CHUNYIP WONG/iStock via Getty Images
The following segment was excerpted from this fund letter.
Newmark Group (NASDAQ:NMRK) / BGC Partners (NASDAQ:BGCP)
On 12/30/2021, at 4:04 pm, NMRK put out a press release saying, “On December 28, 2021, Newmark Group, Inc. awarded to Howard W. Lutnick, the Company’s Chairman and principal executive officer, a one-time $50 million bonus award (the “Lutnick Award”) in consideration of his efforts in delivering superior financial results. These efforts included his management of the company and success in creating value for the company’s stockholders in connection with structuring, hedging, and monetizing the Nasdaq, Inc. (NDAQ) common stock (the “Nasdaq Shares”) held by the company and the significant amount of income earned by the company related to these activities and the significant increase in value of such Nasdaq Shares over time.”
In 2013, BGCP sold their ESpeed trading platform to Nasdaq for $750m in cash and ~1m shares of NDAQ stock per year for 15 years. A clause in the sale agreement stated if Nasdaq were to sell the ESpeed platform, the remaining shares would immediately be granted to BGCP. In 2018 Newmark was spun-off from BGCP and was given the remaining shares of NDAQ to be received. In 2021, Nasdaq sold ESpeed to Tradeweb (TW). Instead of receiving 1 million shares of NDAQ for the next seven years, they received ~7m shares at once. As mentioned above, hedging instruments were used; nonetheless, it was a significant windfall for NMRK.
A retroactive, one-time bonus was given to Howard because of the transaction. To clarify, NMRK’s Board of Directors gave Howard a bonus because Nasdaq sold the Espeed platform. Howard was not a part of the conversation between Nasdaq and Tradeweb and undoubtedly did not influence the transaction. $50m was approximately 1.3% of the market cap of NMRK at the time, and the value of the NDAQ stock received was ~$650m after taxes and forward agreements were settled. Roughly 8% of that value was given to Howard. When the original Espeed sale to Nasdaq occurred, NDAQ stock was trading in the $30’s, putting the original value of the shares to be received in the $450-500m range. From 2014-to 2021, NDAQ’s stock rose from $40 to $200.
Did Howard have anything to do with this price appreciation? I think not. Did Espeed lead to value creation for NDAQ shareholders and potentially a source for the stock appreciation? Nasdaq paid $750m in cash + 15m shares of NDAQ and subsequently sold ESpeed to Tradeweb for $190m. Howard deserves some credit because he clearly got a phenomenal price for ESpeed.
Howard received this bonus because of the hedging activities and monetization of NDAQ shares. NMRK entered into a series of forward agreements with RBC at strikes between $81.57 and $107.10 to lock in a price of the NDAQ shares while retaining upside. Had this hedging program delivered significant shareholder value, some award may be deserved; however, on June 25th, when the transaction between Nasdaq and Tradeweb closed, NDAQ’s share price was… $185. THE HEDGING PROGRAM WAS A NET NEGATIVE TO SHAREHOLDERS, YET HE WAS GIVEN A BONUS FOR IT! Had the hedging program not been consummated, the cost of implementing the hedge would not have occurred, and thus the incremental capital would have remained with NMRK shareholders.
To summarize, the board paid Howard $50m for a transaction that he had nothing to do with and decreased shareholder value. This agreement was not in place during the original sale of Espeed in 2013 and was only retroactively given at the end of 2021. Lastly, to send this out the day before a holiday, after the market closes, they knew what they were doing. They tried to get this by shareholders.
If this wasn’t enough, there’s more. Howard is also the Chairman of BGC Partners, the company NMRK was spun out from. Howard has been on the record several times, most recently on 2/18 at the Credit Suisse Conference, saying “…so obviously you know we like the stock and I think it’s just incredibly undervalued” and “that’s how I think about things, and just start to show, wow, this company is deeply undervalued.” On the one hand, I agree with him. I think BGCP is a pretty cheap stock, especially compared to comps. On the other hand, why shouldn’t this company trade at a discount if the Chairman may give himself a bonus at a moment’s notice? Companies with questionable management teams ought to trade at a discount. One cannot undermine shareholders of a company, complain that another company of yours is undervalued, and think that the market should reward you with a proper valuation; it simply does not work like that.
Typically I find sell-side analyst questions short-term orientated and more model-driven; however, Patrick O’Shaughnessy of Raymond James sums up my thoughts when he asked one simple question “Why should public shareholders have confidence in the governance abilities of Newmark’s Board?”
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Be the first to comment