State and Local Government: Shrink to Grow?
Glenn Watson, Free Vector Advisors
We have followed the GM saga since its bankruptcy announcement in the summer of 2009, and chronicled its massive efforts to shed capacity by cutting employees, factories, dealers and brands to the core. The result of this painful process was a quarterly profit and a highly successful IPO. GM had become so bloated in almost every category of measurement, that it was no longer a profitable company, and creating future pension liability at an alarming rate. In other words, GM became an unsustainable business and had to shrink to survive.
On the Free Vector blog, we have also discussed the impact of declining businesses, declining tax revenues, declining property values, increased health care and pension obligations on governmental operations (Balancing a governmental budget in the “New Normal” 30 January 2010, and The Next Big Risk to Economic Recovery: State and Local Government Bankruptcies, 28 January 2010). Is there a link between the efforts of GM and the plight of the governmental units in the GM footprint?
Not only do we believe this to be the case here at Free Vector, but so does Dave Bing, the new mayor of Detroit (Forbes, 8 November 2010). Bing is deploying a radically different strategy than the one we typically see associated with economic development (new stadia, shopping malls, casinos, redevelopment, etc.) Instead, he understands the physical footprint of Detroit developed a support infrastructure that fit the city in 1950, when its population was more than double. Today, there are fewer residents, fewer tax payers, aging infrastructure, but no reduction in organized City labor cost. In terms of neighborhoods, many are vacant or under populated, and contribute to urban blight and crime.
His plan is to tear down unused housing by leveraging federal neighborhood stabilization funds, and then create fewer but stronger neighborhoods, giving prosperity a better foothold.
The entire “rust belt” of the country features cities like Detroit, all of which could benefit from a fresh approach that recognizes the limitations of the old economy.
Free Vector Advisors can help your municipality restructure its operations with strong ideas and analytics harvested from our private and public sector clients.
Lessons to be Learned from the GM Experience (Part III, Post-IPO Edition)
By Glenn M. Watson
Back in June 2009 we began our series about General Motors in the aftermath of their bankruptcy announcement. We then did a follow-up piece in April 2010 on the take-away lessons for our own small and middle-market companies. Last week, just 16 short months after their declaration of bankruptcy, GM, in a widely covered and discussed atmosphere, executed the largest initial public offering of common and preferred shares issued to date. This transaction has been the talk of the town here in Detroit for two weeks, but what does it mean not only for GM, but for smaller supply chain companies, the equity markets generally, but also the value of an enterprise, and the role of the federal government in an ownership structure?
It makes sense to review where GM stands with respect to basic stock fundamentals. First, the company, after eliminating thousands of employees now has approximately 85,000 employees worldwide. However, GM also has 531,000 retirees; a ratio a bit better than the US Social Security system, but not much. Why is this important? It is important because the new GM, pre-IPO, still has a total outstanding pension obligation of $29,400,000,000. This is a staggering sum to get one’s mind around, and only $6 billion of the IPO is being used to reduce this obligation to $23.4 billion. Can this high pension liability be supported? It remains to be seen.
Second, in the wake of the collapse of the old GM, leaving the common shareholders and most of the bondholders with nothing, the federal government took 900,000,000 common shares for its bailout. In last week’s IPO, however, it only sold 412,000,000 shares, leaving the feds with more than half of their original position (in other words, they still own 24 percent of the company). If you followed the press coverage of the pre-IPO road show hype, the public seemed to be divided as to whether or not they would purchase a car with a substantial government ownership position. Is this concern valid? Can the past history of government-run enterprises be applied in this case?
I think it is fair to say all of us “car guys” liked the fact Bob Lutz came back to GM to help the company focus on product. The “Lutz” cars in the current lineup are now the backbone of company (Cadillac CTS-V, Equinox, Malibu, Cruz, plus a couple of Pontiacs that helped reinvigorate product design). All of the new cars being offered by GM are selling at higher prices than the old GM cars, allowing the company to make money for the first time since 2004. The open questions are whether a) is there enough capacity to continue to make money given the drastic reduction in both brands and offerings, and b) can GM make money in North America (an element that has been critical to past success of GM)?
Finally, now that the dust is settling on the IPO, is the trading price based on the core fundamentals of the new GM, or is it the result of pent up investor demand looking for an opportunity when there have been few since the financial meltdown? Is it a combination of both? What can we learn from this case that we can apply to our companies? Free Vector Advisors have been engaged in this conversation with our clients, and we would be pleased to discuss these matters with you.
