Integrity is the safest way to make money, it’s terribly important

When I worked for the fastest growing bank in Africa, the CEO would often go on about how much he hated derivatives that were just beginning to emerge into the market place. He said if he could not understand it, he did not want it in his bank - it was making money like a casino not through good, rigourous banking. Michael Graham picks up this theme:

Berkshire is especially pumped about their $26 billion cash and stock purchase of the 78% of the Burlington, Northern Santa Fe Corporation (BNSF) they didn’t own. An extensively rebuilt and wisely regulated American railroad system is ushering in a whole new (green) era of national and international importance for the railroads. BNSF was described as their all-in wager on the economic future of America. It’s Berkshire’s biggest purchase ever.

Attendees and questioners from all over the U.S. also bore witness to the wealth their investments in Berkshire Hathaway has brought them. One elderly gentleman we met from Wichita Falls, Texas had come all the way to Omaha just to say thank you.

Munger’s comment that “Integrity is the safest way to make money, it’s terribly important” drew loud applause. So did his thoughts that there’s nothing wrong in “celebrating wealth when it’s fairly won and wisely used”.

There was laughter of a different kind when much of the blame for today’s turmoil was laid at the doorstep of Washington where “those who take the high road are seldom bothered by heavy traffic”.

Trust! Buffett has been criticized for his view that Goldman did nothing illegal in helping craft a between-professionals subprime mortgage deal which the seller wanted to decline, whereas the European institutional buyers of “Abacus” calculatingly took the opposite view. Munger agreed with Buffett, though musing about the ethics of such transactions. In his view derivatives play a useful role in genuine commodity and trade transactions, but when they are nothing but synthetic, casino-like bets (often also dreamed-up by academics) they should be “got rid of from the face of the earth” (loud applause).

 Trust, the plain-vanilla (“Dairy Queen”) way, couldn’t have come through more loudly or clearly. It’s a cornerstone of investing and of the Berkshire approach.

How much longer – the question of succession comes up with an increasing frequency at these annual gatherings? We were reassured that a short list of successors has been chosen, that the board knows who they are, and that the Berkshire and Buffett-Munger culture will live on.

At the same time the Qwest Center has been booked for 2011 and 2012!

By then there could also well be clearer answers to Buffet and Munger’s biggest worry; namely, how much longer Berkshire can keep building wealth for its shareholders at a rate superior to the growth in its benchmark S&P 500 index, as it has done for 38 of the past 45 years. We were told how a compound annual gain in its per share book value of 20.3% is going to be next to impossible to sustain. What should be done when Berkshire can no longer beat the S&P because of its sheer size? The question was posed rhetorically. A dividend perhaps? Knowing them, you can bet that whatever is done will be different?

There can be no question that these one-of-a-kind annual meetings and Berkshire itself will be different when its two great champions are gone. In the meanwhile, is Berkshire Hathaway a jumble of diverse parts, or an undervalued work of art like no other? I’m in the latter camp, also believing it deserving of a place in most, if not all, investment portfolios.

Private equity-backed M&A deals remain far short of the boom times

More private equity deals in Q2

Business owners will get more phone calls to partner with private equity fund managers but these good times will come to an end as money flows more to growing markets like India and China. In the meantime, Reuters tells us Buyout funds are making a comeback, scouring deals from Australia to America after nearly two years of virtual shutdown, but private equity-backed M&A volumes remain far short of the boom times.

Bankers say that while a return to the mega-deals of 2006/07 is still some time away, there is now a steady flow of transactions, with private equity activity picking up in the second quarter.As of June 22, private equity-backed mergers and acquisitions in the second quarter were up 125 percent from a year earlier to $40 billion, and were up by a third from the first quarter, Thomson Reuters data showed. For the year, such deal totaled $70 billion, more than double a year earlier. The general stock market recovery early this year encouraged PE funds to push through listing plans, while a freeing up of debt markets opened up markets for secondary sales to other buyout funds. But with the European debt crisis denting the stock rally, there are concerns about whether PE activity can keep up the recent momentum.

