From Trams, Power Generation and Telephones and Back Again
Some business stories jump right off the page.
For example, consider the Brookfield Infrastructure Fund making a 1.7 billion dollar investment in a Brazilian toll road. The irony is that the roots of Brookfield include Brascan which was a successor to Brazilian Traction. Brazilian Traction evolved into a conglomerate in the 1900s, started by Canadian investors to build facilities in Brazil. The company provided capital and expertise for power generation, transportation and communication systems. In today’s terms, infrastructure.
Brazilian Traction was successful, generating a very satisfactory return on capital, and widely followed on the Toronto Stock Exchange. Alas politics intervened as the Brazilians eventually wanted control of what they considered businesses vital to their economy. The takeover was negotiated with at least one caveat. While the price was workable, one part of the deal was that some of the consideration had to be reinvested in Brazil. The out flow of capital was thereby limited, providing monies for internal reinvestment, protecting the Brazilian currency and acceptable politically.
Nevertheless, after more than a century, the Brazilian economy warrants Brookfield’s investment in a business sector similar to Brazilian Tractions.
There is a world wide stampede into all manner of infrastructure investments. Pension plans love them, fund developers love them, the investment bankers love them and the individual investors love them. With all of this love there is bound to be over paying for good deals and an increasing number of bad projects. Acquiring businesses that are basic to a countries well being has proven to have political risks. Long memories are sometimes useful.
You have to know when to Holden and know when to Foldem (With apologies to Kenny Rogers)
Beginning in the mid 1800s as a saddle manufacturer, Holden passed through many stages into an Australian car manufacturer. Now the bad news is out and the company will be shuttering all production in 2017.
The story of auto manufacturing in Australia closely mimics many industries world wide. The scenario frequently progresses from embryonic to commercialization to expansion, to significant profitability, to maturation and consolidation. The pattern begins with a single enterprise, moving to several, to many, to consolidation. Following the bouncing Australian auto ball replicates both.
Holden is a domestic start up that flourished early in the 20th century, manufacturing cars suited to the Australian market. Generally the autos were robust and of simple in design. General Motors acquired Holden in 1931. The company retained independence in design and engineering. As expected other manufacturers set up shop in Australia including Ford and Chrysler. Laterally companies from Japan and Korea made themselves at home as they have all over the world.
Government inspired support programs were part of the evolution in sometimes vain attempts to maintain competiveness.. The support ranged from import taxes, research and development credits, subsidies, labor force training, cash injections and ownership. Because auto manufacturing is so ubiquitous and massive world wide, the industry is always involved in controversy when economic circumstances change. The 2008 melt down is a wonderful example as governments stepped up to the ownership plate.
News of the Holden manufacturing closure generated a notable quote “A bit sad, very sad actually because I’ve been a follower of Holden with my father ” said Bruce Lethborg, President of Holden Sporting Car Club of Victoria. “My father had Holden cars, my first car was a 1966 HR Holden, its just devastating really
The Holden saga is a recent example of a long line of auto drop outs. Well known in the bone yard are Packard, Studebaker, Hudson, Kaiser, Fraser, Cord and Reo The auto industry is a very big business with a great deal at stake. Different stakeholders win and lose at different times.
The only clear and consistent winners are antique car collectors.
The Story According to Coasters
Yahoo Finance, Value Line, the Wall Street Journal and Barons are a few examples of the huge storehouse of business information. Rummaging through file cabinets and desk drawers generates another lodestone of material. There you will find coasters.
These desk protectors were standard swag given to visitors. Sometimes investment bankers, sometimes analysts, sometimes customers, sometimes visiting experts and sometimes friends. On certain circumstances coveted coasters found their way surreptitiously into visitor’s pockets or brief cases.
Popular giveaways now includes pens, note paper, note books, flash lights, hats, key chains and golf accessories. Not so much coasters. They seem to occupy an unusual space. Their endurance is out of proportion with other giveaways. Perhaps because coasters are not consumed, they do not need batteries, and they are well-preserved in the dark confines of a bottom drawer or in the remote parts of a book case.
