Merger Mania: Boom Times Ahead?

Is this an era of good feeling in mergers and acquisitions?

Time for a break-up or spin-off?

Every other day in the financial media, a deal announcement soars through the headlines.  Dell's founder, Michael Dell, wants to buy back his company, but others bid for the same and "put the company in play" (sort of). US Airways and American Airlines agree to a blockbuster combination that lifts one of the companies out of bankruptcy. Warren Buffett and his Berkshire team decide to purchase Heinz for $23 billion, reinforcing the long-time notion that Buffett has the uncanny knack for extracting value from even the most mature food-products industries.  Sprint Nextel has its eyes on Clearwire. 

In the past week, an aggressive activist investor wants to shake up Sony Corp. and spin out its entertainment division, the unit that includes movies and music labels. Dan Loeb, using his Third Point investment-fund vehicle, prepares to take on the entrenched customs of the Japan financial system, which has always been a guardian of the country's ancient corporate practices and traditions.

Loeb argues that the market is under-valuing the entertainment division because profit margins are not as high as they could be and because performance will improve if its management group "focuses" sufficiently on operations. His argument and his finance logic are not unorthodox.  The daring boldness of his approach toward board members in their country is.

Yahoo, always scrambling to remain relevant and stay on the same stages as Google and Facebook, decides to toss $1.1 billion in the way of Tumblr and acquire it.

Have we wandered back into an era of big deals and industry-shaking merger transactions?  Are the times ripe for companies to stop hoarding billions in cash and start doing something productive with it?  Will we revisit the days of the explosion of deals in the late 1980s or the bubble bursts of the mid-2000s? Will transactions in recent months spur other companies, bankers and investors to do even more?

For a year or two after the financial crisis, companies recovered and conducted business, but they held onto cash generated from operations.  Misers, more or less, they were, in a word, scared. They hesitated to reinvest in new businesses and expansion. They worried about the coming of yet another crisis. They stuffed cash into safe, low-yielding assets because they worried they might not be able to tap debt markets to borrow, even if they could borrow at absurdly low rates. (Apple's billion-dollar stash in 2012 was the stuff of headlines and editorials--until this year when shareholders started pleading with the company to do something with it.)

Companies sat on the financial sidelines--not sure what was looming ahead, not sure of the impact of Washington political winds, not sure when the recovery would ever resume. With stock markets crumbling and volatile and with nobody able to project an economic turnaround, companies weren't eager to make acquisitions, do deals or do much of anything--except wait it out. 

As markets have recovered and business confidence has surfaced, companies with mountains of cash are deciding they must do something. They have begun to feel the pain of purchasing U.S. Treasury securities that accrue virtually no return. With equity markets on a roll--at least in early, 2013--companies can comfortably elect to do cash or stock acquisitions in the way they couldn't rationalize a few years ago. 

But does that explain recently announced big deals?


Statistics actually show merger activity in 2013 running at about the same rate as last year--in number of transactions in the U.S., around the global, in fees generated, and in the aggregate value of deals. Hence, the industry and market celebrate the fact that spikes of last year are not necessarily spikes, but perhaps signs of a new trend.

Through April, according to Factsheet, there have been about 10,000 announced corporate mergers, acquisitions, takeovers, or buy-outs involving U.S. companies over the past 12 months, slightly less than in the previous 12-month period.  The aggregate value of transactions is slightly higher. Certain industries have experienced more significant growth the past year:  broadcasting, real estate, computer hardware and retailing. 

The leading banks in advising companies tend to be the familiar crew of top investment banks:  JPMorgan, Goldman Sachs, Merrill Lynch, Credit Suisse, Barclays and Citi. Despite having withdrawn from much of investment banking, UBS is still booking remnant merger business.

