What we can all learn from Sam Walton

In these times, business owners need more than a coffee to get going. I find a bit of inspiration when I listen to Sam Walton's wise words. Even though he has been gone a long time, his legacy of Walmarts lives on. Take a look at his ideas, so many are now industry best practices:

Rule 1: Commit to your business. Believe in it more than anybody else. I think I overcame every single one of my personal shortcomings by the sheer passion I brought to my work. I don't know if you're born with this kind of passion, or if you can learn it. But I do know you need it. If you love your work, you'll be out there every day trying to do it the best you possibly can, and pretty soon everybody around will catch the passion from you — like a fever.

Rule 2: Share your profits with all your associates, and treat them as partners. In turn, they will treat you as a partner, and together you will all perform beyond your wildest expectations. Remain a corporation and retain control if you like, but behave as a servant leader in your partnership. Encourage your associates to hold a stake in the company. Offer discounted stock and grant them stock for their retirement. It's the single best thing we ever did.

Rule 3: Motivate your partners. Money and ownership alone aren't enough. Constantly, day by day, think of new and more interesting ways to motivate and challenge your partners. Set high goals, encourage competition, and then keep score. Make bets with outrageous payoffs. If things get stale, cross-pollinate; have managers switch jobs with one another to stay challenged. Keep everybody guessing as to what your next trick is going to be. Don't become too predictable.

Rule 4: Communicate everything you possibly can to your partners. The more they know, the more they'll understand. The more they understand, the more they'll care. Once they care, there's no stopping them. If you don't trust your associates to know what's going on, they'll know you really don't consider them partners. Information is power, and the gain you get from empowering your associates more than offsets the risk of informing your competitors.

Rule 5: Appreciate everything your associates do for the business. A paycheck and a stock will buy one kind of loyalty. But all of us like to be told how much somebody appreciates what we do for them. We like to hear it often, and especially when we have done something we're really proud of. Nothing else can quite substitute for a few well-chosen, well-timed, sincere words of praise. They're absolutely free — and worth a fortune.

Rule 6: Celebrate your success. Find some humor in your failures. Don't take yourself so seriously. Loosen up, and everybody around you will loosen up. Have fun. Show enthusiasm — always. When all else fails, put on a costume and sing a silly song. Then make everybody else sing with you. Don't do a hula on Wall Street. It's been done. Think up your own stunt. All of this is more important, and more fun, than you think, and it really fools competition. "Why should we take those cornballs at Wal-Mart seriously?"

Rule 7: Listen to everyone in your company and figure out ways to get them talking. The folks on the front lines — the ones who actually talk to the customer — are the only ones who really know what's going on out there. You'd better find out what they know. This really is what total quality is all about. To push responsibility down in your organization, and to force good ideas to bubble up within it, you must listen to what your associates are trying to tell you.

Rule 8: Exceed your customer's expectations. If you do, they'll come back over and over. Give them what they want — and a little more. Let them know you appreciate them. Make good on all your mistakes, and don't make excuses — apologize. Stand behind everything you do. The two most important words I ever wrote were on that first Wal-Mart sign: "Satisfaction Guaranteed." They're still up there, and they have made all the difference.

Rule 9: Control your expenses better than your competition. This is where you can always find the competitive advantage. For twenty-five years running — long before Wal-Mart was known as the nation's largest retailer — we've ranked No. 1 in our industry for the lowest ratio of expenses to sales. You can make a lot of different mistakes and still recover if you run an efficient operation. Or you can be brilliant and still go out of business if you're too inefficient.

Rule 10: Swim upstream. Go the other way. Ignore the conventional wisdom. If everybody else is doing it one way, there's a good chance you can find your niche by going in exactly the opposite direction. But be prepared for a lot of folks to wave you down and tell you you're headed the wrong way. I guess in all my years, what I heard more often than anything was: a town of less than 50,000 population cannot support a discount store for very long.

Jacoline Loewen, (jbloewen at loewenpartners.com) is a partner in a private equity firm, Loewen & Partners, dedicated to raising capital for family business owners and developing their growth strategies.

How not to strengthen your company brand

Having your own dealer network dedicated to your brand sounds terrific, but in reality, your customers may not like it. Here's a Honda fan and owner of OES, Paul Hogendoorn telling his story about how brand can erode rapidly when the brand strategy of "Honda dealerships only" badly misfires.

I learned a few lessons on my recent mid-life, self re-discovery sojourn – a 3 week motorcycle trip from my home in London Ontario, through Victoria BC, and then up to Dawson City Yukon before picking my way home. The biggest one was the simple reminder that in any business, “it’s all about the customer”.

I ride a 2006 Honda ST1300. The brand, and the specific model that I own, have earned the respect that it enjoys and deserves. But recently the company has begun to move away from an independent dealer network and towards a network of “Honda only” dealers that sell not only the motorcycles, but also the company’s brand of generators, outboard motors and even lawnmowers. My guess is that it is a move designed to strengthen the over-all company brand and leverage the reputation in some marketplaces (motorcycles perhaps) to improve the brand’s success in others (lawnmowers perhaps).

I had counted on replacing my rear tire when I got to Edmonton, a major center where I was sure to find a suitable replacement. However, due to the extra weight I was carrying, or the coarseness of many of the northern roads, or perhaps the higher temperatures that the tire experienced while traveling “expeditiously” through the US flat lands, I found myself in need of a tire about 1000 miles sooner.

I rode to the nearest town with a Honda dealer in the hopes of getting the tire changed. I discovered that they didn’t have one in stock, which was not really unexpected. (It is a fairly unique model). What was unexpected though was when they told me that it would take a week to have one shipped there, and that “nobody airships tires up here anymore”. My choice was to wait a week, or head out and hope to make it to a larger center with a tire in stock. I decided I had no real choice but to take my chances and go.

