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 Boston.com] 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.

.

Debt vapor

Thinking of early 90’s when I had just started working….

Indian companies were then extremely under leveraged and over mortgaged. For every Rupee of debt, one had to mortgage Rs.4 worth of assets because Marked-To-Market (MTM) as a concept was totally unheard of. Book Value has been the norm and it suited institutions better. I remember the time when I used to wait outside the offices of GM/ED of Banks / Financial Institutions (FI) who literally rationed loans. We never had extra assets to mortgage as properties worth several times the value of loans have already been locked down by earlier loans and this wait was necessary to get an NOC to create a second charge for a new loan. Still the securities to total debt ratio managed a cool 4 to 1.

Cut to the early `00, the situation reversed. Liberalization meant multiple streams of credit available to Banks/FIs and FII, PE and Hedge Funds entry meant surfeit of money supply that had difficulty in finding room to get parked. Corporates reveled in this new order of things and leveraged themselves to the teeth. They had a problem of finding destinations to invest in. The recklessness fueled by sudden excesses meant bad judgment and funds literally got sucked into projects that turned out to be literal blackholes, from which nothing would come out.

And now we hear this. I am not surprised. Are you? I think history will repeat and it’s time we prepare ourselves to cool our heels at the reception lobby of Banks/FIs waiting to be called in by the GM/ED…or who knows, it could even be outside a Manager’s office at a Bank Branch…!

.

Leadership menopause

The private equity industry is accused of poaching some of the best brains from the mainstream businesses. Corporate luminaries (Jack Welch of GE, Lou Gerstner of IBM, Jacques Nassar of Ford to name a few) have bolted in droves for private equity, the freewheeling world where investors buy slumping companies and try to turn them around to sell or take public, risking billions of dollars in the process.

All brilliant minds and high performers, no doubt. Their track records speak for them. Profligacy has never been their virtue and all of them balked at cost spirals. I often wonder how they approve of the clearly unsustainable leverage deals brokered by the private equity firms they end up working for, to finance bulge bracket acquisitions. Steven Pearlstein of Washington Post has this eye opener on the recent Avaya deal by Texas Pacific (where Millard S. "Mickey" Drexler, ex-CEO of Gaps Inc. works)

How can they fling caution to winds as soon as they switch to private equity? Has it got to do with the new found freedom from Sarbanes Oxley going to their head…? Or do they undergo a hormonal imbalance during the autumn of their careers ?

But come to think of it, Blackstone boss Schwarzman sure had that close call with change of life. How else do you explain his selling a stake to China, awful hurry to take Blackstone public and indulging like there are no tomorrows only to invite that Congressional tax slap…

.