As part two of the week's interesting stories we'll focus on the business outlook. Just to continue with our story of attending a panel on the LBO industry outlook, with a mid-market emphais, we'll mention that the panel concluded with a live case study. This was a small manufacturer and distributor of a branded set of healthcare cleaning supplies with about $80 of annual revenue and $11M of profits. Quite a tidy little business with low capex requirements, some reputation, low debt and some real adjacent market opportunities. It also helps to know that the founders were in their late 60s and most management was in the 55-65 range. In other words we have a small company with an excellent track record, superb financials and some interesting opportunities. The three panelists were sr. execs from a finance company, a PE buyout firm and a private hedge-like fund focused on alternative investments. The question is what would you pay and how much debt and, most especially, what key questions would you ask. Without reviewing them in detail the questions were very sound in terms of overall EBITDA multiples and debt ratios. There were two interesting things. First off the panelists, while fairly aggressive, were much more conservative than the winner LBO firm's bid which in turn was very aggressive on the debt side for the financing. The second nobody asked the key operational questions: 1) what drives the financials in terms of market, customers and operating capabilities, 2) what happens in a slowdown, how well will those numbers hold up in other words, 3) if you buy it and leverage it up how much does that increase the risk factors and 4) what are the capital requirements to go after the growth opportunities presented to justify the multiples suggested, let alone on offer from the actual acquirer. Now these guys are a lot better at their jobs than I'll ever learn to be. They quickly and efficiently analyzed (it was a short case study after all) the financials as presented. But nobody, and I repeat nobody, asked the fundamental strategic and operating questions. Which, for readers following along at home with this blog, will now know makes us extremely nervous in general and, given the fragilities we've discussed, more so in this case.
There's an interesting WSJ column in today's In the Lead which summarizes the 'run the company aspects' in a way:
Moving Ahead of a Slowdown A look how some companies prepared for an economic slowdown. As U.S. jobless claims rise, manufacturing activity declines and consumer spending skids, many executives are beginning to acknowledge that the economy is slowing. But others, like Mr. Zollars, caught cooling signs early and have already trimmed labor costs and inventory levels and made other adjustments. "The best-performing companies plan in advance -- or at least ahead of many of their rivals -- for slowdowns," says Michael Mankins, a partner and consultant at Bain, which has studied which companies best weathered the last downturn in 2001 and why. "They take a bet early on which way the economy is going and quickly identify which costs they can manage aggressively and where they should use cost savings to fund new growth," he says.
As we mentioned the mid-markets have done better thru '07, which to put it in perspective was a great year overall, than the large buyout firms. But are they a lagging indicator ? There doesn't seem to be much awareness of nor commitment to the mantra of economy - industry - firm analysis we support. The real question here is how widespread is that attitude ? As opposed to the examples in the WSJ story. We suspect, so far, that it still represents the dominant thinking.
Just for some perspective here are some key prior posts that bear on these issues:
We Can See Clearly Now: Retrospect/Prospect
Ganesh Filter II: Clear-seeing Algorithims for an '08 Plan
Ganesh Filters III: Analyzing Businesses Blueprints
Seeing thru Maya: Piercing the Veils of Delusion
General
On the Moneyed Midways - January 4, 2008 Welcome to the Friday, January 4, 2008 special edition of
On the Moneyed Midways, the blogosphere's only running review of the best posts that we can find in the week's best business and money-related blog carnivals! What makes this edition special is that it's the first half of a two part edition of
OMM in which we're recapping the best posts we found in the blog carnivals of 2007, as well as naming the best bloggers we found through those carnivals as well! In this post, along with revisiting the top eight posts we encountered last year, we'll also declaring one to be
The Best Post of the Year, Anywhere!(TM)It's a great edition - literally every post is
Absolutely essential reading!(TM) The very best of the year that was awaits you below....
Business
Who Do You Trust? That's an intriguing question. It applies to personal relationships and business matters alike. I suspect the recent slippage in mainstream media readership has been a function of a loss of trust. This question has repercussions for other corporate relationships you may have, too. Consider: Apple (AAPL) can get away with a snafu like the iPhone pricing issue, because it has earned the trust, even the adoration, of its users. Could you imagine having that trust with Microsoft (MSFT)? Dell used to have that trust, but frittered it away, as they moved from one of the best to much worse customer service in the PC space. AOL also -- they've decayed, become a garbage service for the clueless. (AIM remains mostly worthwhile). Google (GOOG) has earned my confidence, and -- so far -- has not given me any reason to reconsider that trust. Yahoo (YHOO) still has some residual trust -- but its waning fast. I still use Yahoo as a home page, but their inattentiveness to some of their properties is shameful. They have a very, very brief period to right the ship, or their long horrific slide into irrelevancy will be irreversible. Yahoo has frittered away so many good properties, I find it embarrassing. (WhoTF is advising them?)
