In Cameron Crowe’s Almost Famous, Phillip Seymour Hoffman does a fine job of playing disenchanted rock music critic Lester Bangs, who views the purity of Rock n’ Roll as being corrupted by commercial interests. Of course, Rock n’ Roll has never been all that pure in the first place, but that’s another story.
At any rate, even as business-oriented a fellow as me never thought that I would see the day that the Beatles would be providing the background music for a Vegas casino stage show or the day that the Grateful Dead would be cozying up to lawyers and business-types while entering into management deals involving the group’s intellectual property.
Does this mean it’s only a matter of time before Bob Dylan plays Branson, Missouri?
Update: As my brother Joe points out, this may not be Branson for Dylan, but it’s close.

This Liam Pleven-Ian McDonald-Karen Richardson WSJ ($) article reports on an interesting market condition in the disaster insurance business that has been reverberating in business circles around Houston since the storms of last summer — despite robust demand for disaster insurance and huge amounts of capital pouring into providing such insurance, there is nowhere near a sufficient supply of such products to meet the demand for disaster insurance.
As a result of seven costly hurricanes in two years, insurers are pulling back from the amount of risk that they will take in hurricane-prone areas such as the Gulf Coast. The shortage of supply is showing up primarily in the reinsurance market, where primary insurers buy coverage to hedge the risk of loss on the policies that they issue. Reinsurers covered over half of the estimated $40 billion in insured losses that occurred last year as a result of Hurricance Katrina. Consequently, the cost of property-catastrophe reinsurance has risen over 25% this year and, in hurricane-prone areas, the rates are increasing almost four times that amount. And all of this occurring despite the financial market’s creation of new forms of investment vehicles to induce investment of capital at reduced-risk levels.
As noted in this earlier post on federally-subsidized flood insurance in hurricane-prone areas, this tight market condition for disaster insurance is actually having a beneficial impact. Businesses in hurricane-prone areas are considering alternatives to paying huge premiums for disaster insurance, such as self-insurance and re-evaluating investment decisions. This is precisely how markets efficiently allocate risk and resources, and reflects why that efficient allocation is undermined by the federal subsidy on flood insurance.

Kirk Kerkorian’s proposed deal to save General Motors came up just before the holiday weekend, so analysis of the proposal has been sparse to date (previous posts on GM’s Enronesque experience are here). Last Friday, Kerkorian’s Tracinda Corp. — the largest individual shareholder in GM — publicly proposed that GM become the third wheel in an automotive alliance with Nissan and Renault, both of which would buy substantial minority stakes in GM. Nissan and Renault are led by Carlos Ghosn, whose revival of Nissan six years ago has made him the most influential automotive CEO in the world. Interestingly, Kerkorian’s salvo was deftly timed to coincide with the Big Three automaker’s June sales reports, which were dismal.
As GM’s stock rose nearly 10% after Kerkorian’s announcement, GM’s directors convened an emergency meeting while grumbling that they didn’t appreciate negotiating in public, although they announced after the meeting that they would consider the proposal (imagine the lawsuits if they didn’t?). Nissan and Renault’s boards kept up the heat on Monday by announcing that they would entertain an alliance if GM agrees. Such an alliance would leave the weak and struggling Ford Motor Co. as the only independent American automaker.
The WSJ’s Holman Jenkins ($) sizes up Kerkorian’s strategy and suggests “the possibility that Mr. Kerkorian is simply lining up a lifesaver in the event of a sudden auto recession that some see looming. GM likely would not survive a sharp drop in SUV and pickup sales right now.” Regardless of whether that’s the underlying reason for Kerkorian’s proposal, Jenkins observes that Kervokian’s message is clearly “there’s not enough change going on around here. Give me more change.”
Kerkorian’s concerns about GM’s management have merit. Although GM posted a small profit in the first quarter of 2006 on the heels of its gargantuan $10.6 billion loss last year, the profit was primarily the result of an accounting change. Cash flow remains negative and the company’s debt remains in the deep junk category. This lackluster performance comes amidst a larger backdrop of GM’s poor performance over the past six years. Since earning a record $5.7 billion in 1999 and having its stock top out at $70 a share in June 2000, GM’s stock has declined by over 70% since then to below $19 per share at the end of last year, although it has recovered to $29 per share on the early success of current GM CEO Rick Wagoner’s reorganization plan and now Kerkorian’s proposal. Perhaps most importantly, however, GM’s U.S. market share has plummeted to 24.4% from almost 30% in 1999. Twenty years ago, GM’s share was 41%.
Looking at all this, Jeff Matthews has the most entertaining analysis of Kerkorian’s strategy to date, analogizing GM’s choice to the one faced by Sonny Corleone in The Godfather if it turned out that Don Corleone did not survive after being severely injured in Sollozo’s assassination attempt. As Matthews notes, brother Michael’s plan ended up being a better alternative for Sonny than making a deal with Sollozo, there is no Michael Corleone for GM.

