Why is Productivity Private Equity's Obsession?

What if you heard there was a way for an investor to achieve improved results; secured jobs; created more jobs; made the Canadian office the Head Office which means more high level careers for our CFOs and CEOs. Sounds pretty good, doesn’t it? Yet, when I was visiting private equity in Boston, they were skeptical about Canadian companies ability to improve their productivity.

The Globe & Mail is running a fantastic series on productivity and Canadian attitudes. I appreciated that openness to the growing resource of private equity, not only the Bank money. Partnering with investment experts helps owners grow their businesses -- although this mantra of growth, I have discovered, is not what many owners want. Anyway, here is the article.

What could do all this you might ask? Well, the answer lies with something that most Canadians know little about—improving “productivity.” And while improving productivity can help us achieve such benefits, there are no guarantees that all these benefits will be realized. It will depend on the decisions that are made if we are successful in improving productivity. So, at the outset, let’s be clear that improved productivity brings opportunity for economic benefits—not a guarantee. 

But What is Productivity?

Productivity is essentially concerned with how we combine our various resources—labour, tools, equipment, etc.—to produce goods and services. That is, it relates to the decisions we make, and the actions we take, to try to make the best use we can of all the various resources we have available.

I heard Frank McKenna speak about making Canada a high tech expert in oil and mining products and services. This makes great sense if industries cluster and the state encourages this market - Paul Bremmer touches on this in his book, The End of the Free Market. Here is one of the comments to this article that adds to that theme.

Rather than playing to our strengths - i.e. the basic geographic and institutional make up of the country (firms, governments, land, capital, labour), most economic policy wonks and practically every government talks about the "knowledge economy", "innovation", and "productivity" in complete isolation from what it is that Canadians *actually do*. If we want those things (and in some ways we have innovative financial services for the mining industry, a technically advance energy sector, etc) then policy and thinking needs to explicitly connect them to the reality of the country. For example we are the world's *experts* in energy use and production. Per capita we use (and waste), distribute and produce the most, it's a cold country. Let's get "productive" in energy, it's a big input cost across the board. Focusing on the "strength of our banking system" and the sexy high-techiness of Blackberries and bio-tech without linking that to productivity improvements in forestry, water and energy use, mining, oil, etc. etc. proves that there is no real national effort to improve economic productivity. If it happens it's an accident of statistics and of policy.

6 Bear Traps sabotaging funding efforts for mature companies

Having seen many family companies who think they can get money because the investors will fall in love as hard as they have, I thought I would write a quick list of 6 Bear Traps of raising private equity. I asked a few fund managers for their opinions which are quoted in the book, Money Magnet. I also checked out some blogs where these sorts of lists are popular. Here are the top Bear traps sabotaging most funding efforts, in decreasing priority sequence:

1. Lack of a growth story. That story has to begin with the painful problem shared by a large collection of viable customers, with your competitive solution and why your company needs to grow. It has to be a big enough difference to get people to switch. Clay Christenson, Harvard Business School, wrote an entire book about how to get people to move from using the stairs to a new technology called the escalator. Many mature companies have not thought about how to grow their business, preferring to stay in the same, safe markets. Additionally, you need to be able to communicate the essence of that story and value to investors in a couple of sentences – your elevator pitch.
2. Lack of simple goals. Often, the number one question that owners fail to address is: “How much money do you need, and what valuation do you place on your company?” Then you have to have evidence to support your request. I’ve asked this question many times of presenters in angel meetings, and often get a blank look. What are the three things you would do with the money and in what time frame? Keep it to three. How much is your company worth and over five years forward, how much will it grow? Remember, the investor's other options are the stock market and putting the same amount of capital on gold - can you beat that growth?
3. Failure to prepare for due diligence. Any serious investor will perform a thorough archeological dig on your business and your background. Make sure there are no surprises, so you should explain any possible issues first, in the best possible light, before being asked. Get a professional financial advisor to ge you and your company ready and that should include 100% of due diligence already done and ready for the investors to merely review.
4. Lack of understanding of the fund. The book Money Magnet helps you get inside the head of the person with the capital. The key here is to create a win-win situation for your investors. Discussion of risks and rewards in an open fashion, without sleight-of-hand or shortcuts, will convince investors that they can count on you, and will avoid shareholder lawsuits later. 
5. Reliance on inappropriate business professionals. Using well-respected professionals to find you capital and introduce you to the right people as well as stick handle your way through to the check signing is smart. If you can attract well-known advisors, attorneys, and accountants, it will give potential investors comfort that you have been able to get an implied endorsement of your concept, as well as your integrity.
6. Being unprepared for the next steps. After a good elevator pitch or initial presentation, investors will ask for your formal business plan and financial projections. Don’t derail their enthusiasm or risk your professional image by not having these materials immediately available. The same thing goes for incorporating your company, having key hires lined up, and facilities arranged as required.