ALL BUSINESS: Cost Cutting Nightmare Corporate leaders who think they can slash expenses without customers noticing might want to give Circuit City Stores Inc.'s top brass a call. The electronics retailer is living the nightmare of cost-cutting gone bad. The Richmond, Va.-based company has been in a downward spiral since it announced last spring that it would lay off thousands of experienced workers it candidly said it could replace with cheaper new hires. Too bad that service matters in that corner of the retail market. Shoppers quickly noticed and fled -- leaving Circuit City's sales and profits plunging. Its same-store holiday sales, reported on Monday, fell 11.4 percent. And its stock is now about 80 percent below where it was the day before it made the staffing announcement. It's a business school case study being written before our eyes. Companies everywhere should remember this management mishap as they wrestle with cost cuts of their own amid slowing economic growth, rising inflationary pressures and a fatigued consumer. Staffing changes are just one way for companies to curb expenses and preserve or juice up profits. They also could start closing stores or slashing product lines. Regardless of the actions they take, they better know how their customers will react and consider the message they are sending to the public,
CEOs on the hot seat in 2008 Going into 2008, there are plenty of contenders whose jobs would appear to be or should be on thin ice. Not to mention early candidates for this column's annual Worst CEO of the Year award. Some, in fact, were finalists last year. The easiest indicator is stock price. But that, alone, is hardly a reason to ding someone. Stock price, after all, is the one thing a CEO can't control and doesn't take into account long-term strategies or broad economic sluggishness. But it is a clue that something may be off, especially if the price has plunged or has performed poorly against peers.
As the nation's economy cools, some well-known companies are stumbling in painful ways. Rushing to the scene are lots of experts with advice about sustaining or repairing a corporate reputation in tough times. Starbucks is switching chief executives and struggling to reconnect with customers. Circuit City Stores is trying to right itself amid skidding sales and a more than 70% drop in its stock price last year. And the pharmaceutical industry seems to have lost its ability to develop meaningful new drugs. What's gone wrong? The details vary but, in each case, companies with longstanding records of success are acting as though their trusty playbooks suddenly have vanished. Rushing to the scene are lots of experts with advice about sustaining or repairing a corporate reputation in tough times. Their tips may seem obvious, or even preachy in boom times. But when the economy stalls, nervous bosses are more eager for help. Besides, this is too alluring an area for management consultants and public-relations specialists to ignore. Reputation consulting offers plenty of face time with CEOs, as opposed to less glamorous work counseling operating units.
How to Unbreak the Banks The business model for big U.S. banks is broken. If banks and Wall Street don't act, regulators will. And if regulators don't, House Financial Services Committee Chairman Barney Frank and the other Democrats in Congress will. Let us count the ways. One: Bankers no longer scrutinize a would-be borrower to decide whether he is good for the money. Instead they "originate and distribute" loans. Two: New and improved rules for global governments to monitor banks -- known as Basel II, for the Swiss city where such things are negotiated -- rely heavily on banks' ability to build computer models to monitor the risks they are taking. Those models have lost credibility. Three: Ratings companies, principally Moody's and Standard & Poor's, made this mess possible by stamping the triple-A label on securities that turned out to be anything but supersafe. The fault is partly with them. But the fault also lies with government, which enshrined the rating firms' role in law and limited competition among them. Banks and Wall Street could devise a better business model. But they'd best hurry. If they don't act, regulators will.
· How the smart money got it wrong The past 12 months may go down in some circles as the era when alternative energy caught a spark or the era in which the term "subprime" went prime time. But in the history of investment management, 2007 will go down as the one in which some of the brainiest, battle-tested value managers in the country got absolutely shellacked. Smart money? Not so much. A review of the one-year results of value-focused funds with some of the best long-term records shows that a virus of total stupidity savaged their ranks as one after another bought into banks, credit card providers, home builders and retailers at bargain-basement prices that seemed too good to be true -- and were.
· Banks Plead They Can’t Follow Rules What a choice for the banks to face: report big losses or claim that they are not sophisticated enough to comply with an accounting rule that has been on the books for more than a decade. It’s no wonder they would rather leave the argument to a trade association.
