Yesterday, The Wall Street Journal/CNBC sponsored a conference, hosted by Alan Murray. The topic was, I believe, private equity.
Currently, CNBC has video clips of this interview in its free section, broken into four parts. Because it will soon move to their paid, premium area, I won't bother frustrating readers with a link. However, it is well worth your while to watch the 30 minutes or so of total air time.
As I have written here, back in December of 2005,
"However, what really made me sit up and take notice was Icahn’s pointed comment regarding the modern large-cap American CEO. He feels that, on average, and as a group, they are seriously disadvantaging US business relative to foreign businesses. This is a fascinating viewpoint. It echoes my own research, writing and feelings, some of which are found elsewhere on this blog.
Icahn specifically voiced concern that today’s CEOs are so over-compensated that they simply do not pay sufficient attention to maximizing ongoing shareholder wealth. In this, I totally agree ( see my recent post regarding pay-for-performance for large-cap CEOs). He feels that if this trend continues, American business will lose its competitive edge and, over time, fall victim to hungrier, more attentive foreign competitors."
In his CNBC interview, Icahn explained in much more detail how he thinks this has occurred. I must say, I am in total agreement with him. I actually watched it happen at Chase Manhattan Bank in the late 1980s. Essentially, Icahn contends that today's CEOs are the guys who simply socialized well, didn't do anything notably innovative, nor stupid, and kissed ass. Being no threat to their managers, they were moved up in concert with said managers, resulting in senior executive ranks full of yes-men and average, mediocre "talent." Since a CEO of this type does not want a second smarter than him, the capabilities of the firm's CEOs decline with each generation. A business version of Aristotle's theory on the decline of leadership in society, beginning with the wise, benevolent philosopher-king.
Icahn is really funny, but very insightful and shrewd. He explains, without naming names, why CEOs like Jeff Immelt exist and prosper. He goes so far as to lay the blame not with the boards of these firms, but publicly-held mutual funds. Because those funds are so often desirous of pension money to manage, they will often judiciously withhold criticism of a company, in hopes of getting some business.
Too, although Icahn didn't single this out in the parts of the interview I watched (for some reason, each segment cut out at about the halfway point), once a CEO has made something north of $2-3MM, he really isn't all that motivated to make his shareholders wealthier, if he ever was. His major orientation is to just not lose his lucrative, relatively easy job.
I also found it both funny, and chilling, that Icahn explained that, when he actually gets inside of some of these firms, the managements, including the middle layers, are much worse than imagined.
His comments and insights echoed and supported my own proprietary research findings, which is that very few companies are capable of consistently outperforming the market on the basis of total returns. There just are not that many smart CEOs who are motivated to really take risks in order to enrich their shareholders at a rate better than those owners can realize by simply holding the S&P500 Index.
I think it's a mark of how right Icahn is, that so many corporations attempt to smear his motives and ideas when he arrives on their doorstep, holding a significant position in their company, and wanting a board seat.
Thursday, June 28, 2007
Wednesday, June 27, 2007
What's In The News?
As I read the Wall Street Journal, one of my three major news sources (along with The Economist and CNBC) this morning, I found myself strangely unmoved.
The headlines read,
"How Wall Street Stoked The Mortgage Meltdown," "Exxon, Conoco Exit Venezuela Under Pressure, and "As Competition Rebounds, Southwest Faces Squeeze."
None of them seemed all that interesting, relevant, or surprising to me.
We own Goldman Sachs in our equity portfolio. It's up more than 9% year-to-date, and has recovered some of its recent losses, which were only about 4% in total. I honestly don't think the sub-prime mortgage mess is either going to seriously harm Goldman, the financial services sector as a whole, or the economy.
Will some less stable, diversified funds suffer large losses as lots of that paper is truly "marked to market?" Yes. But it's unlikely to cause some sort of panic, much less a recession or "market meltdown." Last week and a few days this week saw equity investors worrying over this potential outcome. However, as time passes and nobody goes bankrupt, investors seem to be settling down.
How about Exxon and Conoco? Well, we don't own them. Instead, we own OxyPete, Allegheny Energy, and El Paso gas. They're all doing very well, thank you for asking. Occidental is up 24% this year, while the other two have returns of roughly 17% year-to-date. Evidently, none are affected by the Venezuelan mess.
I'm curious to read the article, of course. But I think it's rather obvious what the script is going to be. Does anyone else recall Libya in the late 1960s, when US oil firms were summarily ejected via nationalization?
Lastly, there is Southwest Airlines. Some years ago, our portfolio selection process actually picked Southwest. It was a rarity, as I have commented on the low barriers to entry in this sector. The first paragraphs of the Journal's piece tell you all you need to know,
"For years, Southwest Airlines managed to fly above the industry's storm clouds, trouncing rivals with a hard-to-match formula of low costs and low fares. Now it's facing a painful role reversal.
Its revenue growth has slowed, its costs are mounting, and its resurgent rivals have torn key pages out of its playbook.
"The threat to our future is real," says CEO Gary Kelly.
Don't say I didn't warn you- here, here and here, in these prior posts, in fact. In the last post, I observed,
"What seems to sound the death knell for these regional carriers is their eventual desire for passenger and revenue growth which requires them to outgrow their original, self-contained market segment of travelers. Just because an airline wishes to profitably continue its growth does not mean it should, or will, happen. Thus, Southwest’s dilemma.
It is pushing for growth while its total returns over the last five years are already penalizing its shareholders.
Hard as it may be to accept, many companies simply run out of profitable market segments in which to grow, and then their days of consistently superior returns are over. Airline total return performances seem to reinforce this conclusion with stunning regularity. So much for learning by example, or even from their own mistakes."
It would appear that I have, once again, predicted the outcome of another firm's strategic moves.
The airline industry is so beset with low barriers to entry and shared facilities that it does not take a genius to realize that long term, consistently superior total returns are very unlikely. Southwest had its run some years ago, in terms of consistently superior total return performance. Now, however, that is over.As the Yahoo-sourced chart on the right demonstrates (click on it to see a larger version), Southwest Airlines has been flat for five years, and plunging recently. My rationale for this, as expressed in the post which I quoted above, seems to have been dead on.
I guess it's a good thing I am not an editor for a media publication, because my sense of "news" is probably very different than the average persons. I didn't find any of the three Journal pieces all that compelling. Yet, clearly, it's important and useful that the stories are reported.
Perhaps I would add a considerably greater amount of analysis. But, then, it would resemble some sort of, well, real analysis. Then again, maybe it's better to get in-depth analysis from a more objective source, such as a media publication, than a sell-side brokerage firm which you know is biased.
Tuesday, June 26, 2007
Bear Stearns' Miscalulations
The Wall Street Journal has, understandably, featured several recent articles regarding the Bear Stearns hedge-fund debacles. A piece in the Weekend Journal focused on whether or not Bear would stand behind its one failing fund. Another, yesterday, discussed the mechanics of marking sub-prime-backed CDOs to market. Today's Journal returned its focus to Bear Stearns' corporate situation, as it manages the two hedge funds which have racked up such appalling losses so suddenly
I've spoken with several friends about the developing situation at Bear Stearns. We all agree that this is yet another instance of financial service CEOs on the non-commercial bank side of the sector seemingly ignoring obvious signs of public discontent with their behavior.
To understand some of what is occurring with Bear Stearns, you need to recall that James Cayne, the company's CEO, refused to join the rest of Wall Street in bailing out Long Term Capital Management in 1998. I have been told that he personally rebuffed Merrill Lynch's then-CEO, David Komansky's request that Bear join the party in working out a rescue.
Instead, Bear stood on its legal claims, and refused to reset terms of its loans to LTCM.
Now, of course, the shoe is on the other foot. This probably explains, in large part, why Merrill recently moved quickly to seize and auction collateral it held for margin loans to Bear's troubled hedge fund.
Yes, what goes around, comes around. Even if it takes a decade or so to do so.
This weekend's piece in the Journal was eye-opening, as Bear's fund manager, Ralph Cioffi gathered his fund's creditors in a meeting and demanded, among other concessions, a 12-month moratorium on margin calls against the fund by its lenders. While doing so, however, he acknowledged, to an inquiring creditor, that the fund's notional parent, Bear Stearns, did not anticipate providing any capital to shore up the fund's losses during this period.
This is the sort of attitude that not only irks other Wall Street firms, but is seen by the less-well informed public as simply walking away from responsibility.
It's likely that, as with most funds, the two troubled Bear Stearns funds are technically separate corporations, 'owned' by their shareholders, with a separate 'board,' and a contract given to Bear Stearns to manage the fund. Thus, Cayne's attitude that Bear has no technical obligation to assume, or make good on, or even simply provide capital for, the egregious losses in these funds.
Let's be clear on the sort of funds these are. They were developed within the past year or so, explicitly to bottom-fish the sub-prime loan market. They constitute organized efforts to take advantage of the sector's problems, buying low and, so the funds' managers hoped, holding and selling as the sector turned around. Only it hasn't turned around.
Basically, Cioffi and his colleagues made a naked bet on the direction of yields and prices of sub-prime mortgage loans, and got it wrong. By leveraging something like 10:1, they blew through the equity behind their fund with recent losses.
If the two funds were actually just standalone entities, that would be the end of the story. Their creditors would seize the collateral, organize asset sales, satisfy what obligations they could, and the funds would be closed.
However, since the notional parent is a large, stable, well-capitalized Wall Street investment bank, the picture looks somewhat different. Even though the funds' customers are 'sophisticated investors,' the public and, perhaps more importantly, the Democratically-controlled House of Representatives, will view the situation as a wealthy investment bank sticking its customers with losses, while it reaps management fees from the funds, and declines to share the losses.
Sometimes, businesses hurt themselves by ignoring the effect of their actions on the larger society in which they operate. I suspect this is one of those times. I think James Cayne is making a serious mistake vis a vis his company's troubled sub-prime mortgage hedge funds. After shuffling his feet and first refusing to help the funds with loans, to allow them to make margin calls without selling assets, he has already sent a message to the markets, other Wall Street firms, Congress, and the public. His reversal on this issue, and decision to lend to the funds, now comes a day late, if not a dollar short.
Who would now want to invest in a Bear hedge fund? What other firms will extend loans to Bear funds now, without extra protection for the value of those loans? Perhaps they will restrict the leverage that a Bear Stearns-backed fund may use.
