This document discusses how data breaches and cyber attacks typically do not significantly harm companies' stock prices. Through analysis of past breaches, the document shows companies usually experience only minor stock dips and recover quickly. However, serious operational issues like safety problems can severely damage stock. The document advocates activist investing approaches to challenge cybersecurity spending and push companies to prioritize returns. It also provides advice on structuring companies through subsidiaries to better protect assets from litigation following a breach.
3. Disclaimer
All opinions no facts
• No slander or libel lawsuits
All opinions are mine
• Unless you want to sponsor
No offer to buy or sell securities
Nothing here constitutes personalized advice
Always seek sane and qualified advice
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8. What We Have Been Told Is Wrong
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9. There Is A Cover Up
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10. What Do We Hear?
Reputation
damage
Customers leave
Board & Executives
fired
You will be hacked
out of business
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11. Turn Your World Upside Down
Companies do not
get hurt
Consumers do not
care
Numbers support
this
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12. Class Is In Session
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Flickr: benrussell
22. ANTM Day Of Breach
Trendline bounce:
Bullish
Single purchase of
59,894 shares @
137.23
$8,219,253.62
single order
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23. ANTM
ANTM is highly
correlated to SPX
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24. ANTM
Bullish Channel
50 SMA Up Trend
MACD crossover
RSI Trend up
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25. S&P Says It Like It Is
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30. If Data Breaches Don’t Hurt, What Does?
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31. Blowing Up An Oil Rig
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32. Selling Dangerous Consumer Goods
“60 Minutes”
flooring with toxic
levels of
formaldehyde.
Stock drops by
more than 50%
Tilson Funds holds
major short
position.
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33. What about Target’s CEO?
He was fired
because of the
data breach!
The Infosec press
says so!
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34. The Financial Reality
Pretax loss $5.4
Billion on Canada
Breach Cost: 0.191
Billion - .046 Billion
in Insurance
Pretax loss 0.145
billion
Top Line Revenue
1/31/2015: 72.618
Billion
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35. Home Depot
According to earnings
call: Carries $100
Million in
cyberinsurance
Gross breach
expenses $63 Million
After insurance
expenses: $33 Million
2014 Revenue
$83,176 Million
Q4 EPS +43.8%, FY14
+25.3% EPS
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37. Are We Spending Too Much On Security?
CEO Jamie Dimon
letter to
shareholders:
Security budget
$250 Million
1000 Employees
Computer Weekly:
JPM to double
security budget
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38. Activist Investors
Buy shares to
control company
Threaten to oust
board and CEO if
costs are not cut
and profits
returned to
shareholders
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39. Starboard Value vs Darden Restaurants
Fund owns 8.8% of
Darden
Published 294 slide
presentation on why
the company could
make more money
Called for
replacement of all
12 board members
Shareholders
approved
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40. Relational Investors LLC vs. Timken
Investor Highlights:
Pension
contributions drop
from 33% of CF to
near zero
CapEx cut 50%
12% of CF for stock
buybacks
increased to 50%.
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41. Who is Third Point LLC?
The Activist Insight
Activist Investing
Review 2014
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42. Third Point LLC vs Sony
Investor Letter 3Q14
Took significant stake in
Sony May 2013
Suggested Spinoff of
Entertainment
Payoff: incentivizing
Entertainment’s
management to run the
company more
efficiently by engaging
in cost cutting and
laying out clear earnings
targets.
Third Point sold for 20%
return
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44. Leucadia loan to FXCM
Aggregate amount of sale
proceeds or
dividend/distributions
Leucadia
FXCM Holdings
Amounts due under Leucadia
term loan, including fees
100% 0%
Next $350 million 50% 50%
Next amount equal to 2 times the
balance outstanding on the term
loan and fees as of April 16,
2015, such amount not to be less
than $500 million or more
than $680 million
90% 10%
All aggregate amounts thereafter 60% 40%
2 year loan of
$300M
10%, +1.5% per
quarter up to 17%
Limits ability to
merge, sell, lease,
any assets
If not paid off in
3yrs Leucadia can
force a sale
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45. Well, You Did Agree
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46. Get To Know Your Treasurer
Treasury normally
handles insurance
Treasury protects
the company from
hackers
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47. Insurance Substitutes Certainty Qualified
Promise For Uncertainty
Cyber falls under
Errors & Omissions
(AKA Professional
Liability)
Subset of Property
& Casualty Ins.
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48. Common Exclusions
Insured’s fees or
compensation
(revenue
replacement)
Fines & Penalties
• Fines are govt
PCI is not govt
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49. Know Your Trigger
E&O Trigger is a
wrongful act
Sec & Privacy
Trigger is a security
failure or privacy
event
• Legislative only
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50. Add-On At Any Time
Punitive Damages
Voluntary
Notification
Fines & Penalties
Cyber Extortion
• Lockout
• Threat to Disclose
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51. Think Like An Activist
How to run a
program with little
money.
