Month: April 2012

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Doing the Right Thing: Upside? Zero. Downside? Financial Ruin…

  In a typically breezy, highly readable and highly informative blog post (Bronte Capital: Daddy you are more evil than I thought), hedge fund manager (and friend, for the record) John Hempton writes an at once amusing and illuminating description of what he does and why he does it, to the admiration/horror of his son.
 (John leaves out the ‘how’ he does it, but I can tell you it is the ‘how’ that makes John so good).
 However, by summing up his work in the manner he does such that it generates his son’s amusingly alarmed reaction (quoted in the title of the piece), John, I think, diverts attention away from the real underlying issue that anybody who plays on both sides of the investing fence faces when considering going to the press or to the authorities with negative information about a public company.
 The real underlying issue is this: the downside of going public with damaging information on a public company, even if that information could bring down a bad guy and stop the bad guy from doing damage to other innocent investors down the road (e.g. Robert Maxwell, whose favored broker was Goldman Sachs, as described here), is so much greater than the upside that it makes no sense (in America, at least) to bother.
 So you just keep your mouth shut.
 What is the downside to going public?  There are many facets, but the two main ones are these:
 1) Getting sued by the offending scammer, who, being CEO of a public company, can spend unlimited company money (not his own), on the effort to shut your mouth, run you out of business and keep the scam going;
 2) Getting ignored (or worse–see David Einhorn’s grim experience with the unintended cost of being right in “Fooling Some of the People All of the Time“) by the Feds.
 Now, what is the upside of going public?
 Well, the upside is you may ultimately be proven right, and the bad guy may go to jail, in which case the investors and shareholders and analysts and investment bankers who hated your guts during the process and wanted to see you die because it was you (not the bad CEO) who was destroying their company, will finally admit you were right and shower you with kisses—no, wait.
 They won’t.
 They will still hate your guts.
 In fact, they’ll hate your guts even more, because they will perceive that it was you who brought their company down.  After all, without your efforts the fraud they were profiting so handsomely from would not have collapsed. 
 They’ll think, in fact, that you’re evil, because, as you will learn the hard way, scammers never, ever admit culpability: they blame short-sellers on the way to jail, in jail and out on parole.
 So, to summarize: Upside to doing the right thing by going public? Zero.  Downside? Financial ruin.
 Still, while the bad guys John has exposed (and there are more than a few) may agree with the title of his blog, his investors (I am not one) would probably say that John Hempton is way less evil than his son fears.
 And simply based on what I know of the work he does in arriving at his unwanted, non-conscencous, frequently scam-busting conclusions, I would tell his son, “No, your old man’s alright.”
Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011)    Available now at Amazon.com
© 2012 NotMakingThisUp, LLC
                                   
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.
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David Schwartz: One of The Good Guys

