VIEWPOINTS : Don’t Pity the Big Losers on Bogus Dayton Hudson Bid
The tale of the fake bid for control of Dayton Hudson, the Minneapolis-based retailer, is both melancholy and cautionary on many levels.
It is not inconceivable that some fully rational basis will yet be found for Paul David Herrlinger’s Tuesday morning phone call to Dow Jones News Service proclaiming an offer of $70 for the stock, which had closed the night before at $54, by a company he identified as “Stone Inc.”
But at the moment, the incident has a paranoid feel, as though someone held for years under a Chinese water torture of dripping rumors has finally thrown a bucket of out-and-out lies at his tormentors.
The consequent dousing falls on both the just and unjust; while most of those who were soaked doubtless deserved what they got, there may well have been a remnant whose punishment was unwarranted.
Four minutes after the Dow Jones service reported the supposed bid reported by Herrlinger, a portfolio manager and analyst with a Cincinnati investment firm, the New York Stock Exchange suspended trading in Dayton Hudson. When trading began again 100 minutes later, the price was up about $6 a share.
The world being the perverse place it is, the price stayed up for a while after Dow Jones moved a second story casting doubt on the legitimacy of its first report. But when the bell sounded at the close, Dayton Hudson was at $53.125, down 87.5 cents for the day.
Some professionals undoubtedly made money. This is a zero-sum game, and when the papers report that $15 million “was lost” in an episode such as this, it’s equally true that $15 million was won.
Given that the swing between the high Tuesday and the close Wednesday was $12 a share and more than 8.5 million shares were traded, the fellows who got on the wrong side of the trade probably dropped more than $15 million.
Jefferies & Co., a Los Angeles brokerage firm that is not a member of the New York Stock Exchange, traded Dayton Hudson shares during the time the NYSE suspended trading and apparently sold as many as 200,000 shares at prices as high as $63 a share. If that’s true, Jefferies alone probably made more than $1 million on the story, and in common decency should chip in for the cost of Herrlinger’s hospitalization.
One takeover speculator reports that he had kept what he called a “watching” position in Dayton Hudson because Dart Group, a discount retailer, was rumored to be planning an acquisition bid. He claims that he got out at around $60 and bought back in on the way down in the mid-$50s.
“We’d done our homework,” he said, “and we knew that, after valuing all the leases and the real estate, the company was worth, at most, $65 a share, which made the bid implausible. But there are lots of guys down here,” he said, “who bought in around $60 because they figured the story was a sure sign that somebody was putting the company ‘in play.’ And when the (Dow Jones industrial index) gets to 2,400, people believe they can make money on everything.”
A somewhat less sophisticated but equally successful trader reports that when the story came in, he checked with a contact in Cincinnati, found that Herrlinger was genuine and that, although there was no company called Stone Inc., there was a Stone family heavy with money to which Herrlinger was in fact related. But it was oil money, not stock market or buyout or retailing money, and decisions on what to do with that money were made in New Orleans, not in Cincinnati. So he stayed away.
The first reaction of the losing arbitrageurs, or takeover speculators, was that the government should protect them from themselves by banning over-the-counter trading by the likes of Jefferies whenever the stock exchange suspends a stock. That’s the modern version of the free enterprise system: It leaves me free to make money when I guess right, but demands that goodness and mercy and the government protect me against losses when I guess wrong.
But it’s hard to see why the government should waste its policing power on the protection of stock market arbitrageurs. Unless the off-the-board traders like Jefferies have sources of information the public does not have, there’s no reason they should be denied the opportunity to take risks themselves.
The more interesting question is whether one should pity or censure the Dow Jones News Service, which got zapped, in part because it was just standing there. It did verify the existence and status of Herrlinger, calling him back to make sure he was what he said he was. It did not investigate whether what he had said was true before putting the report on the wire.
Obviously, if a mere arb could find out about the Stone family by calling a friend, the news-gathering apparatus of Dow Jones, with the strong Midwestern bureaus of the Wall Street Journal at its disposal, could have developed such background on its own.
Both parties were under great time pressure. What it comes down to, probably, is economist Milton Friedman’s old line that people have more incentive to make the right decision when it’s their own money at stake. And that the traders who play values rather than market moves retain one significant advantage over the whiz kids: They know that whatever the blessings of instantaneous communication, fast access to undigested news may mean only that the fool and his money are parted even sooner than they were in the good old days.