"M&A markets are fragile. There was a slight loss of momentum in the second quarter. Coming off year-end into Q1, momentum was good," said Jeffrey Kaplan, global head of mergers and acquisitions at Bank of America Merrill Lynch.

"There was strong strategic activity and active PE bidding, much of which slowed down. EMEA has seen the biggest slowdown," he added, referring to Europe, the Middle East and Africa.The $70 billion of PE-backed deals this year through June 22 compares with the record $542 billion in the first half of 2007.Availability of easy credit is the key for a pickup in PE buying, and bankers say the U.S. market has seen the most dramatic improvement in financing, driven by large financial institutions.Europe has lagged in its ability to leverage because it is more of a bank-funded market. Overall, choppy equity markets and the rising cost of debt funding will make private equity dealmaking more of a challenge, though bankers say the market for mid-sized deals should open up.

"It will be a while before we get back to mega-deals," said Mike Netterfield, head of financial investor coverage for Asia at RBS.

"We're seeing some larger deals, but it'll be a while before we see the days of the TXU, HCA kind of deals," he said, referring to big U.S. private equity deals involving the likes of TXU, now Energy Future Holdings, and hospital operator HCA Inc.

"The liquidity isn't quite there just yet for mega-deals."

How Private Capital Helps Entrepreneurs and Family Businesses Grow

Private capital can assist owner managed or family businesses realize their liquidity or growth capital needs through flexible structuring. The deal structure is customized to the timing needs of the business owner. At the onset of the investment from the PE fund, the company is valued at fair market price. The business owner is able to cash in on this fair value to diversify the family’s financial holdings or for estate planning purposes. The “second bite of the apple” occurs upon exit of the PE fund when the total value is received exceeds the full sale now.

Private capital provides a tool to solve common family company issues such as succession planning, while also putting the company on a growth path. 

The long term elephant in the room

I listened to Michael Lee-Chin describe learning about Warren Buffett's wealth strategies he learnt back in 1979. I always like to hear about the annual Berkshire meetings which are legendary but this year's one has a different tone altogether. Michael Graham gives us the inside scoop:

My sixteenth pilgrimage to Berkshire Hathaway’s annual Woodstock of Capitalism (refer later) was to bring a reminder of Warren Buffett expressive likening of financial crises to the exposure of those swimmers without bathing suits when the tide goes out.
This ebb tide, it’s not the banks or corporations of 2008 – 09, but sovereign governments that are bringing a type of risk traders and investors haven’t had to worry about since the Asian financial crisis – sovereign default.
It might well also be that the growth of government that began with the Keynesian experiment after World War II is reaching the limits of acceptability. And all the more in Western democracies after the lifesaving, pedal-to-the-metal government stimulus and deficit spending of recent years. (Thank you Tony Plummer and your astute Helmsman Economics commentaries.) Regardless, there must now come unavoidable and extremely unpalatable preventatives – the shrinking of bloated or disproportionately-large bureaucracies, deep cuts to government spending and stringent deficit reduction.
In the EU, it’s no longer Portugal, Iceland and Ireland, but a growing number of others where fiscal discipline and rehabilitation are urgently required. In the UK, a tough-talking new cabinet has led off with a 5% pay cut of its own salaries, along with example-setting limits on ministerial limousines and first-class air travel, and the promise of draconian spending cuts to come. The same in Spain and Portugal which are both urgently addressing unsustainable deficits with big budget cuts. In France, all government spending has been frozen except for pensions and interest payments. And on and on!
Yea for deficit reduction as what could be a recuperative austerity wave begins to roll clean across Europe.At the world level, the IMF is urging governments to cut public debt in order to prevent higher interest rates and slowing economic growth. To these ends it is also advocating stepped-up value-added taxes in countries that already have them, and their imposition in countries that do not. Its message to a debt and deficit-laden U.S. couldn’t be more pointed.