When I got to the other end of town, I noticed another motorcycle dealer that carried a couple of different brands of motor products. I pulled in and asked if they had a tire that would fit my bike. After a few minutes, the parts manager came out with 3 tires - none were the exact size, but they would fit. But then he offered me one further option. “If you want the exact tire sir, for about $50 I can have one flown up here. I could have it here by tomorrow, the day after at the latest.” I chose one of the tires he had in stock, and before I had a chance to catch up on all my emails (and do my Facebook updates) using their customer accessible WiFi connection, they had my tire replaced and I was on my way.

A couple days later, while almost exactly in the middle of a 6 hour stretch without any services, a stone thrown by transport truck rocketing through a gravel section of the highway under construction, pierced my radiator. Green coolant was now spraying all over my front disk brake. In tough situations like that, I did what I always do first: I called my wife!

My riding partner (“Charlie”) and I found a small lodge with a satellite phone connection and diesel generated electricity. We rented their last room (an authentic little log cabin), had dinner, and hoped my wife would be able to find a radiator and somehow get it to us.

My wife located the nearest dealer, about 4 hours away from where I was. They told her that they didn’t have one in stock (no surprise really), and if she wanted to order one they would have it in a week to ten days. She asked about the cost to expedite the order, but they told her that they didn’t do that anymore, they “order everything through the system.”

Not wanting my little adventure to keep me away a full week (or more) longer than she counted on, she called a local independent dealer that was recently disfranchised. They called another independent multi-brand dealer out west that still had their franchise. They in turn ordered and expedited the radiator and were prepared to send it to any dealer in any town that I might be able to get to.

Charlie is not only the best friend from my youth, he is also a certified Porsche and Audi technician – and one helluva MacGyver impersonator.

With the standard Honda tools, a pen knife, an air mattress patch kit, and a couple of electrical tie wraps, he sutured and patched my radiator so that we could ride out of our wilderness lodge and towards the nearest town. We made it to the first town 3 hours away with no trouble, so we went to the next, and then the next. In two days, we rode 1000 miles, with the patch, to the dealer that had ordered and expedited the rad. Four hours later, Black Beauty (my bike) was as good as new When I reflected on this adventure within an adventure, I believe I discovered a serious flaw in this new “single brand” dealer network. For them, their primary advantage and their primary purpose both related to the brand. They support the brand, and they are supported by the brand, But when it comes to the motorcycle marketplace, it’s not about the brand. It’s not even about the motorcycle. It’s all about the rider.The same is true in all businesses, and especially in our manufacturing industries. It’s not about the brand. It’s not about the equipment, or the technology, or even about the product. It’s all about the customer. Whoever meets the needs of the customer the best, wins.

Paul Hogendoorn is president of OES, Inc. and a founding member and past chair of the London Region Manufacturing Council. He can be reached at phogendoorn@oes-inc.com

The Great Escape

There can be no more sobering illustrative example of these realities than today’s USA, where President Obama’s first budget unapologetically anticipated adding $10 trillion in deficits through 2017, led off by $1.5 trillion of excess spending this fiscal year. That’s a whopping 12% of GDP, or another thirteen-digit number to be added to a steeply-climbing national debt that already exceeds $11 trillion, or 70% of GDP.

A cartoon of Uncle Sam with upturned hat asking: “Brother, can you spare a trillion or two?” (Canadian Business - February 16) stays in my mind. There’s also the quip about the US becoming nothing more than a pension (and healthcare) plan with an army. Sadly, there could be a ring of truth to both.

If there is some accompanying comfort, it might be that the U.S. is not alone. Britain’s predicament, as I could realise at first hand, seems every bit as dire. The same is true for most other OECD members – and also for Canada. Though our fiscal position remains much stronger than most, there is widespread questioning of the federal government’s belief we can be back in balance by 2013. Regardless, this will take that much longer than the target recovery date if now-nationwide provincial deficits are also included. (STOP PRESS: Just extended to 2015 by Finance Minister Flaherty who has also revised this fiscal year’s budget deficit estimate to $55 billion from $50 billion.) Globally, add the transfer of the debts of troubled banks and others to a public sector launched on a well-intentioned and major supportive stimulus spending, and the burden of public debt becomes all the more formidable. Then add an extravagant era of private-sector debt overhanging almost all OECD economies, and you have an even more haunting spectre grippingly illustrated by an Economist front cover (June 13) of a baby chained to a massive ball of debt labelled “the biggest bill in history”.

The immediate risk emerges as disinflation, if not deflation, as wages shrink and energy prices fall from their peak levels of a year ago. I concede it may take years for these conflicting forces to play out, but I’m still troubled by the prospect of all that money chasing insufficient goods and services and our politicians succumbing to expediency. Agreed, raising taxes and cutting back on government spending are not usually the best way to win elections. (Not surprisingly, Gordon Brown and Stephen Harper are both apposed to such measures.) There are also finite limits to how much governments can borrow. Monetizing the deficits may sound the better solution, but this is simply a glorified word for inflating the system with cheapened money, thereby diminishing the burden of public debt.

Michael Graham, from his newsletter - The Great Escape

Jacoline Loewen

How the economists missed the biggest thing in their lives

"Why the heck did they not know?" is a common question at economic presentations these days. Today's guest blogger, Michael Graham, elaborates.