And surely, Barney Frank will be using this example to drive new hedge fund regulation through Congress.
It's a shame that James Cayne is repeating such callous, ill-considered and naive behavior in this matter. By attempting to take refuge in the legalities of the situation, he may win the battle, but will almost certainly help lose the war for all of the capital markets, and other Wall Street firms.
I've spoken with several friends about the developing situation at Bear Stearns. We all agree that this is yet another instance of financial service CEOs on the non-commercial bank side of the sector seemingly ignoring obvious signs of public discontent with their behavior.
To understand some of what is occurring with Bear Stearns, you need to recall that James Cayne, the company's CEO, refused to join the rest of Wall Street in bailing out Long Term Capital Management in 1998. I have been told that he personally rebuffed Merrill Lynch's then-CEO, David Komansky's request that Bear join the party in working out a rescue.
Instead, Bear stood on its legal claims, and refused to reset terms of its loans to LTCM.
Now, of course, the shoe is on the other foot. This probably explains, in large part, why Merrill recently moved quickly to seize and auction collateral it held for margin loans to Bear's troubled hedge fund.
Yes, what goes around, comes around. Even if it takes a decade or so to do so.
This weekend's piece in the Journal was eye-opening, as Bear's fund manager, Ralph Cioffi gathered his fund's creditors in a meeting and demanded, among other concessions, a 12-month moratorium on margin calls against the fund by its lenders. While doing so, however, he acknowledged, to an inquiring creditor, that the fund's notional parent, Bear Stearns, did not anticipate providing any capital to shore up the fund's losses during this period.
This is the sort of attitude that not only irks other Wall Street firms, but is seen by the less-well informed public as simply walking away from responsibility.
It's likely that, as with most funds, the two troubled Bear Stearns funds are technically separate corporations, 'owned' by their shareholders, with a separate 'board,' and a contract given to Bear Stearns to manage the fund. Thus, Cayne's attitude that Bear has no technical obligation to assume, or make good on, or even simply provide capital for, the egregious losses in these funds.
Let's be clear on the sort of funds these are. They were developed within the past year or so, explicitly to bottom-fish the sub-prime loan market. They constitute organized efforts to take advantage of the sector's problems, buying low and, so the funds' managers hoped, holding and selling as the sector turned around. Only it hasn't turned around.
Basically, Cioffi and his colleagues made a naked bet on the direction of yields and prices of sub-prime mortgage loans, and got it wrong. By leveraging something like 10:1, they blew through the equity behind their fund with recent losses.
If the two funds were actually just standalone entities, that would be the end of the story. Their creditors would seize the collateral, organize asset sales, satisfy what obligations they could, and the funds would be closed.
However, since the notional parent is a large, stable, well-capitalized Wall Street investment bank, the picture looks somewhat different. Even though the funds' customers are 'sophisticated investors,' the public and, perhaps more importantly, the Democratically-controlled House of Representatives, will view the situation as a wealthy investment bank sticking its customers with losses, while it reaps management fees from the funds, and declines to share the losses.
Sometimes, businesses hurt themselves by ignoring the effect of their actions on the larger society in which they operate. I suspect this is one of those times. I think James Cayne is making a serious mistake vis a vis his company's troubled sub-prime mortgage hedge funds. After shuffling his feet and first refusing to help the funds with loans, to allow them to make margin calls without selling assets, he has already sent a message to the markets, other Wall Street firms, Congress, and the public. His reversal on this issue, and decision to lend to the funds, now comes a day late, if not a dollar short.
Who would now want to invest in a Bear hedge fund? What other firms will extend loans to Bear funds now, without extra protection for the value of those loans? Perhaps they will restrict the leverage that a Bear Stearns-backed fund may use.
And surely, Barney Frank will be using this example to drive new hedge fund regulation through Congress.
It's a shame that James Cayne is repeating such callous, ill-considered and naive behavior in this matter. By attempting to take refuge in the legalities of the situation, he may win the battle, but will almost certainly help lose the war for all of the capital markets, and other Wall Street firms.
Monday, June 25, 2007
Corporations & Remote Collaboration
The Wall Street Journal's Weekend section, two weeks ago, featured a section, in concert with MIT, concerning how corporations work in the modern era from many, remote locations.
In her article, "Working Together...When Apart," Lynda Gratton proposed 10 rules for making global, virtual teamwork successful. It's worth reading the entire piece, to get the full impact of the findings. She provides details about the origin of her information. In brief, it is the product of case studies at companies judged to have had successful virtual teams, followed by a London Business School survey of over 1,500 virtual team members at 15 US and multinational companies. From this information, the 10 rules common to successful virtual teams were distilled.
When I first read the list, my reaction was one of doubt that this sort of thing was going to be very replicable. I recall being at Accenture (then Andersen Consulting) in the 1990s, when we began using LotusNotes on project teams and in industry practices across the globe. Suffice to say, it wasn't pretty, and it wasn't all that effective, either.
However, as I returned to Ms. Gratton's piece to write about it, I am struck by another thought. Much of it is just common sense. For example,
2. Choose a few team members who already know each other.
5. Break the team's work up into modules so that progress in one location is not overly dependent on progress in another.
9. Ensure the task is meaningful to the team and the company.
Some of the other 'rules' make sense as well, but don't exactly seem like rocket science.
On one hand, one is tempted to give credit to the author(s) for distilling the 10 things that make the most difference. On the other hand, they aren't all that surprising.
As I wrote this, it occurred to me that there are some fairly older examples, before the internet age, which must have also produced rules lists like this, e.g., Boeing jet design, IBM mainframe computers, McDonnell Douglas jet and bomber design, intel chip design.
Surely some of these earlier projects learned similar lessons?
In the end, I found this article a bit disappointing. And reinforcing of something my proprietary research on equity performance discovered. Over time, surprisingly few companies can operate so effectively as to consistently outperform the S&P500. Getting things right, growing, and continuing to perform well, seems to remain a sort of 'catching lightning in a bottle' trick, even to this day.
In her article, "Working Together...When Apart," Lynda Gratton proposed 10 rules for making global, virtual teamwork successful. It's worth reading the entire piece, to get the full impact of the findings. She provides details about the origin of her information. In brief, it is the product of case studies at companies judged to have had successful virtual teams, followed by a London Business School survey of over 1,500 virtual team members at 15 US and multinational companies. From this information, the 10 rules common to successful virtual teams were distilled.
When I first read the list, my reaction was one of doubt that this sort of thing was going to be very replicable. I recall being at Accenture (then Andersen Consulting) in the 1990s, when we began using LotusNotes on project teams and in industry practices across the globe. Suffice to say, it wasn't pretty, and it wasn't all that effective, either.
However, as I returned to Ms. Gratton's piece to write about it, I am struck by another thought. Much of it is just common sense. For example,
2. Choose a few team members who already know each other.
5. Break the team's work up into modules so that progress in one location is not overly dependent on progress in another.
9. Ensure the task is meaningful to the team and the company.
Some of the other 'rules' make sense as well, but don't exactly seem like rocket science.
On one hand, one is tempted to give credit to the author(s) for distilling the 10 things that make the most difference. On the other hand, they aren't all that surprising.
As I wrote this, it occurred to me that there are some fairly older examples, before the internet age, which must have also produced rules lists like this, e.g., Boeing jet design, IBM mainframe computers, McDonnell Douglas jet and bomber design, intel chip design.
Surely some of these earlier projects learned similar lessons?
In the end, I found this article a bit disappointing. And reinforcing of something my proprietary research on equity performance discovered. Over time, surprisingly few companies can operate so effectively as to consistently outperform the S&P500. Getting things right, growing, and continuing to perform well, seems to remain a sort of 'catching lightning in a bottle' trick, even to this day.
Friday, June 22, 2007
Blackstone, Schwarzman, & The Tax Code
The current flap over: Blackstone's IPO; Steve Schwarzman's ostentatious lifestyle, and; Congress' intent to modify the tax code to "get" Schwarzman and his ilk, has many interesting aspects on which to comment.
Regarding the Blackstone IPO, my thoughts have not changed since I wrote a multi-part series, part three of which is found here, and this later piece. You can also simply click on the "Blackstone" topic under the Labels list, and read all of my pieces about this firm and its recent activities.
Basically, I suspect Schwarzman is selling at the top. More on this when I discuss Schwarzman's personal issues in the media of late.
Next, as I have frequently said to my partner recently, regarding the Blackstone IPO,
"Why in the world would you be buying, when one of the smartest private equity shops on Wall Street is selling?"
I also said this at the time of Goldman's IPO.
Then there is the little issue of 'fair value' for many of Blackstone's components, as discussed in one of my earlier, linked posts, above.
In summary, the Blackstone IPO essentially amounts to selling investors a limited interest in a blind investment pool. Once I put it that way, most intelligent investors realize that the Blackstone brand name is the only thing that gives this IPO any value whatsoever.
With that observation, let's turn to Steve Schwarzman's lifestyle. The Wall Street Journal and CNBC have run countless articles recently discussing Schwarzman's wealth, income from the IPO, his dietary habits (the expensive stone crabs), his birthday party, that he has a chauffeur and butler, and what tax rates those employees pay, relative to Schwarzman (allegedly higher than their boss).
Rather than comment on Schwarzman's lifestyle, let me try another tack.
Since an investor is buying a non-voting interest in a blind pool, s/he has to trust the judgment of the CEO and senior management of Blackstone. Does Schwarzman's recent behavior cause you to trust his judgment?
Here's a guy who is rapidly becoming the John D. Rockefeller of his era- obscenely wealthy, seemingly arrogant, aloof, and insensitive to the opulent and decadent life he is perceived to lead.
Hardly the poster-boy you want for your brand new equity asset.
Years ago, former Treasury Secretary, former Salomon partner, former WesRay partner Bill Simon was similarly featured in the media as being distant and obscenely wealthy for, come to think of it, being an early leveraged buyout king. Fairly rapidly, (I assume) his publicist set to work showcasing Bill and family's Christmas Day stint serving food at a local Morristown, New Jersey soup kitchen, as well as his many philanthropic activities. Rather than remaining demonized, Simon became more human and caring.