Most importantly these logo-festooned coasters are a permanent record, supplying an interesting snapshot of business history. They are reminders of the ever-changing landscape. Each one offers a window into business history, acting as an index of stories of failure, self-induced implosion, successes, mergers, acquisitions, fortunes made, lost and scams.
Sort of an abbreviated list of Harvard Business School case studies. Coasters are ageless, and provide a mountain of archival material. History buffs might well lobby swag developers for the reintroduction of coasters.
Historical Fiction (Perhaps)
During their regular quarterly meetings the directors of Daimler AG carve out time to review new ventures. This time a youthful market researcher proposed establishing a car rental business. These senior automotive executives could barely contain their dismay. The business was, after all, well established, mature and very competitive. Significant barriers to entry were an additional deterrent.
Prior to World War II many new rental firms entered the industry. Not until airline travel blossomed that demand for auto rentals grew. Now passengers at airports needed convenient ground transportation to replace the traditional buses and taxis.
New auto rental companies proliferated and existing agencies expanded, feeding on the very rapid growth of airline travel for business and pleasure. Avis and Hertz attained major shares. From time to time automobile producers acquired significant equity positions as an outlet for their cars and to introduce their brands to potential buyers.
Pity the poor market researcher now facing this entrenched group of directors with an idea long since discarded.
She quickly got their attention. The proposal was not the traditional care rental business rather, for a whole new venture in a new industry featuring the Smart car. In partnership with Swatch, the Swiss watchmaker, Daimler pioneered the Smart. Initially unsuccessful and almost abandoned until 2006 when a redesign, and great fuel economy, caught the consumer’s attention. The now familiar auto features a very small, reliable, agile vehicle suited to the crowded urban environment. Carrying the Daimler brand helps as well.
The proposal: Marry this auto technology with the communications revolution to meet the new demand for instant convenience in urban driving. This is a new business in a new industry. The Smart Car and associated systems are monitored by GPS, to track its route, fix its location and to calculate rental fees. The driver picks it up almost anywhere and leaves it almost anywhere. The Smart’s size and agility makes parking very easy. Consumers are treated to on-demand, low cost, convenient, personal urban transportation.. They have pay –as –you- go time sharing in autos.
The combination of new auto and communications technology now puts this car rental business in a whole new light. Daimler now has a new market and a new way of promoting the Smart.
The market researcher has attained a new stature and the car2go business is born.
An Initial Public Offering is all About Timing
Imagine this scenario. To the outside observer some thing big was under negotiation. Only the wealthiest and well connected were engaged in the intense discussions. They were surrounded by analysts, legal advisors, accountants, and financiers. The subject was most certainly a very big deal. The investment banker’s mouths watered as they considered the magnitude of the transaction leading to a very generous transaction fee.
The agglomeration of assets was unprecedented. While a single product generated the majority of the cash flow, the assets included minerals, energy, forest products, food products, real estate and retail, all with huge long term potential. Only the most visionary investors saw very far beyond the immediate opportunity. Many years passed before some realization emerged about their immensity.
Discussions ebbed and flowed as to valuing assets, to recruiting investors and to verifying the validity of land titles. Proforma income statements and balance sheets offered little comfort. While the immediate demand for the primary product seemed solid, there was doubt about the longer term. A secure supply of the principal product was a matter of conjecture. There was no certainty as to costs and reliable transportation could only be wished for. Security was an added risk. In favor of the project was an almost one hundred percent monopoly. Additional helpful factors were the emergence of the limited liability corporate structure and double entry book keeping which provided transparency.
Business people familiar with corporate financing cringe at the difficulties such a deal presents. Clearly the owners expect a very large premium, well over an amount supported by earnings alone. Exhaustive arguments lasted many weeks as all the parties strived for a mutually satisfactory valuation.
Some additional exploitable assets had been identified, providing at least a rough estimate of future cash flows. A larger issue was the owner’s conviction that value existed well beyond any current quantifiable amount. The underwriters had some sympathy for this based on the sheer vastness of the assets. But the parties had reached an impasse.
