Tag Archives: entrepreneurialism

Review – Asian Godfathers (#economics, #business, #Asia, #CronyCapitalism, #HongKong)

Asian Godfathers: Money and Power in Hong Kong and Southeast Asia (buy on Amazon.com)

by Joe Studwell, published 2007

A “valueprax” review always serves two purposes: to inform the reader, and to remind the writer. Find more reviews by visiting the Virtual Library.

Studwell’s “Asian Godfathers” examines the economic development of Hong Kong, Singapore, Malaysia, Thailand, Indonesia and the Phillipines, which are “linked by powerful, unifying themes… similar historical legacies and a very particular relationship between political and economic power.” In so doing, it helps the reader understand curious facts such as how,

a small region that, concurrently, could not boast a single non-state corporation among the global top 500 [but] none the less accounted for a third of the wealthiest two dozen people on the planet.

The narrative of southeast Asia is that it is rapidly privatizing after a narrow-miss with communism and concentrated state-owned enterprise intervention throughout the 1950s, 1960s and 1970s post-war period and this explains some of the fantastic personal fortunes of various “business families” in the area. But if these supposedly privatized economies can’t boast globally competitive businesses, how are these people managing to get so rich?

The three minor inquiries of this major inquiry are (pg. xii):

  1. why have secretive tycoons come to rule the economies of southeast Asia?
  2. what have they contributed to the region’s overall economic development?
  3. why are they still so powerful when the depth and potency of the Asian Financial Crisis — an event to whose origins they were central — appeared, to many observers, to be likely to emasculate them? (It did not.)

In searching for answers, the book explores several key themes (pg. xiii):

  • historical; the southeast Asian economy is the product of a relationship between political and economic power that developed in the colonial era and was sustained, with a different cast of characters, in the post-colonial era
  • mechanical; a political elite grants to members of an economic elite monopoly concessions, normally in domestic service industries, that enable the latter to extract enormous amounts of wealth, without a requirement to generate the technological capabilities, branded corporations and productivity gains that drive sustainable economic development
  • political; it was expedient for new indigenous political leaderships to nurture their own dependent class of, typically, non-indigenous tycoons who could siphon off economic rents, give a share to their political masters and not pose a threat to political power
  • economic; instead, growth came from a combination of small-scale entrepreneurs, many concentrated and around manufacturing, and a policy of renting out the local labor force to efficient multinational exporters
  • crisis; these arrangements seemed to work acceptably well until the July 1997 onset of the financial crisis
  • repetition; most of the institutional failings revealed by the crisis have not been tackled in the decades since the crisis broke and it remains unclear whether they will be [there could be another crash, as a result]

The introduction to “Asian Godfathers” is outstanding. It is one of the best, most coherent summaries of the major arguments of a comprehensive work such as this that I have come across, so it is worth quoting extensively from it before outlining and commenting on the rest of the book.

First, why is the book called “Asian Godfathers” (pg. xiv)?

The use of the term godfather in this book aims to reflect the traditions of paternalism, male power, aloofness and mystique that are absolutely part of the Asian tycoon story… a very romanticized myth…has grown up around southeast Asia’s tycoons [along with] sub-myths about race, culture, genetics, entrepreneurialism… the entire grounding of economic progress in the region since the end of colonialism.

The Asian tycoons are not just characters in the book, they are characters in real life and they have worked hard to consciously develop their public character themselves. And with regards to character, it is interesting to note that,

Most of Asia’s godfathers are ethnic Chinese.

This would seem to fit into the “historical” theme, as during the colonial period many of the ennobled members of the business community were part of the Chinese diaspora throughout southeast Asia and their relationships with indigenous and colonial governments were similar to the roles and functions which exist today between political and economic elites in the region due to the seeming “special” status a racial or ethnic outsider can obtain in such scenarios.

