Archive for category: Corporate Insights

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.

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.

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.

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.