Recently, the Queen pointedly asked the brains of my alma mater, the London School of Economics, why they could not have foreseen the coming cataclysm. Weeks later Her Majesty received a lengthy reply that could have been best reduced to a simple “We don’t know”. On my latest trip to a deeply troubled Britain, I couldn’t help but notice an eye-catching headline in The Daily Telegraph. “The Fiscal Ruin of the Western World Beckons” was probably exaggerated. Nevertheless, there should be no doubt about the hole our world has dug itself into. Or the extent to which Mr. Volcker, now head of President Obama’s Economic Advisory Panel, and Ben Bernanke, the re-nominated Federal Reserve chairman, are going to have their work cut out for them. Everyone should want to wish them well.

Those free-market champions Ronald Reagan and Margaret Thatcher would certainly not approve of the bailouts, relief packages, loan guarantees and diverse other rescue measures provided financial institutions and auto manufacturers judged too big to be allowed to fail. The very successful “cash for clunkers” incentive only adds to what one critic has expressively likened to a bewildering alphabet soup.In the case of the U.S., estimated total government support now exceeds a staggering $10 trillion. That’s before the $1 trillion currently being proposed by the Obama Administration for healthcare. The pattern is similar in many other countries, most notably Britain. And also in Canada, which has swung dramatically into the red at both the national and provincial levels. Adam Smith, of Wealth of Nations fame and the father of modern-day free markets, would probably roll in his grave at the resulting interference with the invisible hand of his competitive world marketplace.

No doubt, government intervention on today’s scale must make it harder to keep participants in disciplinary line. As a result, daunting economic risks stand to become all the greater. Nevertheless, to quote Jeffrey Immelt, Chairman & CEO of General Electric, we have no choice but to accept that “the government has moved in next door and it ain’t leaving”.

There could be offsetting comfort in comedian Will Rogers’ homily that “the good thing about government is that we don’t get what we pay for”. But, like it or not, we have entered a prolonged government-private sector partnership of unknown consequences on a scale few would have ever imagined. It must be remembered, that government spending cannot prop up wounded economies indefinitely. Nor can pump-priming fiscal deficits be recipes for sustainable economic growth. Rising government debt also inhibits fiscal and central bank manoeuvrability. A trio like this can bring only short-term stimulus at best.

Web: grahamis.ca

Email: Michael@grahamis.ca

Recession in Canada is officially over

I listened to two economists today at separate presentations. Who was it who said ten minutes spent with an economist is ten minutes wasted? Well, Don Drummond was certainly not one of those economists. He told the TD Bank audience - the recession is over.

I also ran into Michael Graham who sent me his newsletter with its useful insights. Here is Michael's view on the recession this year.

We are going to be able to tell our children and grandchildren how we – and they – escaped the next Great Depression. But only after 12 to 18 harrowing, high-anxiety months morphed into the worst financial crisis since the 1930s. Although there wasn’t a 1929-style stock market collapse, an extremely painful accompanying bear market (the second within a decade) included innumerable downward plunges. Let there be no doubt, as well, that the Great Escape of 2009 came at a fearsome price for which our generation must take full responsibility.It’s not that depression scares are new. Neither are recessions or bear markets which come and go like the seasons, usually presaging healthy restoration and rebalancing. In fact, I think I can safely record that my business career now spans six recessions and ten bear markets, shortly (I hope) to be succeeded by a seventh recovery and an eleventh bull market. Instead, what was so different this time round was an unforeseen and highly-contagious worldwide banking crisis that threatened – and in many instances toppled - household names like dominos. In the process, previously- reckless banks, desperate not to risk their badly-impaired capital any further, wouldn’t even lend to one another. Talk about broken trust.

The universally respected Paul Volcker, former Federal Reserve chairman, couldn’t have summarized what happened more aptly: “I don’t remember any time, maybe even in the Great Depression, when things went down quite so far, quite so uniformly around the world.” Yes, it was a very narrow escape indeed.

Jacoline Loewen, private equity, Toronto

Is there redemption in deal making?

That question is front and center in light of the announcement this week that the Parallel Petroleum Corporation had agreed to be acquired by an affiliate of Apollo Management in a deal valued at $483 million, including the assumption or repayment of $351 million in debt.

The New York Times has an interesting article on this - summarized here:

Apollo has been painted as one of the chief private equity villains of the financial crisis. The firm earned this reputation by orchestrating an attempt by Hexion Specialty Chemicals, which Apollo controls, to escape its obligation to acquire Huntsman. Apollo succeeded in this attempt, but its reputation suffered both externally and possibly internally as its investors sweated the possibility of a big damages award. Parallel’s announcement clearly is a signal to the market that Apollo is not permanently exiled.

But this does not mean that targets will blindly trust private equity. Prior to the financial crisis, the private equity acquisition agreement typically included a reverse termination fee that allowed a suitor to walk for any reason by paying this amount. Targets granted this right because they relied on private equity’s reputation for completing deals. Parallel filed its own acquisition agreement on Tuesday with the Securities and Exchange Commission. Parallel is willing to deal with Apollo, but the agreement itself shows that there is little trust. Instead of relying on reputation, Parallel reverted back to contract terms to ensure that Apollo lived up to its promise. While some of this may be attributable to Parallel’s state and need for certainty, the Parallel deal is yet another sign that a new private equity deal model is developing.

First, the acquisition agreement in the Apollo/Parallel deal does not have a financing condition. This is normal. However, this deal is all equity-financed by Apollo, which is injecting $283.2 million. This means that in order to do the deal, Apollo is taking the credit risk for any new financing as well as refinancing Parallel’s $150 million senior notes. This is a sign of a return to normalcy in the markets, but it also reflects the lengths Apollo had to go to secure this deal.

