Saturday, March 31, 2007

Parker Hannifin's CEO Discover's Customer Needs

Tuesday's Wall Street Journal featured a wonderful article on the radical new pricing policies initiated by the new CEO of Parker Hannifin.

It's sort of a good news/bad news story.

The bad news is, PH had actually hard-coded a fixed markup percentage into their pricing management software. Talk about inflexible, stupid, and being insensitive to the uses to which your products are put. I can see using a fixed minimum markup percentage, but not a fixed universal markup.

The good news is that the new CEO, Don Washkewicz, has brought an end to this practice, and instituted a 'willingness to pay' style, application-sensitive approach to markups. The customer's applications of PH's seals is now a paramount input into pricing. Thus, the company's marketing and product people focus more, not less, on customers, and their applications of PH's products. PH added $200MM of revenue and income to its P&L in four years, bringing it up to its current $673MM.

Two interesting things were mentioned in this story. First, how inept external consultants advocated PH develop a greater customer service focus, but neglect to accompany that with segmentation, product differentiation, and pricing strategies to pay for it. Second, PH had a total insensitivity to how its products were used by its customers. They knew next to nothing about the real customer problems, applications, and options for which PH's seals were alternative solutions.

In short, a lack of fundamental marketing skills existed at Parker Hannifin prior to Washkewicz's elevation to CEO. Now, PH has such a focus, and I hope it makes an appearance in my equity portfolios soon.

A Kindred View on "Shareholder Democracy"

As I wrote in this post recently, all I really want "shareholder democracy" to mean is that I can buy or sell equity shares, cheaply, into a liquid market, whenever I wish.

Now, according to Wednesday's op-ed piece by Holman Jenkins in the Wall Street Journal, I am not alone. While beginning with the Conrad Black case, Jenkins moves to the general topic of shareholder democracy and corporate governance about 3/4 of the way through his piece.

He wrote,

"Alas, corporate governance has become a new favorite cause of society's forces of self-righteousness. They flog the unanalytical ideal of "shareholder democracy." Democracy is a four-syllable word for "good" in these mouths, but does it really apply in this case of companies whose shares trade on a stock exchange?

Investors, after all, have thousands of companies to choose from, with ease of entry and exit afforded through the stock market....You are equally free to buy buy shares in a company in which control remains with a dominant shareholder whose interests may not be synonymous with your own."

Thus, Jenkins agrees with me on the key point that what is essential is the easy entry to, and exit from, equity positions. Voting on various proxy issues is, he agrees, tangential, because you can, in fact, select from numerous equities in which to invest. Jenkins goes further than I did, pointing out that there are markets for each type of company/corporate governance model.

It's a valid and good, nuanced point. As I have written elsewhere in a prior post, if one is Eddie Lampert, voting is moot. You just tender for the company's shares and own the problem. Short of that, I'm not sure what shareholder voting gets you, but, as Jenkins notes, to each his own. You can find almost any model/structure you wish among various listed equities.

As in the case of Warren Buffett echoing my thoughts on the attractiveness, or lack thereof, of certain sectors, it's also nice to be joined by someone like published columnist Holman Jenkins of the Wall Street Journal in seeing the "shareholder democracy" fad for what it is, and focusing instead on the basics- the freedom to buy and sell shares easily and inexpensively.

Friday, March 30, 2007

The Blackstone IPO : Taking Advantage of the Mediocre

Schwarzman must have been planning the Blackstone IPO for some months. Given how quickly it proceeded after the leak a few weeks ago, it was clearly in the works for some time.

Like my recent post about being 'wrong' now, and 'right' later, when the broad, mediocre middle rushes after you, Blackstone/Schwarzman are ahead of the average investor in realizing the end of private equity as we knew it. Or, if not the end, certainly a peak price for private equity firms.

Schwarzman, Blackstone's CEO, is a very bright guy, and no doubt understands Schumpeterian dynamics all too well. After only 22 years, Schwarzman is not so emotionally attached to Blackstone that he is trying to restructure it as its major market sector undergoes radical change. Instead, he's taking the big payday and acknowledging market forces greater than he can control.

Initially, in my three prior posts, here, here and here, I mistakenly believed that the Blackstone IPO would be for common shares of a listed company on an exchange such as the NYSE. Instead, as I read last weekend in the Wall Street Journal, Blackstone is becoming a master-limited partnership, which is, in a sense, very much like the structure of a hedge fund. Limited partners have no say in the operation of the firm, and, after fees and expenses, share in the income of the organization. Apparently, the Blackstone partnership shares would be tradeable.

Thus, my earlier comments regarding Blackstone's inability to continue to do private equity transactions were in error. However, I believe that those transactions will continue to be less lucrative, as the prices rise.

What I find amazing, however, is that investors are lining up to buy shares of an entity in which they can't even measure risk levels. Essentially, they are buying income 'participation shares,' much like I advocated last year in this post regarding corporate governance and takeovers. But, rather than retaining interest in a previously-public firm, they are buying the equivalent of a blind pool.

In a very real sense, Schwarzman has created the best of both worlds- retaining total control and privacy of operations, while establishing a value for the firm, and cashing out while doing it.

Honestly, I have even more respect for him now than I did before. Not that I would be on the other end of an equity transaction from him. And, correspondingly, I have less respect for the investors who buy the Blackstone IPO shares.

Monday, March 26, 2007

Jim Cramer's Confession On The Street.Com TV

My partner emailed me this YouTube video clip from The TV's interview with Jim Cramer. Judging by the comments in the beginning of the clip, it took place sometime in December, before the MacWorld announcements of the iPhone and AppleTV.

I think Cramer speaks quite clearly about both his view of, and actions in support of that view of equity markets. According to him, you really need to be wary of any sort of very short term, especially intra-day, stock price trends.

Cramer dismisses various analysts, Wall Street Journal writers, and CNBC's Bob Pisani as mere pawns who will immediately broadcast whatever lies, rumors or tips they are fed by hedge fund managers like Cramer used to be. According to Cramer's view of equity markets, short-term prices are more likely to be manipulated by large hedge funds with the willingness to create false information and the money to create momentum in their desired direction than to be a function of simple supply and demand forces.

After viewing this clip, I think even less of on-air, real-time "reporting" of breaking stories on CNBC. Far from being only entertainment, they may, instead, be a part of a carefully orchestrated market manipulation.

The manner in which Cramer candidly and off-handedly discusses market manipulation, via false rumors and price manipulations, makes me wonder how anyone else can make money day trading, or even trading with timeframes as long as only a week or two. If Cramer is even remotely correct in his description of how the daily equity markets in the US trade, it's ample reason to have a much longer holding period, such as several months. Like the six-month holding period my equity portfolio management strategy uses. Over such a long timeframe, it's unlikely that an equity's total return will be totally a function of market manipulation.