Can Starbucks get groove back? With his company facing tougher competition along with a sluggish rate of growth, Starbucks visionary Howard Schultz had seen enough. Starbucks shares are trading near 52-week lows, battered by concerns of oversaturation of stores in the U.S., slower traffic at its stores, growing competition from McDonald's Corp. and value-conscious consumers clobbered by higher gasoline and food prices. The stock is down 48% over the past year. In other words, Wall Street is struggling to put a value on Starbucks' earnings growth rate. Most investors don't think Starbucks can match the 30% annual rate it achieved over the past decade. And that has crushed the stock over the past year. Starbucks trades at around 20 times its projected earnings for 2008. For Stepherson, that's still pricey. He's looking for an earnings multiple in the midteens. In his return to the chief-executive post, for starters, Schultz plans to slow the pace of U.S. store openings, shutter a number of underperforming stores, and accelerate global expansion. Also on the table: overhauling the management structure and seeking to reconnect with customers. Schultz didn't put any figures on store closings or expansion. More specifics are expected Jan. 30.
Auto Makers Gear Up for Detroit Show As the big auto makers get ready for the Detroit auto show, they are wrestling with a disconnect between childish dreams and mature reality For more than a decade, the formula for success in the U.S. auto market was to sell fantasies of power and ready-for-anything functionality. That meant trucks and more trucks, and cars that got bigger, heavier and more powerful each year. That business model still has a lot of momentum, and can't be turned on a dime. That's why GM will have in Detroit both a ZR1 and the latest concept iterations of its "E-Flex" hybrid car technology -- made famous by the Chevy Volt concept last year. That's why Ford will showcase both a new generation of its hulking F-150 pickup truck and a concept for a tiny, European scale "B" Car that represents the sort of vehicle Ford will need to sell here in the future. That's why some of the big European brands will be pushing aside the big, high performance, premium-gas swilling sedans that have been their standard bearers through the years to make room for compact, four-cylinder crossovers and vehicles powered by diesel engines. Changing strategies on the fly looks messy and incoherent when you have to put on annual product shows for consumers. But messy change beats getting run over as consumers stampede in a new direction. During 2007, just three segments of the market grew, as defined by Autodata Corp.: Small cars, small sport utility vehicles and "crossovers," which are SUV's built on the underpinnings of cars. The old profit spinners -- midsize and large SUVs and pickup trucks -- all slumped, as did sales of minivans and large cars.
The differing fortunes of auto-parts suppliers Delphi and Dana show the importance of union relations in a bankruptcy-law turnaround, especially where labor's support can be coupled with a large equity investment. Auto-parts suppliers Delphi Corp. and Dana Corp. entered bankruptcy court about two years ago citing similar problems: labor costs that were rising at the same time that vehicle production at Detroit's three auto makers was falling. Dana is poised to escape Chapter 11 this month with exit financing and all-star directors in hand. But Delphi, which filed for protection five months earlier, plods on. It still must raise $5.2 billion in a tight credit market if it hopes to exit bankruptcy proceedings by the end of March, its stated goal. The differing fortunes of these companies show the importance of union relations in a bankruptcy-law turnaround, especially where labor's support can be coupled with a large equity investment.Dana's exit strategy has been aided by an investment plan launched by a private-equity fund recruited by its unions. In contrast, Delphi's chief executive officer, Steve Miller, has been in a grudge match with the head of the United Auto Workers since taking the reins in 2005.
