Archives for posts with tag: Mergers

Kiplinger Letter, Mergers and Fake News

March 15, 2019 //
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My father, who never attended college read two publications to which I still subscribe. One was the Wall Street Journal even though the only stocks he ever owned were utility companies. The other was a little known newsletter called The Kiplinger Washington Letter. At the time he read them, both were standalone firms.

For the last ten years,  the Wall Street Journal has been owned by Rupert Murdoch’s New Corp. which owns Fox News, the London Times,  and like half the media in the free world.  I have been concerned about the WSJ ever since, but somehow, to date, it seems that both its news and editorial work has managed to remain independent from its parent company. This is what was “promised” when that merger occurred. There have been complaints by now former employees and negative articles written by competitors, like the U.K. Guardian, but no Congressional committee meetings!

Now, today, in my re-titled The Kiplinger Letter, as a P.S. at the end, next to the fine print, I am told their 99 year, several generation ownership is no more. It was been sold to a U.K. media firm called Dennis Publishing which is owned by a U.K. private equity firm. And in that brief announcement it says “no changes here, same talented staff and the same mission…”. Of course, when I look on line, the last Kiplinger family editor has been replaced but will remain as editor emeritus, which means basically no title or duties.

Why am I upset? After all, Amazon’s Jeff Bezos purchased the family owned Washington Post. And the long-time business magazine, Forbes, owned and run by the Forbes family for three generations was also acquired. In all cases, the world did not end.

I am upset because, like my father, I viewed the four page Kiplinger Letter as very straight forward, well-researched and with limited bias. I have given subscriptions to a number of family, friends and mentees over the years. In a quick read, you could get caught up on where the world was and where things were trending. Now I don’t know.

Fake News in my headline is there not just to get possible new readers but because every time someone is acquired or merged, the press announcement always says the same thing. No changes, everything and everyone will stay on. But this is not the real world And things Always change especially the leadership and eventually the culture.

Is the media world better off with unique and maybe quirky people like the Forbes or Kiplinger families or is it better owned by much bigger corporate owners? As some of you know, I have worked and prospered in both small, private firms and much larger public ones. Give me the private family owners anytime!

And good luck to the small staff of Kiplinger; I do provide references.

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Warren Buffett, USG and Me, Part II

April 23, 2018 //
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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.

 

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Warren Buffett and Me, Part I

April 10, 2018 //
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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.

 

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Elon, Tesla and Deals

June 28, 2016 //
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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!

 

 

 

 

 

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Microsoft and Minecraft, A Culture Clash

January 6, 2015 //
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My 14 year old grandson with his younger sister were in Chicago this fall for a visit. He and I went to lunch for his favorite food, snow crab legs, while my wife, Tricia, took the grand daughter shopping on Michigan Avenue.

While watching my grandson devour his second order of snow crab legs, I am trying to engage him in a conversation. Conversations with teenagers are always a challenge.  I cover one of his favorite topics, the latest super hero movies-is the new Thor (God of Thunder or something) movie the second one in the series? No, Grandpa Brad, he politely says, it is the third. Who would know? Are D.C. and Marvel movies and super heroes the same group? No, again. I should have known since decades ago, I read comic books!

I decide to try to teach him something about business using one of his other favorite subjects, Minecraft. For those of you not familiar with Minecraft, it is described, on the source of all wisdom, Wikipedia, as a sandbox indie game involving building structures in a 3D generated world. Like most video games it involves exploring, acquiring resources, combat and survival. Which really does sound like business or The Business Zoo! Any parent or grandparent with a teenage boy especially knows about Minecraft. It actually seems more civilized and almost educational compared to most video games which focus on zombies or flying birds attacking hungry pigs. It was originally developed by a Swede called “Notch” and has a cult like following.

The week before my grandson arrived in Chicago, Microsoft, the software giant of Bill Gates, agreed to buy Minecraft for a couple billion dollars. “Notch” will not be part of the new business but will walk away with a lot of marbles and a lot of swedish krona.

I, sadly, tell my grandson to enjoy Minecraft now because it will either become boring to its fans or it will disappear once Microsoft gets their hands on it. Why he asks me? I tell him the sad corporate truth. Big, sleepy giant firms like Microsoft love to buy smaller, trendy niche companies like Minecraft but they almost always destroy the unique Culture and Leadership the smaller company had. The big firms can not help themselves. They want to make the new, smaller firm just like them and by doing so they ruin it. Microsoft has been around almost 40 years and they believe they are much smarter than the people at 4 year old Minecraft. As I have written before, within three years of a takeover like this, two thirds of all the senior and upper level people at the acquired firm, Minecraft, will be gone. With the founder leaving here it will even be accelerated.  Sorry, grandson, that’s the way business and deals work.