Additional financing for current operations was becoming a necessity in order to take advantage of the immediate opportunity. Finally a compromise was reached with the understanding that additional funds could be accessed when values were less opaque.
Now fast forward to 2012, about four hundred years after the original agreement. Today the owner of the Hudson Bay Company is in negotiation with investment bankers to raise additional funds once again by accessing the public markets. The asset is a shadow of its earlier self. Nevertheless the negotiations are as intense as ever and supported by an understanding reached four centuries earlier.
Historical Fiction (Perhaps)
During their regular quarterly meetings the directors of Daimler AG carve out time to review new ventures. This time a youthful market researcher proposed establishing a car rental business. These senior automotive executives could barely contain their dismay. The business was, after all, well established, mature and very competitive. Significamt barriers to entry was an additonal deterent.
Prior to World War II many new rental firms entered the industry. Not until airline travel blossomed that demand for auto rentals grew. Now passengers at airports needed convenient ground transportation to replace the traditional buses and taxis.
New auto rental companies proliferated and existing agencies expanded, feeding on the very rapid growth of airline travel for business and pleasure. Avis and Hertz attained major shares. From time to time automobile producers acquired significant equity positions as an outlet for their cars and to introduce their brands to potential buyers.
Pity the poor market researcher now facing this entrenched group of directors with an idea long since discarded.
She quickly got their attention. The propoal was not the traditional care rental business rather, for a whole new venture in a new industry featuring the Smart car. In partnership with Swatch, the Swiss watchmaker, Daimler pioneered the Smart . Initially unsuccessful and almost abandoned until 2006 when a redesign, and great fuel economy, caught the consumer’s attention. The now familiar auto features a very small, reliable, agile vehicle suited to the crowded urban environment. Carrying the Daimler brand helps as well.
The proposal: Marry this auto technology with the communications revolution to meet the new demand for instant convenience in urban driving. This is a new business in a new industry. The Smart Car and associated systems are monitored byGPS, to track its route, fix its location and to calculates rental fees.. The driver picks it up almost anywhere and leaves it almost anywhere. The Smart’s size and agility makes parking very easy.Consumers are treated to on-demand, low cost, convenient, personal urban transportation.. They have pay –as –you- go time sharing in autos.
The combination of new auto and communications technology now puts this car rental business in a whole new light. Daimler now has a new market and a new way of promoting the Smart Car
The market researcher has attained a new stature and the car2go business is born.
Some Times You Have to be Lucky and Good
This is a business story of good management, good luck and unintended consequences.
Bucyrus Erie is a very successful provider of large equipment for the construction and extractive materials industries. Several decades ago, Bucyrus acquired The Excello Corporation. Excello manufactured heavy earth-moving equipment such as shovels and drag lines. By all indications the deal was well-considered, well-priced and complementary in most of the important areas. Excello corporation’s valuations were reasonable, including the price earnings multiple, the earnings per share growth, a sound balance sheet and a high return on shareholder’s equity. The acquisition price reflected these parameters.
Bucyrus Erie was acquired by Caterpillar In July, 2011.
Within the Excello portfolio of products was a dairy equipment manufacturer. A sound business unit but not the primary reason for the acquisition. The deal took place at a time when dairy product home delivery was still popular and the supermarket had not taken over as the principal food distribution system. Suburbs were developing and living styles changing accordingly.
The dairy equipment division, owned a patent on a new system for packaging milk that was consumer friendly and very suitable to the burgeoning super market format. We have all had considerable interaction with the system. It is that convenient but sometimes cantankerous milk container we open by prying the top into an easy pouring spout. Much earlier you would have read on the spout “Under Patent to the Excello Corporation” … a label that remained there until the patent expired.
While no profitability numbers are available specific to this invention, the longevity of the packaging system is a sound indicator of success.
Look at the spout the next time you open a container of milk and marvel at the importance of a system that led to such convenience and efficiency.
From the vantage point of Bucyrus Erie, rewards sometimes come from being lucky and good.