Second, the equity commitment letter was not disclosed on Tuesday. It will be disclosed with the tender offer documents. (An aside: When is the S.E.C. going to force the disclosure of these documents with acquisition agreements?) But the merger agreement appears to state that Parallel has a right to specifically enforce it. That is, Parallel can sue to force Apollo to specifically perform its obligations under the equity commitment letter instead of paying monetary damages. This is also a sea change. Before the financial crisis, a target only had a right to sue the shell subsidiary acquiring it. The only exception I remember was in the Fortress/Penn National Gaming deal.

In such a scenario, if there was even a right of specific performance, a judgment was required first against the subsidiary, forcing it to sue the buyout firm to perform on the equity commitment letter. Then the subsidiary would somehow have to pursue a lawsuit against its owner. This was a high hurdle. But the private equity firms wanted to keep their liability remote and insisted on it. The Parallel deal and its different approach is another marker that the practice is not likely to continue.

Third, this is the second significant private equity deal in recent months (the Bankrate deal is the other one) in which there is not a reverse termination fee. In other words, the buyer cannot terminate the deal by simply paying a preset fee. Instead, the Parallel merger agreement requires specific performance. Parallel can sue to force the Apollo subsidiaries to perform their obligations, and since these are shells, Parallel can also bypass these subsidiaries to sue on the equity commitment letter to force the money to be provided.

As in other recent private equity agreements, including the Sum Total/KKR Accel agreement, this deal requires that Parallel first seek specific performance as a remedy. Only if specific performance is unavailable can Parallel seek monetary damages and specifically the benefit of the share premium, and only then after giving Apollo two more weeks to perform its obligations.

This is a nice benefit to Apollo. It essentially provides them a free pass on litigation — with a maximum cap of having to close the deal. Because of this, future targets may want to rethink this provision.

Because the Parallel deal is all equity-financed, it can be a tender offer, which means it can close 20 business days after the tender offer commences, as opposed to the two to three months necessary for a proxy contest.

Previously, the margin rules and need to market the debt financing had made it difficult to structure deals as tender offers instead of mergers. The margin rules, Regulations U and X, limit a lender’s ability to lend money on margin stock. “Margin stock” includes any publicly traded security (e.g., Parallel stock). A private equity firm that wants to do a debt-financed tender offer can get around this problem by structuring the deal to comply with these margin rules and limit the amount of its borrowing to 50 percent of the value of the collateral pledged to secure the loan (i.e., Parallel).

Historically, this was lower than a private equity firm is willing to go.

And the tender offer has tight conditions. If you look at Annex A to the acquisition agreement, these are the bare minimum conditions you see in a tender offer — no material adverse change, requirement of regulatory approvals, etc. There is nothing like the minimum cash or Ebitda conditions you often would see in private equity deals.

The Parallel and Bankrate deals show that a new private equity model is developing. Private equity is focusing on the low side range of middle-market deals and negotiating tight contracts with no financing out, specific performance, all equity financing and a guarantee enforceable by targets.

Vice Chancellor Stephen P. Lamb's opinion in Huntsman/Hexion and the private equity implosion appear to be having lasting impacts. Nonetheless, this all-equity model is not portable to larger deals, so it remains to be seen if the historical structure of private equity will shift if and when private equity ventures deeper into the deal pool.

Still, the fact that anyone is still willing to deal with Apollo means a lot for private equity generally and perhaps the short memory of Wall Street. It would also be interesting to know if Apollo had to pay a slight premium for its reputation risk. But that is hard if not impossible to determine. If true, though, it would show that markets are much more efficient than the day’s conventional wisdom.

Replicate the strategy of companies that triumphed slumps.

Have you noticed Harvard Business Review is simplifying its writing style and also adding fancy graphics to their cover?

There is still substance in their articles though and I particularly enjoyed Eric Janszen's newest contribution. Unfortunately, it is in my paid for subscription link so I can not link you, but here's a quick summary:

According to Eric Janszen, author of The Post -Catastrophe Economy, “the era of unbridled, debt-financed consumer spending is over”.

He explains that to attract today’s money-conscious consumers, companies need to replicate the strategy of companies that triumphed in previous economic slumps. As consumer debt declines for the first time in decades, the winning companies will be those that can manage without offering the no-money-down and low-interest deals. Messages that promote value over brand and “getting back to basics” marketing tactics will appeal to debt-averse consumers.

Does Private Equity need to re-look the people assets?

Does private equity need to re-look the way it treats the people asset?

This is one of the concerns I am increasingly hearing from business owners deciding whether to go the PE route.

I am preparing for a large strategy conference for an excellent company, and watched one of my favourite strategists, Gary Hamel, interview Eric Schmidt from Google.

At about 23 minutes in, Eric asks the audience if they are familiar with people from private equity and then comments that private equity is not interested in the assets of Google, the employees. He talks about how private equity is most interested in the cash flow.

"Yes," I thought, "Specialization of management of a business is required and many business owners really benefit from private equity's financial sophistication."

But Eric is giving an off-the-cuff, honest comment and he is an incredibly high level client/partner of private equity. This is like getting a focus group "AHA" from private equity's dream client. One thing I have learned is to listen - really listen - to these throw out lines because they contain the key to building competitive advantage.

Eric's comment should make all private equity people pause and consider. Imagine if your private equity organization made it their strategic focus? Imagine the competitive advantage you could build?

The "IT" I am talking about is the people.

Could you make that top priority in a way that would please Eric?

Talking about the strategic culture of a company made me recall McKinsey's recent report on private equity and my pod cast interview with Sacha Gaie. What sto0d out for me was how few private equity funds made the big profits and how many did very badly. These top achievers were not the big players either. I wonder now if these private equity teams were more tuned in to the culture and the people inside their partnered companies?

It all begins with the people and it all ends with the people.

