King of Capital

The Book of the Week is “King of Capital” by David Carey and John E. Morris, published in 2012.  This ebook recounts the history of leveraged buyout (“LBO” or  “private equity”) firms, mostly Blackstone Group, from the 1980’s through the first decade of the 21st century. This ebook attempts to debunk the stereotype of greedy Wall Streeters.

Back in the 1980’s, one kind of transaction or “deal” the LBO firm did, was buy out companies that were publicly traded, taking them private. It risked only a tiny amount of its own money to take ownership and take over the management, usually 5-15% of the total price. The role of the firm was to arrange financing. The management of the company (client) being bought out, was the party risking the most, and doing the buying out– borrowing a large percentage of the purchase price (leveraging) — in essence, “robbing Peter to pay Paul” with the monies raised by the LBO firm from various financial institutions.

This was where “junk bonds” came in– very risky debt instruments that carried extremely high interest rates, as much as 19%. The reason for the risk and high return, was that, in the event that the client went bankrupt, bank loans were repaid to creditors first, and if there was any money left, then much later, the junk bonds would be repaid.

According to Carey and Morris, the goal of LBO firms that were “corporate raiders” was to capitalize on the hidden value of a target’s assets that was not being reflected in its stock price. The value was there but the directors and officers of the target were too busy looting their company by throwing lavish parties at their mansions and on their yachts, and zipping around in their corporate jets.

The raiders had no interest in owning the target, but wanted to make it leaner and meaner by firing the greedy CEO’s. Then they would cash out at a profit of several times their initial investment. Over time, the targets developed strategies, such as the “poison pill” to counter the raiders. Unfortunately, “For all their talk of overhauling badly run companies, the raiders seldom demonstrated much aptitude for improving companies.” Pox on both the houses of the raiders and targets.

Buyout firms that were not corporate raiders truly wanted to own the target. “…buyout investors look for companies that produce enough cash to cover the interest on the debt needed to buy them and which also are likely to increase in value.” A major part of the job of LBO firms is to identify possible deals through extensive financial research, and then decide whether to invest in the ones predicted to succeed.

The year 1981 was a great year for LBO’s because interest rates peaked, there was an economic downturn, and stocks were down. In the autumn of 1985, two partners, Steve Schwarzman and Pete Peterson started Blackstone Group. Schwarzman said that his partnership would not be able to compete with the older, more experienced LBO firms, unless it “…brought efficiencies to a company by way of cost improvements or revenue synergies.”

The early 2000’s became a rerun of the 1980’s as financial institutions took on excessive debt loads. Fall of 2008 saw the U.S. Treasury Department and the Federal Reserve Bank raise funds to try to bail out Lehman Brothers, Merrill Lynch and AIG by calling on private equity firms like Blackstone Group to help.

Read the book to learn more about the redistribution of wealth among the wealthy over the course of three decades, and the turnover, and victories and defeats of the partners at Blackstone Group.

Deals on the Green

The Book of the Week is “Deals on the Green” by David Rynecki, published in 2007. This ebook discusses how golf fuels business deals among the super-rich.

The author contends that the personality traits golfers need for success in golf and business include: friendliness, “imagination, tenacity, multitasking, guts, passion, and compassion…” The very act of playing golf is a major ingredient for success at many big-name companies, including GE, McGraw-Hill, J.M. Smucker, Tyson Foods, McDonald’s, Goodrich, Estee Lauder, Morgan Stanley and Johnson & Johnson. Businesspeople observe how others play the game– an indication of their character– to determine whether to do business with them.

The people who build a golf course include architects, landscapers and marketers. Many country clubs are exclusive, invitation-only kinds of places. The way “nobodies” can play on the golf courses at such clubs is to participate in fundraising events or volunteer to do menial work at them (and write big donation checks). Most of the major manufacturers of American golf equipment are located in Carlsbad, CA.

Etiquette dictates that any talk of business on the golf course should take place between the fifth and the fifteenth holes. There should be casual conversation, not an aggressive pitch.

Read the book to learn the names of people, places and equipment related to golf, and “…what really goes on when the titans of industry and finance get together” on the golf course.

The Google Guys

The Book of the Week is “The Google Guys, Inside the Brilliant Minds of Google Founders Larry Page and Sergey Brin” by Richard L. Brandt, published in 2009, with an Afterword published in 2011. This ebook recounts the history of the company that created the world’s largest internet search engine, which can analyze millions of pages a second.

The company has more than one hundred attorneys on staff. It must defend itself against lawsuits in connection with intellectual property, privacy, monopolistic practices, censorship, etc. It has about “twenty thousand employees and $20 billion in revenues.”