That being said, Studwell objectively rejects the idea that there is a “culture-centered explanation” for the success of (mostly) Chinese tycoons in southeast Asia, founded on three points:

  1. notions of a cultural imperative ignore historical context; arbitrary decisions made by former colonial powers have led to present-day coincidences, such as the high percentage of “subcontinental ancestry” individuals serving as lawyers and judges in Singapore or Malaysia
  2. the Chinese are non-homogeneous and the Chinese in southeast Asia are typical of the Chinese race in general; Chinese emigres were a self-selected group willing to take significant risks for chances at a brighter future, and they emigrated from geographically, culturally and linguistically different regions around China at different periods of time
  3. the Chinese emigration generally can not be conflated with the godfather phenomenon; while overseas Chinese enjoy above-average incomes in some places, there are also large populations of emigre Chinese who live in poverty similar to the indigenous populations

So does this mean culture and race mean nothing in explaining southeast Asian economic outcomes? Not quite. (pg. xix)

This book argues that these individuals are above all the economic products of the political environment in which they operate and that it is this same political environment that is preventing the region from achieving sustained economic progress. In a worst-case scenario, southeast Asia may be headed towards Latin America-style stagnation and inequality.

So, again, how do these people get so rich? Essentially, they are “asset traders”, trading assets from one political system (Asia) to another (the Western world/global market economy) and they get paid for arbitraging between the two in the form of rents.

Asian godfathers exploit political inefficiency for gain… their companies’ performance in terms of productivity typically lags behind that of the overall economies in which they operate… it is the smaller scale local businesses and the hard work and thrift of ordinary southeast Asians that have driven development.

Interestingly, this is the same argument that was made about the Chinese communist party in control of coastal trading cities and the inland rural entrepreneurs who were driving economic change in China that was put forth in “Capitalism with Chinese Characteristics“. The state-connected actors get all the credit for “producing” measurable trade activity that their political obstructions necessitate, and the contribution of thrifty commercial operators in the domestic economy which are harder to measure and observe go without note despite being at the root of the phenomenon of “third world development” in these regions.

This is one of the central myths shattered by this book– that the mega-wealthy businessmen of southeast Asia are bootstrapped entrepreneurs operating in competitive markets and that Hong Kong and Singapore have grown because they are liberal, free market economies in a world of state intervention and control. The truth is almost exactly the opposite, with the individuals topping the “rich list” representing a group of crony capitalist concessionaires par excellence, and Hong Kong and Singapore in particular representing what happens when you channel large volumes of cash flow through controlled banking and finance regimes, regardless of wider economic or social principles.

This political economic arrangement is not new, and it is not even just colonial. As Studwell argues, it starts with migration pre-dating European control of the region and it relies upon an ancient

racial division of labor in which locals were the political entrepreneurs– focused on the maintenance of political power against indigenous rivals and, later, in partnership with European and American colonists — and outsiders who became economic, and as a corollary bureaucratic, entrepreneurs.

In a sense, there’s really nothing unique or extraordinary about these arrangements. From the dawn of time some groups in society have sought political control over others, which is to say, they seek to live at the expense of the productive people in society. The ancient trade economy resulted in migrant businessmen who proved to be capable administrators not only of their own affairs but also as hired tax farmers and local bureaucrats for the indigenous rulers. Over time, these two groups came more and more to rely upon one another, the businessmen on the rulers for explicit monopoly concessions in return for loyal service, and the rulers on the businessmen for a class of people who could actually get their hands dirty with revenue generation for the state while serving as convenient scapegoats or distractions for the frustrations of the local populace concerning their rule, when need be.

These political arrangements always result in poverty, suffering and gross economic inefficiency. In the case of countries where the governments overtly monopolize or nationalistically control real enterprises, there is the perennial problem of an artificially low supply resulting in artificially high prices. Combined with foreign trade controls which prevent competitive global exports from arriving in their markets, you have the set up for an extremely lucrative arrangement for these “godfather” types who bridge the gap between the inefficient, politically-controlled domestic markets and the efficient, competitive global market. The success of the “trade nations” of Hong Kong and Singapore, then, can be explained by political interference in the nearby local economies, not the absence of such interference in their own:

What is important about Hong Kong and Singapore is that they are archetypal city states — ‘port city states’ would be more precise. Since colonial inception they have offered tariff-free trade (with few or no questions asked about what is being traded) and have been places to park money (with few or no questions asked about where the money came from)… Hong Kong and Singapore perform a simple economic trick: they arbitrage the relative economic inefficiency of their hinterlands… For as long as surrounding countries have imposed tariffs or quotas on trade in their efforts to fund government, Hong Kong and Singapore have profited from circumventing those restrictions.