Over the past few years, a couple of boutique banks, Evercore and Centerview Partners, have slipped through the back door to join this elite club. Evercore nudged its way in 2012-13 with key roles in deals involving Dell, Kraft Foods, and Ally Financial. It ranked 10th among global banks in the aggregate value of deals done in the first quarter, 2013, according to the Financial Times.


The stir around Sony will be intriguing to watch. Gather and get a front-row seat.  You have an irascible investor who likes to get his way and who has a sound track record. He bursts into Sony's offices in Japan to demand that the board respond to his request to spin out the entertainment group. (This week, the board agreed to ponder his demands.)

This kind of corporate jockeying and board-room maneuvering is nothing new in the U.S., but Loeb and Third Point are taking on a different culture, a country not accustomed to takeover tactics or threats from billion-dollar investment funds based in the U.S. However, these are better times even in Japan. Its economy has escaped doldrums under its new prime minister Shinzo Abe, who has taken the right steps to give it a swift kick. Japanese companies and investors might be open to Loeb's ideas--especially if they result in improved returns for all shareholders and two stronger companies.

Yahoo will be watched, if only to see if it can finally get one right. Yahoo is known for errant strategies and botched acquisitions and lagging behind the Internet-eyeballs race . With a new CEO (Marissa Mayer), who has injected hope, energy, and discipline into the company, the market might give it the benefit of doubt and treat the Tumblr acquisition as something that makes sense.

The deal numbers, the league tables, and merger statistics don't point to these being the best of times for merger bankers and private-equity investors. It's not 1986 or 2005 all over again.  Brisk, consistent activity, nonetheless, suggests we are far beyond the deal paralysis of the crisis, even with some large companies still paranoid and protective of some of their stashes of cash. 

The best of times? No. Better times than before? Yep.

Tracy Williams

See also:

CFN:  Boutique investment banks, 2009
CFN:  Today's Bulge Brackets, 2012
CFN:  Outlook, 2013
CFN:  Apple's Stash of Cash, 2012

What Will Dimon Do?

WWJD. Not what would Jamie Dimon do? But what will Jamie do?

Waiting Anxiously for the Shareholder Vote

In a matter of days, JPMorgan Chase shareholders will find out the results of a crucial vote to determine whether Chairman and CEO Jamie Dimon should relinquish  his role as Chairman of the bank holding company. In a similar vote last year, 40% of shares outstanding voted for him to give up the role as Chairman.  A year later, Dimon and JPMorgan have had to digest continual impact from the billions in trading losses in the infamous "London Whale" credit-derivatives debacle. They have endured stiff criticism from regulators for how JPMorgan managed those losses and for how regulators perceived the bank was behaving in response to inquiries.

Dimon has already been penalized for "Whale" mistakes when his 2012 bonus was reduced, even as JPMorgan continued to generate extraordinary earnings last year and in 2013's first quarter. His inner circle of senior managers (operating committee members) has changed faces substantially with some departing, some nudged out, and others promoted.

(JPMorgan reported record income of $21 billion in 2012--good enough for a 15% return on equity. It earned $6.5 billion in the first quarter, 2013. By year-end 2012, the bank reported assets exceeding $2.3 trillion supported by an equity base of over $200 billion.)

Some shareholders, who have large stakes and have stepped into activist roles, want to make sure such trading losses or astounding surprises in mismanagement will never occur again. They want to reorganize board membership, juggle risk-management oversight, and put more checks in the checks-and-balances of Dimon's power over the organization.  In effect, some contend that JPMorgan-related mishaps might not have occurred if Dimon had a chairman peeking over his shoulder.

As the vote counting winds down, the question for the moment is not what should Dimon do or what would he do.  The question? What will he do if the role of Chairman is seized from him?

His storied banking resume' indicates he doesn't like playing second-fiddle. He's comfortable biding a little bit of time as he awaits a top spot, but he fidgets and fumes if the wait is prolonged. Moreover, certainly he wouldn't want to give up power, authority and influence he has had for eight years or more.