Here's Gary and Eric:

Jacoline Loewen, author of Money Magnet.

US Consumer Debt

What private equity does for your business

At its recent CEO Roundtable, Loewen & Partners and the Richard Ivey School of Business recorded a podcast with Sacha Ghai, global private equity expert and the author of the McKinsey Private Equity Canada 2008 report. McKinsey's annual report is an overview of key forces affecting Canadian private equity markets. The report provides a perspective on the short and long term implications for PE players, following the economic downturn. Looking forward, PE firms will create value by focusing on attractive niche opportunities.

Listen to podcast: What Private Equity Does for Your Business -
Sacha Ghai, McKinsey & Company,
chats with Jacoline Loewen for the Financial Post Executive
Download Full Report (PDF 2.32MB)

Percent of PE by Deal Size

MID-MARKET PRIVATE EQUITY DEALS SURGE

In its analysis of private equity activity during the first six months of 2009, PitchBook Data, a private equity research firm, reveals that lower and middle-market companies continue to successfully attract PE investment. Through the first half of 2009, middle market deals accounted for 70% of all investments, more than at any time in the last six and half years.

The new emphasis on deals under $50M means more financing options for small and medium enterprise business owners.

Jacoline Loewen, Author of Money Magnet.

What you can learn from fishing

How often have you heard the story where an entrepreneur risks their business to get the big fish? Doug Trott, founder of PriceMetrix, is one of those owners and the big fish he landed happened to be one of the world’s largest diversified financial services companies - Morgan Stanley. Doug says, "We were convinced that we had a solid track record and the integrity of our product was such that Morgan Stanley would have the confidence to use our service."

However, the risk of the deal falling through was high, made even more so, given the raging financial crisis. "By the time we got into October last year, the market was tanking and then by mid-December there was talk that Morgan Stanley was going to go insolvent”, said Mr. Trott. Thankfully, the insolvency rumours were just that, and a deal was finally struck. In April 2009 PriceMetrix officially started delivery of services to Morgan Stanley. When it comes to fising, go for the big ones because you might just catch one.

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Learn more about PriceMetrix

Royal Bank's market scoop strategy worked

We have heard the market forecast from Ben Bernanke (who was nominated by President Obama to a second term as Chairman of the U.S. Federal Reserve). Bernancke's prediction is that the recession is over while the other sage of Wall Street, Nouriel Roubini, thinks we are headed for the double dipper recession model. One will be right and one will be wrong.

One indicator is to check out bank performance. Being in private equity, we hear which banks are lending on what terms to whom. Royal has been very smart to use this recession as a time to scoop up market share and get mediocre deals done. Customers remember that they were there in the tough times and are loyal back. TD was lending huge amounts to old, steady companies at great rates. National Bank takes on lots of deals that the others sniff at so we will see their performance over the next year or so. If there is a double dipper recession, that could be a problem for them

Here's more from ScotiaMcleod. Lynn Lewis sent me this by Gareth Watson, CFA

This morning as we heard from Royal Bank (RY), National Bank (NA) and TD Bank (TD). While I won't go into specifics for each bank, I will simply say that the earnings this morning were very good across the board. Royal in particular blew away the Street with strength in retail and wholesale. National Bank also exceeded expectations by having strong trading revenue again while TD Bank exceeded expectations by keeping credit in check. Coming into the quarter we knew that retail would be the wild card for the banks as wholesale strength was expected, and the results speak for themselves as retail operations have done well in a challenging operating environment (except for maybe CIBC). Capital levels are strong, if not too strong, and I hope this past quarter will finally put the dividend question to rest as earnings will support dividend payments going forward. Overall it should be a good day for the banks today and therefore possibly the TSX Index. However, I would caution that these banks have been running higher for a long time going into this quarter and that they were pricing in lofty expectations which have been met for the most part (except CIBC), so we don't think there's huge upside today as the market has probably already priced a lot of it in, but without a doubt the strength of the earnings this morning will give Royal, TD and National a good boost at the open.

What American private equity is really saying

I spent the weekend enjoying BBQs, watching fireworks with my family, including the in-laws (oh joy). Actually, I'm lucky in the in-law category as I enjoy them all but I did notice that my Private Equity Fund Manager brother-on-law who works in Boston, USA, looks ten years older than the last time he visited. When I asked him how the US markets were doing, I was expecting him to give a repeat of the media – recession over, blah, blah. Instead, I was disturbed to hear him say that he was seeing private companies going out of business at an alarming rate.

Apparently, banks are not lending money which is the same as the body deciding to stop creating blood. Then there is also the freeze in consumer spending which continues despite the government softly whispering to frightened horses, “It’s OK to go out and use those credit cards.”

My brother-in-law’s doom and gloom report from small business America does confirm reports I have heard from large family owned Canadian companies. One Canadian CFO reported that he had attended a conference in the US and was shocked to learn that American family owned companies, and we are talking blue chip companies, were getting money at 18% line of credit and they thought that was terrific.

This is the reason why Canadian private equity is looking south and doing more deals there than in Canada where banks are still lending at 3% to this particular family business.

When the small to mid-sized companies start closing down, this is a disaster. The bulk of jobs are in the SME market

The key is for government to focus some of their stimulus tax breaks and cash flow breaks on small business balance sheets. Here in Canada, the Ontario opposition leadership race looked at GST tax equalization but a better one would be to reduce tax on new equipment purchases. Any other suggestions?

Jacoline Loewen is the author of Money Magnet and consults to companies wanting private equity and growth strategy.

