Archives for posts with tag: Deals

Warren Buffett began buying USG Corporation stock in 2000 right before its second bankruptcy, not great timing. But USG seemed to fit his investment profile: an industry leader in a basic industry-building materials.

Warren and Berkshire Hathaway stayed in during USG’s bankruptcy, loaned the Company money at 10% and then converted it into more stock. Today, Buffett is USG’s largest shareholder with just over 30% of its common stock. For most of the last twenty years, this was good for USG. A friendly stockholder of that size makes any company almost bullet-proof to any unfriendly takeover attempt. And Warren Buffett is usually a very friendly shareholder; until he isn’t.

Recently, a private German building material firm named Knauf made a hostile take-over bid for USG. Knauf has owned about 10% of USG also for the last twenty years. Normally a take-over bid by someone owning only 10% would not be a sure thing, but there was a unique wrinkle in this offer. Warren Buffett joined the proposal by offering Knauf an option to use his shares in getting the deal done. So now USG faces a take-over bid backed by 40% of its shares. And four other funds like Vanguard own, in total, another 20% of the shares. So, it is very likely that USG Corporation will be acquired. It may just be a matter of time and final price.

Since I left USG Corporation before Warren Buffett bought his first shares in 2000, one could ask what does this have to do with me? On many levels, nothing. Most of the people I worked with there are retired or dead. I was USG’s CFO during their first restructuring not the second one that Mr. Buffett waited patiently to end. But even though I was only at USG a dozen years, the experience and the people meant something to me. We fought to save USG in its first major financial restructuring. It took a toll on me, but it also left a mark and feelings of respect and admiration for the place. USG is a very proud and independent company with a lot of history and a unique culture.

So, this event got me thinking!

All the firms I worked for in my business career may be gone. Arthur Andersen by government decree; Donn Corporation sold to USG; IMC Global which merged with part of Cargill to become Mosaic; and now the 100 year USG Corporation. I outlasted them all.

In the generations before me, people worked their whole life for one firm and then retired there. Some of my wife’s grandparents did that in the tire industry in Akron, Ohio. And at least one of those firms, Goodyear, is still around!

But for the millennials of today, my experience probably seems quaint. Only four companies over an entire work career? Nowadays young people will have a dozen or more employers and no reason to wonder what happened to their previous ones. We change jobs as often as we change our cell phones.

So, best of luck and success to the people and culture of old USG Corporation whatever happens to it!

And Warren Buffett showed up twice: early in my working career and after I retired.

 

Whenever a blogger references really important people or companies, the number of hits on their website goes up. I have found this occurs when I mention my wife’s favorite company, Apple, or the infamous, to me, Tesla. But I actually have had two connections to the famous and well-regarded, Warren Buffett. Let’s start with a story I will call:

Leaving Donn Corporation for Warren Buffet!

I believe that everything in life and business is a cycle. There is a beginning, middle and an end that occur over some variable but predictable timeframe. Daniel Levinson’s book, Seasons of a Man’s Life, talks about this in detail and gives creditability to the notion of a seven-to-ten-year cycle or itch both in one’s personal and professional life.

For me, it was about twelve years after I started with the private Donn Corporation that I almost left. At the time, my old boss had retired and I was the Chief Financial Officer.

The Donn companies had grown ten times in that time period. We had gone through several financial and organization crises. I had finally been able to build a small but great corporate headquarters staff that was working well with both the owner’s family and Donn’s unique business people. The large Donn domestic business had an excellent Controller who was gladly taking on some my work.

I was bored to death! I had never experienced that feeling in public accounting or at Donn. And, I was about 38 years old, prime for what Daniel Levinson would call the Age 40 Transition. He wrote that, at all of these critical times in our life, we all consciously or subconsciously reflect and re-evaluate both our personal and work lives. Sometimes we make big changes and sometimes we don’t.