In the case of Hong Kong and Singapore, “Hong Kong’s immediate hinterland is Southern China… Singapore’s dominant hinterland… has long been Indonesia.” When was the last time you saw China or Indonesia show up on a list of globally competitive economies?

The reason Hong Kong and Singapore are such large financial centers, in particular, is that

Ethnic outsider tycoons who have profited from business concessions in surrounding countries have always sought to keep the funds offshore, fearing — with good reason — that they may one day be the victims of political change.

Perhaps overlooked by some,

Singapore… increased account secrecy provisions and changed trust laws in a manner designed to attract the kind of money Switzerland had dealt in… foreign private banks almost doubled between 2000 and 2006

And meanwhile, “to sustain its economy, Singapore is building casinos to attract corruption money from China.”

In conclusion, rather than proving the efficacy of free markets (which Hong Kong and Singapore largely do not have in terms of domestic industries), instead the experience of these island countries serves to prove

That a city state with a strategic deep water port in a region that has relatively higher levels of mismanagement, corruption and political uncertainty will prosper with little reference to official economic philosophy.

But what about the “godfathers” themselves? Surely they are talented businessmen in their own right despite the relatively uncompetitive markets in which they thrive?

Whether it is as a sop to the political class to help fool the local populace that it has options and opportunity, or it is a sop to their own egos to glory in a sense of achievement and capability that has not been earned, the godfathers’ public personas are men of meager means who rose through the ranks in short order to become industrial and financial titans in their adopted countries while the reality is that most came from already successful families with existing political connections that they enhanced, or, to the extent they were “penniless” before their rise, they certainly didn’t do it through hard work and sweat equity of their own but happened to be in the right place at the right time and got control of an early government concession which became the rocket engine to the top. Many godfathers of the present generation were war-time smugglers, gambling operators or even cooperators with occupying forces as southeast Asia changed hands back and forth during World War II. As Studwell observes,

whether Hong Kong has been ruled by British colonialism, Japanese imperialism or Chinese communism, it has always been managed through the same group of people.

According to one local observer and member of the monied class, “In one generation it is very difficult [to rise from rags to riches ] because it is not an open society.” And according to a local scholar, “I have yet to find a businessman who started as a coolie.” As such, the godfathers have a notorious reputation when it comes to expensive entertainment vices and

the rumors are legion and suggest a form of gambling that echoes that of Middle Eastern potentates — vast sums of money blown away by people who do not know its real value because they have not really earned it.

Nor are their social habits those of the hard-working middle-class bourgeoisie who cherish being part of their communities and maintaining stable, monogamous relationships with supportive spouses. Says one observer, “None of these people has social friends. They fuck a girl, shake off their horniness and then it’s back to work.” It appears to be the life of an addict and by another’s estimation, “If they don’t have a woman a day they can’t function.” The Asian godfathers are more Bill Clinton than Bill Gates, it seems.

Another important aspect of the godfather character is secrecy. While private businessmen are often protective of their trade secrets, customer relationships, technological know-how and tactical elements of their strategy, this is a different form of caginess. Says Studwell, “Most deals involve some element of government licensing or concession, things that both parties prefer to keep private.” The godfathers get special advantages from the government which, if known, ruin their reputations as self-made men, and the governments themselves want the mystique maintained so as to confuse the masses as to how they are controlled (and how they benefit by their arrangements with these business stars.)

And that secrecy is extremely valuable because

At the heart of the average godfather’s empire is a concession or license that gives rise to a monopoly or oligopoly activity… this non-competitive core cash flow, the river of molten gold that will keep him going through good times and bad

allows the godfathers to build their empires, and survive the inevitable setbacks and speed wobbles as uncompetitive pseudo-entrepreneurs jump head first into a bevy of unfamiliar industries and businesses and try to swim without the floaty wings of government assistance.

