Author: authoress

How the Mighty Fall – Bonus Post

A short ebook, “How the Mighty Fall” by Jim Collins, published in 2010, presents an analysis of big, public, reputable American companies that have gone out of business, or made a major fumble but recovered.

The author and his colleague conducted extensive, comprehensive research on the reasons, across a range of dimensions. Collins writes, “We learn more by examining why a great company fell into mediocrity” than the opposite.

So as to avoid bias in how he viewed a company after its failure or recovery, Collins pored over documents in chronological order (thus remaining unaware of how a company ultimately fared until he reached the information in due time), starting well before the crisis.

Companies do need continual creative re-invention. However, “companies that change constantly but without any consistent rationale will collapse just as surely as those that change not at all.”

Collins developed a theory that there are five stages companies go through when heading for bankruptcy. The author provides examples in the histories of real-life businesses when they were being led by particular CEOs.

The difference between Wal-Mart and Ames (a competing department store chain that disappeared in 2002) is that in the late 1980’s, the former had a humble CEO who was always eager to learn. Unlike his narrow-minded peers, he met with Brazilian investors to find out about their retail culture. “Wal-Mart does not exist for the aggrandizement of its leaders.”

Collins’ data indicated a counterintuitive notion: many companies that fell were actually not resting on their laurels. They fell not because they failed to take bold action, but because they exceeded the limits of their resources in doing so. This blogger remembers Woolworth as one of those.

Another point the author conveys is that businesses that delivered cumulative returns to investors in the long term as opposed to focusing on unsustainable short-term growth to put on a show for Wall Street, became great businesses.

The author contends that another element of success is staffing a company with “the right people who accept responsibility” rather than building a bureaucratic hierarchy whose bureaucracy breeds more bureaucracy. The former bestows individual credit and blame.

Read the book to learn:

  • the stages of decline;
  • warning signs;
  • different ways management reacts to them;
  • why IBM was able to right itself by the late 1990’s from its low in 1993, while HP’s pain, starting in the late 1990’s, persisted much longer;
  • why Texas Instruments got its mojo back but Motorola did not; and
  • much more.

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.

Memories Before and After The Sound of Music

The Book of the Week is “Memories Before and After The Sound of Music” by Agathe von Trapp, published in 2002. This ebook describes the real lives of the members of the family depicted in the legendary movie and musical “The Sound of Music.” The shows were Hollywoodized versions meant to appeal to American audiences.

Agathe, born in 1913, was the second-oldest child, and oldest daughter of an Austrian family of seven children by the first wife of a WWI commander of a submarine in the Austrian navy. The wealthy, farm-owning family had ties to royalty, and so had plenty of household help. Nevertheless, the family encountered some hardships during the political, financial and social upheavals of the first half of the twentieth century.

The author tries to set the reader straight on her family history. For example, she writes, “… we did not flee over the mountains into Switzerland. There is no mountain pass that leads from Salzburg, Austria into Switzerland. We simply took the train to Italy.”

A nanny taught Agathe and her siblings German and English. They found low-tech ways to amuse themselves. “…We used our imaginations to turn a row of chairs into an express train and a sofa into a hospital.”

They enjoyed natural wonders during their daily walks. They visited relatives, such as their maternal grandmother, Gromi, who had a spacious garden along the lakeshore. Agathe took an interest in beekeeping, mentored by the headmaster of the local elementary school, on “how to catch a swarm and how to extract honey.” He provided her with the necessary equipment, including bee hood, gloves and smoker. She harvested twelve pounds of honey a few months later.

Agathe played the guitar, while her father and siblings played the violin and accordion. They formed an amateur Schrammel Quartet; if it had been professional, it would have played Viennese folk music in “… little restaurants in Grinzing, a suburb of Vienna, during the time of harvest when the new wine is served.”

The von Trapps became a famous traveling singing group by chance. In the 1930’s, they were encouraged to enter a yodeling competition, and they won. Then came singing on the radio. Austria’s chancellor just happened to be a regular listener of the show they appeared on, and the rest is history. The “Trapp Family Singers” sang in concerts all over the world into the early 1950’s.

Read the book to learn of the von Trapp family’s adventures through the years, among them– how most of the family members lost their Austrian citizenship but were automatically granted Italian citizenship, how they stayed alive even after refusing to comply with specific Nazi orders, and what led the family to start a lodging business and music camp.

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.