At exactly that moment I received a call from an executive search firm. As CFO of a very private mid-sized firm I did not get a lot of these calls, but when I had in the past, I would say thanks but no thanks. This time I actually listened. This time I even agreed to meet the headhunter for lunch. And what I heard was fascinating:

-a much larger, well known public firm was the client

-they wanted someone with my diverse background

-they were growing worldwide through acquisitions

-the CFO role involved a large pay package with stock options (not available at private Donn)

And here was the strangest thing. They were located literally down the street from Donn! It seemed too good to be true. But it also seemed like the perfect next step for me. The bigger size and the public company status were both appealing.  I love doing deals and the stock was a way to build-up my own net worth. I even really liked the search person. So, I agreed to interview. We were closing in on an offer when the headhunter called to say the search has been put on hold. Hmm. Okay.

A few months later he called and told me that his client has just been acquired by Warren Buffett’s Berkshire Hathaway, and it will become one of their portfolio companies. But they still want a CFO.

I said no thanks. The CFO role in a subsidiary of a private company is not the same as a public firm. This is true even if the owner of the private firm is Warren Buffett.  By then, Donn seemed more fun. And, unbeknownst to me, within a short time I would be involved in the sale of the company to USG Corporation. I never regretted my decision to stay with Donn even though I missed the opportunity to work with a legend.

There is a valuable lesson here that I often explain to people I advise. Sometimes, in your personal and business life, you need to take a long, hard look at where you are and explore your alternatives.  You may decide to make a move or you may decide you are better off staying where you are. But the internal review process is critical whether you are in your Age 40 Transition or not!

Next time, I will tell you about my second connection to Mr. Buffett.

 

The Wall Street Journal had an article called “AT&T to Keep Time Warner’s Culture.” This refers to the proposed acquisition of the media firm by the  telecommunications firm. The deal is currently being challenged by the Justice Department. The article goes on to quote the CEO of AT&T saying he is “not a media tycoon” and he does not want to “screw it (Time Warner’s culture) up” by bringing them “a telephone company culture”.

Then the Journal had an interview with Amazon’s second in command, Jeff Wilke. In talking about their recent acquisition of Whole Foods, he said that Amazon “works hard to respect cultures that have been successful,” but that perhaps they can “help” Whole Foods with “resources, ideas and maybe IT services that Amazon has.”

This all sounds very smart and maybe even noble, but sadly, it will probably not play out this way for one or both companies. The larger, acquiring firm almost always screws up the leadership and culture of the smaller firm they spent a lot of money to buy. AT&T has offered $85 billion for Time Warner; Whole Foods cost Amazon $14 billion.

In most acquisitions, within three years two-thirds of the senior management of the acquired firm are gone. The Chairmen/CEOs go first, sometimes immediately with a huge payout for their stock and retention bonus (often equal to three years total pay.)   Sometimes they hang around a couple years to collect an additional bonus. But Chairmen/CEOs go fast followed by their key reports. With these people goes some of the knowledge and value that the acquiring firm paid for. And after the senior leaders are gone, the culture of the company starts to fade away as well. Leadership and Culture are, after all, the flip side of each other.

Why do smart companies willingly or sometimes subconsciously change the successful culture and leadership of the firms they spend a fortune to buy?

First, the acquiring firm, by definition, is the winner in the deal. Thus, they believe that their systems, procedures, people and business strategies are far superior to the firm they just acquired. When the accounting firm PricewaterhouseCoopers took over the legendary consulting firm Booz, the PWC people felt they were in charge, regardless of the rich 100 year history of Booz.

Second, the acquiring firms have lots of staff that are dying to “help” the firm they just took over. From Information Technology to accounting to Human Resources to legal, etc. etc., there are plenty of people who just want to “help.” The building material firm, USG Corporation, acquired my old Donn Corporation which was one tenth its size. USG setup 24 committees to “help” integrate Donn into USG. Donn was a loosely structured, oral culture company with few charts and procedures. USG was much the opposite. A few years later only three of the top dozen Donn leaders remained.

Third, strategies and circumstances change rapidly in business. An old friend said that large firms can change core businesses and strategies faster than people change their underwear. Honeywell just announced that they will spin off two large business groups with $7 billion of sales, so that they can focus more on their core businesses, the remaining $30 billion. Ironically, the original Honeywell business, thermostats, will be spun off with a number of businesses that were acquired in more recent years.

In closing, having been both an acquirer and one who was acquired, I would like to wish the Time Warner and Whole Foods leaders and their culture the best of luck! Things will never really be the same. It will help if you keep in mind that your firm sold and those other guys bought. There are winners and losers in deals just like in everything.