Though there are many such arrangements detailed in the book, the explanation of Hong Kong land development patterns on page 68 is worth quoting at length as a kind of summary of how these special arrangements serve to entrench a group of large scale crony capitalists:

The British administration set the scene for real estate oligopoly because it chose to depend heavily on land sales — all land was deemed “Crown land” until sold — to fund its budget. As Hong Kong grew in the post-Second Word War era, the government auctioned off development land in ever more expensive chunks: US$1 billion a pop for large plots by the mid 1990s. Anyone who acquired land in the secondary market that was not designated for building — agricultural acreage in the New Territories was targeted by the tycoon families behind Sun Hung Kai and Henderson in the 1970s and 1980s — had to pay a hefty upfront conversion premium before construction could begin. The effect was to rule out small players and persons without good connections to the large British banks. A government-commissioned 1996 report by Hong Kong’s Consumer Council found that three-quarters of new private residential housing was supplied by only ten developers between 1991 and 1994, and 55 per cent came from the four biggest developers. A separate look at profitability considered thirteen large residential developments. Margins were extraordinary, especially where conversion fees had been set by private tender on large lots of agricultural land. In such cases, the lowest return the Consumer Council found — as a percentage of total estimated development costs, including land — was 77 per cent. The highest was 364 per cent.

For everyone else in Hong Kong, the outsize cost of housing relative to all other living expenses is a constant complaint.

Middle class Hong Kongers, meanwhile, paid low nominal taxes but some of the world’s highest rents, or mortgage repayments, and apartment management fees equivalent to 13-15 per cent of rents.

Interestingly, Hong Kong locals see this as inevitable, not as a necessary outcome of a crony land development and ownership system, but as the necessary outcome of living on a small island! The argument is that there is only so much land, and they aren’t making more (nevermind landfill projects like the airport, ports, etc.)– somehow competition serves to lower prices in every other area of business but in Hong Kong real estate, no matter how tall you build the buildings, supply never improves and prices keep going up. They’re totally bought in on the godfather propaganda.

The whole system seems outrageous to an outsider, as Studwell describes

a graft-seeking culture among indigenous politicians. “They’re broke every week… feed your mouth, feed your prick. That is how they think.”

Yet,

while the south-east Asian system is corrupt, it is more efficient than ones that pertain in socitieies where the holders of power also seek to be exploiters of business rents.

Here he is referring to places like Africa and parts of the Middle East, but the metaphor could also be apt in looking historically at feudal Europe versus bourgeoisie Europe, where one of the primary political trends was the reduction of large landed estates into ever smaller, privately owned parcels controlled by individual land owners or small businessmen.

So, if the godfathers are not business geniuses, what are they and how do they manage to get anything done across their humongous and complicated business holdings? According to Studwell,

their activities are more like those of supercharged chairmen: setting strategy, deal making, hobnobbing, but ultimately leaving others to execute the substance as well as the detail of what they put in train

and it is their gweilo, or running dogs, who are the real business men in their organizations. Yet, even then these individuals are not as much businessmen as they are “enforcers”, with the top enforcer being more akin to “‘the chief slave’. This is the first person called when the godfather wants something done.” And these gweilo, like the godfathers themselves, are rarely members of the local populace but are instead drawn from “a globally traded management cadre” who graduate from top universities and can be found running large enterprises around the world.

The final piece of the puzzle is the godfathers’ relationship with capital markets. The first thing to note is that every godfather has his own affiliated bank, for example, “By the mid 1990s every major business [in Indonesia], and many lesser ones, had a captive bank.” Interestingly, even “different factions of the military had banks”! With control of a bank, godfathers can tap into cheap capital pools and then hand off social problems to the government in the event of a crisis such as the Asian Financial Crisis of 1997.

And while massive, cheap leverage is the favored form of financial fuel, the godfathers have also found unique ways to employ their legerdemain in the equity markets via that ever-so-wonderful technique of arbitrage. In fact, this explains the puzzling question of “why, despite heady economic growth, have long-term stock market returns in south-east Asia been so poor?” For example, Studwell notes that “Between the beginning of 1993 and the end of 2006, dollar returns in Thailand and the Philippines were actually negative; their stock markets destroyed capital.”