If an Acquisition is your Exit Strategy, the Time to Prepare is Now
M&A activity is again on the rise. Companies that used the recession to trim the fat from their P&L and accumulate cash on their balance sheet are now looking to use that cash for strategic acquisitions that increase their market share and product/service offerings as the business climate begins to improve.
According to a joint project by Thomson Reuters and Freeman Consulting Services that included interviews with 150 executives from a broad swath of industries, global merger and acquisition activity is on track to rise 36 percent, to $3.04 trillion in 2011, the highest amount since 2007.
M&A activity is projected to rise 36% in 2011
For most emerging companies, an acquisition is a much more likely exit strategy and liquidity event than an initial public offering (IPO). Unfortunately, most companies that see an acquisition as a possibility do very little to plan for that event. The result is often a reactive response to an acquisition offer that is less than what the company and its shareholders could have attained if they had proactively planned for such an event as part of their overall strategy.
One of the services we offer at Free Vector Advisors is pre-acquisition planning. A typical engagement might include:
- Extensive due diligence using a due diligence checklist similar to what the company would receive from a potential buyer after a letter of intent has been signed. This allows the company to identify and address potential problems that might lead to a lower offer price, and to create a framework that can be used to keep the company’s books and records organized in a way that will simplify a later due diligence request.
- Preparation of a business plan and financial model that specifically contemplates an acquisition as a potential exit strategy, including the identification, targeting and tracking of potential buyers.
- An initial valuation of the company and a valuation model that can be easily updated and modified as strategic milestones and objectives are reached, and which can be used to evaluate an acquisition offer.
- Ongoing mentoring and support to update and achieve the objectives set forth in the strategic plan, including interim management services, if and as required.
Identifying and planning for an acquisition up front as part of a business strategy allows a company to evaluate an offer against predefined expectations, with less risk of unwelcome surprises through the due diligence process. It also allow the company to proactively solicit potential buyers, hopefully resulting in competing offers and a higher purchase price.
Perhaps the best benefit for preparing for an acquisition in advance is that it allows the company to evaluate an offer on their own terms. By taking the steps to make the company an attractive acquisition candidate, the company has almost certainly taken the steps necessary to show that it has a strong management team, business strategy and ability to execute, regardless of whether or when a potential buyer comes calling.
XLHub = Excel on Steriods
The I’ve recently had an opportunity to download and play with XLHub, an Excel integration plug-in developed by Metric-X. XLHub solves some of the limitations inherent in Excel that anyone who spends a lot of time with that program has experienced, particular in multi-user scenarios.
The problem:
Multiple iterations of the same financial forecast spreadsheet are flying back and forth by email. Multiple people across geographies and departments have responsibility for managing and updating certain data points in the forecast, however, much of that data for a specific department and region is embedded in other spreadsheets that roll-up more granular data.
How do you maintain data integrity and version control? How do you share data back and forth across different spreadsheets? For most companies, this is done through a “cut and paste” exercise to roll-up the data, funneled through a top-down hierarchical structure to maintain data integrity and version control, and which is emailed back and forth to all the participating parties.
Excel is a great application, but it has inherent limitations. Data is locked within cells and spreadsheets, and is not easy to share. Modifications can be done only by one editor at a time, and sharing spreadsheets among users requires a lot of back and forth emails, cutting and pasting, and file proliferation.
The Solution:
XLhub is a database solution for Excel that enables businesses to store data from Excel spreadsheets into a relational database. For companies that have an existing database solution, Metric-X offers integration services, for smaller organizations, Metric-X provides a hosted solution.
By extracting and storing data in a relational database, XLHub unlocks the data silos inherent in Excel, making information available for other applications. Updating and sharing data between multiple users in real time and among different spreadsheets is a snap, with better data integrity and no cutting and pasting. XLHub also provides centralized version control and audit trails for increased compliance.
Installation of XLHub (the demo, hosted version) was quick and painless. After using XLHub, I’ve found it to be an indispensable add-on for managing and sharing data.
Metric-X has some good video demos of the product in action on their website. You can download a free 30-day evaluation copy that includes free training and support during the evaluation period.
Starting a New Business – Made Easy!
Our Free Vector LaunchPad™ services are designed to get you from idea to execution quickly. We take you through the entire process — from business formation and planning, website and infrastructure development, to business launch and the tools to manage and grow your ongoing operations.
click on the image to learn more about FV LaunchPad
To learn more about FV LaunchPad™ or any of our other business services, please contact us at info@freevectoradvisors.com.
Swimming Upstream in a Down Economy: Meet John Song
In the latest in a string of successful entrepreneurial ventures for John Song, Alterian acquires Intrepid Consulting
Intrepid (formerly Lift9) was acquired today by Alterian, a global web content management and integrated marketing company.