American businesses are uncertain about Obama's Plans for Business

I commented that I was shocked by my trip to Boston and the lawyers' and private equity's anger with government, particularly as this city would be voters for the current government. (I get tired of the obsession with Obama - it's his team too.) Even the Harvard Business Review online is bringing up "leadership lessons" directed right at Obama--which surprises me. Niall Ferguson, my favourite money expert, was on CNN talking about how American businesses are hoarding cash, not spending. And why would you hire people if you do not know the consequences of cost or maybe new rules around reducing work force and so forth. As I said before, it's a business owners's summit needed, not a job summit.
Anyway, it is clear that there is terrible uncertainty being created by Washington--where they are more lawyers and, apparently, zero business leaders or MBAs. Lack of business appreciation does create a narrower world view and when the goose is unsettled, the goose is not going to lay the golden eggs to pay for all those big union jobs. Washington needs to get to terms with this and fast.
Perhaps CNN was on in Joanna Slater's home too and she writes in The Globe & Mail:
For a clue to Corporate America’s state of mind, look no further than the piles of money stashed under its mattress. Facing an uncertain economic environment, U.S. firms have socked away cash at a rapid clip, amassing a rainy-day fund the likes of which hasn’t been seen in over 40 years. At the end of March, non-financial firms had accumulated a record $1.84-trillion (U.S.) in cash and other liquid assets on their balance sheets, according to the latest figures from the U.S. Federal Reserve Board. As a percentage of total company assets, which include factories and other investments, cash is at its highest level since the early 1960s.

When and where companies decide to use their stockpile will be a key factor in the strength of the recovery. If companies feel confident enough to invest in new equipment or make acquisitions, it will spur economic activity and hiring. If they remain anxious, such decisions will be delayed, dampening overall growth.

Such hoarding can’t go on forever. Companies that keep piles of cash sitting in the bank earning razor-thin interest rates will eventually face the ire of investors, who will demand that the money be put to better use or returned to shareholders. Two options: paying higher dividends or buying back shares.

Here are some of the more interesting comments:

 Companies use to use lines of credit or short term loans for regular operating expenses, so they didn’t need to keep such high levels of cash, but now a great majority of US banks are effectively bankrupt and lines of credit and short-term loans are all but impossible to obtain, even for the largest and most successful companies. This is why companies now must keep a high level of cash just to be able to meet financing needs for daily operations. There is no “EXCESS” hoarding of cash as this article suggests, that is just silly. 

Canadian banks see a huge market for lines of credits to American businesses and this is why our 4 big banks have huge expansion plans for the US. The American banks are dead, they are broke, so Canadian banks will move in to fill a need there. This article is off base. Yes, corporate cash is up. Corporate long term debt is slightly below record highs. This another smoke and mirror article by someone that doesn't do their homework. Corporate America is swimming debt. They have a little more cash in one pocket and a huge liability in the other. Go ahead and cheer for a day or two. It's a mess of debt out there. The party is going to end in tears.

Can we leave it to start ups to rebuild the economy?

