Wealth Management

Voted #6 on Top 100 Family Business influencer on Wealth, Legacy, Finance and Investments: Jacoline Loewen LinkedIn Profile

August 27, 2009

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.

August 24, 2009

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.

August 16, 2009

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.

August 15, 2009

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.

August 14, 2009

The Ugly Truth about Customers' Buying Preferences

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.

August 11, 2009

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?

August 9, 2009

Not all private equity deals are good deals

The big private equity stories get covered by the newspaper media because they are known by a national readership. In Chrysler's case, an international readership knows the compnay, maybe not the PE firm, but a huge number of people are paying attention. Here is a cautionary tale told by LOUISE STORY in the New York Times about the downfall of Chrysler and how on its way down, it pulled off the golden crown of one of private equity's kings. (Read it on NYT)

FOR Steve Feinberg, the onetime owner of Chrysler, the past year has been a crawl toward defeat. He lost billions of dollars. He lost prestige. He lost his privacy. And he ended up a ward and supplicant of the federal government.
"Cerberus did not have a clue about the automotive industry," said Don Johnson, a former Chrysler employee in Ohio. "I don't think anything could have been worse." Steve Feinberg on Capitol Hill in December, as lawmakers worked on a bailout for automakers. "From the day we bought it," he recently said of Chrysler, "we worked hard to improve it."
But, even now, Mr. Feinberg, a man who can play a decent game of chess while blindfolded, is hard-pressed to pinpoint many mistakes. Sitting in his office on Park Avenue, far away from the detritus that surrounds Detroit, he grows pensive when asked what he has learned from his audacious — and failed — effort to privatize and resurrect the legendary and deeply troubled auto giant. “I don’t know what we could have done differently,” he says, crossing his arms on his chest. “From the day we bought it, we worked hard to improve it.”
He pauses, pondering, as the clock ticks away. Then he shakes his head. “We were too optimistic on timing,” he says. “Maybe what we should have done was not bought it.” Mr. Feinberg took over Chrysler almost exactly two years ago, promising to revive the company. Chrysler filed for bankruptcy protection at the end of April. So how he and his private equity firm, Cerberus Capital Management, choose to describe their journey with Chrysler is a delicate matter.
If he says he should have shelled out more money to help Chrysler, he could face the ire of investors who have already suffered heavy losses on his gambit. If he says he should have simply dumped Chrysler’s auto arm, while clinging to its more promising finance unit, he could be accused of caring more about his wallet than he did about Chrysler’s workers and the automaker’s role in the economy.
Mr. Feinberg’s education at the hands of Chrysler, the government and economic reality is emblematic of the limits private equity players have encountered as they’ve sought to reap outsize returns while also contending that they had the smarts and managerial prowess to repair companies of any size. Not too long ago, some pundits and analysts wondered whether private equity firms — backed with a rising tide of easy bank loans — could gain enough traction to make runs at seemingly untouchable behemoths like General Electric.
When Cerberus began poking around Detroit, some at the firm said they thought that the American automobile industry was going to be the biggest turnaround story in history. In sessions with potential investors in the last few years, the Cerberus team came across as passionate, skilled and incredibly confident that they could succeed where others had failed. “I thought, wow, this really signals a real change in the landscape here,” recalls a person who attended a Cerberus session who asked to remain anonymous because of agreements he signed. “I guess it gave me hope. The auto companies needed an enormous amount of capital, and where else was it going to come from?”