Not so, Steve Schwarzman. He seems to have this 'thumb in your eye' attitude. The comments about not having the slightest idea how expensive his and his wife's lunch of fresh stone crabs was. His frequently-quoted comments about wanting to 'win' at private equity, be the best, beat everyone else.
I think it's relevant that Schwarzman seems to have lost, assuming he had some to start with, any common sense regarding appearing as 'obscenely rich public enemy number one.' Personally, I would not want to own interest in a company led by someone whose judgment is now seeming so clouded.
Think Dennis Koslowski, Michael Millken, Ivan Boesky, et al. Things just seem to go badly when corporate titans wander into the public eye too prominently. None of those companies fared well as their leaders came under scrutiny.
Pete Peterson plans to retire as Chairman of Blackstone. Nobody really knows Larry Fink. Maybe they should gently nudge Schwarzman aside and let Fink become the lower-key, more kindly persona of the firm?
Finally, we come to the tax code aspect. This article describes the current tax situation for private equity partnerships, and proposed tax code changes.
My business partner and I discussed this yesterday over lunch. The reality of the tax code is that it is a collection of special-interest loopholes. Various industries get pilloried, or coddled, depending upon the year, the party in power in Congress, and economic conditions. Think about pharma, oil, 'high tech,' now private equity.
It's understandable that private equity partnerships should enjoy a capital gains treatment of their carried interest in risky buyout-and-turnarounds. However, if that includes paying lower rates on fairly quick payouts of 'special dividends' and operating profits of their owned operating units, then it's less clear that this is 'fair' to begin with.
It's unclear to me, as I write this post this morning, whether or not such special cashflows are shared by limited private equity 'partners,' i.e., investors, or only by the master partners. If it's the latter, then I would have less of a problem with the particular taxation of such income at shorter-term rates.
I don't condone Congress using Schwarzman's personal lifestyle and financial situation as a reason to "get" all private equity firm partners and their wealth. That's capricious, confiscatory, and symptomatic of class warfare. We don't need that. It is, in fact, antithetical to the whole basis of the American Dream- work hard, get rich.
For Congress to decide this month that some people who have succeeded must now be penalized, is extremely discomforting.
By the way, while I'm on the topic, does anyone else recall the last time Congress legislated its righteous indignation at another corporate excess? CEO compensation?
Remember when Congress became so critical of CEOs who earned large cash compensation that they imposed a special tax rate for salaries above $1MM?
The result was to pay CEOs with ....... stock options! Yes, the now-discredited compensation scheme that was spawned by Congressional ineptitude and jealousy.
Fact is, as Lloyd Blankfein, Goldman Sachs CEO, opined on CNBC this morning, tax code changes should be carefully considered by Congress before being enacted. Knee-jerk, envy-based changes will have serious consequences.
What Blankfein didn't explicitly say, but implied, was this. Who do you think is, on average, smarter- the average Wall Street/private equity partnership CEO, or a US Congressman or Senator?
Right. Nobody really smart stays in politics for long. So you have a bunch of basically mediocre, average-intelligence, at best, Congressmen and Senators enacting legislation, to be subsequently outwitted by some of America's most intelligent, best-educated and experienced minds.
The same thing happens every election cycle with campaign finance so-called "reform."
The ill-considered changes in the tax code for private (equity) partnerships will be no different.
Will such changes in the tax code trigger a private equity pullback, and, correspondingly, a public equity market value meltdown? The next market collapse, with attendant domino effect on asset values, buying behavior among average Americans, and, finally, economic recession?
Possibly. If it does, figure on a radical change in the political landscape in the runup to the 2008 Presidential and Congressional elections.
However, my guess is that it won't trigger such apocalyptic consequences. More likely, it will result in a higher hurdle rate for deals, a slowdown in their pace, and a gradual cooling off of the private equity deal frenzy.
However, nobody really knows. This particular focusing event, the Blackstone IPO, is fast becoming the transformational event in the longish journey of private equity firms as they emerge from their shadowy world of truly private activity, into the glaring light of publicly-traded interests.
One final observation. It's noteworthy that, despite the enormous financial and political stakes involved, pretty much everyone is fated to behave in their 'real' fashion, despite how it plays out in public.
Schwarzman is seen as a callous, ruthless financial titan, insensitive to how his actions affect public and political reactions to them. He is fast-becoming the lightning rod for legislative action to punish wealthy capitalists like him.
Henry Waxman appears as the power-hungry socialist he is, attempting to interject himself into the Blackstone IPO process, via an appeal to the SEC, with no basis for it. With any luck, his antics will attract sufficient attention to shift control of either or both Houses of Congress in two more years.
Investors are, even now, at 9:36am, feverishly bidding to own an uncontrollable, non-voting share of a pig in a poke. Sometime further down the road, when the nth private equity partnership sells public interest shares, there will be a fiasco of some sort, and perpetrators will be accused and convicted in the press and Congress long before anyone is indicted and brought to trial.
Some things never change, do they?
Regarding the Blackstone IPO, my thoughts have not changed since I wrote a multi-part series, part three of which is found here, and this later piece. You can also simply click on the "Blackstone" topic under the Labels list, and read all of my pieces about this firm and its recent activities.
Basically, I suspect Schwarzman is selling at the top. More on this when I discuss Schwarzman's personal issues in the media of late.
Next, as I have frequently said to my partner recently, regarding the Blackstone IPO,
"Why in the world would you be buying, when one of the smartest private equity shops on Wall Street is selling?"
I also said this at the time of Goldman's IPO.
Then there is the little issue of 'fair value' for many of Blackstone's components, as discussed in one of my earlier, linked posts, above.
In summary, the Blackstone IPO essentially amounts to selling investors a limited interest in a blind investment pool. Once I put it that way, most intelligent investors realize that the Blackstone brand name is the only thing that gives this IPO any value whatsoever.
With that observation, let's turn to Steve Schwarzman's lifestyle. The Wall Street Journal and CNBC have run countless articles recently discussing Schwarzman's wealth, income from the IPO, his dietary habits (the expensive stone crabs), his birthday party, that he has a chauffeur and butler, and what tax rates those employees pay, relative to Schwarzman (allegedly higher than their boss).
Rather than comment on Schwarzman's lifestyle, let me try another tack.
Since an investor is buying a non-voting interest in a blind pool, s/he has to trust the judgment of the CEO and senior management of Blackstone. Does Schwarzman's recent behavior cause you to trust his judgment?
Here's a guy who is rapidly becoming the John D. Rockefeller of his era- obscenely wealthy, seemingly arrogant, aloof, and insensitive to the opulent and decadent life he is perceived to lead.
Hardly the poster-boy you want for your brand new equity asset.
Years ago, former Treasury Secretary, former Salomon partner, former WesRay partner Bill Simon was similarly featured in the media as being distant and obscenely wealthy for, come to think of it, being an early leveraged buyout king. Fairly rapidly, (I assume) his publicist set to work showcasing Bill and family's Christmas Day stint serving food at a local Morristown, New Jersey soup kitchen, as well as his many philanthropic activities. Rather than remaining demonized, Simon became more human and caring.
Not so, Steve Schwarzman. He seems to have this 'thumb in your eye' attitude. The comments about not having the slightest idea how expensive his and his wife's lunch of fresh stone crabs was. His frequently-quoted comments about wanting to 'win' at private equity, be the best, beat everyone else.
I think it's relevant that Schwarzman seems to have lost, assuming he had some to start with, any common sense regarding appearing as 'obscenely rich public enemy number one.' Personally, I would not want to own interest in a company led by someone whose judgment is now seeming so clouded.
Think Dennis Koslowski, Michael Millken, Ivan Boesky, et al. Things just seem to go badly when corporate titans wander into the public eye too prominently. None of those companies fared well as their leaders came under scrutiny.
Pete Peterson plans to retire as Chairman of Blackstone. Nobody really knows Larry Fink. Maybe they should gently nudge Schwarzman aside and let Fink become the lower-key, more kindly persona of the firm?
Finally, we come to the tax code aspect. This article describes the current tax situation for private equity partnerships, and proposed tax code changes.
My business partner and I discussed this yesterday over lunch. The reality of the tax code is that it is a collection of special-interest loopholes. Various industries get pilloried, or coddled, depending upon the year, the party in power in Congress, and economic conditions. Think about pharma, oil, 'high tech,' now private equity.
It's understandable that private equity partnerships should enjoy a capital gains treatment of their carried interest in risky buyout-and-turnarounds. However, if that includes paying lower rates on fairly quick payouts of 'special dividends' and operating profits of their owned operating units, then it's less clear that this is 'fair' to begin with.
It's unclear to me, as I write this post this morning, whether or not such special cashflows are shared by limited private equity 'partners,' i.e., investors, or only by the master partners. If it's the latter, then I would have less of a problem with the particular taxation of such income at shorter-term rates.
I don't condone Congress using Schwarzman's personal lifestyle and financial situation as a reason to "get" all private equity firm partners and their wealth. That's capricious, confiscatory, and symptomatic of class warfare. We don't need that. It is, in fact, antithetical to the whole basis of the American Dream- work hard, get rich.
For Congress to decide this month that some people who have succeeded must now be penalized, is extremely discomforting.
By the way, while I'm on the topic, does anyone else recall the last time Congress legislated its righteous indignation at another corporate excess? CEO compensation?
Remember when Congress became so critical of CEOs who earned large cash compensation that they imposed a special tax rate for salaries above $1MM?
The result was to pay CEOs with ....... stock options! Yes, the now-discredited compensation scheme that was spawned by Congressional ineptitude and jealousy.
Fact is, as Lloyd Blankfein, Goldman Sachs CEO, opined on CNBC this morning, tax code changes should be carefully considered by Congress before being enacted. Knee-jerk, envy-based changes will have serious consequences.
What Blankfein didn't explicitly say, but implied, was this. Who do you think is, on average, smarter- the average Wall Street/private equity partnership CEO, or a US Congressman or Senator?
Right. Nobody really smart stays in politics for long. So you have a bunch of basically mediocre, average-intelligence, at best, Congressmen and Senators enacting legislation, to be subsequently outwitted by some of America's most intelligent, best-educated and experienced minds.
The same thing happens every election cycle with campaign finance so-called "reform."
The ill-considered changes in the tax code for private (equity) partnerships will be no different.