Since he has been JPMorgan's head, he has not had a formal second in command, a president waiting in a green room for him to retire.  When JPMorgan purchased Bank One ten years ago, where he had been Chairman and CEO, he agreed to be President and CEO-in-waiting.  Typical of Dimon, he itched to assume full control of the bank sooner than he was supposed to. From the moment he arrived in New York from Chicago, he aggressively pushed his agenda of expense-control and balance-sheet strengthening, while then-CEO Bill Harrison was still in office.  Back then, Dimon urged the board to make him Chairman and CEO months ahead of schedule. That was no surprise.

Before JPMorgan and Bank One, Dimon had made his mark at Citigroup. As Sandy Weill's long-time protege' when the two of them built a financial-services behemoth during the 1990s, Dimon, over time, agitated his boss, even undermined him. Eventually a power struggle and some fiery situations caused Weill to fire his favorite deputy. Dimon might have been the CEO of Citi today (and Citi might be a much different organization), if he were willing to play fair and square with Weill.  Weill had the last word, and Dimon went on to make financial history elsewhere.

What will Jamie do if he's no longer chairman of JPMorgan?

Will he remain as CEO and proceed to manage the bank in the way he has since the financial crisis--expanding in all areas, controlling costs and operations, restructuring the mortgage businesses, and hustling to keep a trillion-dollar bank under control? Will he be willing to subject his strategy, actions, and every managerial move to the second guessing of a non-executive chairman--especially when Dimon hasn't been accustomed to such in the past decade?

Or will he agree to finish out the year or two as CEO and opt to retire sooner than he expected? Will he cooperate, manage the global business, and assist in selecting a CEO successor and grooming him or her? Will he cooperate, too, if only to ensure his own shareholder stake in the bank (over hundreds of millions in ownership) is not jeopardized?

Amidst this debate of corporate governance, many have taken sides. Some have pointed to studies that show the impact of separating the two roles.  Many of the studies indicate little, if any, favorable impact on a company's revenue or earnings growth or stock price when the roles are separated.

Jeff Sonnenfeld, a senior associate dean at Yale's School of Management, a Consortium school, in The New York Times this week called the shareholder vote at JPMorgan a "Jamie Dimon Witch Hunt" and reminded readers that some of the most scandalous companies in the last century, including Enron and Worldcom, had separate Chairmen and CEOs.

Other experts point out the decision to separate should not be determined by previous studies, but by the particular challenge or issue that confronts the company. Case by case, they say. In the case of JPMorgan, the challenges are to (a) manage the complex risks and operations of a financial institution almost too big to fail, (b) respond to, report, and manage the escalating requirements of regulators, and (c) meanwhile, continue to grow revenues, earnings and a stock price that seems to have trouble eclipsing the $50/share threshold. Some of the proponents in the shareholder vote think JPMorgan can overcome these kinds of challenges with two people in charge.

But what happens to JPMorgan and its ability to confront these issues if one of the two is not Dimon? Is Dimon about to bolt out the door?

Here are a couple of scenarios.

1.  Shareholders vote to keep Dimon as Chairman, but the vote is close, say 51%-49%.  Dimon, therefore, won't linger or care how close it was. With a short memory, he will proceed along his recent course--cooperating with regulators, gearing up for Dodd-Frank and Basel III, reshaping his inner circle, and driving his bank leaders crazy, pushing them to increase revenues, manage all risks imaginable, and control costs.

Several recent scoldings from regulators and all the attention in the press about confrontations with lawmakers and regulatory bodies will keep Dimon focused on issues of risk, regulation and compliance.  The bank is re-engineering its organization from front to back to ensure compliance and help comfort outsiders to show Dimon has things under control in the way it seemed he didn't--momentarily--during the "Whale" crisis.