Shhh...Don't tell the Americans

An investment strategist who travels the world advising fund managers where to put their clients money was told by his company to censor his presentation for their American market. The London Head Office felt that American finance experts would not appreciate hearing about the decline of American markets. I used to work for his bank and they were not shrinking violets when it came to telling the brutal facts so this hesitancy to tell the truth just because the clients will not like what they hear and have deep pockets is a radically new policy.

Having lived through the last century, I lived through lights on the British Empire. Denial is the common reaction. Watch this season of Mad Men to see the British in full steam, eyes closed mode as they take over a New York agency and the Americans tell them “We are the future, not Britain.” Well, now Americans are in the same situation.

Smart investors will put aside their patriotism and figure out how to get on with things.

Twelve Myths of Sustainability

The sound of profits sucking out of the balance sheet is a common one and the temptation is to go wild trying to build a better business. Hold on. Some of your ideas may be drastically wrong. So, I thought it would be a great time for a book summary from my favourite management philosophers, James C. Collins and Jerry I. Porras.

They did a six-year research study, and examined what it takes to "create and achieve long-lasting greatness as a visionary corporation". The findings were summarized in their early and more text like book Built To Last. The research produced surprising results for the authors, exposing at least twelve commonly held businesses myths:

MYTH 1. It takes a great idea to start a company.

Few visionary companies started with a great idea. Many companies started without any specific ideas (HP and Sony) and others were outright failures (3M). In fact, a great idea may lead to road of not being able to adapt.

MYTH 2. Visionary companies require great and charismatic visionary leaders.

A charismatic leader in not required and, in fact, can be detrimental to a company's long-term prospects.

MYTH 3. The most successful companies exist primarily to maximize profits.

Not true. Profit counts, but is usually not at the top of the list.

MYTH 4. Blueprint for Core Values

Visionary companies share a common subset of "correct" core values.

They all have core values, but each is unique to a company and it's culture.

MYTH 5. The only constant is change.

The core values can and often do last more then 100 years.

MYTH 6. Blue-chip companies play it safe.

They take significant ‘bet the company’ risks.

MYTH 7. Visionary companies are great places to work, for everyone.

These companies are only great places to work if you fit the vision and culture.

MYTH 8. Highly successful companies make some of their best moves by brilliant and complex strategic planning.

They actually try a bunch of stuff and keep what works.

MYTH 9. Companies should hire outside CEOs to stimulate fundamental change.

Most successful organisations have had their change agents come from within the system.

MYTH 10. The most successful companies focus primarily on beating the competition.

They focus on beating themselves.

MYTH 11. You cannot have your cake and eat it too.

Decisions do not have to either or, but can be both.

MYTH 12. Companies become visionary primarily through "vision statements".

Vision is not a statement it is the way you do business.

Why most innovation never gets off the shelf

It never fails to amaze me how difficult it is to get innovations actually done in larger organizations. There are root causes common to many of my clients, and I have observed that so often it comes to the day-to-day nature of communication.

To be fair, the conversations to get innovations of the shelf and onto the company's list of things to do are difficult for many companies. Michael Beer (great name, even better guru of organizations) says that most organizations won't change unless the leadership has the courage to initiate the measures necessary to do so. Here is a summary of how to ensure innovation happens by Michael Beer:

Ways to make your company bring up its innovation game

We've discovered that standard initiatives such as employee surveys, interviews by external consultants, and even relatively straightforward, one-on-one conversations between managers and the CEO don't usually help an organization shift toward greater candor. Primarily that's because employees don't believe that management, particularly the CEO, will actually listen and act on their comments.

Often, such initiatives have a negative effect on the company, fostering cynicism. In one multinational company we studied, a task force of valued managers, when asked by senior management to conduct and analyze a worldwide employee survey, refused to do so. They simply did not want to be associated with what they perceived would be yet another useless exercise. At the same time, top management honestly believed that past initiatives they had instituted were the result of past feedback.

Creating organization-wide conversations is a crucial task of leadership—but often a very difficult one. We've developed a four-point process for fostering such conversations:

1. Advocate, inquire, repeat
A conversation that surfaces the unvarnished truth about an organization's innovation strategy needs to move back and forth between advocacy and inquiry. CEOs and senior leaders need not only to defend their initiative but also to find out what others think, up front. Indeed, the two activities should be closely linked.

Innovation initiatives tend to fall apart right from the start when top management advocates for a specific project and then begins to implement it without discussing it with key team members and partners in other parts of the organization. This inevitably leads to management later discovering that employees had legitimate concerns about the project that they never felt free to voice.

Some managers err in the opposite direction. They don't advocate at all, opting instead to simply inquire. So they assemble a large team of trusted employees and ask for a consensus on direction. This just leads to frustration and, often, stagnation.

It's the leader's job to point managers and team members in a specific direction but to make sure it's a direction they can respond to. To effect innovation, a leader must advocate, then inquire, and continue to repeat these actions as necessary.

2. Cut to the chase
Energizing an initiative requires that the conversations about it focus on only the most significant factors facing the organization—the company's ability to carry out the initiative and any obstacles to performance. All too often, leaders become mired in mundane business details and lose sight of the issues that will guarantee overall success. Leaders must ask themselves, "Do we have a coherent and distinctive innovation strategy that key managers believe in? Do we have the capabilities to execute? Is our leadership effective?"

When Ludwig implemented a strategic fitness process at DIS, he focused on the most important issues: the division's overall strategy and the barriers to innovation. Through honest conversations, he quickly learned about the real cause of DIS's inability to get its new products to market. The division had a hierarchical culture that dated back to the original owners of the business, which had been acquired by Becton Dickinson several years earlier. The various departments, accustomed to being directed from the top, were unable to cooperate effectively, and therefore the project organization strategy intended to speed innovation had failed.