Will such changes in the tax code trigger a private equity pullback, and, correspondingly, a public equity market value meltdown? The next market collapse, with attendant domino effect on asset values, buying behavior among average Americans, and, finally, economic recession?
Possibly. If it does, figure on a radical change in the political landscape in the runup to the 2008 Presidential and Congressional elections.
However, my guess is that it won't trigger such apocalyptic consequences. More likely, it will result in a higher hurdle rate for deals, a slowdown in their pace, and a gradual cooling off of the private equity deal frenzy.
However, nobody really knows. This particular focusing event, the Blackstone IPO, is fast becoming the transformational event in the longish journey of private equity firms as they emerge from their shadowy world of truly private activity, into the glaring light of publicly-traded interests.
One final observation. It's noteworthy that, despite the enormous financial and political stakes involved, pretty much everyone is fated to behave in their 'real' fashion, despite how it plays out in public.
Schwarzman is seen as a callous, ruthless financial titan, insensitive to how his actions affect public and political reactions to them. He is fast-becoming the lightning rod for legislative action to punish wealthy capitalists like him.
Henry Waxman appears as the power-hungry socialist he is, attempting to interject himself into the Blackstone IPO process, via an appeal to the SEC, with no basis for it. With any luck, his antics will attract sufficient attention to shift control of either or both Houses of Congress in two more years.
Investors are, even now, at 9:36am, feverishly bidding to own an uncontrollable, non-voting share of a pig in a poke. Sometime further down the road, when the nth private equity partnership sells public interest shares, there will be a fiasco of some sort, and perpetrators will be accused and convicted in the press and Congress long before anyone is indicted and brought to trial.
Some things never change, do they?
Thursday, June 21, 2007
Web Radio Tries To Go Mobile
Monday's Wall Street Journal carried a piece describing how web-based radio is now aiming to go mobile, rivaling XM and Sirius.
According to the article,
"Unlike satellite radio, Internet radio offers the potential for greater personalization without the cost of monthly subscriptions or satellite receivers."
Additionally, it notes that Internet radio uses stored program material which is 'pushed' down to the receivers. That makes it essentially a playlist of songs.
So, unlike XM and Sirius, or most 'radio,' Internet radio doesn't have a "live" component. It's just a unique mix of music, or other program material. Call me old-fashioned, but when I think of "radio," I think of news, live voices/commentary, and maybe some weather and traffic.
Internet "radio" is really just another digital music download method which can play through your radio.
How does this differ from my nearly-limitless capacity iPod?
From my limited experience with Internet radio through my PC, I know it can be soothing and enjoyable to listen to a stream of pre-programmed tunes while working. But I would not envision paying for that type of pablum on a hand-held receiver, or in my car.
Further, using those Internet radio stations prevents me from hearing other audio on my PC.
Unless I'm mistaken, XM and Sirius are, or were, trying to merge, because the market for their services hasn't been growing sufficiently quickly to give their business model a reasonable chance for profitability anytime soon.
Now we have an ostensibly cheaper, less value-added version, Internet radio, which is simply a glorified playlist.
I know there is at least one MP3 player, Sansa Connect, about which I wrote here, that allows 'rental' of music, pushed via WiFi. And I can always buy music for 99 cents per track from iTunes, and use my iPod. With the addition of a relatively inexpensive wireless accessory, or an older-technology cassette-based adapter, I can listen to my iPod in my car.
So, remind me why I want to buy another expensive electronic device, and probably pay a monthly fee, in order to have yet another collection of music, and process to learn. But I don't actually own the music.
As I opined in my Sansa Connect post, perhaps it's just that I'm not the target market for Internet radio. However, it really doesn't seem to add much more to my life than another method of downloading music to a portable digital player. Doesn't almost everyone now have access to a PC, high-speed access, and iTunes?
Who needs Internet "radio," when it's really just another means of playing digital music.
According to the article,
"Unlike satellite radio, Internet radio offers the potential for greater personalization without the cost of monthly subscriptions or satellite receivers."
Additionally, it notes that Internet radio uses stored program material which is 'pushed' down to the receivers. That makes it essentially a playlist of songs.
So, unlike XM and Sirius, or most 'radio,' Internet radio doesn't have a "live" component. It's just a unique mix of music, or other program material. Call me old-fashioned, but when I think of "radio," I think of news, live voices/commentary, and maybe some weather and traffic.
Internet "radio" is really just another digital music download method which can play through your radio.
How does this differ from my nearly-limitless capacity iPod?
From my limited experience with Internet radio through my PC, I know it can be soothing and enjoyable to listen to a stream of pre-programmed tunes while working. But I would not envision paying for that type of pablum on a hand-held receiver, or in my car.
Further, using those Internet radio stations prevents me from hearing other audio on my PC.
Unless I'm mistaken, XM and Sirius are, or were, trying to merge, because the market for their services hasn't been growing sufficiently quickly to give their business model a reasonable chance for profitability anytime soon.
Now we have an ostensibly cheaper, less value-added version, Internet radio, which is simply a glorified playlist.
I know there is at least one MP3 player, Sansa Connect, about which I wrote here, that allows 'rental' of music, pushed via WiFi. And I can always buy music for 99 cents per track from iTunes, and use my iPod. With the addition of a relatively inexpensive wireless accessory, or an older-technology cassette-based adapter, I can listen to my iPod in my car.
So, remind me why I want to buy another expensive electronic device, and probably pay a monthly fee, in order to have yet another collection of music, and process to learn. But I don't actually own the music.
As I opined in my Sansa Connect post, perhaps it's just that I'm not the target market for Internet radio. However, it really doesn't seem to add much more to my life than another method of downloading music to a portable digital player. Doesn't almost everyone now have access to a PC, high-speed access, and iTunes?
Who needs Internet "radio," when it's really just another means of playing digital music.
Wednesday, June 20, 2007
GE's & Pearson's Reported Bid for the Wall Street Journal
It's hard to know just where to begin this post. It has so many interesting angles.To begin with, let's take a look at this Yahoo-sourced price chart (click on the chart to view a larger version) for Pearson, LLC, GE, Dow Jones, and the S&P500 for the past five years. Ironically, of the three companies, Pearson has had the best five-year record of stock price performance (which I'm using here as a quick proxy for total returns), followed by GE and Dow Jones.
Even with Dow Jones' recent uptick in price, due exclusively to the acquisition offer by Rupert Murdoch (discussed here), it still badly trails the S&P. As does GE, despite its recent runup. The latter's price gains, by the way, are confined to about three weeks in the past five years, all of those weeks being in the past three months. If anything, it could well be some institutional investors pre-positioning for an eventual GE breakup.However, back to the subject of the Dow Jones offer. Last month, I wrote, in part, in that linked post,
"The Dow Jones board's recent Chair has been trying to goose the company's performance, to little avail. My guess is that most investors understand that the old media pond within which Dow Jones lives is going to overwhelm the effects of any one firm's individual efforts. It's time for a more modern media vehicle to properly invest in and use the Journal's brand franchise.
No, the narrow version of the journalistic independence argument won't work for a publicly held company. Maybe if Ottoway and the Bancrofts wanted to take the firm private. But that's not what they want. They want top dollar and journalistic immunity from any economic realities.The likely best outcome for the Journal and the rest of Dow Jones' media assets is to join a modern, global multimedia entity which can leverage their values further than is possible currently, while affording investment in them to retain their current competitive attributes. More than anyone else in media, Murdoch fits this description.
The crocodile tears over a potential loss of editorial independence and a standalone media presence are misplaced. This is about a too-small, old media company which has failed to properly take advantage of its best brands to create shareholder value. It's time for the Bancrofts to put up or sell. Either commit to investing in Dow Jones to enable it to consistently earn superior returns and realize its brand values, or sell it to someone who can."
Seen from this perspective, my own analysis of the recently-revealed GE-Pearson plans for a joint takeover of Dow Jones is as follows.
First, as the Wall Street Journal article published yesterday noted, most M&A deals are done from weakness, not strength. This one is no exception. Dow Jones isn't courting any suitors.
Rather, Murdoch wants the world's premier business print news brand to fuel his multimedia plans for the business news sector.
As such, it's difficult to see what Pearson adds, because it is a print publisher. In fact, according to various sources, its shareholders have rewarded it for reducing emphasis on its Financial Times unit. In fact, it's no accident that Pearson and Dow Jones both lag the S&P. Expensive, print-based business news organizations in the multimedia, YouTube and cable world, are just waiting to be cannibalized via Schumpeterian dynamics.
Now we turn to GE. Where to start? Here's a company that can't get out of its own way to reward investors with consistently superior returns for nearly six years under CEO Jeff Immelt. Now, it wants to form a closely-held joint venture with a European-based company, to merge print businesses.
What flavor of Kool-Aid are they drinking over at GE and NBC/Universal these days? You've got different social cultures, plus business cultures to merge, and a third-party entity to form, answering, one presumes to both parents.
Yeah. That's a surefire recipe for success. What Immelt's merry band can't manage with their own, wholly-owned assets, they will now fix by sharing a completely new business with a third party partner. Oh, and did I mention that the nascent bid is reported to allow for the Bancrofts to continue as minority shareowners?
Yes, that's going to make running or eventually disposing of the unit a lot simpler! Right!
Here's where the part about merging/acquiring from weakness comes in. The only reason GE is doing this is to try to keep The Wall Street Journal out of Murdoch's hands. Everyone knows that Murdoch wants that brand to fuel his imminent cable business news channel. What better brand name to use than "The Wall Street Journal News Channel," or somesuch moniker?
Ironically, whereas Murdoch pledges to invest in The Wall Street Journal, should he buy the parent company, most observers are fairly sanguine about the need for Pearson and GE to cut costs at Dow Jones in order to justify their bid. So not only are the two companies conglomerating an expensive new asset, but they plan to gut it while they attempt to manage it with some sort of trans-Atlantic management structure.
Will GE/Pearson get a credible bid together, and/or win Dow Jones? I have no idea. I will offer this insight, though. If they are successful in acquiring Dow Jones and, thus, The Wall Street Journal, look for it to be a financial non-event, at best, and failure, at worst, over the next decade.
Here's a funny little aspect of media businesses that seems to have escaped everyone. Everyone except, I am guessing, Rupert Murdoch. The key assets walk out of the door each night. Or email their work in from assignments each day.