John W. Snow, a former Treasury secretary in the Bush administration and Cerberus’s chairman, also heralded Cerberus as Chrysler’s savior, likening the firm’s investment to the government rescue of Chrysler in 1979. “Over 25 years ago, when Chrysler faced bankruptcy, it turned to the United States government for assistance,” Mr. Snow said at a National Press Club meeting in 2007. “Today, Chrysler again faces new financial challenges. But it is private investment stepping in to inject much-needed support.”
Cerberus and its co-investors ultimately invested $7.4 billion in Chrysler, a sum now worth an estimated $1.4 billion. Ideally, Cerberus hoped to wed Chrysler’s finance arm to another finance company it controlled, GMAC. To that end, the risks in Chrysler’s auto business were something that the Cerberus team thought it could manage and that wouldn’t stand in the way of making billions of dollars for investors. “This will go down as one of the investments made at the very top of the credit bubble,” Josh Lerner, a professor who studies private equity at the Harvard Business School. “They don’t look good. This will be a black eye on their record.” Indeed, GMAC and Chrysler became so weak that they needed $22.6 billion in government aid in the last year to stay afloat. For Chrysler and its workers, investors, business partners and customers, was all of that worth it?
Mr. Feinberg defends his actions, saying he did everything possible to help the company. Known for avoiding publicity, he says that he was naïve not to anticipate the public attention that would surround him once he bought Chrysler and that he would have avoided the investment had he known. “I always view the press as something for guys who were trying to do big things,” he says, perhaps overlooking that Chrysler was, indeed, a very big thing.
DON JOHNSON, a former Chrysler employee, says he worked on initial production of the Jeep Liberty at a plant in Toledo, Ohio, in summer 2007, when Cerberus won the right to buy Chrysler from Daimler of Germany. To the surprise of some, Mr. Feinberg managed to woo the support of the United Automobile Workers for the deal. But Mr. Johnson says he was always skeptical about the carmaker’s new owners. “Cerberus did not have a clue about the automotive industry,” he says. “I don’t think anything could have been worse.”
Still, if you peel back Mr. Johnson’s argument, you quickly find a story of an automaker that was already in peril by the time Cerberus came on the scene. For example, he says the body shop at his plant couldn’t produce Jeep frames fast enough to keep up with the paint and assembly lines. Instead of fixing the problem, he says, the factory paid the body shop workers overtime to come in Sundays to keep up. Cerberus took the helm about a week after Mr. Johnson’s team ran into problems with the Jeep. When Mr. Feinberg addressed workers at a town hall meeting at Chrysler’s headquarters in Auburn Hills, Mich., shortly after the deal, he spoke of his long love of American manufacturing, according to workers who attended the speech. In particular, he said he was proud to repatriate Chrysler’s ownership from Germany.
“Steve saw this as a huge patriotic opportunity, in addition to a great investment,” says Robert L. Nardelli, the former Home Depot chief executive whom Cerberus installed at Chrysler’s helm. Although some investors doubt that anything other than profits drove Mr. Feinberg’s investment, many say they believe that he was authentically excited by the prospect of reviving an American corporate icon — a theme that Mr. Feinberg is happy to support.
Surrounded by rifles, a motorcycle and model cars in his office, Mr. Feinberg mentions family members who have served in Iraq and a brother-in-law who worked at G.M. He apologizes for rambling and explains his motivation for investing in Chrysler: “I love this country,” he says. “I feel it’s been great to me. I had a great chance.” Still, Mr. Feinberg, 49, has spent years as a dealmaker. The son of a steel salesman, he graduated from Princeton in 1982, where he studied politics. He went into finance so he could pay off his student loans. He worked at Drexel Burnham, the investment bank made famous by Michael R. Milken before it collapsed, and then, after a brief stop at a smaller firm, he was a co-founder of Cerberus in 1992.
For years, Cerberus was largely a trading shop specializing in distressed debt. But by the mid- 1990s, Mr. Feinberg expanded into buying and selling distressed companies and hired dozens of seasoned corporate executives to run them. Chrysler was the biggest prize he had ever bagged, and many co-investors say they always believed Cerberus’s stake in Chrysler’s auto operation was never the main reason the firm was interested in the company.