Events of the past year will encourage him to be more forthcoming with the public about his intentions for succession.  He might even quietly support the effort that his successors be a separate Chairman and CEO. In recent months, with the shuffling among those in the inner circle and by appointing people into the roles of COO, he has offered clues. But in the past, he offered hints of who were the designated favorites one year, yet changed the slate quickly a year or two later.

2.  Shareholders vote to take away Dimon's Chairman title, but permit him to remain as CEO as long as he wishes. Dimon will be wounded. However, he would be a professional, uttering the right remarks about his support for the new structure. He would also likely regroup and contemplate next steps. He would not be comfortable taking directions regarding strategy and the deployment of capital from a part-time Chairman, especially if he feels confident his sole leadership is the best course.

As an experienced professional and an investor who will not want boardroom turmoil to inflict unnecessary volatility in the stock price, Dimon won't pout and play spoilsport. However, the thrill and energy of running JPMorgan won't be the same. The power he wielded within the organization may not be the same, because the buck won't any longer stop with him.

He would likely plan a retirement over the period of a year or two. Following the footsteps of former CEOs, like GE's Jack Welch, known for being accomplished, premier business managers, Dimon will review his achievements, reflect on them, and will likely want to write about them (or teach them to a business-school finance class). He won't sit still and will pursue something bold. He'll want to advise future bank leaders on what went right, what worked, how it all worked, and what went wrong.

And it's likely then he'll insert the last word to say that separating the roles of Chairman and CEO at JPMorgan might have been something, in his case, that didn't work as well as the status quo.

Tracy Williams

See also:

CFN: JPMorgan and Its Trading Losses, 2012
CFN: Jamie Dimon on Regulation, 2012
CFN:  Jamie Dimon's Message to Shareholders, 2011

MBA Professors: Who's the Best?

NYU's Damodaran: Finance Pundit

Take any prominent business school, any of the schools recruiters and prospective applicants gush over. There is likely on campus a well-known, popular, favorite teacher, a campus legend who exudes business-school royalty. That professor would be the one whose course is in saturated demand and is a hot attraction.

That's the professor who has the knack for making corporate finance or economics lectures sparkle, who ignites the classroom with animated discussions of business decision-making, business strategy or financial maneuverings. She is the professor who delivers the lecture in operations research or derivative products with verve--an actress at the podium who explores a business-school case as if it were a movie script.


He would be the professor, an expert in his field, who commands in-depth knowledge in his subject, who has written tirelessly on the topic, and who is likely the industry's go-to source to explain to the public a financial trend, a theory of markets, a marketing ploy or the science of pricing goods. 

In finance, she would be the professor who transforms an intermediate accounting lecture into Broadway drama, successfully able to explain concepts of cost of capital or cost of goods sold with conviction and passion. And her students would get it.

In the world of business schools, lists abound everywhere: lists of top schools; lists of top places to study finance, marketing or non-profit management; lists of schools whose graduates have the highest starting salaries, and lists of schools most favored by recruiters.

There are now even lists of top professors.  How is it even possible to assess, rate and rank thousands of MBA professors across the country in an unbiased way? How do you assess fairly what it means to be a top professor? List-makers do it regardless, notwithstanding the subjective, whimsical nature of rankings.

Disregard for a moment the validity of rankings and lists. You might notice one name that tends to appear on many lists of top MBA professors, partly because he is indeed a highly respected professor. Or it's partly because he is popular with students, who fawn over his lectures and dive into his blog postings and writings. It's partly because they absorb his message and are stirred by it enough to jump into the dialogue. It's partly because of his masterly manner of communicating, an ability to explain finance in ways that are colorful, relevant and intriguing.

That professor would be Aswath Damarodan, a corporate finance professor at Consortium school NYU-Stern (who has likely taught dozens, if not hundreds of Consortium students over the years).  He has written several books on corporate finance, taught a generation of students at Stern, and, thanks to the the breadth and immediacy of the Internet, has blogged weekly on just about any finance topic he feels deserves his attention, insight and analysis. In a typical blog posting or essay, he explains the topic, provides analysis and shows trends, adds background, adds insight, and, as if he can't wait, offers a striking opinion. Sometimes it's an opinion that bites or hurts or certainly goes against popular discourse.

