Sunday, February 22, 2015

Pignataro, Mergers, Acquisitions, Divestitures, and Other Restructurings

Paul Pignataro is a master at explaining complicated financial concepts. Earlier I reviewed his work on Financial Modeling and Valuation and Leveraged Buyouts. Now comes his third book in as many years: Mergers, Acquisitions, Divestitures, and Other Restructurings (Wiley, 2015).

Pignataro, the founder and CEO of the New York School of Finance, draws on both his teaching skills and his extensive experience in investment banking and private equity. As in his previous books, he first sets forth some general principles and then takes the reader step by step through a case study. He assumes no prior knowledge, not even of basic Excel coding. By the way, according to standard investment banking modeling etiquette, “all hardcoded numbers and assumption drivers should be entered in blue font” and “all formulas should be entered in black font.” (p. 58) (My own spreadsheets follow this etiquette insofar as they distinguish between hardcoded and formula-generated numbers, but my color choice, which I always considered tasteful, is outright garish by Wall Street standards. Oh well, I guess that’s what happens when you code in a flannel shirt and sweat pants instead of accepted Street attire. But I digress, something Pignataro is careful not to do.)

The case study for this book is the 2013 all-stock merger of equals transaction between OfficeMax and Office Depot, a consolidation in which OfficeMax became a wholly-owned subsidiary of Office Depot. This is a particularly timely case study since Staples has recently made a play for the merged company.

How would an analyst go about determining whether the OfficeMax-Office Depot merger makes sense? He would, Pignataro suggests, build a full-scale model consisting of eight parts: assumptions (purchase price, sources, and uses), income statement, cash flow statement, balance sheet adjustments, depreciation schedule, operating working capital schedule, balance sheet projections, and debt schedule. (The template for the model can be found on the book’s companion website, accessible through the url that appears at the end of the book.)

Pignataro holds the reader’s hand every step of the way. It’s impossible to get lost in this book. Ideas follow one upon another—if not inexorably, at least logically. And painstakingly described Excel keystrokes capture numbers critical to financial analysis. By the end of the book the reader has a full-scale model, a model he can use as a template for his own future work.

Sunday, February 8, 2015

Browder, Red Notice

Bill Browder has written a book that is by turns gripping, chilling, and moving—a book that impels a reviewer to pile one outraged adjective upon another. Red Notice: A True Story of High Finance, Murder, and One Man’s Fight for Justice (Simon & Schuster, 2015) is a scathing indictment of Putin’s brutal kleptocracy, which Browder and the people connected to his firm, Hermitage Capital, experienced firsthand.

Browder, the grandson of Earl Browder, head of the American Communist Party who ran for president twice on the Communist ticket, rebelled and became a capitalist, though he still felt the pull of Eastern Europe. His first major deal was for his employer, Salomon Brothers: buying $25 million worth of Russian privatization certificates that were then exchanged for shares in undervalued Russian companies. In a short time the portfolio was worth $125 million, and the 29-year-old Browder became a hero at Salomon.

Soon enough, he decided to go out on his own. With considerable difficulty he launched his firm, based in Moscow, in 1996. A year later his investors were amply rewarded: the fund was ranked the best-performing fund in the world, up 235 percent for the year and 718 percent from inception. Started with assets of $25 million, the firm now had AUM of more than $1 billion. In 1998, hit by the Russian currency crisis, it dropped a whopping 90 percent, but by the end of 2003 it had managed to climb out of its hole, and then some. It had rallied more than 1,200 percent from the bottom of the market.

Its spectacular recovery was the result of a joint, though uncoordinated effort. Hermitage Capital exposed corruption in Russian companies owned by oligarchs who posed, early on, a challenge to Vladimir Putin’s power. Putin was only too happy to use Hermitage’s research to his own ends. His intervention reined in some of the oligarchs and led to increased corporate profits. Putin won, Hermitage won.