According to five people who heard Cerberus’s Chrysler pitch, all of whom requested anonymity because of confidentiality agreements, Mr. Feinberg’s deputies valued the financing unit more than the auto operation. In fact, the deputies believed, the finance unit’s value covered the cost of buying Chrysler, making the car company something of a bonus — if that part of the investment worked out, great; if not, Cerberus could still profit on the finance unit.
Mr. Feinberg says he believed the automobile operation had great potential value, perhaps even more than the finance arm if Cerberus could put the automaker on the right track. But that meant he and Mr. Nardelli (who had never overseen a car company) had to effectively manage the auto operation — no small feat.
By October, only three months into Cerberus’s tenure, Mr. Johnson says it was becoming obvious to him and other workers that trouble was ahead. “We went from three shifts to two shifts to one shift within a year,” Mr. Johnson recalls. “Then there was just down week after down week.” To reduce expenses, Mr. Nardelli cut excess factory capacity and billions of dollars in fixed costs. He improved the interiors of several models, which bolstered some of its approval ratings.
But there still wasn’t a strong demand for Chrysler’s product line, which was packed with large vehicles like minivans and S.U.V.’s at a time when skyrocketing gas prices were making consumers interested in more fuel-efficient cars. The company was aware that its lineup was far too limited. And Cerberus sent Chrysler executives around the world to seek partnerships with foreign automakers like Nissan. The hope was that those companies would help provide a broader product line for dealers.
But there was not time for any of the efforts to bear fruit. Chrysler was burning through cash. “Once the car market stalled, the cash in the auto market evaporated,” says Maryann Keller, a longtime auto analyst and consultant, of Chrysler’s predicament. “The cash was leaving their balance sheet, and they weren’t selling cars to make money they could invest.”
That situation was made worse by hefty interest payments on more than $10 billion in debt that Cerberus arranged for Chrysler as part of the takeover, which left the automaker carrying piles of debt just as auto sales were about to plummet. While many private equity deals involved saddling companies with debt to pay off investors, Chrysler needed to take on more debt because it had so little cash on hand to finance its operations, some analysts say. The company paid back some of the debt in November 2007.
Ms. Keller says that the company that Mr. Feinberg took over was already suffering from myriad problems: a bad cost structure, a limited product line and no pipeline of more diverse offerings. In short, she says, Cerberus had simply bought “a basket case.” At the beginning of 2008, Mr. Feinberg sized up his investment in a private letter to his investors. “We do not need to be heroes to earn a good return on the investment in Chrysler,” he wrote. “We do not need to transition the car industry or even to return Chrysler to a much stronger relative position in the U.S. car market in order to be successful.”
His letter sent a chill around New York, where dozens of hedge funds had joined in his Chrysler bet. Although these firms had agreed to let Cerberus control decisions involving their investments, there was fear about how his harsh words might affect the industry’s image. After all, such a steely, hard-headed look at Chrysler didn’t mesh with the patriotic tone of Cerberus’s other statements about the company. Nor did it comport with the private equity industry’s broader arguments that its investments were good not only for its firms, but also for America. Cerberus, meanwhile, was unable to stop Chrysler’s downward spiral. Last fall, Chrysler and General Motors tried to merge their operations, a scenario Mr. Feinberg supported, but a deal could not be struck. And in November, Chrysler announced a huge employee buyout. Mr. Johnson, the worker at the Toledo plant, joined thousands of others who signed up.
“There was absolutely no hope” among employees accepting the buyouts, he says. Mr. Feinberg says that he sympathizes with Mr. Johnson, but that he also believes business restructurings are, unfortunately, often brutal affairs. “It’s demoralizing when things go down,” he says. “But that’s a turnaround, you know. Some guys make it; some guys don’t want to deal with it. This was the most difficult environment. You couldn’t think of a worse storm for an employee to have to live through.”