Larry and Sergey, the company’s founders, avoid doing conventional things that even many tech companies do. When they set up shop in 1998, the two never wrote a business plan. They “almost never give interviews or attend conferences.” Since they possess incredible power, they are not just tough business negotiators, but unreasonably arrogant ones.

Currently, the company provides a large array of services, in addition to a search engine. These include “PC applications, e-mail, cell phone operating systems, Web browsers, Wiki information sites, social networks, and photo editing sites…”

Read the book to learn more about Google, Inc., its history, and the personalities of its founders.

The Cure

The Book of the Week is “The Cure” by Geeta Anand, published in 2008. This ebook tells the emotional, suspenseful story of how a family coped with three disabled children, two of whom were suffering from a genetic disease for which a cure is yet to be found.

In the late 1990’s, John Crowley’s daughter and son were both diagnosed with Pompe disease, a muscle disorder. Patients, with varying severity, “have imperfectly produced acid alpha-glucosidase enzyme” which results in paralysis, obstructed breathing, and, if left untreated, death before the age of five.

Even though Crowley possessed the personality, talents, skills, education and privileged background that one would think would allow him access to a life-saving enzyme to save his children, he had to face numerous obstacles. The father naturally fell into the role of entrepreneur to do so. His wife provided invaluable emotional support and around-the-clock care of the children with the help of nurses; not to mention the running of the household.

Nevertheless, lots of genetic and environmental luck determines whether patients become fully cured and/or whether the quality of their lives improves significantly, or whether they die– even when they are sufficiently fortunate to take part in a trial of a new life-saving medicine. Death would be inevitable without the medicine.

Every patient is different. There are many different criteria the U.S. Food and Drug Administration considers when deciding whether to approve particular medical products for sale. Money plays a major part in whether a new product ever sees the light of day. A young medical research company raises funds through venture capitalists, and because the whole operation carries extremely high risks, if the company achieves success– the rewards, fittingly, are also extremely high.

Scientists must do years of preclinical testing on animals to make sure a new medicine works sufficiently well before even considering administering it to humans. In the United States, possible deadly consequences and possible future litigation motivate the scientists to act with integrity by performing tightly controlled experiments, so as not to have to fudge research results.

Another aspect of drug development, is avoiding a conflict of interest such as that in Crowley’s situation. He played a pivotal role in the race to bring a medicine to market; it appeared he was doing it to get the medicine for his own children.

The estimated annual expense of the enzyme for each child was $200,000, and $1 million for all future annual medical expenses, including the enzyme, plus wheelchairs, nurses, ventilators, catheters, etc.

Read the book to learn of the Crowley family’s experiences with American biotechnology.

Bad Boy Ballmer

The Book of the Week is “Bad Boy Ballmer, the Man Who Rules Microsoft” by Frederic Alan Maxwell, published in 2002. This ebook recounts the history of Microsoft and the career of its co-founder, Steve Ballmer.

Ballmer grew up in Birmingham, Michigan, which was a community comprised of “intense and well-funded academic, athletic, and social competition, and a high level of parental expectation, involvement, and support.” Ballmer’s father decided he was going to attend Harvard College. Fortunately, his superb academic record proved sufficient for acceptance. There, he met Bill Gates. They struck up a friendship and started Microsoft in the spring of 1975.

In the early 1980’s, under Ballmer’s and Gates’ auspices, the company created applications software that worked best on its own operating systems. This was one of many of Microsoft’s monopolistic practices that prompted government investigations and many lawsuits against it. Legally, financially and politically astute, Microsoft successfully defended itself for well over a decade, and employed unlawful dirty tricks in taking swipes at IBM, Sun Microsystems, Netscape and many other companies that made competing products. The whole time, Microsoft arrogantly denied it was a monopoly.

In the summer of 1998, Ballmer was named president of the company, which was still dogged by accusations of illegal business practices. The corporate culture had changed for the worse, and employee turnover rose. In order to boost morale, Ballmer “scheduled one-on-one interviews with the top hundred of Microsoft’s now thirty-five thousand employees, asking them what they thought was wrong with the company and how it could change.”

Ballmer told the press that his $180 billion company was overvalued. Shortly thereafter, on September 23, 1999, Microsoft’s NASDAQ stock price plummeted. Shareholders in the Seattle area alone suffered collective losses of $11 billion, or over “$3,000 for every man, woman, child and dog.” Other tech stocks fell precipitously as well. It was thought that Ballmer’s remark was a deliberate strategy to financially debilitate Microsoft’s rivals, which lacked the resources his company did.