The acquisition is the latest in a string of successful ventures for Seattle entrepreneur John Song.
Just over a year ago, John founded Lift9, a social media analytics company based in Seattle. While there are quite a few software products that provide social media analytics, software algorithms can’t replace the value of human interpretation of sentiments, language usage and context that provide real insights behind the numbers. Lift9′s solution was to outsource this human element to a world-class research center based in Vietnam, at a fraction of the cost incurred by its competitors.
In February, Lift9 acquired a controlling interest in Intrepid Consulting, an established UK-based ethnographic market research firm with a branch office in Seattle (Free Vector Advisors represented Lift9 in this acquisition). Today, the combined Lift9/Intrepid was acquired by Alterian, a publicly-traded global market research firm, for an undisclosed sum.
Lift9 is but the latest success story that John has been involved with. I first met John in Seoul, Korea, where I was working as foreign legal consultant for a Korean law firm, and John was working with an English-language Korean business magazine. When I left the law firm and returned to the States, I took a job with the Seattle law firm of Bogle & Gates; John was one of only two people I knew in town.
Within a couple of years, I began representing ARIS, a Seattle start-up founded by John’s brother Paul, and later become the company’s General Counsel, working closely with John and Paul as the company acquired a dozen companies in the US and the UK. ARIS was one of the first IT services companies to have an initial public offering, riding the ERP wave and providing consulting and training services on Oracle and Microsoft ERP and database products.
After ARIS, John took a position as CEO with a start-up internet appliance company called Epods (the product prototype could stand in for a 2001 version of Apple’s Ipad, but in retrospect was probably a bit early to market).
After a brief stint at Noetix, the business intelligence software spin-off of ARIS, John founded ZeroDash1, an analytics and optimization consultancy that was acquired within a year (sound familiar?) by Ascentium, an interactive agency based in Seattle. Post‐acquisition, John assumed the role of Managing Partner of Ascentium before founding Lift9 in July of last year.
John’s unique gift is having the vision to see the next most logical extension of the latest hot business trend — the growth in adoption of ERP systems and coupling it with the training inevitably required to educate a company’s employees on how to use and administer those systems (with his brother Paul at ARIS); combining the value of business analytics gained from Noetix with the emergence of web optimization at ZeroDash1; the combination of social media analytics with traditional market research and offshore resourcing at Lift9/Intrepid.
John success lies in iterative innovation, finding the next logical (and lucrative) opportunity by extension. Combine that with outstanding vision, communication, execution and leadership skills, and you have a recipe for success, regardless of the state of the economy.
You can read John’s take on the acquisition on his blog, www.meetjohnsong.com. Congratulations to John and the entire Lift9/Intrepid team on their most recent success!
Bert Sugayan
Want to be a Successful Innovator? Get Some Grey Hair First
According to Newsweek, older workers are more likely to innovate than their under-35 counterparts:
As it turns out, the average founder of a high-tech startup isn’t a whiz-kid graduate, but a mature 40-year-old engineer or business type with a spouse and kids who simply got tired of working for others, says Duke University scholar Vivek Wadhwa, who studied 549 successful technology ventures.
What’s more, older entrepreneurs have higher success rates when they start companies. That’s because they have accumulated expertise in their technological fields, have deep knowledge of their customers’ needs, and have years of developing a network of supporters (often including financial backers). “Older entrepreneurs are just able to build companies that are more advanced in their technology and more sophisticated in the way they deal with customers,” Wadhwa says.
The Grey-Haired Author
The 2009 Kauffman Index on Entrepreneurial Activity found that the fastest growing segment for entrepreneurship in America is in the 55-64 age group, with people over 55 almost twice as likely to found successful companies than those between the age of 20 to 34. That’s good news for our economy as Baby Boomers enter their entrepreneurial prime, since new companies create the vast majority of new jobs.
Bert Sugayan
Who is your organization’s “Fix -It” person?
An interesting article in the August 16, 2010 edition of Fortune Magazine entitled “Buffett’s Mr. Fix it”. I have found during the course of my career that even the biggest, most successful companies still deploy seemingly simple solutions and methods to both running their businesses and solving the inevitable problems that crop up periodically. We all know of Warren Buffett and his strong record of success at Berkshire Hathaway, and most of know he has a record being a “hands-off” , yet highly attentive CEO.