If GE/Pearson buys Dow Jones, look for Murdoch to spend richly to buy a list of key Wall Street Journal talent, and distribute their well-regarded efforts via his multimedia empire.
Ironically, if GE were to spin NBC/Universal to shareholders, then it could cleanly pursue the Dow Jones acquisition as a media pure play, dispensing with the complexity of the Pearson angle. Perhaps even sell CNBC to Murdoch, and let him have Dow Jones, too, while reaping an enormous profit on the sale.
As with so much Jeff Immelt has touched since he became CEO of GE in late 2001, I think this business move will fail to lift the company's total returns to a consistently superior performance, relative to the S&P500. At best, it will prop up NBC/Universal, which may, when the unit is spun off under Immelt, or as part of a private equity de-conglomeration of GE, fetch a better price. But it's unlikely to be worth the price paid, especially if it leaves the Bancroft's with a say in management or editorial affairs.
Tuesday, June 19, 2007
Yahoo Finally Admits Failures
Yesterday's shuffling of senior officers at Yahoo, beginning with Terry Semel's departure, is long overdue. As long ago as last summer, in this post, I wrote of the company's lack of strategic direction, including Semel's ability to even correctly describe his firm's need for 'strategic planning.'
Since that time, I've written several other pieces about the firm's travails. You can locate the most recent ones by clicking on the label "Yahoo," among the listed topics on the side of the main page of this blog.
As this, ironically, Yahoo-sourced chart displays, the past two years have been abysmal ones for that firm. Especially compared to Google. What clearly meets the eye is how the S&P500 easily outperforms Yahoo, with Google far above it. With its long experience in online businesses, you have to wonder how Yahoo squandered its early brand awareness.I continue to contend, as I did in this post, from March of this year, that Yahoo has never successfully identified just what it offers that can command a sustainable price in the online marketplace.
Now, Semel has stepped down, and co-founder Jerry Yang has assumed the CEO title. As my partner said, when I mentioned it,
"yeah, that's going to work."
Doesn't it always? Chuck Schwab at his firm, or Ted Waite at Gateway Computer. Oh, right, and another computer maker, Dell, with Michael Dell returning to its helm.
Whether recent-hire, and newly-appointed President of Yahoo, CFO Susan Decker, will actually make a difference, is questionable. Some analysts believe she is only going to need to be open to a sale or merger, in order to effectively discharge her new responsibilities. Perhaps so.
I'm sure there will be lots of press about Microsoft/Yahoo or AOL/Yahoo mergers. And maybe one of them will even occur.
To me, however, the most likely epitaph for Yahoo is that it remained the used car of the online world for too long, wasting its early, premier position in so many nascent areas. Now, I believe Schumpeterian dynamics have overtaken it, rendering it a largely has-been collection of concepts, technologies and online information offerings. If they haven't managed to collect revenues for most of this by now, thus setting expectations of free services, what makes you think someone else can do better without losing visitors, resulting in continued problems achieving profitable growth and, with it, consistently superior total returns?
Hello Atlanta
The Sitemeter counter on the bottom of my main blog page provides me with some rather detailed information. While I never record them, individual IP numbers for each visitor are shown, along with the IP provider, web browser, computer operating system, time, date of visit, length, number of pages read, entry page, and a few other items.
That's how I know that someone from Home Depot's Atlanta HQ visits my blog every morning between 7 and 8AM.
I'm guessing that, due to the stream of posts I wrote about the ailing firm while it suffered under mediocre management by Bob Nardelli, someone in the public relations function is tasked with monitoring my blog, among others which have featured the firm.
It may even be an automated blog crawler, as my partner suggests, rather than a live human.
Either way, this post is for you, Home Depot.
As Nardelli's exit has partially removed the spotlight from your firm, it's quite possible that it may be months before I write about your firm again. Most of the interest was in comparing the egregious behavior of Nardelli with his inability to operate Home Depot in a manner which earned consistently superior total returns for shareholders. Something it actually had done for years prior to his arrival. In fact, in those days, I owned and profited from owning the company's stock. I wrote a post about it, here, last July.
However, if Frank Blake would like to know what I know about what level and patterns of operating performances will increase the probabilities that Home Depot's stock will consistently outperform the S&P500, I'd be happy to share my proprietary knowledge with him.
Although I now use my proprietary research for equity portfolio management, it was, in fact, originally developed as a knowledge transfer product. It has been applied to one large financial institution whose then-CEO is, even now, a well-known figure in US business circles. As I did with that firm's senior executives, I am quite sure I can help Blake and his colleagues understand what sort of fundamental operating performances are likely to lead to Home Depot's return to consistently superior total return performances.
Just post a comment here with contact directions, and we can discuss the matter privately.
That's how I know that someone from Home Depot's Atlanta HQ visits my blog every morning between 7 and 8AM.
I'm guessing that, due to the stream of posts I wrote about the ailing firm while it suffered under mediocre management by Bob Nardelli, someone in the public relations function is tasked with monitoring my blog, among others which have featured the firm.
It may even be an automated blog crawler, as my partner suggests, rather than a live human.
Either way, this post is for you, Home Depot.
As Nardelli's exit has partially removed the spotlight from your firm, it's quite possible that it may be months before I write about your firm again. Most of the interest was in comparing the egregious behavior of Nardelli with his inability to operate Home Depot in a manner which earned consistently superior total returns for shareholders. Something it actually had done for years prior to his arrival. In fact, in those days, I owned and profited from owning the company's stock. I wrote a post about it, here, last July.
However, if Frank Blake would like to know what I know about what level and patterns of operating performances will increase the probabilities that Home Depot's stock will consistently outperform the S&P500, I'd be happy to share my proprietary knowledge with him.
Although I now use my proprietary research for equity portfolio management, it was, in fact, originally developed as a knowledge transfer product. It has been applied to one large financial institution whose then-CEO is, even now, a well-known figure in US business circles. As I did with that firm's senior executives, I am quite sure I can help Blake and his colleagues understand what sort of fundamental operating performances are likely to lead to Home Depot's return to consistently superior total return performances.
Just post a comment here with contact directions, and we can discuss the matter privately.
Monday, June 18, 2007
GM's Union Negotiations
According to Thursday's Wall Street Journal, GM is once again in negotiations with the UAW to try to solve its profitability problems on the backs of its blue-collar labor force.
I know, it sounds like I'm some sort of Debsian liberal. But I'm not. I actually happen to believe that the responsibility for Detroit's auto makers' mess is management's, not union's.
As I wrote in one of my first posts on this blog, here,
"Why did unions ever begin taking future pension contributions from the companies for which their members worked, instead of cash compensation?
When you think about it, some of those company CEOs of yesteryear were deceptively brilliant. They managed to get unsecured loans, in the form of future pension “obligations,” from the unions representing their workers. No bank would have lent the same sums on the same terms for the same prices. That’s because, ultimately, companies have much more latitude with which to discharge or change their pension obligations in bankruptcy than they have to escape a group of angry, unified, legally-empowered financial creditors in the same situation
In hindsight, “defined benefit” plans of any type or name, public or private, are a clever way for a public corporation or a government to fund operations with implicit loans. For big steel, autos and airlines, as well as other labor-intensive sectors in the ‘50s, ‘60s and later, this amounted to labor union members lending, via unsecured future compensation and fringe benefit promises from their employers, sums of money for which they had no collateral. Financial engineering which puts modern investment bankers to shame.
Where is the expose on the union leaders who foolishly negotiated, on behalf of their members, to accept unsecured IOUs from companies on terms that the companies’ banks would never have lent them the money?"
As I read the Journal article, what I see is further futility in the actions of all parties. Management attempting to close its cost gap with competitors mainly through cutting its employees' compensations. Union leaders breaking their organization into tiers, so that older members get higher compensation, while sacrificing newer workers, to preserve union membership and jobs. A very French-style, Faustian bargain.
Don't get me wrong. I think the union wage scale has remained stuck at an unsustainably high lever, with respect to the value now added in the manufacture of Detroit products. It's just a little sad to watch even the union leaders sacrifice their own members for the leaders' political aspirations of remaining head of a large union, when the number of members should be declining, with the value of output, and the number of employees necessary to create that output.
Looks like business as usual in Detroit this summer, all the way 'round.
I know, it sounds like I'm some sort of Debsian liberal. But I'm not. I actually happen to believe that the responsibility for Detroit's auto makers' mess is management's, not union's.
As I wrote in one of my first posts on this blog, here,
"Why did unions ever begin taking future pension contributions from the companies for which their members worked, instead of cash compensation?
When you think about it, some of those company CEOs of yesteryear were deceptively brilliant. They managed to get unsecured loans, in the form of future pension “obligations,” from the unions representing their workers. No bank would have lent the same sums on the same terms for the same prices. That’s because, ultimately, companies have much more latitude with which to discharge or change their pension obligations in bankruptcy than they have to escape a group of angry, unified, legally-empowered financial creditors in the same situation
In hindsight, “defined benefit” plans of any type or name, public or private, are a clever way for a public corporation or a government to fund operations with implicit loans. For big steel, autos and airlines, as well as other labor-intensive sectors in the ‘50s, ‘60s and later, this amounted to labor union members lending, via unsecured future compensation and fringe benefit promises from their employers, sums of money for which they had no collateral. Financial engineering which puts modern investment bankers to shame.
Where is the expose on the union leaders who foolishly negotiated, on behalf of their members, to accept unsecured IOUs from companies on terms that the companies’ banks would never have lent them the money?"
As I read the Journal article, what I see is further futility in the actions of all parties. Management attempting to close its cost gap with competitors mainly through cutting its employees' compensations. Union leaders breaking their organization into tiers, so that older members get higher compensation, while sacrificing newer workers, to preserve union membership and jobs. A very French-style, Faustian bargain.
Don't get me wrong. I think the union wage scale has remained stuck at an unsustainably high lever, with respect to the value now added in the manufacture of Detroit products. It's just a little sad to watch even the union leaders sacrifice their own members for the leaders' political aspirations of remaining head of a large union, when the number of members should be declining, with the value of output, and the number of employees necessary to create that output.
Looks like business as usual in Detroit this summer, all the way 'round.
