Is Cerberus Pro-Global Warming?

An auto industry publication today tells us that Cerberus CEO Stephen Feinberg has been making a lot of trips to Washington D.C. lately to lobby legislators against proposed increases in fuel economy standards.

We know that Cerberus is named after the 3-headed dog that guards the gates of hell, but that doesn’t mean they have to oppose efforts to stop global warming here on earth.

Mr. Feinberg should (a) make a commitment to protect the environment in the communities in which his firm does business, (b) replace that old Ford truck he boasts about with a newer fuel efficient car, and (c) buy some carbon offsets for all those trips to D.C.

Cerberus to buy a Bounty Hunter?

In articles published in both the San Francisco Chronicle and the Orange County Register last week, ACS’s role in property confiscation procedures in California was characterized as:

“..acting like bounty hunters that coerce banks and financial institutions into turning over assets that may or may not qualify as lost or abandoned for a percentage of the find.”

ACS’s take in this process is said to be 11% of whatever it seizes, and since 2003 the Texas company has made a cool $40 million. Of course, to be fair, they did donate more than $100,000 to California candidates between 2002 and 2003.

In Tulare County, California, however, officials have decided to stop doing business with ACS after 18 years because, are you ready for this, ending the outsourcing agreement will save them as estimated $2 million a year.

The County is working to place as many of the long-time ACS employees in the new department as possible. Wouldn’t it be great if Cerberus would be as open about its plans for ACS employees?

Queuing Up for Cash

It looks like several of the folks involved in the proposed buyout of ACS are already putting measures in place to ensure they get some green out of the process.

In response to shareholder questions about the value of the Cerberus bid, ACS announced last Friday that it was opening up the buyout process to competing bids. But don’t cry for Cerberus just yet, they get a consolation prize of $7.5 million and could see another $15 if the deal blows up entirely.

And don’t fret for Chairman Darwin Deason, either; if his personal share in a competing offer is higher than the one made by Cerberus he has to hand over 40% to them, but gets to keep the other 60% for himself.

And at the ACS annual meeting last Thursday, other ACS executives protected their own pay levels when the company’s management defeated a measure requiring non-binding shareholder approval of executive compensation. Vote margins have not been released. The defeat came after proxy advisors Glass Lewis & Co. and Institutional Shareholder Services (ISS) had recommended that shareholders pass the measure, the AP reported:

Both proxy advisory firms said it would be in shareholders' best interest to vote for an investor proposal that would require non-binding shareholder approval of executive compensation.

In an analysis, Glass Lewis found Affiliated Computer Services paid more compensation to its top officers than the median compensation for 43 similarly-sized companies.

Indeed, ACS CEO Lynn Blodgett recently earned a spot on The Corporate Library’s “pay for failure” list, which ranks CEOs according to a pay to performance ratio.

And, ACS is among the U.S.-based companies the American Federation of State County and Municipal Employees (AFSCME) chose to send its “say on pay” shareholder proposal in January. It seems that many on Capitol Hill agree. In April, the House passed a “say on pay” bill that would give shareholders a voice on executive compensation issues. The bill has strong advocates in the Senate.

Executive compensation issues are being discussed in the context of rising inequality, a trend that more Americans are feeling, more acutely, everyday. According to ISS counsel Patrick McGurn, passage of the “say on pay” bill by the House indicates that the issue of income inequality will be gaining traction among the American public, and will be a major campaign issue during the approaching national election cycle. When it comes to curbing out-of-control CEO pay, the public is looking to activist shareholders, who have been flexing their muscle to great effect of late.

So here is the multi-million dollar question in our minds: Given how the end of the exclusivity deal played out, can we be blamed for assuming that if ACS is taken behind the closed doors of Private Equity that ACS and PE execs will make sure they benefit richly while ACS employees are left wondering what will happen to them?

Is ACS giving Cerberus the cold shoulder or just being coy?

Last week, TheStreet.com reported that the board has taken little action to negotiate with Cerberus and Chairman Darwin Deason since increasing their take-private offer to $62 a share last month.

One senses the animosity between the special committee and the Deason/Cerberus team has evolved into a standstill. The board has yet to open its financial books to Cerberus, "which would have signaled a willingness to cooperate rather than resist and remain a publicly traded company." Perhaps, the board is still shopping around for other bids - although one analyst claims that possibility is unlikely. Thus far, no competing bids have been made public.
Regardless, Credit Suisse analysts say the offer is still too low compared to other strategic deals, "particularly in light of what appears to be an improving fundamental outlook for ACS."

From the start, this deal has not been greeted with the enthusiasm Darwin Deason and Cerberus may have wished; and if shareholders side with Credit Suisse's take on it, they may not end up with the profits they hoped for either.

Cerberus may have some work to do to win the hearts and minds of the ACS special committee. Given the Cerberus connection to the Walter Reed scandal and problems with other government contracts (such as the IRS), it may be in ACS’s interest to just take a pass.