DIS's open conversation about the issues that really mattered clarified the company's strategy and energized the organization. As Ludwig says, "Getting feedback from the employees was indispensable, and putting it into a strategic context is important. We discussed… strategic issues, such as delivering the goods and services to our customers more effectively than our competitors. Once we decided it was strategic, we had to fix it or suffer the consequences; and no one was willing to suffer the consequences of gradual loss of competitive position." Soon after these candid conversations took root, DIS regained leadership in its market. "The process got things on the table quickly," Ludwig says.

3. Be open and inclusive
Fundamental business innovations almost always require changing the worldview and the behaviors of a whole set of interdependent players—the CEO, the senior leadership team, and managers down the line. This won't happen without a collective, public conversation. Several levels of management across important functions and value-chain activities must be part of the conversation, and leaders need to keep everyone three to four levels below them informed about what they've learned, and what changes they're planning.

This collective, public conversation was critical when sales managers at Mattel Canada were trying to initiate a different kind of innovation: introducing a new sales channel. Due to the cyclical, hit-driven nature of the toy industry, excess inventory was a perennial problem for the company. The inventory could be sold off only via heavy discounting, which tended to depress margins for all sales.

Since the warehouse was close to a major Canadian city, a group of employees proposed adding an outlet store to their warehouse. Several managers praised this as an excellent idea, but it was never implemented. It was apparent that conflicts between the sales department and the distribution department were to blame—but no one was willing to confront the conflicts openly.

Mattel Canada finally and successfully implemented its toy outlet innovation only after sales, distribution, and the other departments had an open, fact-based discussion of their issues. At that point, they realized that the outlet store would benefit all of them. Sales could maintain better margins by avoiding discounting, distribution could save time by not having to shift around old inventory, and finance would be able to free up capital that had been tied up in inventory. Mattel Canada used collective conversations so effectively that it transformed its division from Mattel's least profitable international subsidiary to its most profitable.

4. Strive for honesty alongside low risk
In most of the companies we've studied, managers discussed innovation-related problems with the few people they trusted but acted on their findings in more public venues. Since most managers fear that being honest would hurt their careers or even endanger their jobs, they are naturally reluctant to speak candidly. Plus, many managers worry that candor would only make leadership so defensive that the conversation would not lead to change. By encouraging honesty, then rewarding it, leaders can demonstrate to all levels of the organization that candor is valued. Once a leader is able to address the real issues facing innovation, issues that could only have been unearthed through truthful give-and-take can be rapidly and effectively addressed. With an increase in profitability comes a side benefit: employee morale will also improve dramatically.

It's surprising how few corporate leaders make a genuine effort to foster candor within their companies. Sadly, they lose any chance at building organizations in which speed and transparency contribute to the vitality of their enterprise. Adopting the process we have outlined here is a critical first step in creating an agile enterprise that can drive rapid innovation and compete on a global scale.

The Ugly Truth about Customers' Buying Preferences

By Jacoline Loewen

Summer movies show you that sometimes ‘good enough’ is what your customers want. I checked out the latest date movie The Ugly Truth with my husband. He suggested it knowing that my favourite Scottish hunk, Gerard Butler, was playing the lead role. Well, it served up a good enough script with lots for the male and female funny bone, a predictable ending and lots of eye candy. Will it win an Oscar? Not a hope in hell! Will I tell my book club I enjoyed it? No way! Did it make me, the client, happy? Absolutely!

The ugly truth actually is, that I have been dreaming of seeing Macbeth with my other favourite actor, Colin Feore, at Stratford this summer; instead, I settled for convenience.
These summer movies do not plan to be best in the Oscar category. Their plan is to appeal to a mainstream audience with a need to share a pleasant time together and a willingness to pay cash for movie tickets.

In the same way, Microsoft did not take over the computer market because it was the best operating system – Apple arguably offers superior technology to Windows. Microsoft took over the market because it gave the customers what they valued.

What did customers need, back in those early days of software applications? In the 1980s, people wanted to type, draw diagrams, create slide presentations and run spreadsheets. So what was the problem? You could get any of those software packages and have an excellent spreadsheet or word processor program.
The problem was that businesses were busy going international; they needed a universal language for all of their documents.

Executives from Vancouver wanted to be able to walk into the office in Hong Kong and be able to use the same software application. They also wanted to connect directly and immediately – seamlessly – to their customers’ computer systems. Microsoft was the first to bundle up three different software ‘apps’ (applications) into one, add in email and call it Windows. It could run with one operating system and in additional, any document could be emailed and used anywhere in the world.

Microsoft offered integrated product choice, not random stand-alone products that addressed one problem only.

Good Enough

Microsoft provided that connectivity in a single package and at a ‘good enough’ standard. The market bought it.

You see, the better mousetrap does not win. If you are building the best mousetrap out there and hoping to get venture capital, take a moment to review your lofty goals. Yes, you can continue selling your wonderful product that is far superior to the competitors, but Betamax engineers also shared your mindset. VHS succeeded with innovative marketing and better management, yet we all know Beta was far superior technology.

Look at Apple. Its intuitive software was far more advanced than Windows, but the US Justice department wanted to carve up Microsoft into Baby Bills, not Apple into Baby Steves.

The Value Rule

The Windows ‘value proposition’ beat the superior performing packages that were stand-alones. The past decade has shown that customers will pass the 'best of the breed' products to buy the all-in-one Windows integrated solution. Customers came flooding in through the doors (and Windows – excuse the pun.)
Your ‘value proposition’ should focus on one problem (e.g. Microsoft’s customers’ yearning for a universal language for all documents) experienced by your customers.