It was also, as it turns out, a bad storm for Chrysler’s owners. MR. FEINBERG, a longtime free-market enthusiast and a Republican who never envisioned himself needing the government for help, suddenly found himself running a company that needed federal support to stay alive. By early last December, with Chrysler bleeding cash, he had become a vocal presence in Washington, circulating around Congressional offices to get his story out. He even offered to put tens of millions of his own money into Chrysler, a move that would have been largely symbolic.
“He said his dad was a blue-collar manufacturing type,” says Senator Bob Corker, Republican of Tennessee, who often spoke with Mr. Feinberg. “You sit there and you talk to Steve, and you can tell he’s from a background that greatly understands what the American worker is all about.” But Mr. Feinberg soon found himself negotiating with government officials who understood what Wall Street was all about.
When Congress did not pass a rescue bill for the automakers, the Treasury Department stepped in, using financial authority it had already assumed from its bailout of the banking system. Cerberus’s fate moved into the hands of Steven Shafran, a Goldman Sachs alumnus who represented the government and was regarded inside Treasury as a tough negotiator.
Mr. Shafran forced Cerberus to accept a painfully low valuation of its GMAC stake. He also quashed arguments by Cerberus that Chrysler’s financial arm shouldn’t be responsible for paying back bailout funds provided to Chrysler’s auto operation. At some point in December, Mr. Feinberg began to realize that Cerberus’s investment in Chrysler’s auto operations was largely unsalvageable. In a phone call with Mr. Shafran about 2 a.m. on Dec. 19, he offered to simply give the car company to the government, according to five people briefed on the call.
Mr. Feinberg says he was offering Cerberus’s stake in the auto company to the government as a bargaining chit for negotiating with bankers, the union and others. But some Treasury officials were worried that he was simply trying to avoid leaving the finance unit on the hook for $2 billion of the $4 billion the auto operation received in federal aid.
Treasury officials declined Mr. Feinberg’s offer and also were so wary of his motives that they put in a rule requiring that federal bailout money provided to Chrysler’s financial arm could be used only to help Chrysler’s auto unit. Despite all of that back and forth, Mr. Shafran says he believes that Cerberus behaved professionally. “They were prepared to work closely with us to ensure a smooth landing for the car company,” he says.
When the Obama administration took over this year, Mr. Feinberg got a second chance to negotiate. He faced yet another Wall Street refugee trying to save the auto industry, Steven Rattner, as well as Ron Bloom, a former banker who worked more recently for the United Steelworkers union. Mr. Feinberg was particularly focused on decreasing the $2 billion guarantee the previous administration had wrung out of Chrysler’s financial arm. He eventually knocked that amount down by hundreds of millions of dollars after agreeing to give up some other things the government wanted — something Mr. Feinberg regards as a fair outcome.
“Basically,” Mr. Bloom says, “they realized they made a poor investment and wanted to end it in a decent way.” Chrysler filed for bankruptcy protection on April 30 to help clear the way for a merger with the Italian automaker Fiat. Cerberus now values its Chrysler stake at 19 cents on the dollar. It is a humbling and embarrassing figure for Mr. Feinberg. But it’s better than zero cents on the dollar, which is what his stake might have been worth had the government not bailed him out.
Mr. Feinberg and his colleagues at Cerberus maintain to this day that their time at Chrysler was, in part, a reflection of their patriotism — a view that some analysts find hard to swallow. “It’s hard to believe that any of these firms — including Cerberus — will be viewed as patriots in 10 years,” said John Rogers, a private equity analyst at Moody’s Investors Service, “because I don’t think their impact on any of these companies will be seen as so positive for the overall economy.”
Mr. Feinberg still begs to differ, saying his experience at Chrysler has left him feeling like a good citizen. “There were times we could have been tougher and pushed harder and gotten more,” he says, “but it wasn’t the right thing for the country.”