Given the hedge fund theme today, it seems appropriate to note that the Russian state oil company Rosneft (previous posts here in connection with the Yukos chapter 11 case) is proceeding with its huge $10 billion initial public offering on the London Stock Exchange. As this NZ Herald op-ed notes, participation in the Rosneft IPO is not recommended for the faint-hearted and, as this Financial Times ($) article reports, the company’s prospectus includes 25 pages of risk factors that certainly could not be construed as underplaying the risk of investing in the IPO:

Rosneft yesterday began selling itself to investors, warning of “material weaknesses” in its internal controls, a Kremlin-controlled board that might not always act in the interests of minority shareholders and possible legal liabilities of at least $14.7bn (£8bn).
The state-owned Russian oil giant published the preliminary prospectus for its float in London and Moscow next month. It hopes to raise $10bn-$11.7bn, making it one of the world’s largest initial public offerings and valuing the company at up to $80bn.
Over 25 pages, the potential pitfalls are set out. As expected, the central threat to any investment lies in the legal challenges surrounding Rosneft’s contentious acquisition of the former assets of Yukos, the oil company once owned by the now imprisoned oligarch Mikhail Khordokhovsky. Rosneft acquired Yuganskneftegaz, the main asset, in an opaque and forced auction.

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Markets are truly amazing. The ever-observant Walter Olson reports that UK financial institutions are now providing “matrimonial dispute loans” — loaning money to a party in a pending divorce secured by the party’s expected award or settlement from the party’s soon-to-be-ex in the divorce. Inasmuch as the hedge funds cannot be far behind such a financial innovation, it’s only a matter of time before the next reason touted for regulation of the hedgies is that they are promoting marital discord without appropriate oversight.

Houston-based — er, . . I mean Bermuda-based, or is that Barbados-based? . . . — Nabors Industries, Inc. is one of the world’s largest drilling contractors. The company has nearly 600 land drilling rigs and more than 900 land workover and well-servicing rigs, and operates across the U.S. and in Africa, Canada, Central and South America, and the Middle East. Nabors’ offshore equipment includes platform rigs, jack-ups, barge drilling rigs, and marine support vessels, and the company provides oil field hauling, maintenance, well logging, engineering and construction services. In short, Nabors is the type of oil field service company that exploration and production companies want to have competing for the business of drilling or providing other services for an oil or gas well at the lowest possible price.
One of the reasons that Nabors has been one of the most profitable oil field service companies over the past 20 years or so is that its management team is constantly searching for ways to make the company more profitable and valuable to its shareholders. So, in 2001, Nabors moved its tax headquarters to Bermuda and its legal headquarters to Barbados to lessen its American income taxes. The move has paid dividends for Nabors shareholders as the company paid only $6 million in U.S. income taxes last year on almost $430 million in profits, which would have generated over $80 million more in taxes if Nabors were based in the U.S. Several other big companies have done the same thing as Nabors.
So, given the competitive advantage that Nabors and other tax haven-based companies have over their American-based competitors, you would think that Congress might get the message and simply reduce the tax regulation that prompted such moves. But that would be too easy. Rather than addressing the cause, a fierce debate developed in Congress with demagogues from both parties promising voters to crack down on “Benedict Arnold companies” such as Nabors that move to tax havens to avoid paying U.S. income taxes.

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The Woodlands, Texas-based Anadarko Petroleum Corp. announced this morning (NY Times story here) that it has agreed to buy Kerr-McGee Corp. and Western Gas Resources Inc. in separate all-cash deals totaling $21.1 billion, plus the assumption of $2.2 billion in debt, in a deal that will create America’s largest independent exploration and production company. The boards of each company have already approved the transaction, although Kerr-McGee shareholders and regulators must still approve the deals, which are expected to close by the end of the third quarter. Previous posts on Anadarko are here.
Gee, that’s pretty big news in the old hometown.
Anadarko will pay about $16.4 billion, or $70.50 a share, in an all-cash deal for Kerr-McGee and assume debt and other liabilities estimated at $1.6 billion, which works out to pay a premium of about 40% to Kerr-McGee shareholders over Thursday’s closing price of $50.30. Anadarko will also pay about $4.7 billion, or $61 a share, and assume about $560 million in debt for Western Gas, which translates to a premium of about 49% for Western shareholders over Western’s closing price on Thursday of $40.91. The Kerr-McGee deal includes a right to match competing offers and a break-up fee of $493 million while Anadarko’s agreement with Western Gas includes a right to match competing offers and a break-up fee of $154 million.
Anadarko will fund the entire deal with a $24 billion line of credit from UBS, Credit Suisse and Citigroup, and reasons that it expects to recover 3.8 billion barrels of oil equivalent from the acquired properties at less than $12 per barrel. Oil has traded near $70 per barrel for the past couple of months and Anadarko announced that will hedge 75% of the acquired production through late 2008.
Anadarko’s bold play follows other huge acquisitions in the oil patch, such as last year’s Chevron Corp. acquisition of Unocal Corp. for about $18 billion and ConocoPhillips’ purchase of Burlington Resources for $36.5 billion while more conservative industry players such as Exxon Mobil Corp. have held tight and plowed their huge profits over the past couple of years into share buybacks.
Never a dull moment in the oil and gas business, eh?

Former Houstonian Dan Rather‘s mercurial 44-year career at CBS News came to an end yesterday. The departure had been long anticipated after he stepped down as “CBS Evening News” anchor last year in the wake of a scandal over a report about President Bush’s Vietnam-era military service. Rather pulled no punches in publicly stating the reason for his resignation from CBS News: “[A]fter a protracted struggle, [CBS News] had not lived up to their obligation to allow me to do substantive work there.” The 74 year-old Rather is currently negotiating a deal to handle a weekly news program for Mark Cuban’s HDNet cable channel.
Meanwhile, on a less significant note, Rather’s former co-anchor at CBS News, Connie Chung, just had her dreadful show — “Weekend with Connie and Maury,” the MSNBC show with Chung and her husband, Maury Povich — mercifully terminated, but not before Chung gave this “Thanks for the Memories” musical number in farewell. Suffice it to say that I hope never to be caught in a karaoke bar with Chung.