The answer is simple: “buying equities in south-east Asia is fundamentally about buying into the godfather business model”. And the godfather model contains the implicit query

why work hard to increase a company’s stock price and pay dividends when all the capital you need is available at a real interest rate close to zero per cent from a bank whose board you control?

From this standpoint, then, it should come as no surprise that

the eight largest conglomerates in the region exercise effective control over a quarter of all listed companies, while the top twenty-two conglomerates control one-third of listed vehicles.

What is, perhaps, surprising is how the godfathers have managed to profit even from running their listed companies into the ground. This was one of the most fascinating reveals in the book:

The game here was for tycoons to sell low-grade property assets into new corporate entities, back-load the debt repayments of the purchaser and list them with the story that dividends in year one would be a guide to future earnings.

The money used to finance this arrangement is often provided by their bank. And when the publicly-listed corporate structures verge on insolvency, the godfather’s private companies offer to repurchase the assets at pennies on the dollar. It is an outstanding bait-and-switch which allows them to swipe millions (billions?) along the way formerly belonging to “dumb money” mutual funds. In many instances of these IPO-to-privatize shenanigans “the boss himself would own only about 10 per cent of what he was selling, a powerful signal that the asset was overpriced.”

The 1990s leading up to the Asian Financial Crisis represented a kind of Golden Era of banking charlatanry for the godfathers where “Hong Kong, for instance, had negative real interest rates from the end of 1990 to the start of 1995”, which allowed for such inanities that “K. S. Lo, the real estate tycoon and elder brother of Vincent Lo, [telling a CSLA analyst] he would buy any property in Hong Kong sight unseen.” If that kind of anecdote isn’t revealing of the reality of the free market, competitive real estate economy in Hong Kong, nothing is.

Studwell has produced an outstanding and deeply-researched resource in “Asian Godfathers.” While my review focused on Hong Kong and Singapore, which are of particular interest to me personally, there is just as much detail here about Malaysia, Indonesia, Thailand and the Phillipines, as well as a variety of throwaway lines that come out of the mouths of the main characters and those forced to bask in their wake alike that are just too funny not to chuckle about. The great detail with which Studwell describes the machinations of the godfathers and the mass of damning evidence he provides that they not only do not operate in free economies but only exist because of the nature of southeast Asian government manipulation of regional economies is deeply satisfying to this reader and I am sure it will be refreshing to other curious minds as well.

This book is not a classic that can be read again and again with new insights about the human condition to appreciate every time, but it is an outstanding treatment in its specific area that I would strongly recommend to anybody curious to know more about southeast Asian political economy in general, and how crony capitalism works specifically, not just in these economies but around the globe because the formula is similar, if not identical. There are only so many ways to rip people off and it turns out it doesn’t require too much creativity. I plan to purchase and read a copy of Studwell’s How Asia Works in the future, and I am also considering a few other titles selected from his extensive bibliography, including:

Books – Summer Reading Hit List (#reading #education #economics #philosophy #business)

The following is a list of books I’m trying to get through from now until Fall (July-September) in order of current priority. Strike through text indicates the book has been read and likely blogged:

  1. Becoming A Manager by Linda A. Hill
  2. Human Action by Ludwig von Mises
  3. The Great Deformation by David A. Stockman
  4. The Entrepreneurial Mindset by Rita Gunter McGrath
  5. Civilization & Capitalism, 15th-18th Century, vol. 1, The Structure of Everyday Life by Fernand Braudel
  6. Baby Catcher by Peggy Vincent
  7. The Six Pillars of Self-Esteem by Nathaniel Branden
  8. The Beginnings of Western Science by David C. Lindberg
  9. The Theory of Money and Credit by Ludwig von Mises
  10. An Introduction to Logic and Scientific Method by Morris R. Cohen
  11. The Generalissimo by Jay Taylor
  12. The Mystery of Capital by Hernando de Soto
  13. Max Stirner: His Life and His Work by John Henry Mackay
  14. Asian Godfathers by Joe Studwell

Notes – Stanford Graduate School of Business Search Fund Primer (#searchfund, #business, #investing)