August 7, 2009

Government infrastructure spending has arrived

Aecon talks about the infrastructure industry in the second half of this year - looking good. http://tiny.cc/s6vma
The CEO, Scott Balfour, admits he is not sure if the rush of work is due to the government spending on infrastructure but that there is more work than they usually see. When I last heard Scott speak, it was to The Ticker Club, Toronto, and I was impressed with his positive energy and global perspective.

Here's part of the article:
By David Paddon (CP)
TORONTO — Canadian construction heavyweight Aecon Group Inc. (TSX:ARE) is finding new bidding opportunities are coming forward at an unprecedented pace that's likely the result of government economic stimulus packages, top executives say.
For the last six or eight weeks there have been significant new project opportunities every week that are "clearly being pushed as part of the stimulus package that we've been hearing so much about," Aecon president Scott Balfour said Wednesday on a conference call for analysts.
One analyst noted that some of the projects on Aecon's to-do list have been there for some time before the economic downturn and asked how much credit to give to the government stimulus spending.
"Truthfully, I don't know that it's possible for us to differentiate," Balfour replied. "Would all those projects still have been going but for the stimulus package? I just don't know."
But he added that the pace and number of projects coming forward at once has never been seen before "and so I can't help but believe that a lot of that is as a result of the incremental funding from the stimulus programs."
John Beck, Aecon's chairman and chief executive officer, said the Toronto-headquartered company is seeing an urgency to spend the money prior to March 31, 2011, the announced date for end of the federal stimulus program.
"And so there's a scramble. We're seeing that on some of the projects that may have been planned before," Beck said.

August 5, 2009

Unions lambast private equity

Here is an article in the New York Times ripping away at Private Equity by ANDY STERN, president of the Service Employees International Union. Read at WSJ:

May I add that this article is a great illustration at the disconnect between private equity and unions. Private equity's process is a black box for union leaders and an anathema, particularly to those who do not want to give up their 18 days paid sick day leave. As one commenter put it: "When Andy Stern and the SEIU subject their pension funds to the same oversight that he is suggesting should happen for private investors (as is the law), perhaps I'll take more seriously his analysis of how best to regulate capital markets."
Here's Andy:

While we’re still digging ourselves out of the greatest economic crisis since the Great Depression, private-equity firms are shoveling dirt back in the hole. Firm leaders still argue that the over leveraged, privatized and market-worshipping financial model they perfected—uninhibited by regulation and enforcement—is key to rescuing our nation’s banks.
Last month, the Federal Deposit Insurance Corporation (FDIC) released draft guidelines limiting the ability of private-equity firms to invest in failed banks. These new guidelines will ensure that the banks are well capitalized, that the details of their investments and loans, like those of any commercial banks, are made available to the FDIC, and that the FDIC and other agencies can prevent a rerun of the Savings & Loan crisis of the 1980s and ’90s.
Meanwhile, private-equity stalwarts have been arguing against those guidelines. If we are to believe these guys, any attempt to rein in private equity’s ability to invest in bank deals would stifle investment and hinder economic recovery.
They promise they’ll play by the rules this time, that we can trust them, that they’re looking out for taxpayers. But we’ve played that game before. And we learned ordinary Americans pay the price when financial markets are unregulated and over leveraged deals—which initially thrived—eventually go bust.
We lose our jobs as our employers cut back or are forced to close their doors altogether. We lose our retirements as the value of the stock market plummets, along with our investments and our pension funds. We lose our homes because we can no longer afford our mortgages after getting laid off or having our hours cut. We lose our recovery when banks cut off the credit our small businesses need to survive.
But hard-working people lose in more ways than this. As homes foreclose and businesses go bankrupt, states and cities lose tax revenue—resulting in cuts to services we depend on. That tax revenue could be used to provide health care for all, develop a new green economy, or foster a world-class education system. But instead of investing in our future, we end up bailing out a reckless financial industry.
Most Americans, like myself, believe in a pretty simple philosophy—that if you work hard and play by the rules, you should be able to get by and raise a family, send your kid to college, and retire with dignity.
That’s been the promise of America for decades—until a handful of people on Wall Street and in Washington figured out how to rig the system against us.
Nobody is trying to stop private-equity firms from making profitable investments. But we need to ensure that the decisions made by a few never again threaten our ability to provide for our families and win a better life for our children. The FDIC’s guidelines are, for two reasons, an important step toward protecting the economy from future financial recklessness.
First, banking is still a relatively new industry for private-equity investors. It’s therefore not unusual for the government to provide them with increased oversight, ensuring their new investments prove sustainable. Private equity’s recent track record suggests that it needs regulation on this front.
For example, the Texas Pacific Group’s (TPG) disastrous investment in Washington Mutual last year prevented the financial giant from raising additional capital until it was too late, resulting in its forced fire-sale to J.P. Morgan Chase. This wiped out TPG’s entire investment.
Then in May, four private-equity investors teamed up to buy BankUnited—a bank with $12.7 billion in assets and $8.3 billion in deposits—for only $900 million. The FDIC committed to share in 84% of the bank’s losses. Though taxpayers subsidized the purchase and took on most of its risk, private-equity firms stood to gain most of the profits.
Second, private equity’s entire business model is based on reworking the connection between risk and reward. In this case, they get all the rewards while the government and taxpayers take on all the risk. This is not the way to stabilize our banking system. The FDIC’s guidelines ensure that more risk is spread out among investors with less saddled onto the taxpayers.
These are the kinds of guidelines that the Service Employees International Union (SEIU) called for long before this economic crisis. SEIU wanted to ensure that private-equity firms wouldn’t continue to reap all the rewards of their investments while using workers and taxpayers as a backstop against potential losses and failures.
The FDIC’s new guidelines are a good first step, but full economic recovery will take more. We must continue to act more boldly and more broadly if we are truly serious about building a new financial model that rewards long-term sustainability over quick profits and fad investments.
As I said at the top of this article, Mr. Stern is the president of the Service Employees International Union.