Performance of Microsoft employees was reviewed every six months, on a 5-point scale. Managers competed for the privilege of supervising employees awarded high scores. However, the system had an inherent unfairness in that some managers gave 3’s for 4.5-level work, because they were supposed to rank their subordinates pursuant to the normal curve.

Read the book to learn more about how Ballmer’s personality and actions shaped Microsoft for over a quarter of a century.

Multipliers

The Book of the Week is “Multipliers: How the Best Leaders Make Everyone Smarter” by Liz Wiseman with Greg McKeown, published in 2010. This repetitive ebook discusses two kinds of leaders:  “Multipliers” and “Diminishers.”

Multipliers positively influence the people around them so as to draw out almost two times what they previously believed their capabilities to be, as reported by senior professionals interviewed by the authors. “People reported actually getting smarter around Multipliers.”

A study conducted in a non-workplace arena showed that people who were lauded for their efforts rather than for their intelligence “actually increased their ability to reason and solve problems.” The book’s authors relate this to Multipliers, saying that Multipliers create a self-fulfilling prophecy of greatness by recognizing their colleagues’ accomplishments, spurring better thinking from everyone.

The authors cited many examples of this, including one in which a company did not hire additional talent in order to meet its goal of increasing sales quickly, but instead, utilized Multipliers to better leverage the brain power of its existing sales force. Another company used Multipliers effectively in that “They didn’t box people into jobs and limit their contribution… [they]… let people work where they had ideas and energy and where they could best contribute.”

In addition, Multipliers have a great sense of humor– the trait of a great leader– it represents security with oneself, and a lack of self-consciousness. Multipliers search for talent all over, identify and draw out the positive behaviors that come naturally to the people they influence, maximize performance, and remove obstacles.

Read the book to learn the many other ways Multipliers bring out the best in their coworkers, and how Diminishers negatively impact their coworkers.

Beam, Straight Up

The Book of the Week is “Beam, Straight Up: The Bold Story of the First Family of Bourbon” by Fred Noe, with Jim Kokoris, published in 2012.  This autobiographical book recounts the history of the brand of Kentucky bourbon known as “Jim Beam” as told by a descendant of the company’s founder.

The drink recipe dates back to the 1790’s, and the family first started selling whiskey in 1795. Bourbon is a kind of whiskey. The name Bourbon was derived from the county name in Kentucky in about 1820.

Whiskey is “a spirit that’s made from a grain like corn, rye, wheat or barley.” A whiskey can be called bourbon only if it is comprised of a minimum of 51% corn, that has been aged a minimum of two years “inside charred, new oak barrels that can only be used once.”

Other varieties of whiskey include scotch (mostly barley), Canadian (mostly rye) and Irish (mostly malted barley). “Thanks to our innovation and our premiumization (upscale brands), bourbon was the fastest-growing large category in the United States in 2011.”

In the early days, the family shipped the bourbon in oak barrels on flatboats via streams and rivers, of which Kentucky likely has more than any other state. In the 1850’s, railroads and steamboats began to serve as additional shipping channels.

The spirit industry had its share of problems through the decades. In the 1920’s, there was Prohibition. Other drinks containing alcohol including vodka, scotch, wine and beer rose in popularity. Even so, competing whiskey-making companies would assist each other when they faced various equipment failures due to disasters.

Noe writes, “Sometimes I think the whole world is like one big bar, and I’m the world’s bartender.”

A First-Rate Madness

The Book of the Week is “A First-Rate Madness, Uncovering the Links Between Leadership and Mental Illness” by Nassir Ghaemi, published in 2011. This book describes the leadership abilities of John F. Kennedy, Martin Luther King, Abraham Lincoln, various Civil War generals, Adolf Hitler, George W. Bush, Tony Blair and Ted Turner, as determined by their mental health, or lack thereof.

The author argues that most people who have mental illness are not insane all the time; they merely have abnormal moods, such as depression or mania some of the time. He claims that mentally ill political and military leaders are heroic in times of crisis, and mediocre during peaceful, uneventful times; the opposite is true for mentally healthy leaders. This concept can be applied to the corporate world, too.

“In a strong economy, the ideal business leader is the corporate type… He may not be particularly creative… all is well only when all that matters is administration… When the economy is in crisis… the corporate executive takes a backseat to the entrepreneur…” It is rare to find someone who is an excellent leader under both extreme and normal conditions.

