A Blog by Jonathan Low

 

Jan 22, 2019

Why the Bezos Divorce Should Worry Amazon Investors

The question is control, future leadership, their impact on corporate strategy and performance. JL


James Stewart reports in the New York Times:

The divorce rate in California is 60%, and many of the founders of  Silicon Valley companies are only now reaching the age for the midlife crisis. Two-thirds of initial public stock offerings backed by venture capital funds have involved super-shares. The fate of controlling shares in divorce should be of interest to investors. Among 24 chief executives who got divorced between 2009 and 2012, 29% stepped down within two years of the divorce settlement. The announcement that the Bezoses would divorce after 25 years of marriage raised questions about the future of their 16%, $140 billion stake in Amazon.
Jeff Bezos and his wife, MacKenzie, may be the first billionaire couple with a huge stake in an enormous technology company to announce their divorce.
They won’t be the last.
The surprise announcement last week that the Bezoses would divorce after 25 years of marriage instantly raised questions about the future of their 16 percent, roughly $140 billion stake in Amazon. As its founder, chairman, chief executive and largest shareholder, Mr. Bezos exerts almost complete control over the company he created.
The big question is, now what? Will Ms. Bezos sell her portion of the family’s vast Amazon holdings? Will she seek a seat on the company’s board? Will she push for big strategic or management changes?
The Bezos divorce could have consequences for investors in other companies with billionaire founders — Google, Facebook, Groupon and Snap, to name a few. Unlike Mr. Bezos, who owns Amazon shares with ordinary voting rights, these tech entrepreneurs wield control of their companies by holding special classes of shares that confer extra power to their owners.

To put it more explicitly: What would happen if Mark Zuckerberg and his wife filed for divorce?
That’s not to suggest there’s anything amiss in the relationship between Mr. Zuckerberg and Priscilla Chan, or with the marriages of controlling shareholders at any other giant tech company.
But more such breakups are inevitable — after all, the divorce rate in California is about 60 percent, and many of the founders of high-flying Silicon Valley companies are only now reaching the age for the proverbial midlife crisis.
The phenomenon of tech companies with controlling founders is still relatively recent. Google set a trend when it went public in 2004 with dual-class shares that enshrined Sergey Brin and Larry Page as the controlling owners. In the ensuing 15 years, about two-thirds of initial public stock offerings backed by venture capital funds have involved similar super-shares, according to Dealogic.
The fate of such controlling shares in cases of divorce is, or should be, of intense interest to investors.

David F. Larcker, director of the Corporate Governance Research Initiative at Stanford’s business school and a co-author of “Separation Anxiety: The Impact of CEO Divorce on Shareholders,” said his research showed that “shareholders should pay attention to matters involving the personal lives of C.E.O.s and take this information into account when making investment decisions.”
The law doesn’t explicitly require controlling shareholders to disclose prenuptial or other agreements that could affect the disposal of their company stakes in the event of divorce. But some experts said they would support such a requirement.
“It’s absolutely material, and as a result it should be disclosed,” said John C. Coffee Jr., director of the Center for Corporate Governance at Columbia University. In theory, he said, any provision that would reassure investors would lead to a higher share price. “There’s no question it’s in the best interests of shareholders,” he said.
Charles M. Elson, a professor and director of the corporate governance center at the University of Delaware, also supports the disclosure of prenuptial agreements. “No one thought a Bezos divorce was a risk factor” for Amazon, Mr. Elson said. “Now no one knows how this will turn out. From a shareholder perspective, it’s certainly material.”
Mr. Larcker said requiring public disclosure might be going a little too far, considering the privacy issues involved. But he agreed that, at the least, a board needed to be kept fully informed.
“Once a divorce settlement is underway,” he said, “the board needs to think about whether the ex-spouse will demand a board seat, whether they are planning to liquidate their shares or perhaps sell as a block to an investor, maybe an activist. All of these actions can have a real impact on shareholder value.”
So far, investors have hardly reacted to the Bezos breakup — Amazon’s shares are up slightly since the announcement. That might be partly because the couple went out of their way to characterize the split as amicable, saying they plan to “continue our shared lives as friends.”
When many billions of dollars are at stake, amicable divorces are rare, even when they start out that way. “Most divorces start out contentious and end contentious,” said Samantha Bley DeJean, a matrimonial lawyer in San Francisco, who has worked with many Silicon Valley entrepreneurs and represents Angelina Jolie in her custody battle with Brad Pitt. “When they start out amicably, you hold out some hope that they’ll stay that way, but in my experience it only gets worse.”
In 2017 Mark Pincus, the billionaire founder of the internet game company Zynga, and Alison Gelb Pincus filed for divorce. The two had a prenuptial agreement, which hasn’t been made public, but presumably addressed the issue of Mr. Pincus’s 70 percent voting stake in Zynga. In an interview with The New York Times last year, Mr. Pincus said the split was amicable.
After the couple filed for divorce, Mr. Pincus converted his super-voting shares into ordinary shares, reducing his voting control of Zynga to about 10 percent. He told The Times that the conversion had nothing to do with the divorce.
Ms. Pincus is an entrepreneur in her own right: she helped found the online retailer One Kings Lane, which was sold in 2016 to Bed Bath & Beyond for nearly $30 million. The Pincuses quietly finalized their divorce last year on terms that haven’t been made public. Zynga hasn’t disclosed any changes in Mr. Pincus’s shareholdings since then.
A spokeswoman for Zynga, where Mr. Pincus remains executive chairman, declined to comment. Ms. DeJean, who represented Ms. Pincus, said she couldn’t discuss the case. But in general, she said, the fact that both spouses are extremely wealthy typically doesn’t change the dynamics of a divorce.
“It becomes a matter of principle,” she said, “and principles can be dangerous in these situations, especially when there’s enough money to litigate them.”
In their 2010 divorce, Steve and Elaine Wynn, the founders of the casino company Wynn Resorts, each received half of the couple’s 36 percent controlling stake in the company, valued then at $1.4 billion. To maintain Mr. Wynn’s control, Ms. Wynn agreed to vote her shares along with her ex-husband.
At the time, the arrangement seemed amicable: Ms. Wynn warmly described Mr. Wynn as her “partner of 41 years and father of her children,” and Mr. Wynn said he was delighted that his ex-wife would remain on the company’s board.

That didn’t last long. After two acrimonious years, Ms. Wynn was forced off the board and sued to regain voting control of her shares.
The animosity only deepened after The Wall Street Journal reported last year that Mr. Wynn had repeatedly sexually harassed Wynn employees and had paid a manicurist $7.5 million after she told others that Mr. Wynn had forced her to have sex.
That led Mr. Wynn to step down as chief executive. He sold his shares, leaving his former wife as the company’s largest shareholder. Since peaking in 2014, Wynn shares have fallen by more than half.
Mr. Larcker’s research found that among 24 chief executives who got divorced between 2009 and 2012, seven (29 percent) stepped down within two years of the divorce settlement.
Ms. DeJean said she had recently drafted numerous prenuptial agreements for young entrepreneurs. Negotiating them is delicate: It’s not especially romantic to be discussing the disposal of assets in a divorce proceeding in the middle of a courtship or engagement.
The idea of making those prenuptial terms public could be anathema to such clients.

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