There are few finance topics he isn't afraid to address. His willingness to reach out to students (and alumni and just about anybody interested in finance), his eagerness to engage in dialogue with the public are likely a prime reason he appears on top-prof lists.

His blog postings, for sure, could be required reading for advanced students and even jaded investment bankers who might want to understand (big picture) the business they conduct (although his tone regarding investment bankers won't win fans from this crew).  His postings and explorations of ideas might help bankers and company CFOs understand whether the direction they are headed in  a deal is a path that benefits shareholders or a path that leads to financial doom.

In arguably the biggest corporate-finance headline of 2012 ("What should Apple do with its billions in cash?"), Damodaran gladly inserted his views, an analysis that would earn in buckets of fees if he were the mandated adviser.  Providing a fresh valuation of Apple shares, he conveys his blunt disappointment in Apple CEO Tim Cook: "I see Mr. Cook go from forum to forum, saying nothing of substance and wreaking havoc on the stock price almost every time he talks."

(This week, he updates his occasional analysis of the company, based on recent earnings, and he decides it is still safe to hold on to Apple stock, if you hold it. He had not yet analyzed the details of Apple's $17 billion debt offering, although he suggests accruing more debt could be a good thing at Apple.)

Damodaran has built his reputation and star power at Stern over 27 years.  He holds an MBA and Ph.D. from Consortium school UCLA.

The postings, his writings, and in-class discussions link finance theory and traditional analysis to current events, but he is not wedded to old theory.  For the most part, he tries to make sense of what's going on and then provide a passing point of view.

In early 2013, with gold markets headed for a free-fall, the professor stepped in to help students and his followers put some common sense around investing in gold. Damodaran, like many experienced investors (including guru Warren Buffet), wonders what's the big ado and fascination with gold as an investment, yet explains one or two cases where, in fact, investing in gold should be part of a balanced portfolio.

Damodaran won't hesitate to recommend the best way for a company to manage its balance sheet or shape its capital structure or the best strategy for buying back stock or paying a dividend. He didn't hesitate to declare that most large-scale acquisitions don't make sense in the long term.  Moreover, he says companies ought to do much of the deal or valuation analysis themselves and shouldn't rely too much on the conflicted advice from investment bankers.

Activist investors, such as those who have pursued an agenda with companies like Apple, JCPenney, and Herbalife, grab much of the publicity in the financial press. Some call for significant transformation in the company, whether in the board room or in production lines.  Some, well, hold companies hostage to get their agenda on the table, if only to trigger a quick short-term surge in the stock price.  Do they act against the objectives of long-term strategic investors?

Damodaran examined the question recently, weighed all sides, and decided in the end that the two groups don't act against the interests of the other.  Short-term activists, he argued, really look out for the interests of strategic investors.

Drama, flair, style and energy thrust teachers onto lists of best professors.  Damodaran, as former students would attest, has some of that, but his writings, teachings and spontaneous, well-reasoned observations about what surrounds him in the marketplace are what keeps him there.

Even the most astute MBA students in finance and those headed for cubicles at Morgan Stanley, Carlyle or Blackstone can praise his efforts to "break it all down" and tell the real story of what's going in financial markets. Consider his "Musings on Markets" a must-read for both first-year finance students and senior deal-doers.

Tracy Williams

See also:

CFN:  Most Popular Business School Professors, 2011
CFN:  Professors and the Global Imperative, 2012
CFN:  Most Satisfied MBA Alumni, 2011
 

Getting Pushed Backed, While "Leaning In"

Applicable to all under-represented groups?