August 4, 2009

Big brand private equity to get the upper hand

The Securities and Exchange Commission Monday released the full, 114-page documentation supporting proposals to ending pay-to-play problems at public pension funds that it made last month.
As sister blog Private Equity Beat points out, reports Scott Austin, the documentation affirms what many placement agents had feared after reading the short initial proposal from the SEC, which was somewhat vague: under the new rules, private equity firms would be banned from using placement agents to solicit business from government pension fund clients.
With regards to venture capital firms, which generally don’t use placement agents as much as buyout firms, this is especially troublesome to the smaller firms that rely on them to raise capital. If this ban does go through - the proposal will be open for comment for 60 days, it may give the so-called brand name firms even more of the upper hand. For reactions, read more in VentureWire….

August 2, 2009

An Act of God?

Those who know me personally will conclude (I hope!) that I am not the type prone to throwing shoes at the television, at least not as early as seven in the morning. So I must confess that, on more than one occasion in recent weeks, I have come perilously close to doing so. The object of my un-desire? The normally level-headed crew that run the Squawk Box morning show on CNBC Europe. Mea culpa; a day hardly passes when I have not been tempted to bung a brogue at the US CNBC crew who – with a few honourable exceptions such as Bob Pisani – are so smug, they cannot see an empty space let alone an empty glass without imagining an overflowing swimming pool. And, for the record, I only watch Bloomberg when I cannot get CNBC; Bloomberg’s Stars and Stripes cheerleading makes CNBC look sober, even sombre!
What is it that so gets my ire up? It is the idea, so widely peddled in the Western media and even sadly in the venerable Financial Times, that we are experiencing a GLOBAL financial crisis. NO! NO! NO! What is happening is first and foremost a WESTERN WORLD financial crisis, a world where Japan is arguably not merely a but the founding member. More people live in countries that will see their nation’s GDP grow this year than live in those that will see it contract. As John Stopford so eloquently put it: “It is the Developed World that is experiencing an Emerging Market crisis.” Yes, of course there have been repercussions for most of the rest of the world, not least in (why am I not surprised?!) that “wagon-still-hitched-to-the-wrong-ox”, South Africa. But in Asia – where the world’s newest economic locomotives are stationed – and Latin America, Russia, the Middle East and much of the rest of Africa – home to the world’s main ‘coal trucks’ – these repercussions are much more akin to the buffetings one might feel when a hurricane passes five hundred miles away: the effects wear off quite quickly.
For completeness however, note that some emerging markets – the passenger cars of Eastern Europe, the Baltic States and Mexico – are marooned in a siding by virtue of being hitched to the ‘out-of-steam’ Puffing Billys of Europe and the US respectively. Unable to be lower cost than Asia, no longer able to sell their migrant workforce into their bigger, richer next-door-neighbours, these emerging markets have found their place in the world’s value adding hierarchy undermined from all sides. In Eastern Europe and the Baltic States in particular, chronically high cross-border, cross-currency debt burdens owed to Western European banking houses mostly in the form of house mortgages are threatening to precipitate maxi-devaluations and sovereign defaults. If Latvia goes, which Eastern European and Baltic houses of cards might tumble down in its wake?