Ghaemi contends that “…depression led to more, not less realistic assessments of control over one’s environment, an effect that was only enhanced by a real-world emotional desire…” In other words, people prone to clinical depression have a more acute sense of reality than those who are not, a concept called “depressive realism.”

When the mentally healthy leader faces a crisis, he handles it poorly, because having suffered little in his youth, he “…hasn’t had a chance to develop resilience that might see him through later hardships” and has not developed the ability to empathize. George W. Bush was one such leader. To boot, he had “hubris syndrome.” Getting drunk on power, like many mentally healthy leaders, made him “…unwilling and even unable to accept criticism or correctly interpret events that diverge from their own beliefs. Hubris syndrome worsens with duration and absoluteness of one’s rule.”

Read the book to understand the psychology behind the successes and failures of the aforementioned leaders.

Dot Bomb

The Book of the Week is “Dot Bomb” by J. David Kuo, published in 2001. This ebook details the business dealings and the ensuing suspenseful power struggle at a dot-com company called Value America between 1996 and 2001.

The online retailer’s intended brand image was to boast maximum selection of merchandise shipped directly from sellers. This delivery-on-demand arrangement allowed the company to remain inventory-free, and thus minimize overhead costs. However, in reality, it needed to use resellers for many of the supposedly infinite products it sold.

Value America’s founder and leader, Craig Winn, was a charming megalomaniac who had grand plans to partner with various major corporations in order to attract investors and make the company worthy of an IPO. Unfortunately, Winn had planned to sell stock to the public just after the peak of the dot-com boom, when brokerages’ confidence in internet companies had started to wane.

After Value America went public, Goldman Sachs issued a report that Amazon.com was the internet retailer with the highest potential for success because it had high sales margins on its then-merchandise consisting only of books; a $30 billion valuation was not out of the realm of possiblity. Goldman went on to say Value America had the worst prospects, with sales margins of 1% and runaway costs. It would have to achieve revenues of billions of dollars in order to make any money.

Toward the end of the story, the author realized “Despite the hype, headlines, and hysteria, this was just a gold rush we were in… a lot of us were kin to those poor, freezing fools in Alaska who had staked everything on turning up a glittering chunk of gold.”

Read the book to learn the fate of the author, his family and the other Value America employees with dollar signs in their eyeballs.

Until the Sea Shall Free Them

The Book of the Week is “Until the Sea Shall Free them” by Robert Frump, published in 2001.

This wordy, repetitive, yet suspenseful book tells the detailed story of the February 1983 shipwreck of the Marine Electric, among many other briefly described maritime catastrophes. The scurvy old 605-foot bulk carrier transported coal in the North Atlantic Ocean from Boston, MA to Norfolk, VA.

The investigation of what happened conducted by the Marine Board– a panel of industry officials– was subject to the vagaries of the maritime legal system. Safety inspections of ships were performed by the U.S. Coast Guard and the American Bureau of Shipping. The National Transportation Safety Board was yet another regulatory body of maritime matters.

The Marine Board generated reports on shipping accidents. In rare cases, its recommendations might include Justice Department investigation and prosecution of a shipping company executive, or a review of the license of a ship’s captain; the latter, for criminal law violation, like for negligence in putting men’s lives at risk for failure to follow safety procedures.

A ship’s officers were usually blamed for disasters because ship owners and builders had a friendly relationship with the federal government. Political contributions helped elect candidates who turned a blind eye to regulating safety in marine commerce.

The ship’s top officers were under tremendous pressure to go on a voyage despite safety violations. Whistle-blowing behavior might get them fired. There was always the threat that a rival union would be awarded their current shipping contract. Some men waited more than a year before they could be assigned their next job on a ship.

For years, disasters were waiting to happen, due to the “rationalization, denial, greed and stubbornness” in connection with repairing and mantaining of decades-old ships. In the mid-1970’s, more than one fifth of all deaths from shipping accidents were due to structural failures of the vessels.

Heartbreakingly, during a winter storm at sea, some crew members die when they are so close to surviving. The lifeboats are buffeted about by rough waves and dashed on rocks or into a seawall, or men who lack protective clothing and proper safety equipment, fall into the freezing water while trying to board a rescue boat.

As in many other industries, shipping is one in which the big companies care more about money than seeking to reduce dangerous conditions. Despite poor safety records and the expenses of lawsuits and damage to their reputations, the large players stayed in business through the decades of the twentieth century. On the flip side, in accidents, numerous greedy seamen abused a lenient system that awarded them big bucks in personal injury cases.

Read the book to learn the fates of the parties associated with the Marine Electric after its fall from grace.