So the topic that has made a torrent splash in the early weeks of 2013 is a new catch-phrase:  "Lean In," taken, of course, from Facebook COO's Sheryl Sandberg's new book of the same name. The book raced to the top of best-seller lists. The subject--how women can push (or propel?) themselves into the top echelons of business--is relevant. The advice and guidance are useful, although Sandberg acknowledges there are no quick fixes, no one special way to progress along the path, and certainly no assurances that every woman who "leans in" will one day find herself chair of the board.

Nonetheless, Sandberg determined it was time to put the issue back on the table and force companies and business leaders to assess where we are.  She advises women to seize control of their destinies, bang on the door and avoid waiting for it to open.

So next question. Are her advice and guidance relevant to other under-represented segments (URM) in business--Asians, Latinos and blacks? Does her message, including her instructions and urgings, apply to minority professionals? What happens when members of those groups dare to "lean in," ask for what they want, aspire to become senior business leaders and push for opportunity, promotions and adequate compensation? What happens when they "lean in," assert themselves, but then get pushed back, get pummeled or--even worse--outright ignored?  What happens if they are pushed back for not being patient or for being too vocal, too ironclad specific about what they seek in the next 10 years?

Let's now narrow this to minority professionals in financial services.  What happens if those from  URM, who thrive in, say, corporate finance, banking, trading, funds management, or equity research lean in and get pushed back? Get punched and knocked down in their efforts to seize a seat at the leadership table?

Career paths in finance are often rough, brutal--marked by periods of overwhelming workloads, evolving deadlines, demanding clients, mountainous risks, complex deals, blockbuster trades, tough decisions, and severe competition from other firms and from the colleague down the corridor. Many associates or vice presidents are aware it takes more than superior technical skills to get promoted, be rated highly, and win hard-fought pieces of the bonus pie. It takes stamina, perseverance, contacts, mentors, a thick skin, and bits of chance (lucky markets, lucky opportunities, and being in the right group or on the right team in good times).

So how do under-represented minorities in finance put themselves in settings where they can--more often than not--be in the right place in pivotal career moments?  How do they "lean in" to make sure they contribute to important client meetings, deals and projects--the deals and projects that get people noticed and put them on go-to lists of those who get to do bigger deals, manage bigger projects and oversee larger clients? 

Many minority professionals in finance and consulting already know the game; they have already seized half of it by enduring grueling recruiting processes and have earned treasured spots at firms like Goldman Sachs, McKinsey, Morgan Stanley or any of the notable private-equity firms, investment managers or hedge funds. Like many women in the same roles, they understand what it takes "lean in." They plotted ways to gain entrance into top schools.  They managed rigorous course loads in business schools and successfully navigated through numbing rounds of interviews.  They know what it takes to be aggressive, stand out, and grab opportunity when the doors open ever so slightly and briefly. 


Those who survive the pressures of doing deals, booking big trades, making investment decisions and meeting budget "lean in" in their roles of banker, trader, analyst, or researcher. They raise their hands to ask for plumb assignments, request to be put on innovative deals, and volunteer for special overseas roles. Always accessible and committed, they give up weekends, holidays and weekday evenings.

After a few years, they know it is critical to be on the inside of strategy sessions, senior management presentations, and any gathering to discuss ways to boost revenues or introduce new products and services.They find ways to nudge inside the doors where the biggest decisions are made.

But as they "lean in" and make exhausting commitments to the firm, the client, the deal, the portfolio and the business, many have not adroitly figured out what to do when they get "pushed back." Getting pushed back occurs more frequently than they expected. Often the push-back occurs for subjective, unfair reasons. Sometimes the push-back is blind-sided gesture on the part of a manager, colleague or management team.

Getting pushed back too frequently for inexplicable reasons leads to discouragement. It triggers floods of emotions and self-reflection:  What did I do wrong? What can I do to alter their perceptions of me? What more can I do to earn visible assignments or prove myself in a bigger role with significant responsibility? Why do they not recognize me when I raise my hand, make noise, stomp my feet and share my ideas for new products, clients and revenue growth?