Notes on “A Primer On Search Funds” produced by the Stanford Graduate School of Business

“The Search Fund”

  • Greater than 20% of search funds have not acquired a company
  • Stages of the Search Fund model:
  • Raise initial capital (2-6mos)
  • Search for acquisition (1-30mos)
  • Raise acquisition capital and close transaction (6mos)
  • Operation and value creation (4-7+ years)
  • Exit (6mos)
  • SFs target industries not subject to rapid tech change, easy to understand, fragmented geographic or product markets, growing
  • Highest quality deals are found outside broker network/open market due to lack of auction dynamics
  • Research shows that partnerships are more likely to complete an acquisition and have a successful outcome than solo searchers (71% yielded positive return, 15 of top 20 performing funds were partnerships)
  • Principals budget a salary of $80,000-120,000 per year w/ median amount raised per principal $300,000~
  • Majority of the economic benefit of SF comes through principal’s earned equity; entrepreneur/partners receive 15-30% equity stake in acquired company in three tranches
  • Investors typically receive preference over the SFer, ensuring investment is repaid, with return attached, before SFer receives equity value
  • Individual IRR from 2003-2011 median was not meaningful, heavily skewed toward 75th percentile where median was 26% in 2011; 57% of individual IRRs were not meaningful in 2011; the median fund destroyed capital in 2009 (0.5x) and 2011 (0.8x); 58% in 2011 broke even or lost money
  • Half of the funds that represent a total or partial loss were funds that did not acquire a company; biggest risk is in not acquiring a company at all
  • Median acquisition multiples: 1.1x revenues; 5.1x EBITDA
  • Median deal size, $8.5M

“Raising a Fund”

  • Search fund capital should come from investors with the ability and willingness to participate in the acquisition round of capital raising

“Search Fund Economics”

  • Search fund investors often participate at a stepped up rate of 150% of original investment in acquired company securities

“Setting Criteria and Evaluating Industries”

  • Desirable characteristics for a target industry: fragmented, growing, sizable in terms of revenues and number of companies, straightforward operations, early in industry lifecycle, high number of companies in target size range
  • Desirable characteristics for a target company: healthy and sustainable profit margins (>15% EBIT), competitive advantage, recurring revenue model, history of cash flow generation, motivated seller for non-business reasons, fits financial criteria ($10-30M in revs, >$1.5M EBITDA), multiple avenues for growth, solid middle management, available financing, reasonable valuation, realistic liquidity options in 3-6 years
  • Key challenge is “know when to take the train” lest a SF never leaves the station waiting for the perfect opportunity
  • Ideally, seller is ready to transition out of the business for retirement or personal circumstances or has something else they’d like to do professionally
  • Experience shows it is better to pay full price for a good company than a “bargain” for a bad one
  • Idea generation: SIC and NAICS codes, Yahoo! Finance, Thomson Financial industry listings, Inc. 5000 companies, public stock OTC and NASDAQ lists and even the Yellow Pages; generate a list of 75 potential industries to start
  • Target industries buoyed by a mega-trend
  • Can also target an industry in which the SFer has worked and possesses an established knowledge base and network
  • Some focus on 2-3 “super priority” industry criteria (eg, recurring revenues, ability to scale, min # of potential targets, etc.)
  • Objective is to pare down the industry target list to 5-10 most promising
  • Basic industry analysis (Porter’s five forces, etc.) is then used to narrow from 10 to 3; SFers use public equity research and annual reports for market size, growth, margin benchmarks; also Capital IQ, Hoover’s, Dun & Bradstreet and One Source
  • Industry insiders (business owners, trade association members, sales or business development professionals) and industry trade associations or affiliated ibanks and advisory firms are primary methods of research and often have general industry research or white papers available
  • Next step is to create a thesis to codify accumulated knowledge and compare opportunities across common metric set in order to make go/no-go decision
  • In order to become an industry insider, SFers typically attend tradeshows, meet with business owners, interview customers and suppliers and develop “River Guides”

“The Search”