Toyota Stock May Be a Buy Toyota Motor may well have had a landmark 2007, yet its shares slid 24% during the year. Now, some analysts say 2008 could be a good time to give the stock another look. When full-year sales figures become available, they might show that Toyota unseated General Motors as the world's largest auto seller on an annual basis. Toyota led after six months, then GM retook the lead at the nine-month mark. For Toyota, selling more than 9.3 million vehicles globally couldn't keep its stock from falling. Contributing to that drop were weak sales in the U.S. amid higher fuel prices, the subprime-lending crisis and a steep decline in housing sales. Another factor hitting Toyota's results was the strengthening of the yen against the dollar; a rising yen decreases the value of earnings repatriated from overseas markets when calculated in yen. And for 2008, economic forecasts for North America -- where Toyota got more than 36% of its revenue in the fiscal year ended March 2007 -- remain gloomy. Nonetheless, some analysts say Toyota's shares have fallen too far in recent months. They say the stock's fall hasn't taken into account the car maker's strong growth projections in the emerging markets of China, Russia and India as well as its record of cutting costs to offset the U.S. slowdown. Toyota Takes Texas as Tundra Sales Gains Destroy Last Bastion for Detroit
GM, start your turnaround The season always seems to be winter for GM. Yet for the first time in years, signs of warming are emerging. Wagoner is feeling good about the automaker's progress, especially in the troubled heart of its business: making and selling cars in North America. GM's latest new-car launches - Buick Enclave, Cadillac CTS, Chevrolet Malibu - are getting enthusiastic reviews and generating strong sales. The new products are giving GM (GM, Fortune 500) a much-needed image boost in the marketplace, while Wagoner has been making huge cuts in costs on the factory floor. By slashing both the hourly and salaried workforces, boosting productivity, and reducing health-care costs, he has cut $9 billion (or 22%) out of GM's fixed operating costs. And following years of patient negotiation, he reached a historic agreement with the United Auto Workers to push responsibility for retiree health care off GM's books, a burden that has been adding about $1,400 to the cost of every car and truck GM builds in North America. Three years ago Wagoner put his big plan into operation when he personally took charge of product development, manufacturing, and marketing and sales for North America. His decision to put his reputation - and perhaps his tenure as CEO - on the line finally put some steel behind GM's repeated promises to become more competitive. By setting a few clear and easily understood performance targets, Wagoner has led GM to within a neck of catching up in labor productivity and cost with its No. 1 competitor, Toyota.
McDonald's Takes On Starbucks McDonald's plans to install coffee bars at its nearly 14,000 U.S. locations starting this year, its biggest menu addition in three decades. The effort to poach Starbucks customers aims to add $1 billion to the fast-food chain's annual sales. McDonald's is setting out to poach Starbucks customers with the biggest addition to its menu in 30 years. Starting this year, the company's nearly 14,000 U.S. locations will install coffee bars with "baristas" serving cappuccinos, lattes, mochas and the Frappe, similar to Starbucks' ice-blended Frappuccino. Internal documents from 2007 say the program, which also will add smoothies and bottled beverages, will add $1 billion to McDonald's annual sales of $21.6 billion. The confrontation between Starbucks Corp. and McDonald's Corp. once seemed improbable. Hailing from very different corners of the restaurant world, the two chains have gradually encroached on each other's turf. McDonald's upgraded its drip coffee and its interiors, while Starbucks added drive-through windows and hot breakfast sandwiches. The growing overlap between the chains shows how convenience has become the dominant force shaping the food-service industry. Consumers who are unwilling to cross the street to get coffee or make a left turn to grab lunch have pushed all food purveyors to adapt the strategies of fast-food chains. It also shows how the chains' efforts to adapt to a changing market have had drastically different results on their bottom lines. McDonald's is entering the sixth year of a successful turnaround, while Starbucks has begun struggling after years of strong earnings and stock growth. Still, the new coffee program is a risky bet for McDonald's. It could slow down operations and alienate customers who come to McDonald's for cheap, simple fare rather than theatrics. Franchisees say that many of their customers don't know what a latte is. The program attempts to replicate the Starbucks experience in many ways -- starting with borrowing the barista moniker. Espresso machines will be displayed at the front counters, a big shift for a company that has always hidden its food assembly from customers. McDonald's says it wants customers to see the coffee beans being ground and baristas topping the mochas and Frappes with whipped cream.
Starbucks, Threatened by McDonald's Coffee, Brings Back Schultz as Chief Howard Schultz was peddling a unique idea when he turned a Seattle coffee-bean roaster into a chain of U.S. cafes called Starbucks Corp. Now he is returning to lead a company battered by the competitive landscape it created. Investors responded by sending the shares up the most in almost two years in U.S. trading. Starbucks trained customers to demand better-tasting coffee. In the process, it spawned thousands of mom-and-pop imitators and enticed even McDonald's Corp., the world's biggest restaurant company, to open coffee counters. By bringing back its visionary leader eight years after he stepped aside as chief executive officer, Starbucks is telling shareholders the challenges run deeper than labor costs or a drop in consumer spending. Schultz, who returns after Starbucks reported its first quarterly drop in U.S. customer visits, called the chain's problems ``self-induced'' and said Starbucks hadn't introduced enough ``exciting'' products.
What does it take to build the world’s cheapest car?