Sometimes after such self-reflection, they find ways to rebound. Some learn the art of bouncing back and conjure the strength to rebound not once, but time and again. They take a different angle or approach, when they "lean in."  They respond to feedback. They return with an even better project idea, finance model, or client tactic. They re-commit to the team, deal, or firm. They find other mentors to toot their horns or help with a career strategy.

Unfortunately, getting pushed back too often leads to bewilderment and loss of energy and enthusiasm. Eventually it leads talented under-represented minorities (and women) to withdraw or recede while still on the job and ultimately to resign from the job itself. Bouncing back after leaning in and getting pushed back over and over becomes too draining, too stressful. 

How to bounce back from the push-back is usually the kind of guidance many mid-level finance professionals from under-represented groups (including women) crave:

When senior managers compose the deal team that will work on the billion-dollar underwriting for, yes, Sandberg's Facebook, how should they barge their way onto the team? When the team is being composed to advise Google, Eli Lily or John Deere on its next major acquisition, how do they ensure they are selected?

When a sector leader selects someone to lead a business group in London, Brazil or Tokyo, how do they win such a coveted assignment? When the institution rolls out a new product to a new client group in a different part of the country, how do they make sure they have a fair shot at the opportunity to lead the product campaign?

When they do extensive research, exquisite financial modeling or insightful analysis and come up with novel ways to assist a client or structure a financing, how do they ensure their voices are not silenced and their ideas not stolen?

As year-end approaches, when they review their accomplishments and contributions, how do they ensure in evaluation season their rankings or ratings won't slip, because they don't have champions or advocates on their behalf or because others diminish their contributions?

There is no formulaic solution to handle the "push-back."  Much depends on the environment, the firm culture, the immediate surroundings, management hierarchy and the financial state of the institution. Much also depends on personal goals and priorities (something Sandberg's book examines from cover to cover).  In all cases, it helps to reassess a situation, review those personal priorities, maintain confidence, and recommit to what is important. In some cases, it even helps to "lean on" others more experienced (not necessarily "lean in") who have traversed the same corporate routes and endured similar push-backs and setbacks.

Motivated and talented minorities and women lean in continually--every day, throughout the year, in every transaction, trade, client session, or discussion of risks, revenues, investments and new products.  They want to understand the best ways to thwart the "push-back." And they want encouragement and energy to rebound one more time with confidence that all the effort has a chance to pay off.

Tracy Williams

See also:

CFN:  Making Demands on Diversity, 2013
CFN:  Venture Capital Diversity Update, 2011
CFN:  MBA Diversity: A Constant Effort to Catch Up, 2012
CFN:  How Mentors Can Help, 2009
CFN:  Mentors:  Still Critical and Necessary, 2010
CFN:  Affinity Groups, 2011

What Happened at JCPenney?

Waiting for the invitable b-school case

Eventually this will become an intriguing business-school case, particularly for those concentrating in marketing and general management.  Activist investors push hard to re-engineer, restructure and revitalize JCPenney, the old retailing outfit--languishing in modern times, struggling to expand, and suffering with losses and a tanking stock price in the post-recession recovery.

The old CEO resigns, and the company figures it has found the solution in a dynamic new CEO, who would swoop in and radically change JCP by casting upon it magical dust from Steve Jobs and Apple.  JCP, amidst fanfare, hires Ronald Johnson after he helped spawn and lead Apple's broadly successful and wildly popular store expansion.  Apple, Jobs and Johnson had transformed the branch-store and electronic-purchasing experience into in-store theater.

JCP succumbs to the nudges from shareholder activist and prominent investor William Ackman. They reason that Johnson would similarly transform the low-retail customer experience into something resembling an Apple store in over 1,000 JCP stores across the country.