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53. Scenario
You are a compliance consultant for an activist
investment firm. A new campaign has replaced the
Board & C-Suite.
The target company will be transformed into an
investment holding company and operations will
be spun out.
The target company recently completed an
acquisition, but has not completed a merger.
Your mission is to protect the IP assets of the
company while producing returns for the investors.
The CIO, CISO, CMO were used to obtain
“synergies”.
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59. New Structure
Acme Holdings, Inc
IP Company Equipment Leasing
Staffing Real Estate Operations
Data Center
Manufacturing
Logistics
Silo business in
separate legal
entities
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60. Contagion Defense
Each legal entity is
self-contained
Separate bank
accounts /
accounting books
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61. Intellectual Property
Trademark, Patent,
Copyright
Licenses logos,
patents to other
subsidiaries and 3rd
parties
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62. Staffing Company
Workforce shifts to
staffing company
Resources can be
contracted out
rather than laid off
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63. Sale/Lease of Assets
Real Estate
• Lease office space
Source Code
• License software
Machinery
• Lease equipment
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64. Operating Company
Has no real assets
Nothing to sue for
Easily replicable
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65. Mission Accomplished
Revenue per
employee is up
IP protected by
attorneys
Financial
renovations
complete
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66. Conclusion
FUD does not sell
People & creativity
are your greatest
asset
Don’t be afraid to
try something
different
Your investors may
leave you no
choice.
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Editor's Notes
Compliance normally reports to The Board
Compliance, Anti-Bribery Anti-Corruption, Environmental Regulation, Conflict Minerals, Child Labor,
We’re going to blow your perception of reality and history. We’re not going to be looking at pre-Columbian Viking runes carved into rocks, but numbers forever etched into the NASDAQ.
We’re going to cut through the propaganda and the noise and get to the truth. There’s no way North Korea hurt Sony that bad because their technology is so far out of date. The only way that could have happen is if they had help….from aliens.
Q4 EPS 1.50 above guidance of 1.43-1.47 share.
Q4 sales + 3.8%
Full year sales +1.3% in store
Online sales +30%
Total dividend +19.8% ($1.2 Billion)
Q4’14 Earnings $19.2B, +8.3% v. last year
Online business +36% v. last year
13% operating margin and a 27% return on invested capital by the end of fiscal 2015
26% increase in our quarterly dividend to $0.59 per share
new share repurchase program of $18 billion
From Top Left: Jeff Smith –Starboard Value, Dan Loeb – Third Point, Carl Ichan – Ichan Enterprises, Bill Ackman – Pershing Square
Starboard notes that Olive Garden's takeout containers are dishwasher safe, which Starboard says requires Olive Garden to "over-engineer package and drive up costs significantly without necessarily driving any benefit associated with more foot traffic of increased pricing power on customers."
Financial - covenants may cap leverage or a company’s debt by asserting a maximum debt to equity ratio, or minimum debt to cash flow coverage ratio.
Operating Activity - prevent you from using business proceeds (your capital and profits) for certain purposes without bank approval
Reporting - may permit the bank to demand to see your records at any time without advance notice
Preservation - required to purchase casualty insurance and maintain property and equipment to the bank’s standard.
Investment Expenditure - They can prevent you from making certain capital expenditures,strategic acquisitions and other cash investments that could be beneficial or competitively necessary for your
company’s growth.
Asset Sale - may prevent your company from selling off assets during the course of business, restrictingtransfers and voluntary liquidation as well. You may be forced to hold onto underperforming assets to satisfy these covenants and lower the returns on your capital.
Cash payout - covenants restrict transfers of wealth among the owners of your firm. Common covenants of this type restrictdividends, prepayment of subordinated debt, including prepayment. This could prevent the buyout of a partner or shareholder even in the event of their death.
Management - restrict the governance structure of your company, keeping you from merging with other firms, consolidating your business, transferring ownership or changing your management
or board without explicit bank approval
Trea
1st party covers damage to you 3rd party covers damage to someone else
1st party -Cost of identifying scope of loss, taking measures to stop or contain, notifying customers & others, costs of counsel & exports, cost of restoring data.
Opportunity cost of employees attending to the breach is not covered, normally. It is an optional endorsement (for cost).
Standard loss policies Exclude electronic data
3rd party has many exclusions, especially for terrorism or violation of the law
Brokers can help you benchmark your peers. Companies are put into buckets by industry, e.g. big box retail or big box retail home improvement
Insurers want to pool customers into similar categories of risk. You want this too.
Exclusion: unfavorable business conditions, if you would have lost the money anyway insurance won't cover