Begin With Your Customer

Business begins with people. Human beings make up your market. Each one, with her quirky tastes, individually buys from you. Understanding this will give you a competitive advantage. Your strategy must dig deep. There are the obvious, frequently discussed; overt needs, but the un-discussed, covert needs are where you will find gold. Your customers are going to force you to change because they will vote with their wallets where their needs are best met.

Critical Question: How do you add value to your customer?

Asking your customers is not the way to figure out value. If you asked them if they would use the mainframe with all its power, or the PC, which is a step backwards, you know the answer you are going to get. You have to get inside their day and watch how your product could make life easier, so much easier that your customer will take on the hassle of switching over to your company.

Signs of revivals among private equity's giants

From The Economist, we learn that there are signs of revival among private equity's giants:
Along with the rest of the finance industry, the private-equity business has endured a miserable couple of years. Congress continues to plan heavier taxation of its profits, even though they have slumped. As banks, which had been lending buy-out firms spectacular sums of money on extraordinarily generous terms, abruptly turned off their taps, buy-outs became a rarity.
In the first half of 2009, just $24 billion of private-equity deals were completed worldwide and only three loans were extended to fund leveraged acquisitions, the lowest number since 1985, according to Dealogic. That compares with deal volumes of $131 billion last year and $528 billion in 2007.
Meanwhile, the economic crisis has meant that many of the firms snapped up by private equity in the boom years have got into difficulties, so private-equity bosses have had to spend most of their time trying to keep them alive when they would rather have been selling them for a profit and snapping up new bargains.
There have been some notable casualties suffered by some usually reliable performers. Apollo could not save Linens ’n Things, a retailer, from bankruptcy. The purchase of Chrysler by Cerberus made the private-equity firm named after the three-headed dog guarding the gates of hell look like a different sort of dog when the carmaker filed for bankruptcy. But possibly the most ignominious loss in the history of private equity was suffered by the venerable Texas Pacific Group (TPG): it invested $1.35 billion in Washington Mutual in April 2008, only for its entire stake to be wiped out five months later when the mortgage lender went bust and most of its assets were bought by JPMorgan Chase.
Last week TPG’s founder, David Bonderman, was appointed to the board of post-bankruptcy General Motors, suggesting that the WaMu misfortune has not done too much damage to his reputation. That is one of several signs in recent weeks that the wind may be starting to blow in a better direction for private equity. Some private-equity firms have invested on terms that have been described as “Don Corleone financing”
First, a few deals have been announced. They are small compared with the blockbusters of the credit bubble, such as Blackstone’s $40 billion purchase of Equity Office Properties in 2007, but better than nothing. Bankrate, a financial-services website, has agreed to be bought by Apax Partners for $571m. Some private-equity firms have invested in life support for CIT, a troubled lender, on terms that have been described as “risk-free” and “Don Corleone financing”.
There has also been a twitch of life in the market for disposals, with the announcement that Vitamin Shoppe, owned by private equity, intends to hold an initial public offering (IPO), albeit a tiny one that may value the retailer at $150m. Still, given that the IPO market has been dead this year, and trade sales of private-equity-owned firms have also been rare, this is not to be sniffed at. Perhaps the exit market, which in the first half of this year has raised only $21 billion, compared with $115 billion in the first half of 2008 (according to Dealogic), is past its worst.
But the clearest signal that things are looking up for private equity is the news that the granddaddy of the industry, Kohlberg Kravis Roberts (KKR), is to revive its plans to go public—and fast. These plans were postponed after the bankruptcy of Lehman Brothers last September led to a meltdown in the financial markets. By early this year KKR’s partners were considering abandoning the IPO for good. Now, they are in a hurry to get it done. The IPO is due to take place in October, through a reverse merger of the holding company into a European unit that KKR floated in happier times. By this method, KKR gets a listing in Amsterdam at least a year before it could get one in America—though the firm says it will put in place corporate-governance measures designed to meet the high standards of the New York Stock Exchange rather than the less demanding Dutch requirements.
Why the rush? There is no evidence that Henry Kravis and George Roberts, the two founders still active at KKR, are looking to cash out, as was the case with Pete Peterson, a founder of Blackstone, which went public in 2007. It seems that KKR wants public equity as currency for rewarding and retaining other partners and for acquisitions (perhaps of other private-equity firms or financial companies). That means it sees opportunity.
Mention of Blackstone is a reminder that when a private-equity firm goes public, that is not necessarily a buy signal for the industry. Blackstone’s IPO marked the industry’s pre-crunch high point, and Blackstone’s share price has never since come close to its IPO level of $31 a share. Strikingly, however, having fallen to under $4 this March, Blackstone’s share price has since rallied to over $11—another sign that KKR may be getting its timing right. If so, it will be no surprise if IPO plans are soon announced by Carlyle and perhaps other leading firms.
For all its recent difficulties, private equity still has plenty going for it—not least an estimated $400 billion of uninvested capital. True, the credit-fuelled mega-deals of old are unlikely to return soon. Deals will be mostly financed with equity rather than debt, which means that private-equity groups will need to improve the fundamentals of the businesses they buy rather than just profiting from financial engineering. The first area to see an increase in dealmaking is likely to be “roll-ups”, in which firms already backed by private equity will consolidate fragmented industries by buying small competitors from their troubled owners.
However, for the big private-equity firms like KKR, the greatest opportunity may come in diversifying. Already KKR has raised money to invest in distressed securities and infrastructure development. It may also see a chance to snap up stakes in other private-equity firms through the fast-growing secondary market for limited partnerships. It also has an advisory business, and is said to see an opportunity in helping firms raise capital. With the investment-banking industry a shadow of its former self, could it be that the future of the newly public KKR, along with Blackstone and maybe others, will be to become increasingly like, and competitive with, Goldman Sachs?