Saturday, January 2, 2016

Notes from Lords of Strategy by Walter Kiechel(1)


Some of my highlights..

Consultancies—start-ups and established outfits, including the strategy firms—stood willing to help clients figure out how to make sense of it all. By the end of the decade, some BCG offices derived nearly half their business from projects related to new technology.

In this emerging world, according to Evans, “the key way to think about competitive advantage is to think about how to design ecology in such a way to achieve goals you’re trying to pursue.

The role that strategy consultants play in the business hasn’t received much attention, but represents a remarkable convergence of mind-sets, analytical inclinations, and shared profit motivations.

The PE business, is in part the opportunity to actually run something. What consultants bring to jobs in private equity, at least to hear them tell it, is experience in improving the performance of companies—experience based on years of analyzing and advising.

by Bain & Company’s calculations in 2007, 75 percent of PE firms fail to earn more than their risk-adjusted cost of capital, a figure undoubtedly made worse by the recent disruptions—will be the ability to ratchet up the performance of their portfolio companies and, with it, their eventual sales price.

on “results” and its preeminent skills at Greater Taylorism. “Quite frankly, it’s the purest type of Bain work there is,” says Dan Haas, one of the founders of the practice, “because it’s all about creating value, you’ve got a motivated management team, and the stakes are incredibly high for everyone. For a firm of impact junkies, it doesn’t get any better than that.”

Bain’s help to its PE clients comes in two forms. Before the decision to buy a particular business, it will perform what it calls “strategic due diligence,” surveying the industry and players across the potential property’s value chain, from its suppliers to its customers....including what parts of it we will want to sell off. After the purchase has been consummated, Bain then works with its client to develop a performance improvement plan, particularly for the first one or two years: targets to be achieved, including financial goals, often plotted down to the month, with the steps to be taken to get there.


“Every day you don’t sell a portfolio company, you’ve made an implicit buy decision.”

The issue of what happens to overall employment at businesses acquired by PE firms was controversial even before the recent economic crisis. Private equity buckos are inclined to the view that certain functions, like human resources, can often be outsourced.

The CEO of the mortgage lender, Angelo Mozilo, and his team were convinced that the stock market wasn’t setting a high enough value on their enterprise. In strategic planning sessions in 2002, their consultant advised them that if Countrywide’s market share was higher, so would be their stock price. The consultant, Eric Flamholtz, a professor at UCLA’s Anderson School of Management, told how most industries evolved such that one competitor had more than a 40 percent share, the next more than 20 percent, a third competitor 10 percent, and the rest mere boutique status. (One can almost see Bruce Henderson nodding from the great beyond.) This, at a point when Countrywide’s share was about 10 percent and the market share leader’s was no more than 13 percent. [And we all know what happened to countrywide]

For students of strategy surveying the wreckage of the financial system, examples of strategic precepts leading the players astray won’t necessarily come as a surprise. (Think back to all those companies that claimed to have been ruined trying to apply the growth-share matrix to themselves.) What may be more of a shock is how seldom strategy or the consultants who pushed it creep up in accounts of the misadventures that led to the crisis. This is not just because of the consultants’ traditional determination to keep their work confidential

So what were the bulge-bracket consultants doing for their banking clients? As the Bear Stearns example suggests, much of their effort went to helping with Greater Taylorism in its most reductive, cost-cutting form. Often this work came under the rubric “sourcing.” In the 1980s, the consultants had demonstrated that what was pulling the banking industry’s profitability down was not the expense of the interest it paid out on deposits but rather the cost of new branches and technology...

Asked to name sins of omission or commission they may have committed in connection with the global financial crisis, most consultants will allow that in their advice they failed to make sufficient provision for risk, particularly systemic risk

Friday, January 1, 2016

Linkfest

Long and Short: Interview With Author Lawrence Creatura - ValueWalk
The 26 happiest, richest, healthiest, and most crime-free countries in the world
The definitive guide to Nordic cooking, in 730 recipes
Incredible: In 2015 I Learned That…
So, Just Average Is Best… | Wexboy
A Strange Tale of Fruitcakes and the Collin Street Bakery
The Secret to Raising Smart Kids - Scientific American
Big Short Genius Says Another Crisis Is Coming -- NYMag
Hilarious: In today's Not The Onion
"The History of the Black-Scholes Formula" via
"Getting My Ass Handed to Me by the World’s Largest Hedge Fund" via
16 mobile theses — Benedict Evans
"Blackstone's $26 Billion Hilton Deal: The Best Leveraged Buyout Ever" via
"Inside the Sony Hack" via
"The libido crash" via

Tuesday, December 29, 2015

Linkfest

Many Concerns About Third Avenue http://news.morningstar.com/articlenet/article.aspx?id=734259 …
In Honor Of "The Big Short", Here Is Michael Burry's Historic Commencement Speech | Zero Hedge http://www.zerohedge.com/news/2015-12-26/honor-big-short-here-michael-burrys-historic-commencement-speech …
A three-step approach for management to respond to activist investors: http://strat.bz/iDDyRIk
#StarWarsTheForceAwakens' path to box office glory. #dataviz https://www.reddit.com/r/dataisbeautiful/comments/3yghss/the_path_to_box_office_glory_can_look_very/ …
‘Rise of the Robots: Technology and the Threat of a Jobless Future’, by Martin Ford - http://FT.com http://www.ft.com/cms/s/0/21fea1ae-f3e7-11e4-a9f3-00144feab7de.html#axzz3vbLjgFlQ …
The Browser - Santa Hints At Christmas IPO https://thebrowser.com/articles/santa-sell-christmas …
The rating game | The Verge http://www.theverge.com/2015/10/28/9625968/rating-system-on-demand-economy-uber-olive-garden …
14 Behind-the-Scenes Secrets of TSA Agents | Mental Floss http://mentalfloss.com/us/go/72788
The world just agreed to a major climate deal in Paris. Now comes the hard part. - Vox http://www.vox.com/2015/12/12/9981020/paris-climate-deal …
Farnam Street's 2015 Annual Letter to Readers https://www.farnamstreetblog.com/2015/12/annual-letter-2015/ …
John Malon | Cable Cowboys http://archive.wired.com/wired/archive//2.07/malone_pr.html

Few notes from Buffet

Continued interest in only investing in the US; I couldn't disagree, with the amount of fraud that happens in emerging markets: 
"Though we will always invest abroad as well, the mother lode of opportunities runs through America. The treasures that have been uncovered up to now are dwarfed by those still untapped. Through dumb luck, Charlie and I were born in the United States, and we are forever grateful for the staggering advantages this accident of birth has given us."

Hope is not a strategy:
"These four investees possess excellent businesses and are run by managers who are both talented and shareholder-oriented. At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of a so-so business. It’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone."

On not doing any due-diligence:
"Jack Ringwalt, a friend of mine who was the controlling shareholder of the two companies, came to my office saying he would like to sell. Fifteen minutes later, we had a deal. Neither of Jack’s companies had ever had an audit by a public accounting firm, and I didn’t ask for one. My reasoning: (1) Jack was honest and (2) He was also a bit quirky and likely to walk away if the deal became at all complicated."

A hate for EBITDA:
"Last year, for example, BNSF’s interest coverage was more than 8:1. (Our definition of coverage is pre-tax earnings/interest, not EBITDA/interest, a commonly used measure we view as seriously flawed.) "

and the corollary:
"Our public reports of earnings will, of course, continue to conform to GAAP. To embrace reality, however, you should remember to add back most of the amortization charges we report."