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.

Just Plain Dick

The Book of the Week is “Just Plain Dick: Richard Nixon’s Checkers Speech and the ‘Rocking Socking’ Election of 1952” by Kevin Mattson, published in 2012. This ebook details the 1952 U.S. presidential election in which vice presidential candidate Nixon became more the center of attention than presidential candidate Dwight Eisenhower.

The dirt that generated bad publicity for a candidate in that election was of a slush fund of Nixon’s. When the news broke in September 1952 about Nixon’s alleged campaign finance impropriety, there was lots of hand-wringing among Eisenhower and his advisors as to whether Nixon should be dropped from the ticket.

The nature of the new medium of television– a visual, collective, simultaneous experience for a large audience– was a game-changer. It allowed Nixon to deliver directly to the American people, what turned out to be the perfect message in a way that repaired his reputation and ultimately helped him and his superior win the election.

Nixon’s emotional appeal persuaded his audience that he was a member of the middle class– not an elitist. Mention of his wife’s cloth coat and his dog struck just the right tone. To top off his speech, he skillfully initiated crowd sourcing by inviting voters to contact the Republican Party to express their opinion on whether he should withdraw from the race.

Read the book to learn the details of this memorable, fascinating episode in American political history.

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.

Thank You For Arguing

The Book of the Week is “Thank You For Arguing” by Jay Heinrichs, published in 2007. This is a book on debating. The author teases apart the differences between arguing and fighting, and logic and rhetoric.

There are three kinds of persuasive language:  blame, values and choice. Each is of a different tense. Blame is past tense. Values depict the present. Choice talks about the future. The author advises the reader to switch tenses if an argument gets heated. The future, though, is the tense most likely to bring about peace.

People in a courtroom recount past events that involve blame. However, to get their points across, lovers and politicians should try to stick to the present and future. Two useful questions to ask when a problem crops up are, “What should we do about it?” and “How can we keep it from happening again?”

Values, which involve morals, are undebatable. The author says, “Argument’s Rule Number One:  Never debate the undebatable. Instead, focus on your goals… If you want your audience to make a choice, focus on the future.” Also, “When you argue emotionally, speak simply. People in the middle of a strong emotion rarely use elaborate speech.”

One more tip:  When one is deciding on an issue to argue, the most persuasive issue will be the broadest one. For instance, in launching a protest against consolidating two departments in a workplace, one should seize upon the issue of productivity, rather than fairness.

The author sadly concludes that universities used to teach rhetoric, but stopped doing so in the 1800’s when “…academia forgot what the liberal arts were for: to train an elite for leadership.”

Read the book to learn more debating techniques.

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.

Alive

The Book of the Week is “Alive: The Story of the Andes Survivors” by Piers Paul Read, published in 1974. This paperback tells the suspenseful true story of the aftermath of a plane crash in the Andes Mountains in Chile.

The small plane contained mostly strapping teenage boys who were members of a Uruguayan rugby team. Read the book to learn how the hardiest victims survived sub-freezing temperatures in the snow for a prolonged period– as they were trapped in the mountains– despite the fact that they had become chain-smokers.

Cracked

The Book of the Week is “Cracked” by Dr. Drew Pinsky with Todd Gold, published in 2004.

The author of this ebook, a doctor, recounts his experiences treating drug addicts in a rehabilitation facility. Many of his patients were subjected to various kinds of childhood abuse that “…caused them to feel helpless, powerless, and in grave danger.” They became distrustful, and had difficulty making social connections and processing emotions. Many had parents who were addicts.

Some people are genetically predisposed to becoming addicts. One fifth of people entering rehab are addicted to marijuana, and usually, alcoholism runs in their families. People may develop lesions on the brain after just a couple of exposures to the drug ecstasy. Many people turn to shoplifting as a substitute thrill to opiate abuse in trying to quit their addiction.

At the start of addiction, the nucleus accumbens in the brain changes so that the body thinks that controlled substances such as heroin, alcohol, cocaine, etc., are necessary for survival. Beating an addiction requires rewiring some of the noncognitive parts of the brain.

Sadly, American society pressures its citizens to derive emotional comfort from material possessions, an unhealthy practice. “We forget that people feel best when they’re interacting, talking, helping, and creating with other people… face to face, particularly in times of adversity or when they’re feeling threatened.”

Read the book to learn the stories of typical addicts, the detrimental behaviors of their loved ones, and of the author’s frustrations with his patients’ stingy insurance companies.

Happiness From the Inside Out – Bonus Post

Today is Thanksgiving Day for Americans, many of whom use the excuse of a celebration based on a traditional story of questionable veracity to:

take a break from work

overindulge in certain foods

watch aggressive men play a game called “football” (though the foot is seldom used) and

show fleeting gratitude for their material possessions.

This holiday is a sad commentary on the lack of happiness in the United States.

Along these lines, this blogger would like to list a few interesting, general factoids from the book, “Happiness From the Inside Out” by Robert Mack, published in 2009.

“The second reason people try to buy happiness with success is that they actually mistake success for happiness. They think success and happiness are the same thing, or least should be the same thing.  But happiness is more than success.”

A woman’s, but not a man’s happiness level rises with the birth of a child.

Both parents experience lower happiness levels with the birth of children after the first one.

Parents feel least happy through the kids’ teenage years, and their mood improves significantly only when the kids move out.

In a widely publicized, competitive environment like the Olympics, second-place finishers tend to be harder on themselves than third-place finishers. The silver medal winners compare themselves to the gold medal winners, so they feel more anguish at losing than the bronze medal winners, who compare themselves to all other competitors.

The third-tier athletes are happier– more grateful for what they have; they put things in perspective. Enough said.

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.