Four Wheels for the Masses: The $2,500 Car For Tata Motors of India, which will introduce its ultra-cheap car on Thursday, the better question was, what could it take out? The company has kept its new vehicle under wraps, but interviews with suppliers and others involved in its construction reveal some of its cost-cutting engineering secrets — including a hollowed out steering-wheel shaft, a trunk with space for a briefcase and a rear-mounted engine not much more powerful than a high-end riding mower. The upside is a car expected to retail for as little as the equivalent of $2,500, or about the price of the optional DVD player on the Lexus LX 470 sport utility vehicle. The downside is a car that would most likely fail emission and safety standards on any Western road, and, perhaps, in India in a few years, when the country imposes tougher environmental standards. But Tata is not looking to ply California’s highways. Instead, the company wants to provide four-wheel transportation for the first time to people accustomed to getting around on two, including hundreds of millions of Indians and others in the developing world. Even so, the “People’s Car” (a nickname, since Tata has kept the real name under wraps, too) may ultimately affect what many people drive around the world, since it is part of a broader trend among carmakers to try to build less expensive cars. “It’s basically throwing out everything the auto industry had thought about cost structures in the past and taking out a clean sheet of paper and asking, ‘What’s possible?’” said Daryl T. Rolley, head of North American and Asian operations for Ariba, which helps supply parts to Tata, BMW, Toyota and other carmakers. “In the next five to 10 years, the whole auto industry is going to be flipped upside down.”
New Year's Flop Tech stocks are proving to be the biggest disappointment of the new year. Technology companies have big sales overseas, where growth has stayed strong, and sell mostly to businesses, so they are less vulnerable to slowdowns in consumer spending. Now, however, tech stocks are suffering the brunt of the stock market's recent beating. Behind the problems: a round of profit-taking and disappointing earnings projections because of a slowing global economy and cuts expected in sales to financial companies, which are among tech's biggest buyers and are struggling with big losses.
Apple, Google, Technology Companies Slide on Concern Over Consumer Demand Weakness in the U.S. economy figures to take a bite out of the technology industry's growth rate in 2008, when analysts expect tech spending to slow around the world. The picture is not exactly dire: A forecast released Thursday by analyst firm IDC calls for the worldwide information-technology market to grow 5.5 percent to 6 percent in 2008, the lower end of what has become a usual range. In the U.S., the market is expected to expand 3 percent to 4 percent. Those growth rates are softer than this year's 6.9 percent worldwide expansion and 6.6 percent growth in the U.S., according to IDC. Just a few months ago, IDC was expecting the U.S. tech market to grow 5.5 percent in 2008. The company pushed its estimate down to 3 percent to 4 percent as the mortgage crisis heightened and rising high oil prices enhanced the prospect of a recession next year,
Intel's Otellini Says New Home Video, Music Gadgets Spurring Chip Growth Otellini is relying on Intel's experience in ratcheting up the speed of processors to make future phones more like personal computers. In 2006, he decided to scrap predecessor Craig Barrett's $5 billion effort to sell chips that run the communications features of phones, after failing to wrest sales from Texas Instruments Inc. and Qualcomm Inc. Intel, the world's largest semiconductor maker, plans to release its package of mobile chips, called Menlow, in the first half. Facing slowing growth in PC sales, the Santa Clara, California-based company is once again turning to the market for mobile handsets, which outsell computers by more than 4-to-1.
AT&T Falls Most in Five Years as CEO Cites `Softness' in Consumer Business AT&T Inc. dropped the most in almost five years in New York trading after Chief Executive Officer Randall Stephenson said slowing economic growth led to ``softness'' in the home phone and Internet businesses. The shares fell 4.6 percent, helping to spark a broader decline in U.S. stocks, after Stephenson said AT&T is disconnecting more home-phone and high-speed Internet customers for failing to pay their bills. The disconnects in the home-phone business, which accounts for about a fifth of sales, have put more pressure on Stephenson, who became CEO in June. Last year, he relied on the popularity of wireless handsets such as Apple Inc.'s iPhone to fuel growth, helping to make up for losses of home-phone customers. AT&T lost 468,000 primary home-phone lines in the three months ended in September, Stephenson's first full quarter since taking the CEO job. The company ended the third quarter with about 32 million primary residential phone lines, a 3.9 percent decline from a year earlier.
Blockbuster thinks digital Chief Executive Jim Keyes told investors Wednesday that Blockbuster Inc. will look more like an "entertainment convenience store" over the next three years, with a greater emphasis on digital delivery thanks to the company's recent acquisition of video-download service Movielink. Blockbuster is working on a flash-memory product that could allow movies to be seen more easily on portable devices, and is testing other technologies that would facilitate portable viewing, the executive said. Ultimately, Blockbuster will offer rentals that allow viewers to download movies straight to the TV, Keyes added. Rival Netflix Inc. and LG Electronics said last week that they're developing a set-top box that will allow consumers to stream movies and other content directly from the Web to high-definition TVs