Even Linkedin has White House staff posting questions on the public forums asking for advice on how to create jobs. If you could give the government one recommendation to create jobs, what would it be?
If that interests you, I recommend reading this month's Inc magazine; their superb cover story is

 a plan to revitalize the American economy by creating lots of new start-ups. Some of the proposals, such as a offering visas to foreign-born founders, are already generating controversy. There is a the question whether more start-ups would be good for America. In a Bloomberg Businessweek cover story, former Intel CEO Andy Grove attempts to challenge this widely accepted idea. "The underlying problem," Grove writes. "[Is] our own misplaced faith in the power of startups to create U.S. jobs."

Exactly, Andy, start ups can not work in isolated patches. You need the big companies to be the cruise ship and the start ups can be all the harbour services to that cruise ship. By letting these big cruise ships leave the harbour for China, we explicitly miss-out on the next new industry ("but what of the industries we haven't created yet?") when the knowledge and expertise that accumulates in the ecosystem of manufacturers and suppliers is largely offshore. 
Think batteries, solar power, etc. What seems like a sound farming-out-of-commodity-work this year turns into a wholesale ceding of the next step in an industry's development five years down the road. 
I believe Groves is absolutely right that we need to re-think our assumptions about what the link is between what is in the interest of an individual company and what is in the interest of our nation medium-term. 
It is not always natural for many in the business world to have an honest discussion of what kind of society we should aim for - and accept that societies do not build themselves but are build by leaders who have a vision greater than their own economic freedom. It is a discussion we should have. 
Nortel was one of those major cruise ships and should have been given the GM package of bail out money too. Problem was that no one at Nortel believed that they were in such bad shape and no one did what GM did, get together a large group of businesses and go to Ottawa to lobby their case. 
I feel heartened that finally these stories are on front page covers of magazines and that great business leaders are bringing their points to the debate.

Private Equity sees the value in Health Care

The tale of rival Indian and Malaysian bidders for a Singapore-based health-care chain might be described as "same hospital bed, different dreams."

A full-on bidding war for Parkway Holdings Ltd., a successful Singaporean provider of swanky, high-end hospital care, broke out last week when India's Fortis Healthcare Ltd. announced an offer for the shares it doesn't already own in Parkway that values the company at 4.32 billion Singaporean dollars (US$3.10 billion). Fortis's bid of S$3.80 a share tops a partial takeover offer of S$3.78 a share from a unit of Malaysia's sovereign-wealth fund aimed at securing majority control without having to buy the whole asset.

The two offers share one thing in common: a belief that rapidly growing demand for quality health services around Asia represents a unique business opportunity. But the offers from each of Parkway's two biggest shareholders envision different players—one government-owned, another a private-sector industry leader—grabbing the consolidator's position.

Malaysia's interest in Parkway is clear. It holds 24.1% of Parkway outright through Khazanah Nasional Bhd., the state-owned investment fund, and owns 60% of a Malaysian Parkway affiliate. Parkway also generates 26% of its revenue in Malaysia, which is expected to be a key driver of its future growth, according to a Citi Investment Research report.

Moreover, Parkway offers tiny Singapore's bigger, less developed neighbor a chance to leapfrog into a leading position in high-end health care, an industry the government has singled out for strategic growth. Malaysia already has used government funds in that effort: state-owned oil company Petroliam National Bhd., or Petronas, owns a luxury, "futuristically designed" (as the website puts it) 300-bed hospital in the country's capital, Kuala Lumpur, built two years ago in part to promote medical tourism.

For Fortis, Parkway offers a chance to expand from its base in India across the region. One of India's largest hospital groups, Fortis is run by billionaire brothers of the Singh family that founded drug maker Ranbaxy Laboratories Ltd. In an email, Fortis Chairman Malvinder Mohan Singh said a combination between Fortis and Parkway would create a "pan-Asian health-care platform" that stretches from the Gulf to Southeast Asia, with both China and India representing big opportunities.

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