My grandson shrugs and he goes back to explaining to me the difference between the Justice League (D.C. Comics) and The Avengers (Marvel Comics).

Happy New Year to all!

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Breaking up Pepsi and Management Compensation

February 28, 2014 //
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Wall St. Journal article: Activist shareholder Nelson Peltz threatens to break up Pepsi. Their Board says, no thanks.

Facts: The term “activist shareholder” is a Wall Street polite term for a firm that buys a small percent of a company’s stock and then threatens them with either a takeover or demands seats on their Board or something. Many people do this these days. Carl Icahn buys some Apple shares and demands stock buybacks. The activist shareholder does this for a couple reasons: the firm’s stock price seems low to them and they can make a lot of money on re-selling the shares if the price moves up. Corporate Boards really dislike these people.

Facts: Pepsi sales are $66 billion (a Fortune 500 top 50 firm). Half are beverages and half are snacks and cereals. The snacks business is growing well in sales and profits. The original core beverage business much less so, even though this includes Gatorade and Aquafina water. Apparently, selling sugared drinks and old soda pop is not what it was years ago. Pepsi is resisting Mr. Peltz’s suggestions, but said they would increase dividends and buy back more common stock to make him happy (and hopefully go away!) Just don’t mess with our Doritos!

This article reminded me of two related conversations I had recently: First, a friend and I were wondering how very large firms like General Electric are able to manage themselves. Our agreed answer was that they are not. GE sales are $150 billion which ranks it the 8th largest U.S. firm. It is truly a very mixed conglomerate with appliances, energy (nuclear power equipment) , transportation (trains),  aviation (engines) and finance. Very few of these products, industries or markets have anything to do with each other. But GE’s senior management are some of the highest paid corporate people.

Second, a couple friends asked why some giant companies keep buying other businesses trying to get even bigger. One asked if it was due to the egos of the senior people. A very appropriate and partially true comment. But there is another much more basic reason. And it goes back to my old friends in Human Resources and one of my favorite topics, Management Compensation.

You see, most companies set their salaries and bonus levels in large degree based on the size, usually in sales, of a business. When I was at USG Corporation, the headquarters people were paid the most. Then those who ran the largest business, Gypsum Wallboard,  the next most and so on down the line. And this is not just the President or CEO of a given business, it included all the senior management and on down to managers. For in Management Compensation, size does matter. You might ask, isn’t it harder to manage a bigger business? Answer, no; it’s harder to manage a more multi-faceted or troubled business. Or to manage an international firm with many different country locations, laws, and taxes than one giant U.S. based business. You might also ask, shouldn’t a firm’s Board of Directors figure this out and pay what is right? Well, the Board usually relies on outside Compensation Advisors who are hired by….. you guessed it the company’s Senior H.R. person! Not much help there.

So why do people like Nelson Peltz or Carl Icahn go around and threaten these giant firms? To make a fortune off the money they invest in these companies’ common stock, of course! But how do they know that nine times out of ten they will make money doing this? Because they know the following secrets. First, giant firms really do not maximize shareholder value over the long run by buying (often at huge premiums) and then trying to manage very different businesses. Most of these bolted together giant firms would be more successful and worth more as a smaller  firm or as a part of a similar business. Peltz wants Pepsi’s snacks to merge with Mondelez International which used to be Kraft’s snack business before he and some of his activist friends got involved. The second and most important secret is that the Senior Management of most of these giant firms will do anything in their power to get rid of these activist investors so they can continue to collect large salaries and bonuses based on the fact that they are a Fortune 10 or 50 giant firm. It takes a unique CEO and team to decide to breakup this game and take a chance on actually trying to run a smaller company versus a conglomerate. And remember it is tough being a CEO since their average tenure (or corporate life) is 5 years. They may need that money someday.

So good luck to Pepsi and their Senior Management. As an aside, I have not drunk a Pepsi in years (Vitaminwater instead) but I do love their Doritos and Lay’s chips!

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Merging the U.S. and Canada

December 19, 2013 //
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No, this was not the opening on The Today Show or announced on Fox or CNN recently. Rather this is the subject of a new book published by Harper Collins by a dual Canadian-American citizen, a Ms. Francis.

Normally, or never, have I done a book review on this blog. We will not start now but we will make several observations about the book and its main premise.