Friday, June 15, 2007
GE To Become A Public/Private Equity Shop
In an attempt to justify GE's existence as a conglomerate, its CEO, Jeff Immelt, announced today that, henceforth, he would transform GE into a public/private equity enterprise.
"If Steve Schwarzman (Blackstone CEO) can go public with its portfolio of operating businesses, then I can take GE into the private equity game," Immelt was quoted as saying.
Tiring of getting "no respect," and feeling like "the Rodney Dangerfield of CEOs," Immelt has decided to spin off his entire business portfolio, while buying ailing units of other firms.
"We're going to show the world, and our investors, that GE's vaunted management system is the best in the world. We can take a corporate sow's ear and make it into the proverbial business silk purse, then spin it back to the public, just like Blackstone, KKR, and TPG," Immelt declared.
Regarded for decades as one of the two most influential incubators of US corporate management talent, along with Proctor & Gamble, GE has been known for training generations of financially-oriented managers who have gone on to lead other American corporations. Not, mind you, always to consistently superior total returns. But lead, nonetheless, complete with comfortable compensation packages.
As such, Immelt intends to convert GE into a sort of managerial competence "pure play." According to pundits and analysts, Immelt intends to put every manager in GE's new acquisitions through its storied Crotonville 're-education' center, in order to remake them as fully-trained, GE-style managers.
Immelt, tired of the heckling of numerous analysts and bloggers, declared,
"We're going to prove to investors, analysts, bloggers, and the public, that GE managers can manage anything well. If private equity shops can buy on the cheap and fix businesses, so can we. And to prove it, I'm starting with a clean slate of operating businesses."
To be sure, it's a novel approach. But, then, nothing else Immelt has done has delivered consistently superior returns for his shareholders. They would have been far better off selling their GE stock upon Immelt's elevation to CEO, and simply buying and holding the S&P500.
In a related story, GE's board was reportedly raising Immelt's compensation for 2008 to approximately $800MM. A spokesperson for the board noted that Blackstone's Schwarzman had received some $700MM from his company's IPO, and, thus, the CEO of a public 'private equity' shop, as GE's Immelt has reclassified his company, ought to be worth the same, if not a little more.
CNBC said it would not be interviewing Immelt on this latest compensation-related development. Not, at least, until NBC/Universal has been spun off to shareholders.
(The preceding piece is intended as humor. None of the quotes are factual. However, given Immelt's insistence on running a conglomerate, it may well be that the only way he can avoid penalizing GE shareholders with a discount to net asset values is to transform GE into the only type of successful conglomerates on the American business scene today- private equity firms.)
"If Steve Schwarzman (Blackstone CEO) can go public with its portfolio of operating businesses, then I can take GE into the private equity game," Immelt was quoted as saying.
Tiring of getting "no respect," and feeling like "the Rodney Dangerfield of CEOs," Immelt has decided to spin off his entire business portfolio, while buying ailing units of other firms.
"We're going to show the world, and our investors, that GE's vaunted management system is the best in the world. We can take a corporate sow's ear and make it into the proverbial business silk purse, then spin it back to the public, just like Blackstone, KKR, and TPG," Immelt declared.
Regarded for decades as one of the two most influential incubators of US corporate management talent, along with Proctor & Gamble, GE has been known for training generations of financially-oriented managers who have gone on to lead other American corporations. Not, mind you, always to consistently superior total returns. But lead, nonetheless, complete with comfortable compensation packages.
As such, Immelt intends to convert GE into a sort of managerial competence "pure play." According to pundits and analysts, Immelt intends to put every manager in GE's new acquisitions through its storied Crotonville 're-education' center, in order to remake them as fully-trained, GE-style managers.
Immelt, tired of the heckling of numerous analysts and bloggers, declared,
"We're going to prove to investors, analysts, bloggers, and the public, that GE managers can manage anything well. If private equity shops can buy on the cheap and fix businesses, so can we. And to prove it, I'm starting with a clean slate of operating businesses."
To be sure, it's a novel approach. But, then, nothing else Immelt has done has delivered consistently superior returns for his shareholders. They would have been far better off selling their GE stock upon Immelt's elevation to CEO, and simply buying and holding the S&P500.
In a related story, GE's board was reportedly raising Immelt's compensation for 2008 to approximately $800MM. A spokesperson for the board noted that Blackstone's Schwarzman had received some $700MM from his company's IPO, and, thus, the CEO of a public 'private equity' shop, as GE's Immelt has reclassified his company, ought to be worth the same, if not a little more.
CNBC said it would not be interviewing Immelt on this latest compensation-related development. Not, at least, until NBC/Universal has been spun off to shareholders.
(The preceding piece is intended as humor. None of the quotes are factual. However, given Immelt's insistence on running a conglomerate, it may well be that the only way he can avoid penalizing GE shareholders with a discount to net asset values is to transform GE into the only type of successful conglomerates on the American business scene today- private equity firms.)
Thursday, June 14, 2007
Blackstone's IPO Underwriting Strategy: Silence The Street
"Bribe" is an ugly word. So I'm not going to use it again in this post.
I read yesterday that Blackstone has employed 17 Wall Street investment banking houses in its IPO process. Even, according to the Wall Street Journal article by 'breakingviews.com,' Goldman Sachs. The latter was originally snubbed for having worked on another private equity shop's IPO.
Additionally, it is alleged that Chase was allowed in, despite its having backed a competing bidder for Equity Office Properties, a recent Blackstone purchase.
To quote the Journal article,
"But perhaps Blackstone has another motive. By bringing everyone on board, it may keep criticism of its trumpeted $33 billion-plus valuation at a minimum. This is particularly important for, say, Goldman, whose own stock trades at a whopping price-to-earnings discount to Blackstone's implied valuation.
Yet, behind closed doors, it's widely believed that those who publicly criticize Blackstone's value won't be invited to sell its IPO. Looks like Wall Street opted to keep its collective mouth shut."
You think?
This is unquestionably the motive for Blackstone's hoovering up any party whose credible scepticism about its IPO valuation might cause investors to balk. The effect is to mute all sell-side criticism. Then you have the unstated silence of anybody else with a trading desk, who hopes to broker any of Blackstone's order volume in this lifetime.
You can search my blog for posts on Blackstone's IPO. For starters, however, read this one, from April.
In this post, I wrote,
"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."
I can only reiterate my earlier sentiments. As I said to my partner over lunch yesterday,
"Who would be foolish enough to be on the other side of an equity deal from Goldman or Blackstone?"
I own Goldman in my equity portfolio now. But I only bought it in January, not as an IPO. As such, it is market-valued now, not seller-valued.
With all the hoopla on Capitol Hill this week regarding new taxes for carried interest income in private equity deals, and Schwarzman's $700+MM payday, and $7B interest in Blackstone, the real danger is overlooked.
I contend it is this pervasive, collaborative silence on Wall Street, as it collectively abets Blackstone in valuing its IPO.
Alas, no amount of legislation will ever remedy this. No, for this, we have to trust people to use their common sense. To think.
And that brings me to an old story about the former Governor and Senator from my home state of Illinois, Adlai Stevenson.
When running in one of his campaigns for President against Eisenhower, it is said that Stevenson was approached by a woman who gushed,
"Governor, you have the vote of every thinking American."
Stevenson, perhaps apocryphally, is said to have replied,
"Oh, Madam, I'll need many more votes that that to win the election."
Caveat Emptor, indeed!
I read yesterday that Blackstone has employed 17 Wall Street investment banking houses in its IPO process. Even, according to the Wall Street Journal article by 'breakingviews.com,' Goldman Sachs. The latter was originally snubbed for having worked on another private equity shop's IPO.
Additionally, it is alleged that Chase was allowed in, despite its having backed a competing bidder for Equity Office Properties, a recent Blackstone purchase.
To quote the Journal article,
"But perhaps Blackstone has another motive. By bringing everyone on board, it may keep criticism of its trumpeted $33 billion-plus valuation at a minimum. This is particularly important for, say, Goldman, whose own stock trades at a whopping price-to-earnings discount to Blackstone's implied valuation.
Yet, behind closed doors, it's widely believed that those who publicly criticize Blackstone's value won't be invited to sell its IPO. Looks like Wall Street opted to keep its collective mouth shut."
You think?
This is unquestionably the motive for Blackstone's hoovering up any party whose credible scepticism about its IPO valuation might cause investors to balk. The effect is to mute all sell-side criticism. Then you have the unstated silence of anybody else with a trading desk, who hopes to broker any of Blackstone's order volume in this lifetime.
You can search my blog for posts on Blackstone's IPO. For starters, however, read this one, from April.
In this post, I wrote,
"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."
I can only reiterate my earlier sentiments. As I said to my partner over lunch yesterday,
"Who would be foolish enough to be on the other side of an equity deal from Goldman or Blackstone?"
I own Goldman in my equity portfolio now. But I only bought it in January, not as an IPO. As such, it is market-valued now, not seller-valued.
With all the hoopla on Capitol Hill this week regarding new taxes for carried interest income in private equity deals, and Schwarzman's $700+MM payday, and $7B interest in Blackstone, the real danger is overlooked.
I contend it is this pervasive, collaborative silence on Wall Street, as it collectively abets Blackstone in valuing its IPO.
Alas, no amount of legislation will ever remedy this. No, for this, we have to trust people to use their common sense. To think.
And that brings me to an old story about the former Governor and Senator from my home state of Illinois, Adlai Stevenson.
When running in one of his campaigns for President against Eisenhower, it is said that Stevenson was approached by a woman who gushed,
"Governor, you have the vote of every thinking American."
Stevenson, perhaps apocryphally, is said to have replied,
"Oh, Madam, I'll need many more votes that that to win the election."
Caveat Emptor, indeed!
Wednesday, June 13, 2007
Private Equity Meets The MBA
Yesterday's Wall Street Journal carried a piece about private equity and MBA schools in its Career Journal section.
Where to begin? Perhaps with the question,
"Have these already questionable educational programs absolutely no shame?"
As I have written recently, here, and less recently, here, here, and here, the once-vaunted MBA is already, in my opinion, a shadow of its former self. Between more mediocre talent pools, teaching ranks stretched more thinly as more schools offer the degree, and a shift in focus to 'soft skills,' it's become a mere trade school certificate.