Prime Minister Stephen Harper has also weighed in with hard-choice, deficit-reduction urgings ahead of the G8 and G20 summits he's host at Deerhurst and in Toronto.
Wouldn’t it be great if the Western world were to at last be getting the message about the risks of spending and borrowing one’s way to disaster!
Of course, words are one thing, implementation and perseverance another. There should be no doubt about the angry resistance to come, or the political (and re-election) temptations of monetizing deficits and repaying debts in still-cheaper (i.e., further-devalued) currencies. They’re continuing fork-of-the-road risks investors cannot afford to ignore.
Also to be kept in mind is how the fork of expediency could lead to the next wave of inflation (even hyperinflation) which might be subdued for now but, considering today’s strangling national and international indebtedness, has to remain the longer-term elephant in the room.
The other fork in the road leads to austerity – spending cutbacks, higher taxes and new frugality. It can only be tough, but is surely the healthier road to take even if it means reduced future investment returns. (In Charlie Munger’s view, refer later, there is no better way of being happy than getting your expectations down.)
The disciplined fork will not halt the shift in global power to Asia led by emerging powerhouses like China and India. Nor will it soften the aftershocks of the EU debt and deficit crisis on global trade, capital flows and economic growth.
However, in what cannot be a zero sum game, if China, India, Asia and the BRIC world continue to do well, we should do well too.Crisis, discipline and opportunity were words featuring prominently at an overflow Berkshire Hathaway annual meeting that was to leave 38,000 attendees, including the Grahams, much encouraged about the worldwide future for investing.
I always come away from these meetings the better for the wisdom, humour and taciturn wit of the ageless Warren Buffett, rising 80, and Charlie Munger, 86.
This time, I may not have learned that much new, but it was refreshing all the same to be reminded of time-proven homilies like investing not requiring brilliance as much as it does discipline and the avoidance of stupid mistakes. (A related example touched upon is fuel from corn which was described as “stunningly stupid”.) And also that investing requires continuing learning because the world keeps changing, and it will be hard to fail (in investing) if “each night you go to bed a little wiser than when you woke up”.
I am also always reminded at these meetings how Warren and Charlie love declining share prices because “we can then buy more”, whereas it “pains” them to buy more when share prices are going up.

These are times that try men’s souls

Business owners are wondering if we are heading for flat growth which means values of businesses may not be preserved from the same old, same old. With BP and Europe, we have had a busy first half of the year. Something to keep in mind is that there always seems to be something bad happening in the world. I have been reading forecast books written in the the early 1990s - one by Peter Drucker - and they all miss the Internet and the incredible increase in global connectivity. It has unleashed wealth for millions of people.
I was reminded of the gloom only forecasters by Michael Graham and liked his comments on Thomas Paine. Here is what he has to say about our troubled times:

No one would have thought, and I still can’t, of the mighty European Union with its (equivalent) $16 trillion economy being threatened by the over-indulgences and debt excesses of a handful of its smallest members whose combined GDPs total well less than $1 trillion. However, as with the banking crisis of 2008 – 09, excesses like these can be contagious. Hence, the need to beware of modern-day Greeks bearing debt and even after Greece’s rescue from the brink of collapse to question whether an emergency Euro 750 billion safety net for the remaining PIIGS (Portugal, Iceland, Ireland, Spain) is enough.

Yes, “Acropolis Now” could be presenting the 27–nation European Union and its 16–member Euro with a debt crisis threatening their very existence. The respected German Chancellor Angela Merkel, is one who believes it could be that serious. But, by the same token, could countries like Greece be canaries in the coal mine providing timely wake-up calls of much worse potential disasters needing to be urgently headed off?

 In another tumultuous era, Thomas Paine, the renowned American writer, began his 1776 pamphlet “The Crisis” with the words “These are times that try men’s souls”. Little did he foresee the incredible progress a stricken America’s was to go on to make in becoming the most magnificent wealth-building economy the world has ever known. And concomitantly to unleash human potential no other society may ever rival.

“Weiji”, the Chinese word for crisis has two meanings – danger or opportunity. No doubt which has dominated in China’s spectacular leap to modern-day world ascendancy? Yet not too many years ago, in 1997, an Asian financial crisis that included China posed destabilizing threats similar to today’s Europe. Instead, what followed was an astonishing recovery. And, if China and Asia, why not also the opportunity for constructive change out of crisis in our debt and deficit-riddled world?