Ms. Francis’ main points involve the economic logic of the two geographic neighbors becoming more of a “more perfect North American union” to compete in the world’s economy. The two countries would have an economy larger than the European Union and a wealth of nature resources, energy, water and technology.  Each country would gain something to compete better in the global economy. And the two countries (and Mexico) already cooperate on a number of fronts.  All of that actually makes sense.

But, as with many grand ideas, this starts to fall apart in the detail and especially in what I will call the “softer” issues.

First and foremost is that U.S. citizens call our selves, Americans. We believe that we are the one and only Americans. Technically, of course, we have other neighbors like Canada that could say that but only we do. Why is that? Because we believe we are, to quote Ali, The Greatest! We really never think about Canada. If U.S. citizens are asked to name some famous Canadians, we might stumble on a sports figure like Wayne Gretzky or the younger kids might say Justin Beiber but we struggle to name anyone from up there. And do not ask us who the current Prime Minister is yet alone his party. We really do not think much about Canada or Canadians. Sorry about that.

Second, and Ms. Francis does mention this, is that both countries have strong regional issues. In Canada and in Quebec province we have the French. An equal language with English. U.S. citizens do not get that one at all. Of course, we have a third of our population whose primary language is Spanish, which the Canadians might find confusing. And as different as the U.S. is with its south and west, let alone its Texas and California, Canada has very unique cultural differences between the Maritimes in the east to the their own cowboys in Calgary.

But lastly and maybe the most importantly is a small Canadian secret. Ms. Francis talks about our two countries as best friends. As noted above, one of the friends knows or cares nothing about the other. But worst than that is something my old boss Don Brown taught me. Mr. Brown was born in Canada but spent most of his life and built his business in the States. One day, on one of our private lunches or helicopter flights together he asks me a question. Brad, you have traveled all around the world for my company and met a lot of people. Which country do you believe dislikes the U.S. the most? I assumed he meant France, since the French seem to dislike everyone so that was my answer. He smiled and said, No, it was his birthplace and our neighbor, Canada. The Canadians, he explained, are so close to the U.S. and all it offers but are not here. So they are jealous and secretly dislike the U.S. Over the years, I have asked a number of Canadian friends and they all privately agree.

So, no merger of the U.S. and Canada anytime soon!

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Office Depot/Office Max, a Merger of Equals

July 6, 2013 //
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Disclosure: I own a very modest amount of the stock of Office Depot. I brought it because the people who work in the Chicago and Florida stores we frequent are so helpful and polite (and thus well managed). They even talked me into their frequent buyer program and each year I get about $20, which is enough for a modest bottle of wine.

Because of my vast ownership, I and thousands of others, received the Joint Proxy Statement to announce their merger and to get my vote. The second line on the cover announces that this is “A Merger Of Equals”.

So, I naturally found this lead-in fascinating enough to actually read much of the important parts of the 250plus page Proxy. In the finer print, you find some interesting details: 1. Office Depot shareholders will get 55% ownership to 45% for Office Max, very interesting.  2. Office Max legally will become a subsidiary of Office Depot, also interesting. 3. For tax purposes, they hope to qualify the merger as a tax-free reorganization which makes sense. 4. For accounting purposes, this will be an acquisition by Office Depot of Office Max, those pesky accountants just don’t like equals! 5. The new Board will have equal representatives from both and will elect a new Chairman,  senior team, and headquarter location. That meeting would be fun to listen in on.

I am very sorry to tell the fine employees of both firms, but there are “No Mergers of Equals!” The banking world loves this phrase and uses it constantly. It sounds friendly and cooperative and even nice. But if you look at the history of bank mergers, someone always brought someone, period. Modern day JP Morgan/Chase goes back to Chemical Bank buying half their New York competitors. Most of the deals were called mergers of equals. But the old Chemical Bankers always came out on top. And within three to five years, two thirds of the other bank’s senior people were gone, “to pursue other interests”. Yes, Jamie Dimon, a non Chemical banker,  is now Chairman, but that is another story.

The reason most mergers can not be mergers of equals is that people in the same industry, whether it’s banking or office supplies, hate their main competitors at worst, and distrust and dislike them at best. Even in the same industry, the culture and leadership style of each firm is always unique and never easy to blend. That is the nature of companies and the people who run them. It is a dog-eat-dog world out there and in my forthcoming book, The Business Zoo. Deal with it.

Who will come out as the real buyer and winner of this deal? I don’t know but I am rooting for my Office Depot team!

Note to self: send in that Proxy, my shares may turn the tide!

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Bad Weather, Holidays and Deals

February 11, 2013 //
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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!

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