However, today's Journal article shocked even me. The gist of the piece is that MBA schools are angling to get more of their new grads into the lucrative private equity firms. They are trying to set up co-taught courses, using retired private equity partners. Trying to make contacts for mainlining their grads into the firms.
At this point, let's have a brief reality check. Private equity firms are, by and large, composed of very experienced, once-senior executives in publicly-held companies, who realized they could do better managing and fixing some businesses without the glare of shareholders and required SEC filings. They hire, for the most part, similarly-seasoned managers to actually work on and improve the businesses they buy. Then they spin them back out for the profit.
Where, in the model, besides ordering take-out for delivery late at night, or perhaps scheduling car services for the late-night workers on the various acquisitions, is there room for newly-minted, inexperienced young MBAs?
Didn't we all learn from the consulting sector that, ultimately, customers wise up to being read rehashed B-school platitudes from fresh-faced young things with MBAs? Last I looked, McKinsey, Booz Allen, and most of their ilk had much reduced circumstances and reputations, as their customers began to catch on.
So, now, the MBA mills are training their sights on private equity firms?
This is either about to be comical, or tragic. Comical, because PE firms are the real McCoys of smart, no-nonsense capitalists. Tragic, if some of those firms actually buy this line, and begin hiring novices to ply their ultra-profitable trade.
Not to mention, again, as in this post, that so much of what private equity does is simply better, faster implementation of the classic lessons of old-style, non-soft skill MBA and BS in BA programs. It's not so much the insights, as it is the experience of knowing just what to do, when, in which situations.
At some point, there actually are jobs that require experience, not simply a newly-minted degree from the right school.
It should be interesting to see if this story has legs, and we learn, in a year or so, that there is, indeed, an influx of newly-graduated MBAs into the sector. And what effect they are having on their employers.
On that note, one last word of warning. Back in the day, when I was a young MBA myself, a little outfit called Atari ruled the newly-digitizing world. I don't recall the exact number, but one year, something like 25% of the Harvard Business School's graduates went to work there. The next year, 1984, Atari, then a unit of Warner Brothers, and a victim of overheated expansion and loss of control over the company's strategic direction, was, in large part, sold to Jack Trarmiel. Upon this ignominious event, one wag commented that it should be a signal to the market that anytime a company begins hiring that large a portion of HBS's graduating class, it's time to dump the company's shares.
Last year, 11% of the HBS class went to work in private equity companies.
Where to begin? Perhaps with the question,
"Have these already questionable educational programs absolutely no shame?"
As I have written recently, here, and less recently, here, here, and here, the once-vaunted MBA is already, in my opinion, a shadow of its former self. Between more mediocre talent pools, teaching ranks stretched more thinly as more schools offer the degree, and a shift in focus to 'soft skills,' it's become a mere trade school certificate.
However, today's Journal article shocked even me. The gist of the piece is that MBA schools are angling to get more of their new grads into the lucrative private equity firms. They are trying to set up co-taught courses, using retired private equity partners. Trying to make contacts for mainlining their grads into the firms.
At this point, let's have a brief reality check. Private equity firms are, by and large, composed of very experienced, once-senior executives in publicly-held companies, who realized they could do better managing and fixing some businesses without the glare of shareholders and required SEC filings. They hire, for the most part, similarly-seasoned managers to actually work on and improve the businesses they buy. Then they spin them back out for the profit.
Where, in the model, besides ordering take-out for delivery late at night, or perhaps scheduling car services for the late-night workers on the various acquisitions, is there room for newly-minted, inexperienced young MBAs?
Didn't we all learn from the consulting sector that, ultimately, customers wise up to being read rehashed B-school platitudes from fresh-faced young things with MBAs? Last I looked, McKinsey, Booz Allen, and most of their ilk had much reduced circumstances and reputations, as their customers began to catch on.
So, now, the MBA mills are training their sights on private equity firms?
This is either about to be comical, or tragic. Comical, because PE firms are the real McCoys of smart, no-nonsense capitalists. Tragic, if some of those firms actually buy this line, and begin hiring novices to ply their ultra-profitable trade.
Not to mention, again, as in this post, that so much of what private equity does is simply better, faster implementation of the classic lessons of old-style, non-soft skill MBA and BS in BA programs. It's not so much the insights, as it is the experience of knowing just what to do, when, in which situations.
At some point, there actually are jobs that require experience, not simply a newly-minted degree from the right school.
It should be interesting to see if this story has legs, and we learn, in a year or so, that there is, indeed, an influx of newly-graduated MBAs into the sector. And what effect they are having on their employers.
On that note, one last word of warning. Back in the day, when I was a young MBA myself, a little outfit called Atari ruled the newly-digitizing world. I don't recall the exact number, but one year, something like 25% of the Harvard Business School's graduates went to work there. The next year, 1984, Atari, then a unit of Warner Brothers, and a victim of overheated expansion and loss of control over the company's strategic direction, was, in large part, sold to Jack Trarmiel. Upon this ignominious event, one wag commented that it should be a signal to the market that anytime a company begins hiring that large a portion of HBS's graduating class, it's time to dump the company's shares.
Last year, 11% of the HBS class went to work in private equity companies.
Tuesday, June 12, 2007
The Market, She Be Confused
Roughly a year ago, in one of the earlier pieces on this blog, , "The Market, She Be Angry...," I commented on how analysts so often, mistakenly, anthropomorphize capital markets.
In part, I wrote,
"Despite the signs of investors waffling on the economy's health, Brian Wesbury commented that average mortgage interest rates are still a full point lower than they were during the last expansion. And the Fed is moving to ensure low, long-term inflation. Thus, there's no reason to expect the economy to suddenly sieze up and slide into a recession."
And that paragraph roughly fits today's market, too. This time, the S&P500 Index is down recently due to investor worries about inflation.
In the past week and a half, inflation worries have trimmed roughly 3 percentage points from the Index's year-to-date return, driving down to about 5.3%.
But, wait. Weren't investors worried only two months ago about global economic growth and weak earnings? Wasn't the last earnings announcement season a big surprise, accounting for the Index's more than 8 percentage points of gain in April and May?
So, in the space of something like 60 days, we apparently have investors moving from worries about too little growth, to worries about too much growth, too little liquidity, and rising inflation.
Which is it? Or is it even either one? Is it simply the usual case of many inept pundits and analysts misleading equally-naive investors?
That would be my bet. More heat than light, again. In fact, in each of the past three years, pundits have called a near-recession for later in the year, only to see investors push the index up by November, as low-inflation growth was confirmed by the fourth quarter.
What is disconcerting is how much of this misinterpretation of economic signals is repetitive, and, yet, goes unreported as such. The much heralded recessions have not materialized. Now, the much heralded inverted yield curve is normal, rather than inverted.
So, where's the celebration, now that the non-inverted yield curve should be signaling no recession? Instead, the pundits frown, note the possibility of a Fed rate hike, or less global liquidity with higher rates, and, thus, slowing growth.....and a recession.
I think we're seeing more confusion on the part of most market watchers, pundits, analysts, talking heads, etc. And even retired Fed Chairmen, albeit one who has a spotty record on forecasting equity prices.
When I see this amount of baseless, rapid change of thinking in the equity investor base, I pay it little heed for long term equity market trends.
In part, I wrote,
"Despite the signs of investors waffling on the economy's health, Brian Wesbury commented that average mortgage interest rates are still a full point lower than they were during the last expansion. And the Fed is moving to ensure low, long-term inflation. Thus, there's no reason to expect the economy to suddenly sieze up and slide into a recession."
And that paragraph roughly fits today's market, too. This time, the S&P500 Index is down recently due to investor worries about inflation.
In the past week and a half, inflation worries have trimmed roughly 3 percentage points from the Index's year-to-date return, driving down to about 5.3%.
But, wait. Weren't investors worried only two months ago about global economic growth and weak earnings? Wasn't the last earnings announcement season a big surprise, accounting for the Index's more than 8 percentage points of gain in April and May?
So, in the space of something like 60 days, we apparently have investors moving from worries about too little growth, to worries about too much growth, too little liquidity, and rising inflation.
Which is it? Or is it even either one? Is it simply the usual case of many inept pundits and analysts misleading equally-naive investors?
That would be my bet. More heat than light, again. In fact, in each of the past three years, pundits have called a near-recession for later in the year, only to see investors push the index up by November, as low-inflation growth was confirmed by the fourth quarter.
What is disconcerting is how much of this misinterpretation of economic signals is repetitive, and, yet, goes unreported as such. The much heralded recessions have not materialized. Now, the much heralded inverted yield curve is normal, rather than inverted.
So, where's the celebration, now that the non-inverted yield curve should be signaling no recession? Instead, the pundits frown, note the possibility of a Fed rate hike, or less global liquidity with higher rates, and, thus, slowing growth.....and a recession.
I think we're seeing more confusion on the part of most market watchers, pundits, analysts, talking heads, etc. And even retired Fed Chairmen, albeit one who has a spotty record on forecasting equity prices.
When I see this amount of baseless, rapid change of thinking in the equity investor base, I pay it little heed for long term equity market trends.
Monday, June 11, 2007
The New York Times Gives Jeff Immelt A Pass
New York Times writer Joe Nocera penned a long, fawning piece about Jeff Immelt, GE's CEO, in the paper's Saturday edition. My partner had mentioned it to me on Sunday morning, and sent me the article, knowing of my prior posts on GE and Immelt (search on either term, and/or click on the two labels on the side of the main page).
I wrote most recently on this topic here, and here. For the record, let me state my unequivocal belief that Immelt has failed in his richly-compensated role as GE's CEO for nearly six years. I believe that Immelt should go, as the company is spun into its constituent parts as standalone businesses. The firm no longer has an economic reason for being.
That said, let me quote some of the more outrageous passages from Mr. Nocera's Times piece,
“When you put your foot on the gas in this company,” Jeffrey R. Immelt said a few weeks ago, with just the slightest trace of a satisfied smile, “the car goes forward.”
Oh, and one other thing: the entire time he’s been chief executive, the stock hasn’t budged. (It closed yesterday at $37.32.) In April, Jeffrey T. Sprague, the Citigroup analyst, called for “a partial breakup” of G.E., arguing that the company’s “size and complexity is working against investor interest in the stock.” During Mr. Welch’s 20 years at the helm, G.E.’s stock had a staggering 7,000 percent total return, including dividends. If the company’s share price doesn’t start to rise soon, Wall Street is going to be agitating for more than a breakup.