By Michael Graham

Michael Graham

Michael Graham Investment Services Inc. Tel: 416 360-7538 Fax: 416 360-5566 Web: grahamis.ca

Advantages and Disadvantages of U.S. Private Capital

I try to warn business owners that U.S. PE funds have a huge range of personalities. Some are unpleasant, such as vulture funds. The onus for due diligence lies with the business owner and it’s very important to do due diligence on the PE funds. “You are in a marriage where you cannot get divorced,” I like to say to business owners. The success of the relationship is determined by the personality and chemistry of the fund. Different styles of investing can lead to a deterioration of the relationship which can throw off the dynamics of the partnership and attaining growth may become hard pressed.

U.S. firms can provide American-specific expertise, in terms of market knowledge, networks, banking relationships and exit alternatives.

PE funds can also provide value through effective board members, helping make complex decisions and providing expertise on M&A. Upon exit, the PE fund can help pull valuation up by effectively positioning the company to sell to a bigger universe of funds.

The litmus test is the composition of the firm’s professional staff and track record with other management teams. I encourage CEOs to contact the CEOs of previous and current investments of the potential fund investor. Communicating CEO to CEO, there will be “no surprise in the end zone”. As a business owner, you will gain a better understanding of how the fund works -- if they are crowding on day-to-day operations or if there’s a previous onerous relationship.

This is the ultimate litmus test for business owners, contacting the entire list of CEOs that a fund has worked with. Business owners need to know how the fund they’ve partnered with will react when the going gets tough – this is when the fund shows their metal!

Boston Private Equity Fund Managers are Heartier than Canadians

I recently visited Boston to meet with the Private Equity Funds interested in Canadian investments. It was interesting to see how many were Harvard graduates, Harvard with distinction. I also noticed that Americans cultivate a hearty, can-do welcome. It does feel louder and more aggressive than many Canadians. I liked it but could see how America is where the strong do go to excel, while the shyer ones who do not self promote may be left in the dust.
America is a pushy place and I liked it. I was reminded of the huge cultural gap in style between Americans and probably the Brits and us Canadians. What do you think of this advice?
From Entrepreneur
(Read the full article.)

Everyone likes to do business with a winner. No matter what stage of your career, you need to look like you've made it. That means wearing a suit that will impress. As a universal rule, make it your business to be the best-dressed in the room. If you lack the fashion sense, a premier store will be more than happy to assign a knowledgeable salesperson to assist you.

And if you're thinking of the budget thing again, forget it. Put it this way; a smashing, well-tailored suit will last you for years. Allocate the upfront cost over dozens or possibly hundreds of business meetings and the investment becomes a mere pittance. Remember that your goal is not to save money; it's to make the sale--leave the penny pinching to others.

Bring your ego with you in full bloom. It's not enough to look successful; you need to act it as well. This demonstrates that you are also one of the smartest people in the room.

Again, take a page from Trump. Sure, he can be garish and way over the top, but no way is he going to check his ego at the door. Neither should you. So find a way to bring up your most significant achievements, tell an intriguing story and talk up your travels, discoveries and epiphanies.

The timid and the small thinkers will talk sports and weather. They will pale in comparison to the bold winners who regale their prospects and customers with compelling ideas and stories.

I'll never forget the afternoon I spent with legendary Washington attorney and presidential advisor Clark Clifford. He didn't just "meet" with me; he held court in a walnut-paneled office, wore a suit fit for a monarch and fascinated me with vividly colored stories that thrilled as much as educated and entertained. He established himself as one of the most important people in a town filled with big egos and left the impression that when it came to lawyers in the nation's capital, there could be only one choice.

This is the challenge and the opportunity before you--to make certain that of all the salespeople your customers and prospects come in contact with, you are the one indelibly imprinted on their brains. You don't sell. You thrill.

---

Mark Stevens is the CEO of MSCO, a results-driven management and marketing firm, and the bestselling author of Your Marketing Sucks and God Is a Salesman. He is a popular media commentator on a host of business matters including marketing, branding, management and sales. He is also the author of the popular marketing blog, Unconventional Thinking.

Do companies actually want to grow?