 David Schwartz, who passed away last weekend, was one of the good guys.
 The company he and his wife, Alice, founded in their garage many years ago is a clinical diagnostics and life science products maker called Bio-Rad Labs, which readers may recall from a few years back when its “mad cow” disease test was suddenly in demand after a limited but frightening outbreak of that brain-wasting disease in North America.
 Mad cow test aside, Bio-Rad happens to be one of those off-the-radar public companies that does nothing the way Wall Street’s Finest like to see things done when it comes to “increasing shareholder value.”
 For one thing, it has a Class A/B stock structure that gives the family control in a way that most Wall Street analysts, who have never run anything in their lives more complicated than an espresso machine, find exasperating, since it has (presumably) prevented the company from being taken over for a short-term profit—long-term potential be damned.
 For another, Bio-Rad doesn’t issue scads of stock options to senior executives, which means it doesn’t have to toss money down a rat-hole buying shares back at silly prices, which is what most companies do when they are “enhancing shareholder value” via share buybacks that should actually be labeled “enhancing our senior executives’ value.”
 (In 10 years, Bio-Rad’s fully diluted share count has risen only 15.5%.  At the other extreme, Life Technologies, which swims in the same pool as Bio-Rad but plays the Wall Street game like a shark, has seen its fully diluted share count rise 75% in the same time frame.)
 A third thing Bio-Rad does that has never endeared it to Wall Street’s Finest is not managing its quarterly earnings to hit Wall Street forecasts.  Its average “earnings surprise” over 5 years has been 21.3%, according to my Bloomberg, while the aforementioned Life Technologies’ “earnings surprise” is a P/E-enhancing 11.6%.  (GE, the King of Managing to Quarterly Earnings, has a 4.4% average surprise.)
 There are many more things Bio-Rad does that don’t march to the mantra of “enhancing shareholder value” sung by Wall Street’s Finest (and by way too many public company CEOs), like building a real business without worrying about what analysts worry about.
 Notwithstanding the Class A/B structure, the lack of share buybacks, the non-smooth earnings stream, and big piles of cash that build up on the balance sheet and then leave when an attractive acquisition comes along (an acquisition which may or may not be “immediately accretive”—another slogan in the “enhancing shareholder value” toolkit of trite sayings), Alice and David built, from a standing start, a diagnostics and life science company with 7,000 employees generating $2 billion of revenue, carrying an enterprise value of $3 billion, without ever having to cater to the whims of Wall Street’s Finest.
How, exactly, did they accomplish this?  One of many examples comes in the following story.
 After the North American “mad cow” outbreak occurred, Bio-Rad was suddenly facing a windfall from its test, so I visited the company to get an update on its long-term plans from the CEO (David and Alice’s son, Norm Schwartz), and the CFO (Christine Tsingos).  David sat in with us, wearing his usual bolo tie and occasionally interjecting in his affable way.
 When the mad cow issue came up, however, David took over the conversation.
 Now, he could have hyped his stock using the mad cow disease as a launching pad.  He could have, like many other CEOs in his shoes might have, pretended it was the beginning of up-and-to-the-right growth for Bio-Rad that would get me and other investors excited.  He could have easily pumped his stock and made himself a lot richer in the short-run.
 But he didn’t.
 Instead, he took a piece of paper and drew a line that looked like the normal distribution of a standard deviation.  “The mad cow revenue will climb like this,” he told me, tracing the upward curve of the line.  “Then it’ll peak and then fall off, like this.  Meantime, we’ll use the money to invest in other things for the long term.”
 And that’s exactly what happened.
 And it’s exactly what they did.
 And it worked for everyone involved.
 David Schwartz was one of the very, very good guys.
Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011)    Available now at Amazon.com
© 2012 NotMakingThisUp, LLC
                                   
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.
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Augusta National Golf Club: What Would Warren Do?

Golf’s Masters Facing Male-Only Dilemma With IBM CEO Rometty
By Beth Jinks and Michael Buteau
    March 28 (Bloomberg) — Will International Business Machines Corp.’s Ginni Rometty be able to wear a green jacket at the Masters Tournament?
    As Augusta National Golf Club prepares to host the competition next week, it faces a quandary: The club hasn’t admitted a woman as a member since its founding eight decades ago, yet it has historically invited the chief executive officer of IBM, one of three Masters sponsors. Since the company named Rometty to the post this year, Augusta will have to break tradition either way.
    IBM holds a rarefied position at the Augusta, Georgia, course. The company has a hospitality cabin near the 10th hole, beside co-sponsors Exxon Mobil Corp. and AT&T Inc. The companies’ male CEOs have been able to don the club’s signature green member blazers while hosting clients. Non-members, who don’t wear the jackets, must be accompanied by a member to visit the course or play a round….
—Bloomberg, March 28, 2012
 That’s the story, at least according to Bloomberg…but it’s not the whole story—or at least, the most interesting part of the story.
 The most interesting part of the story is that Warren E. Buffett, CEO of Berkshire Hathaway and currently the highest profile liberal Democrat in the American business world—being a friend and advisor to the President of the United States while also allowing his name to be attached to a contentious tax hike proposal—also happens to be a member of all-male Augusta National Golf Club.
 Indeed, one of the non-monetary perks of selling your company to Berkshire Hathaway is a round of golf with the Oracle of Omaha himself at men-only Augusta.
 (You can read about that and more in the just-issued 2012 edition of “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett,” available on Amazon.com’s “Hot New Releases in Investing” list.)
 Further complicating the situation, and making it stickier than in years past for Warren Buffett, is that Berkshire Hathaway is now the largest shareholder of IBM, thanks to Buffett’s buying spree early last year.
 So, we wonder, What Would Warren Do to unravel this Gordian Knot, wherein the CEO of one of his largest investments is banned from membership at the highest profile golf club in the world, of which he is one of its highest profile investors, at the very time his own very high public profile is part of the current tax policy debate?
 We’ll bet Augusta decides to admit Ms. Rometty without a fuss or even a press release; Buffett is spared questions about the issue at next month’s Berkshire Hathaway shareholder meeting; and the President gets the credit.
Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011)    Available now at Amazon.com
© 2012 NotMakingThisUp, LLC
                                   
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.