In October 2003, however, Putin upped the ante: Mikhail Khodorkovsky, the CEO of Yukos and Russia’s richest man, was arrested. In June of the next year he was sentenced to nine years in prison. His fellow oligarchs got the message. What could they do to avoid ending up in that cage? Browder speculates that Putin’s response was “50 percent.” “Not 50 percent to the government or 50 percent to the presidential administration, but 50 percent to Vladimir Putin. I don’t know this for sure. It could have been 30 percent or 70 percent or some other arrangement. What I do know for sure was that after Khodorkovsky’s conviction, my interests and Putin’s were no longer aligned. He had made the oligarchs his ‘bitches,’ consolidated his power, and, by many estimates, become the richest man in the world.” (p. 164)

Browder, unaware that he and Putin were on a collision course, continued to name and shame Russian oligarchs. “There was a difference this time, though. Now, instead of going after Putin’s enemies, I was going after Putin’s own economic interests.” (p. 165)

This would not do. In 2005 Browder was expelled from Russia, and things would only get worse from there. As Browder’s lawyer Sergei Magnitsky told him, and as his own imprisonment and subsequent murder would make manifest, “Russian stories never have happy endings.” And in Putin’s Russia stories are a pack of lies, justice is a joke, endings are final.

Sunday, February 1, 2015

Kogon, Merrill, & Rinne, The 5 Choices

Are you familiar with Stephen R. Covey’s book The 7 Habits of Highly Effective People, which has sold more than 25 million copies since it was published in 1989? And perhaps the sequel, The 8th Habit: From Effectiveness to Greatness? Okay, here’s a bit of corporate history that probably passed you by but that’s nonetheless important to the story: Franklin Quest, the company best known for its planners, bought the Covey Leadership Center in 1997 to form FranklinCovey. FranklinCovey is today a publicly listed (NYSE: FC) global professional services firm and specialty retailer selling training and productivity tools to individuals and organizations. Its clients have included 90% of the Fortune 100 and more than 75% of the Fortune 500. It holds the copyright to this book.

The three authors—Kory Kogon, Adam Merrill, and Leena Rinne—are all affiliated with FranklinCovey. Kogon, the company’s Global Practice Leader for Productivity, has already co-authored two other FranklinCovey books. Advanced praise for the book, blazoned on the cover of the uncorrected proofs, comes from New York Times bestselling author Sean Covey. As you should begin to understand by now, The 5 Choices: The Path to Extraordinary Productivity, published by Simon & Schuster (who also published Stephen Covey’s books), was written in-house as part of the firm’s productivity suite.

So, after all this background, what does the book actually promise? Its claim is straightforward: to achieve extraordinary productivity you need to make the correct five choices in three areas: decision management, attention management, and energy management. When making a decision, act on the important and go for the extraordinary, don’t react to the urgent or settle for the ordinary. With respect to attention, schedule the big rocks, don’t sort gravel, and rule your technology, don’t let it rule you. As for energy, fuel your fire, don’t burn out. The combination of high-value decisions, focused attention, and high energy will yield extraordinary productivity.

If these principles sound familiar, it may be because they “are anchored in the timeless principles of human productivity that we and others have taught at FranklinCovey for over thirty years.” (p. 20)

The authors describe the Time Matrix, which is divided into four quadrants. Q1 is necessity, and includes crises, emergency meetings, last-minute deadlines, pressing problems, and unforeseen events. Q2 is extraordinary productivity, with proactive work, high-impact goals, creative thinking, planning, preventing, relationship building, and learning and renewal. Q3 is distraction: needless interruptions, unnecessary reports, irrelevant meetings, other people’s minor issues, unimportant email, tasks, phone calls, status posts, etc. Q4 is waste: trivial work, avoidance activities, excessive relaxation (television, gaming, Internet), time-wasters, gossip.

If you’re like most people, you’re spending only 60% of your time on important things and 40% on things that aren’t important to you. (Actually, the self-reported 60% figure sounds high to me.) You wouldn’t be satisfied if your car only worked a little more than half the time or if only half of the players on your favorite team showed up for a championship game. So, the authors ask, “why settle for less when it comes to your time?”

To be extraordinarily productive, you not only have to use your time wisely, you have to make wise decisions. And, the authors explain, “high-value decisions don’t come in a predictable order. They are nonlinear opportunities. If we are not aware, we might miss them entirely, or only address them in a rushed, low-quality way. A linear approach in a nonlinear reality is a recipe for failure.”

Consider the gap between the least and most productive performers in low-complexity, medium-complexity, and high-complexity jobs. In the first case (for instance, a worker in a fast-food restaurant) the most productive workers are three times more productive than the least productive; in the second (like a production worker in a high-tech factory), top performers are twelve times more productive. “However,” the authors write, “in high-complexity jobs, where the right decisions make all the difference (like software engineer or an associate in an investment banking firm), the differences between the top and the bottom performers were so profound they were unmeasurable.”

Well, that should make you put down the potato chips, stop mindlessly surfing the web, get up off the sofa, and take notice.