Most other emerging markets however are still moving forward precisely because their houses – be they financial or residential – have not come tumbling down. Of course, as is now well known, in the West, the houses of Lehman’s, AIG, Northern Rock, Fannie Mae and Freddie Mac have been razed to the ground whilst the houses built by the likes of Pulte, Lennar, Horton, Beazer and Taylor Woodrow have crumbled in value. Given the interconnectedness between the financial health of the typical Western banking house with the typical Western residential house, and the fact that the failure of the one has hastened the fall of the other and vice versa, was it any wonder we witnessed a plague on both these Western houses? By contrast, the banks of emerging market locomotives and coal trucks may well be boring but at least in their world, one can still say they are as safe as are their houses (though I fear this simile may have outlived its usefulness! As safe as the Bank of China, perhaps?!)
So why do so many blinkered financial commentators in the West make the mistake of assuming that their current financial crisis is everyone’s financial crisis, that it is truly global?
The first answer is that many hardly recognise that there is a bigger world out there beyond the end of their own national noses – to borrow the title of a Michael Jackson song, they seem to assume “We are the World”! Wrong; they are not, never were and never will be. Indeed, as much as it may gall those who sit in their home-biased business Western TV studios to admit it, there is a whole New World out there beyond the West, a world wherein arguably the greenest pastures open to mobile global capital now lie.
Secondly, these commentators assume that because they are the centre of global finance (which for now they are but, given recent events, this status is now living on borrowed money and so on borrowed time), they jump to the conclusion that what is rotten in the core must by definition be rotten everywhere. Wrong again; yes, the periphery has inevitably been bruised but it is by no means bowed; indeed, much of it is already showing signs of restoring its much higher growth trajectory when compared to the now “Turning Japanese” West. Perhaps their misconception is wrapped up in a naïve and indeed even patronising belief that what afflicts the risk-free (except that it is no longer risk-free!) rate at the centre could not but hurt the higher beta periphery even more. (As a friend in London harrumphed, admittedly in a good-natured jest: “Good God, man, are you trying to tell me that our former colonies are now doing better than we are? What is the world coming to?” What, indeed.).
Thirdly – and Western politicians use this ‘logic’ even more than do its financial commentators – there is a “get-out-of-jail-free” card that suggests if the Browns, Sarkozys and even the late-lamented Bushes can cast their domestic crisis as truly global, they can claim that its causes are largely “beyond us” so, they hope, absolving them of any blame. Like a real tsunami, they must have hoped that if the financial tsunami could be cast as “an act of God”, Western voters would not take out their anger on their Governments. So far, Anglo-Saxon voters are having none of it: “Chuck the incumbents out” has become their rallying call.
As US Republicans have learned and the UK Labour Party has already experienced in local polls and is sure to experience in national polls next year, democracy hath no fury like a house-owner scorned.
But of course, this crisis was not an act of God; it was wholly an act of man and Western politicians of all political persuasions as much as those who elected them in the first place were and are still deeply implicated in this tsunami’s formation.

Our guest blogger is Dr. Michael Power. Dr. Power may be reached at:
email address: Michael.Power (at) investecmail.com