market multiple to intrinsic value it will impact his ambitions in a similar way 
No, since the metric is book value, he will still make money irrespective of the stock price. I dont see any downside to book value in the business he is in.