 

In the category of just when you seen it all! No, not Britain voting to leave the European Union. But that news headline seemed to have taken this one off the main pages of the Wall Street Journal.

I am referring to one of the most fascinating people of our day. No, not Donald Trump. I am talking about Elon Musk. He may be a bigger Dealmaker than Trump if he can pull off his latest idea. Mr. Musk has proposed that his Tesla controlled company buy, at a big premium, his solar panel controlled company.

The “facts” if you can call these worthwhile facts are as follows:

-Tesla, the electric car company, has never made a profit even though it receives huge direct and indirect government subsidies  and  currently “sells” their cars for close to $100,000 each. Tesla is not expected to be profitable until 2020 at the earliest but has a market value of $32 billion, because some people love Mr. Musk. Tesla is thus worth more than General Motors and a lot of other longtime firms who make profits.

-The Solar panel company, Solar City, has never made a profit even though it receives huge direct and indirect government subsidies as well. The company lost $283 million during the first three months of this year alone. The synergy of merging these two firms and any resulting increased valuation have not been fully explained to date. Electric cars and solar panels, you never know.

-Both firms have sold tons of stock or debt to finance their losses and activities. Tesla just sold $1.7 billion of its stock and is spending $5 billion to build a new battery factory. Solar City, in 2014, sold $214 million in bonds, the largest buyer of which was Mr. Musk’s controlled space exploration firm, Space X. Mr. Musk has lent his own money to these firms, over the years ,and right now has a roughly half a billion dollar personal line of credit secured by his various companies’ stock. Always a complex legal and financing arrangement.

-The Chairman of Solar City is a first cousin to Elon Musk. Neither of them will personally “vote” for the merger but are both very supportive of it getting done as are some other cousins and relatives.

Now if these were private firms, I say fine, hopefully the lenders understand the risks. But these are all public firms that Mr. Musk “controls” with various ownership percents which overall are around 25%. Over the years he has reduced his ownership through public offerings of stock. So there is a lot of other people’s money involved in this rotating shell game. Some large investors, like Fidelity, have endorsed this merger. Fidelity owns a chuck of both firms and Space X as well.

Who will make money on this merger? Elon Musk, his cousin and his family, it is reported, could have a windfall of just under a billion dollars.

All I know is that in big deals, whether its Donald Trump or Elon Musk, the Dealmakers usually come out alright. If you own the stock or debt or one of these entities you may have to wait another decade or two to know if you made money. By then, one financial writer, noted Elon Musk could be living on Mars courtesy of one of his firm’s space rockets!

 

 

 

 

 

A Deal truism: Deals often occur in bad weather and over holidays.

As I was starting my  book section on Mergers and Deals, I had the following casual conversation with my wife:

Me: I think I will start the Deals part with Donn Corp. buying the access floor company, Liskey.

She: Was that the one you and Ted were caught in a snowstorm driving on the Ohio Turnpike to Toledo?

Me: No, that was another one we looked at called Floating Floors.

She: Was that the one you were caught in a blizzard in Buffalo for a week?

Me: No, that was the ceiling company we bought called Flangeklamp.

She: Was that one of the times that you delayed a Christmas visit with my family?

Me: That did happen a lot!

So it got me thinking about a couple truisms about Deals. Deals very often occur in bad or terrible winter weather. And Deals very often do mess up your personal life and cause you to delay or cancel a vacation or a family visit. Why is this?

The main culprit is that so many Deals want to be completed by a company’s year end which is often December 31. This lets you write off your old sins and start the New Year fresh. That also means you are often traveling, negotiating or completing Deals in bad weather and around the Holiday season. Learn to Deal with it.

The recent string of terrible storms at the end of 2012 and the start of this year, reminded me of this.

In my forthcoming book, you will learn other Deal truths. Like the critical importance 0f performing financial and operational due diligence on a company you want to buy. Or why it is so much easier and more fun for both management and their Boards of Directors to buy something than to sell something. Based on recent headlines, the shareholders of the old computer giant H-P should be asking these questions.

Or, one of my favorites truths about Deals, that there are no Mergers of equals, ever, period.

I look forward to sharing these Deal truisms and other lessons I have learned in The Business Zoo!