Mr. Immelt seems pretty much at ease about that, too.
Mr. Immelt also felt that G.E. needed to do a better job at what is called “organic growth,” that is, growth that is not a result of acquisitions. So he had G.E. study companies that excelled at internal growth, like Apple and Toyota, quantified the qualities that those companies had in common, and began teaching them at General Electric. Now, Mr. Immelt has told Wall Street that he wants the company’s organic growth rate to be 8 percent a year, twice what it used to be.
Most C.E.O.s whose stock hasn’t moved in five years would be in a world of trouble, of course. And Mr. Immelt is not going to get his 20-year run if he can’t get the stock to move. But he’s still got plenty of time to show that his repositioning is working; Wall Street may be antsy, but no investor is crazy enough to call for his ouster. And he’s adamant that the solution is to wait for the market to catch up with the company’s changing nature, rather than to execute a partial breakup just to please the Street.
“Investors go through cycles where they don’t like conglomerates,” Mr. Immelt said. “But if you want to be a lasting company, you have to know how to be a multibusiness structure. If Google is going to be a 100-year-old company someday, it is going to have to learn to do more than search.”
Let me make a few points, by way of rebuttal.
First, my proprietary research has concluded that, in order to have a significantly above-average probability of earning consistently superior total returns, companies need to post real rates of revenue growth in excess of Immelt's goal of 8% per annum. Less than the rate I discovered, and the company will not be considered a consistently high-revenue growth firm. Earnings growth, by the way, is statistically unrelated to consistently superior total return performance.
So much for Jeff's foot on the accelerator helping shareholders enjoy consistently superior returns by holding GE stock.
Second, as I wrote in one of the linked posts recently,
"Few today realize how Jones, of whom I have heard it said, "once a beanie (accountant), always a beanie,' stripped much of the strategic vision from GE that Borch had instilled through his business unit investments. Jones retooled the company to be a cash machine because, well, he was an accountant. He liked cash.
Welch, upon taking the helm from Jones, faced an unprecedented period of high inflation and a wide array of non-strategic businesses at GE. He rapidly cut and pruned the company's businesses, earning the now-forgotten moniker "neutron Jack."
What's ironic is how everyone seems to have forgotten GE's heritage of being subjected to wrenching change with each new CEO of the prior forty years, except for Immelt. He's the only one not to have actually made a big change in the firm, and it has stalled."
Thus, Immelt has actually broken the pattern of GE leadership through the ages by essentially changing virtually nothing. The firm has adapted to past eras, that is true. And this era is one of the continued de-conglomeration of American business. His sarcastic shots about Google to the contrary, Immelt's firm is too diversified to provide consistently superior returns to shareholders, because it's taxing them to feed an overgrown bureaucracy presided over by....none other than Chairman Jeff the First.
What Immelt fails to understand, in suggesting Google can't continue growing in its natural niches, is that every business undergoes a Schumpeterian life- and death- cycle. My guess is, Immelt is going to preside over GE's death.
Third, regarding Immelt's observation about investors "going through cycled where they don't like conglomerates" is a bit disingenuous. As I wrote in one of the linked posts above,
"Simply put, corporate diversification for cash flow smoothing has been a discredited management approach for creating consistently superior total returns for some time. My own proprietary research, which drives my equity portfolio selection of consistently superior large-cap companies, confirms this. Back some thirty or forty years ago, when trading equities was expensive and information and innovation were in shorter supply, it may have made sense for investors to hold shares of conglomerates. And, in the day, they existed- Gulf&Western, ITT, and Litton, to name just a few. But they are gone now. ITT still exists, but in nothing like the shape it had under Harold Geneen."
The era of growing, permanent corporate conglomerates is over, thanks to very efficient, large and deeply liquid capital markets. Markets so liquid that private equity firms can borrow to buy ailing business units of conglomerates, fix them, and spin them back out to the public. The only apparently consistently profitable "conglomerates" these days appear to be the large, multi-operating-unit private equity shops. But they don't seem to want to hold their businesses- just increase their value and flip them back to the public.
I question Nocera's trust that Immelt has 20 years to eventually re-ignite GE's total return performance. In Welch's day, the large private equity pools now common did not exist, and investors were far more patient.
Typically, it's been my experience that corporations, and their CEOs, cite 'soft' values and concepts when they simply can't earn consistently superior total returns for their shareholders. Even today, as Yahoo's Terry Semel came under assault for that company's abysmal performance under his tenure, Yahoo's corporate spokesperson recited a long list of non-quantitative 'accomplishments' under Semel's reign, carefully avoiding the clear record of financial failure.
Immelt is no different, nor are his supporters, such as Mr. Nocera.
I wrote most recently on this topic here, and here. For the record, let me state my unequivocal belief that Immelt has failed in his richly-compensated role as GE's CEO for nearly six years. I believe that Immelt should go, as the company is spun into its constituent parts as standalone businesses. The firm no longer has an economic reason for being.
That said, let me quote some of the more outrageous passages from Mr. Nocera's Times piece,
“When you put your foot on the gas in this company,” Jeffrey R. Immelt said a few weeks ago, with just the slightest trace of a satisfied smile, “the car goes forward.”
Oh, and one other thing: the entire time he’s been chief executive, the stock hasn’t budged. (It closed yesterday at $37.32.) In April, Jeffrey T. Sprague, the Citigroup analyst, called for “a partial breakup” of G.E., arguing that the company’s “size and complexity is working against investor interest in the stock.” During Mr. Welch’s 20 years at the helm, G.E.’s stock had a staggering 7,000 percent total return, including dividends. If the company’s share price doesn’t start to rise soon, Wall Street is going to be agitating for more than a breakup.
Mr. Immelt seems pretty much at ease about that, too.
Mr. Immelt also felt that G.E. needed to do a better job at what is called “organic growth,” that is, growth that is not a result of acquisitions. So he had G.E. study companies that excelled at internal growth, like Apple and Toyota, quantified the qualities that those companies had in common, and began teaching them at General Electric. Now, Mr. Immelt has told Wall Street that he wants the company’s organic growth rate to be 8 percent a year, twice what it used to be.
Most C.E.O.s whose stock hasn’t moved in five years would be in a world of trouble, of course. And Mr. Immelt is not going to get his 20-year run if he can’t get the stock to move. But he’s still got plenty of time to show that his repositioning is working; Wall Street may be antsy, but no investor is crazy enough to call for his ouster. And he’s adamant that the solution is to wait for the market to catch up with the company’s changing nature, rather than to execute a partial breakup just to please the Street.
“Investors go through cycles where they don’t like conglomerates,” Mr. Immelt said. “But if you want to be a lasting company, you have to know how to be a multibusiness structure. If Google is going to be a 100-year-old company someday, it is going to have to learn to do more than search.”
Let me make a few points, by way of rebuttal.
First, my proprietary research has concluded that, in order to have a significantly above-average probability of earning consistently superior total returns, companies need to post real rates of revenue growth in excess of Immelt's goal of 8% per annum. Less than the rate I discovered, and the company will not be considered a consistently high-revenue growth firm. Earnings growth, by the way, is statistically unrelated to consistently superior total return performance.
So much for Jeff's foot on the accelerator helping shareholders enjoy consistently superior returns by holding GE stock.
Second, as I wrote in one of the linked posts recently,
"Few today realize how Jones, of whom I have heard it said, "once a beanie (accountant), always a beanie,' stripped much of the strategic vision from GE that Borch had instilled through his business unit investments. Jones retooled the company to be a cash machine because, well, he was an accountant. He liked cash.
Welch, upon taking the helm from Jones, faced an unprecedented period of high inflation and a wide array of non-strategic businesses at GE. He rapidly cut and pruned the company's businesses, earning the now-forgotten moniker "neutron Jack."
What's ironic is how everyone seems to have forgotten GE's heritage of being subjected to wrenching change with each new CEO of the prior forty years, except for Immelt. He's the only one not to have actually made a big change in the firm, and it has stalled."
Thus, Immelt has actually broken the pattern of GE leadership through the ages by essentially changing virtually nothing. The firm has adapted to past eras, that is true. And this era is one of the continued de-conglomeration of American business. His sarcastic shots about Google to the contrary, Immelt's firm is too diversified to provide consistently superior returns to shareholders, because it's taxing them to feed an overgrown bureaucracy presided over by....none other than Chairman Jeff the First.
What Immelt fails to understand, in suggesting Google can't continue growing in its natural niches, is that every business undergoes a Schumpeterian life- and death- cycle. My guess is, Immelt is going to preside over GE's death.
Third, regarding Immelt's observation about investors "going through cycled where they don't like conglomerates" is a bit disingenuous. As I wrote in one of the linked posts above,
"Simply put, corporate diversification for cash flow smoothing has been a discredited management approach for creating consistently superior total returns for some time. My own proprietary research, which drives my equity portfolio selection of consistently superior large-cap companies, confirms this. Back some thirty or forty years ago, when trading equities was expensive and information and innovation were in shorter supply, it may have made sense for investors to hold shares of conglomerates. And, in the day, they existed- Gulf&Western, ITT, and Litton, to name just a few. But they are gone now. ITT still exists, but in nothing like the shape it had under Harold Geneen."
The era of growing, permanent corporate conglomerates is over, thanks to very efficient, large and deeply liquid capital markets. Markets so liquid that private equity firms can borrow to buy ailing business units of conglomerates, fix them, and spin them back out to the public. The only apparently consistently profitable "conglomerates" these days appear to be the large, multi-operating-unit private equity shops. But they don't seem to want to hold their businesses- just increase their value and flip them back to the public.
I question Nocera's trust that Immelt has 20 years to eventually re-ignite GE's total return performance. In Welch's day, the large private equity pools now common did not exist, and investors were far more patient.
Typically, it's been my experience that corporations, and their CEOs, cite 'soft' values and concepts when they simply can't earn consistently superior total returns for their shareholders. Even today, as Yahoo's Terry Semel came under assault for that company's abysmal performance under his tenure, Yahoo's corporate spokesperson recited a long list of non-quantitative 'accomplishments' under Semel's reign, carefully avoiding the clear record of financial failure.
Immelt is no different, nor are his supporters, such as Mr. Nocera.
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