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Colgate’s Two-For-One Special

Glenda Conner 0

Let me state the facts up front: I am a shareholder of Colgate-Palmolive and I have been for years. I own it, and it’s in accounts that I manage for clients. I’ve held it for years because I have high regard for the company, and I still do. But there’s a situation brewing there that bears watching.
In the ongoing AIG International investigation, former General Re CEO Ronald Ferguson has been questioned by the New York State Attorney General’s office over questionable transactions with AIG International. At Colgate-Palmolive, Mr. Ferguson chairs the audit committee, and is a member of the finance committee private investment trust
.
Also in the AIG International investigation, Ms. Elizabeth Monrad is responding to regulators’ questions about General Re transactions with AIG International. Ms. Monrad was the chief financial officer of General Re, and has since moved on to be the chief financial officer at TIAA-CREF. The pension fund reports “that she received a “Wells” notice from the enforcement staff of the Securities and Exchange Commission. ” Ms. Monrad is currently on leave of absence from TIAA-CREF. At Colgate-Palmolive, Ms. Monrad chairs the finance committee, and is the deputy chair to Mr. Ferguson on the audit committee.
While not involved in the insurance transactions, Colgate nevertheless finds itself affected by them: Mr. Ferguson and Ms. Monrad are very key persons on the Board. I make no assumption of any wrongdoing by them – that’s for the regulators to determine – but one can imagine that while they’re under investigation, their priorities may be quite different than they were at the beginning of 2005. How long will the investigations last? How will their priorities be reassigned as the investigations continue?
Most importantly: where does Colgate-Palmolive fit into the priorities of Mr. Ferguson and Ms. Monrad? The audit and finance committees need the talents of its members even more urgently as Colgate embarks on its ambitious plans to rationalize capacity. The distractions posed by the investigations are a concern to me. They should be a concern to all other long-term Colgate-Palmolive shareholders as well.
But What Does Myron Scholes Know About Options?
A lot more than most of us, I think it’s fair to say. (And I’d be happy to admit it, too.)
Remember the Cisco system for divining dubious values on employee stock options? The one they’ve put on the SEC’s plate for vetting? Then read this article from Dow Jones Newswires by way of Private investment Custodian: “Stock-Option Guru Scholes Doubtful On Cisco Value Plan.”
Mr. Scholes’ comments are straight out of Econ 101, (see: supply & demand). “In order to bring “a very idiosyncratic contract to the market,” he said, it would have to be sold at a discount “in order to encourage the market to take it.”
While Cisco is billing the alternative market price as an attempt to find an “accurate” valuation for stock-option expensing, Scholes said the market auction proposal is one that by its nature will not draw a true price. For one thing, a small market placement and little liquidity means the issue would likely sell at a discount…the outsider with less information [than Cisco] would pay less for such an instrument than the cost to Cisco.” [Emphasis added.]
Sounds sensible. Mr. Scholes makes some sound points about the robustness of the market for these instruments; I would have liked to know what he thought about the “option on an option aspect” of the instruments as well, but the interview or the article didn’t go there. We’ll have to wait and see if the SEC reaches the same conclusions as he does.

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