A Tale of Three Ventures
Dealing with gaseous and air-born particulate stack exhaust has a recent and interesting history. In the late 1960s determining the volume and content from a gas turbine electrical generating plant was assigned to a Calgary-based consulting engineering firm. Solving this problem highlighted the broader issue of measuring emissions from stacks in many industries.
Effluent as a result of extracting sulfur from natural gas presented just such a challenge. Government and operators were both interested, one from a regulatory view and the other to improve efficiency. Measurement capabilities were primitive. Instrumentation left much to be desired and was applied under very arduous circumstances. The search for improvement generated new technology yielding data continuously from remote locations without physical intervention. Before long the information allowed for improved efficiency. Lower emissions, increased sulfur recovery and a profitable instrumentation product line were the results.
Hog and dairy operations generate a large amount of biological waste. Traditional remediation methods require volumes of fresh water, settling ponds, atmospheric evaporation, transportation of low concentration liquid manure, solids removal and distribution. Impacts are significant such as continuous input of water, odour contamination, and expensive transportation. Regulations include water limits, land use and waste disposal. High costs, environmental issue land limitations and water restrictions are not popular with producers either.
A low-cost alternative was needed that concentrated the liquid manure mechanically, that recovered potable water, that provided for inexpensive effluent distribution and could be operated in a rural setting. Just such a system is now available. Environmental issues are solved and the producer can sell by-products profitability. The equipment provider enjoys a successful enterprise.
Treating new and existing hazardous waste is an ongoing problem. Financing, constructing and locating a required facility become contentious as does operating and transporting material to the site. Governments have taken the approach of guaranteeing the financing for the construction and operation of such an operation. Hazardous waste generators are charged a disposal fee, and government makes up the shortfall based on a predetermined rate of return. While adventuresome, this approach on a long-term basis has proven to be fraught with difficulties. Although circumstances differ somewhat, a major stumbling block is the opportunity to convert to a profitable enterprise without subsidization.
Reducing sulfur dioxide emissions is beneficial to the producer, the instrument manufacturer and the public. Equally all parties to the swine water treatment problem benefit. Not so much with respect to hazardous waste destruction. No enduring benefit to all constituents has ever materialized because it was born as a cost centre and not as a profit centre. To be sure, not always possible but certainly worth trying for.
How many Pringles is 2.7 Billion Dollars?
Extra! Extra!, Kellogg purchases the Pringle product line from Procter and Gamble for 2.7 billion dollars. For the record a billion is nine zeros and a trillion is twelve zeros in the United States. Under any circumstances these are big numbers.
So how many Pringles does Kellogg need to sell to generate a return based on profits? One hundred Pringles (chips, that is) sell for $1.50 and therefore 0.015 dollars per Pringle. With a profit margin of 8.0% and a price tag of $2.7 billion, Kellogg is looking at the sale of 2.2 trillion Pringles. That is 220 billion “Super Stack” cylinders.
This transaction is recent in a long line of deals in the confectionery, food, beverage, over-counter pharmaceuticals, and snack-food industries. Within these industries many of the same assets have moved at least once. Bick’s Pickles provides a good example. Beginning in 1960 companies such as Robin Hood Flour, Kraft, International Multifoods and Smuckers have all owned Bick’s.
So what is with this high frequency of transactions? The Investor Relations people will provide explanations thusly: “moving into growth markets to take advantage of shifting demographics , rationalizing our product lines, focusing on our core business, realizing marketing efficiencies, exiting mature products and to reinvest the proceeds in higher growth products and markets ” and so on.
Perhaps there are less obvious reasons. There is a possibility that many deals happen because they can and because of habit. Expressed another way the perceived dynamics of any system cause actions that while seemingly based on logic are actually based on tradition and standard ways of thinking. The constant rotation of oil and gas assets and trading hockey players have similar characteristics.
This concept of habit versus fresh thinking is explored at The Beer Game.
The fundamentals of the deals are less significant than the deals themselves. Enjoy your Pringles.
Don Thurston
403 874-8233