  • Median # of months spent searching, 19
  • 54% spend less than 20 months searching, 25% spend 21-30 months, 21% spend 30+ months
  • Track acquisition targets with CRM software such as Salesforce, Zoho, Sugar CRM
  • Bring up financial criteria and valuation ranges as early as possible when speaking to potential acquisition targets to save everyone time
  • A company that is too large or too small as an acquisition target may still be worth talking to for information
  • You must immediately sound useful, credible or relevant to the owner; deep industry analysis should already have been performed at this stage
  • Tradeshows can be a critical source of dealflow
  • If a particular owner is not willing to sell, ask if he knows others who are
  • “River Guides” are typically compensated with a deal success fee, usually .5-1% of total deal size
  • Boutique investment banks, accounting firms and legal practices specializing in the industry in question are also a good source of deals
  • The business broker community itself is extremely large and fragmented; could be a good rollup target?
  • Often, brokered deals are only shown if a private equity investor with committed capital has already passed on the deal, presenting an adverse selection problem
  • Involve your financing sources (such as lenders and investors) early in the deal process to ensure their commitment and familiarity

“Evaluating Target Businesses”

  • Principles of time management: clarify goals of each stage of evaluation and structure work to meet those goals; recognize that perfect information is an unrealistic goal; keep a list of prioritized items impacting the go/no-go decision
  • Stages: first pass, valuation/LOI, comprehensive due diligence
  • It is in the best interest of the SFer to tackle core business issues personally during due diligence as it is the best way to learn the details of the business being taken over
  • Adding back the expenses of a failed product launch rewards the seller for a bad business decision; adding back growth expenses gives the seller the double benefit of capturing the growth without reflecting its true cost
  • Due diligence may also uncover deductions to EBITDA or unrealized expenses that reduce the “normalized” level of earnings (undermarket rents, inadequate insurance coverage, costs to upgrade existing systems, etc.)

“Transitioning Ownership and Management”

  • Create a detailed “Transition Services Agreement” with the seller, a legal contract where specific roles, responsibilities, defined time commitments and compensation are agreed prior to the transaction close
  • The first 100 days should be dedicated to learning the business
  • Businesses consist of people, and people need communication; great leaders are always great communicators
  • “Don’t listen to complaints about your predecessor, this can lead to a swamp and you don’t want to be mired there.”
  • The goal is to learn, not to make immediate changes
  • Outwork everyone; be the first person in and the last to leave
  • Many SFers insert themselves into the cash management process during the transition period by reviewing daily sales, invoices and receipts and signing every check/payment made by the company
  • The company’s board should be a mix of deep operational experience, specific industry or business model experience and financial expertise
  • The seeds of destruction for new senior leaders are often sown in the first 100 days

Entrepreneurial Opportunity Cost (#socialism, #bureaucracy, #freemarket)

I am wondering out loud here: when people attempt to do some kind of modeling of the various opportunity costs of having government provide X, versus having “the market” provide X, do they factor in the opportunity cost of lost entrepreneurial progress inherent in bureaucratic provisioning?

For example, if someone was arguing that the government should control automobile production, is there any calculus attempted that examines the present value of foregone future improvements in automobile production and design that will inherently be included in bureaucratic provisioning?

A further example– the roads and highways we drive on, which have been provisioned by government for decades, haven’t changed all that much. But cars have made huge technological leaps in terms of how they’re designed and built. Cars have entrepreneurs behind them, roads and highways have bureaucrats behind them.

I’m not sure I am articulating my inquiry as coherently as I might like to but there it is nonetheless!

Reminder On The Death Of “Fugitive” Marc Rich (#MarcRich, #capitalist)

Marc Rich died today in Switzerland at age 78 (Bloomberg.com).

Marc Rich, even in death, is remembered for being a “fugitive.” While his exile to Switzerland may have been self-imposed and motivated by avoiding legal entrapment in the United States, he is better remembered for being an outstanding trader of commodities, with a creative knack for getting around arbitrary political boundaries and conflicts to connect buyers and sellers of desired goods.

This aspect of Marc Rich’s life, along with his legal prosecution and other items of interest, were discussed at length in my review of The King of Oil, the official biography of Marc Rich published in 2010, three years before his death.