I have discovered in my work with business owners and private equity, that many owners do not want to grow their businesses. I found this wonderful twenty minute conversation between P. Bruce Hunter and Robert Gold invaluable. 
Robert is an accountant for many years to owners. He is himself an entrepreneur and business founder. Bruce drives a TEC group where he is to fire up Canadian business owners on the key issues. Bruce knows the right questions to ask - you know the ones, you do not want to think about them, never mind discuss them with someone like Bruce who is familiar with issues. I suggested to Bruce and Robert that they make this a weekly podcast conversation because they have a great chemistry. Here's Bruce about his podcast:

My recent interview with Robert Gold and Andrew Brown can be heard at BusinessCast.ca, the world's pre-eminent podcast for Entrepreneurs. I understand from Robert that it is the number one podcast on the Financial Post podcast page as of today. The subject of how to drive

BusinessCast - The Podcast for Entrepreneurs businesscast.ca

The iTunes-featured BusinessCast is the best business podcast for entrepreneurs developed to help small and medium-sized businesses.

Identifying Best Fit with Your Firm

U.S. PE funds can provide a compelling financial offer while also bringing relevant industry experience. As business owners, an investor that is able to gain a firm grasp of your business concept quickly is advantageous. Otherwise, the investor can be a costly drain on your time.

In selecting a best-fit investor, your needs as a business owner must be aligned with the investor you select. There are a wide variety of PE funds, tailored to a variety of business owner’s needs. Will the PE fund add identifiable value?

A lot of PE funds simply supply the capital injection and remain a passive investor for the term of the investment. Others are much more focused in providing a team effort with management to kick-start the growth plan.  If applicable, a PE fund can also assist with U.S. expansion.

I encourage business owners to ask for the track record of PE funds. Canadian companies should opt-out or avoid being the test case for a fund’s first Canadian investment. “What is the fund’s track record in Canada?” Call up the list of CEOs the PE fund has worked with in the past. They can shed light on the relationship and experience.

Evaluate the fund’s total strategy and investing style for compatibility. There is a huge diversity in the U.S. realm of PE funds. Funds typically vary in size of investment, industry focus, preferred stage of investment company, ownership of investment, and board participation to name a few. PE funds invest in late stage growth where products already exist and there is a revenue stream. Large investments can be up to $100 million USD in equity or as small as $10 to 15 million USD. With their equity stake, some funds may prefer a control or minority ownership position.

Typically PE funds reside on the board of the investee company as either active or passive board members. Active is good, but not undermining management, which often can be a slippery slope. The degree of diversity of investment professionals is also important as business owners should be looking for board members who provide expertise in a wide range of business areas. Maturity of the fund is also imperative as the stage of the fund’s life will dictate the timeline of investment. 

Chinese Stock market down 22%

We had a very busy week in Ontario. There was a 5.0 earthquake, with the epicenter 61 km north of Ottawa. The earthquake could be felt from Montreal to Toronto. A tornado touched down in Midland and now we are enduring the G20 Summit Lockdown in Toronto. I saw Goodluck, the Nigerian leader, get into his limo and spoke to Kola, one of the Nigerian guards. They have been enjoying the warm weather and are impressed with how clean and quiet Toronto seems. The streets are empty and it seems like a scene from Zombies in the City.

While this was happening around us, the markets were also enduring a very rough week pulling the returns for the month and the year back into negative territory. Year-to-date the S&P TSX Composite is down -.65%, the S&P 500 is down -3.77% and the Dow Jones is down -2.92%. What you may not know is that the Chinese stock market is down -22% year-to-date and other international indices are also in negative territory. The markets are currently in a trading range and we have gone back to touch the 50-day and 200-day moving averages. With more and more economic indicators coming in below expectations even the most ardent commodity bull has to step back and assess at least the near-and intermediate-term landscape. 

Private equity is awash with cash - for now. In two years time, the tides will have receded though. For business owners, entrepreneurs and CEOs, now is the time to look seriously at private equity partners. There is no market mood to affect your valuation of your business and you get experts putting their thinking caps on to build your business. Right now, we all need all the help we can get.

Jacoline Loewen, expert in private equity and family business and author of Money Magnet: Attracting Investors to Your Business which is now a text book at Ivey Business School.