Friday, May 23, 2008

Just talk the talk

Talk about timing. Sometimes you get it so awfully wrong that you become a butt of a million jokes. This morning I read this article “Power of Leadership Economics” by Ashish Singh, MD of Bain & Company India and Chris Zook, the firm's Global Strategy Practice in the ET.

The article talks about the enormous value associated with positions of leadership. They place some findings in support of the economics of leadership. I quote –

“….The typical industry has more than six competitors. In any sector, the two leading players usually capture over 75% of the profit pool, and the company with the greatest market power usually snares about 70% of total profits.

In contrast, followers with a marginal share of the profit pool act as the shock absorbers of the economic system, exhibiting much larger fluctuations and enduring a bumpier ride during downturns. When we analysed 22 pairs of global leaders and their followers — Nike versus Reebok (now owned by Adidas) or Southwest Airlines versus Delta, for example — we found that the average variance in profit margin was three times as great for followers as for leaders….”

Then I recall Standard & Poor’s ‘‘weakest links’’ report [cited by] forecasting 75 US companies that will default on their debts in the next 12 months. Of the 93 companies at risk, more than half were involved in takeovers by big-name private equity firms, including Boston’s Thomas H. Lee Partners, Bain Capital, and J.W. Childs Associates. These guys led the LBO march and loaded the portfolio companies with so much of debt that did them in. There are 93 US companies at risk of defaulting on $53 billion in debts, marking a 50 percent jump since last June, when the credit crisis started. Many of these debt-laden companies were involved in giant leveraged buyouts by these monsters.

Bain Capital acquired Guitar Center Holdings Inc. last June for $2.1 billion, putting $650 million in debt on the guitar-store chain’s books, according to Dow Jones & Co.’s LBO Wire, an online report. That debt is rated a B-, giving it junk bond status, according to S&P. The loans were made at time when banks were placing minimal financial requirements on companies — which could make defaults less likely.

Now of all times, the top dogs of Bain & Company chose to come out and talk about “leadership economics” …. Who’s next? Citi, Merril Lynch, UBS, Morgan Stanley…? Leadership it is, truly; in driving companies aground.

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