ACS's Darwin Demonstrates 'Survival of the Fortunate'

Yesterday, Merger Market reported that ACS and its special committee have decided not to file suit –brought “on the grounds of auction interference”—against ACS Chairman Darwin Deason and Cerberus.

In an April letter, the chair of ACS’ special committee overseeing the deal questioned whether a truly competitive bid was possible given Cerberus’ exclusive agreement with Deason to negotiate the take-private transaction. Also at issue was Deason’s employment agreement, as it may have been a deterrent to buyers:

[Deason’s] employment agreement is unusually strong for a chairman and grants him chief executive-type rights, including the exclusive and sole right to all hiring and compensation activities at the executive level, as well as the sole right to nominate board members… Further, to obtain the agreement’s termination, notice must be provided 30 days prior to 18 May of any given year. Thus any buyer of ACS would not be able to terminate the agreement until 18 April of next year, it was pointed out.

But ACS and the special committee are betting that the threat of litigation has appeased wary buyers:

ACS and the special committee believe the pursuit of litigation would not get additional mileage as the communicated threat toward Deason was adequate. …[A]s a result of the threat, the special committee feels the auction process may be enhanced.

Deason must be particularly relieved to have withstood another round of scrutiny, as his role in the take-private bid was likely motivated by a desire to move his business dealings out of the spotlight. Deason began deal talks with Cerberus back in November 2006, at about the same time as the backdating scandal that saw the forced resignations of ACS’ chief executive and chief financial officers. Deason (alleged in pending litigation to have been personally enriched—to the tune of $71 million—by the options tinkering) claimed to be unaware of any backdating, and came out unscathed. (The WSJ reported that Deason may have known more about ACS’ backdating practices than previously acknowledged. In a hand-written note uncovered during a probe into ACS’ backdating practices, Deason stated that the company “always” picked the “lowest” prices “so far” in the quarter to award stock options.)

Seems to be a survivor, that Darwin Deason. But he’s not out of the woods, yet. He’s been named in two, still-pending, shareholder lawsuits related to the deal.

Birds of a Feather…

ACS will feel right at home alongside IAP Worldwide, the Cerberus-owned government contractor. Both are facing criticism for repeated delays in implementing large government contracts – and forcing taxpayers to pick up the slack.

This Sunday, the Nashua Telegraph reported that New Hampshire’s contract with ACS to handle the $61 million upgrade of the state’s Medicaid Management Information Systems has reached a “critical juncture.” The system upgrades have been plagued with delays and is a full year behind schedule. Last week, the Health and Human Services Deputy Commissioner told the state’s executive councilors that ACS is reimbursing the state for costs related to the delays. However, ACS is not paying the federal share of delay costs – even though the feds are funding 75% of the project – and there’s no guarantee that the feds will pick up that cost.

Cerberus might say this is the kind of inefficiency the firm hopes to correct after the buyout. However, IAP’s five-year, $103 million contract with the IRS to process income tax returns has also been held up by extended delays. IAP was expected to have taken over at seven processing sites by Dec 1, 2006. By April 2007, IAP had started work at only two facilities. Further delays were reported as a result of IAP not meeting contractual obligations related to background checks.

Hmmm…taxpayers paying for contractors’ mistakes. Under Cerberus’ watch, such mishaps add insult to injury when you consider the tax advantages enjoyed by PE which we raised in our last post. Can we expect more of the same if Cerberus acquires ACS?

What, me pay taxes?

Cerberus knows a tax dodger when it buys one. According to a comprehensive 2004 study on corporate tax avoidance, ACS reportedly paid an effective tax rate of 14.2% over the three year period between 2001 and 2003 instead of the statutory income tax rate of 35%. While certainly not the only company to benefit from Bush’s corporate tax breaks, ACS enjoyed the cut rate despite earning over $1 billion in profits during that period.

Recall that ACS is a major government contractor, deriving 41% of its revenues from government work. So while ACS was paying less than its fair share of income taxes, it was also raking in taxpayer dollars – twice over fattening its bottom line at the expense of the tax system.

Who lost out? According to Citizens for Tax Justice and the Institute on Taxation and Economic Policy:

· The general public, who must pay higher taxes, lose public services, or be responsible for big future debt burdens.
· Relatively disadvantaged industries and companies that will find it harder to compete for investment capital with tax-favored corporations.
· The U.S. economy, which is harmed by the distortions that corporate subsidies produce.
· State governments and state taxpayers, which see their corporate tax systems erode along with the federal system.
· The integrity and sustainability of the tax system as a whole.

Surely Cerberus can appreciate a kindred spirit. After all, Cerberus too is benefiting at the expense of taxpayers since the carried interest management earns from the firm’s funds is taxed only at the capital gains rate of 15%.

Led by Republican Sen. Charles Grassley (Iowa), proponents of legislation that would raise private equity managers’ tax rates from the 15% capital gains rate to 35% income rate are making similar arguments about who is losing in the current system. Even defenders of the Bush tax cuts can’t argue that taxing private equity firms at cut rates has any trickle-down benefits.