An apparent paradox, so what does this mean? Is Mt. Buffett the one who sets global strategy and then let his teams run with the ball, or is he a funnel, through which all things Berkshire must flow through to get his sign-off ? If it was the latter, Berkshire would not exist as we know it today - it is too large. Mr. Buffett hires the best managers for his various sub-business (ranging from Burlington Northern, to Geico, to Net Jets, and quite a few others in between) and gives them free reign to run their divisions as they see fit. Yet even in Buffett’s world, things don’t always go as planned – - a VP makes a huge mistake, and the business needs to get fixed and fixed fast. This is when a “go-to” person comes in handy, and this concept is equally valid at small- and middle-market companies, governmental units, and other organizations.
In the case of Berkshire Hathaway, their “Mr. Fix it” is David Sokol, a tough, no-nonsense engineer by training, coupled with the pragmatism of the Midwest. Know to get enormous volumes of work done in a day (no funnel at Berkshire), he can be found daily mingling with employees, customers, business partners, and pitching deals around the world, as well as run three businesses. How is this possible?
Mr. Sokol guides his business through six laws. Any strong company has pillars of strength, value, mission and goals, and Mr. Sokol’s are quite simple: Operational Excellence, Integrity, Customer Commitment, Employee Commitment, Financial Strength, and Environmental Respect. Every employee in all three of his businesses knows these laws, and Mr. Sokol relentlessly drives them hard into every organization he touches, sometimes in ruthless fashion, that they get him the results Warren Buffett expects to see.
One might ask how one, single manager can run three huge businesses at once. He hires first-rate executive assistants and uses them aggressively. They know how he thinks. They keep him organized, they know the group goals (as does everyone else). They know he does not like to be late for meetings; he believes it shows disrespect, so they always build in extra time for meetings. Ironically, even Sokol has made big mistakes ($200 million loss at MidAmerican, for example), he immediately reported the bad news to Buffet, and Buffett simply told him “Don’t make a habit of it”, and sent him right back out to work. To ensure that it does happen again, he uses this misfortune when training young executives (the trust your gut thing).
What are the takeaways here for our own smaller businesses? First, the guy in charge of putting out fires at one of the largest companies in the world is not an Ivy League MBA, but a Midwesterner with common sense, a set of inviolable principles, and a lot of hard work. Mistakes happen, but those who can get up quickly, fix the problem and move on are in better shape than those who dwell on the negative, don’t address the root problems, and continue to be mired in tough times, in tough times.
Who is the go-to person in your organization? Is there one? If not, why not? To be effective, this person must know the company and space intimately, have the trust of the CEO (even when mistakes are made), and must be driven to bring the entire organization up with him/her in their efforts.
Glenn M. Watson
Technology is the Next Victim of Disruptive Technology
An interesting Newsweek interview with Harvard economist and author (The Innovator’s Dilemma) Clayton Christensen, who introduced the world to the concept of “disruptive technology” 15 years ago.
Mr. Christensen makes prescient observations on the coming decline of Apple (he thinks the performance of Apple products may be outstripping the performance that mainstream consumers need, and that the interdependence of their hardware and software is misguided in the long run); and that the next industry to fall victim to “disruptive technologies” will be the software industry (as a result of the increasing pervasiveness of cloud services).
As interesting as those observations are, I find the following quote the most insightful from the perspective of a business strategist:
Ironically, one thing that many promising startup companies suffer from is having too much capital. Once a company gets burdened with too much investor capital, it starts to think that it needs to grow very quickly. Almost always, a startup’s first strategy is wrong. Once they get out into the marketplace and try to sell things, they find that many of the things that they had assumed are untrue, and that their strategy needs recalibrating. But when a company is overcapitalized, the founders can assume that they’re right for quite a while before they start to need to depend on peoples’ willingness to pay. The more capital, the longer a company can go without testing its fundamental assumptions. (Emphasis added).
As Mr. Christensen so aptly makes clear, the assumptions that underlie a business strategy are as, if not more, important than the strategy itself. The assumptions are the foundation of the strategy, and need to be closely and continually monitored, challenged, and refined — with corresponding course corrections to the overall strategy and direction of the business.
Most companies (and people) are hesitant to change direction for fear of being perceived as uncertain or wavering in commitments made. Understand and articulate the assumptions underlying those promises and commitments – and don’t be afraid to change course quickly if those assumptions turn out to be wrong.
Women- and Minority-Owned Businesses as Engines for Growth
The Puget Sound Business Journal published an article today co-written by me and Farayi Chiro, Chairman of the Small Business Partnership for Prosperity, making the case that women- and minority-owned business enterprises may lead the economic recovery in the Greater Seattle region. The article references the recent conference sponsored by the SBPP and the concept of a women and minority owned business cooperative referenced in an earlier post.
Here is the link to the full Puget Sound Business Journal article.