Johnson was supposed to bring the secret code to the magic of Apple. He brought revolutionary transformation to JCP, eliminated traditional discounting pricing, and altered the buying experience by setting up stores within stores. He instituted change in Apple-like ways.  Just as Jobs would do, he avoided detailed, quantitative marketing research and analysis.  Just like Jobs, based on experience and hunch, he decided that he could determine what customers want and decide how stores should be designed and structured. Jobs used to say customers aren't sure what they want, so he should determine that. Johnson approached JCP's customer base similarly.  

Two years later, JCP seems to be in a financial quagmire, a retailing mess.  The stock price fell from about $37/share to less than $14/share in the past year.  Sales last quarter fell over 20%, and the company has announced losses and management change. The bleeding had to stop immediately. It even decided to invite back former CEO William Ullman, as if it will contemplate a reversion back to the old JCP.

Marketing gurus and analysts will ponder this in the time to come and try to figure out what happened, why Johnson's strategy crashed, and why consumers who flock to whatever is new at Apple were turned off by Johnson's store changes and redesign. Business-school professors will decide this is a timely, significant case to study retail strategy, marketing management, and consumer behavior.

But there is a finance element to what happened.  The change was triggered by a large equity shareholder, activist Ackman.  He thought complete, rapid transformation was the best way to boost sluggish shareholder value. The company had--at that time--manageable debt loads, substantial amounts of liquidity and cash, and sufficient amounts of cash flow from the 1,000-plus stores to plow back into the business. Sales growth seemed to have stalled, mostly a result of consumers' reluctance to spend during and immediately after the recession.

The best way to get sudden boosts in stock price, he likely figured, was to make substantial changes in management and business strategy, while keeping the balance sheet stable.   The best and most popular choice would be someone who had that Apple magic.

Now with recurring losses and dwindling levels of cash, corporate-finance advisers may need to step in to determine clever ways to manage what could turn out to be a bothersome debt burden.

(Some will argue the company was distracted by current litigation related to Macy's and Martha Stewart. This might have been a thorn in management's efforts in the short term, but would not likely have proven to be the difference between soaring growth and sorrowful losses.)

JCP, Ackman, and Johnson all combined to take a significant business risk. Perhaps they should be and will be applauded for that. But somehow it didn't work. Or for the first two years, it didn't work.  Given time, it might have taken off later, or it might have eventually "clicked" with customers, or the company might have discovered a new, different customer segment to enjoy the different, more flamboyant in-store experience. 

Perhaps it pushed too hard, too fast. For now, marketing MBA students will have a chance to scrutinize what went wrong and why.  Finance MBAs may get a chance to study whether the strong voices from large activist shareholders can steer an old company that needs a swift kick, but does so in the wrong way.

Tracy Williams

See also:

CFN: Apple's Stash of Cash, 2012
CFN: Dell Going Private? 2013

Is the MBA under attack, too?

The MBA: Evolving and Adapting

Press reports in the past year have occasionally announced the dismal state of the law degree. They've shown the downward trends in law school applications and the widespread lack of opportunities for new law graduates. And there is a lively, fiery debate about what is and what should be a legal education. A law student spends three years in school and, after assuming huge debt loads and making boundless financial sacrifices, graduates into the great unknown.

Should she head for the dungeons of corporate law? Should he explore other channels (the public sector, e.g.), where limited opportunities for sustained employment exist? What should they do, when legal positions have dwindled in large numbers across the country in recent years? Should law schools take the lead in assisting their graduates? (Some have done just that in the past year, by hiring some of their own graduates or subsidizing them in their first-year jobs.) Should law schools spearhead a radical change in legal education by eliminating the third year of classes and permit students to launch careers with one less year of burdensome debt?

Law deans, judges, attorneys, prospective students and law professors are in the midst of a vigorous discussion about the future of the law degree and the roles and responsibilities law schools will have. (See Third-year Overhaul at NYU, Law Schools Worth the Money?)


Is the MBA similarly under attack and similarly encountering a dismal outlook? Are there similar declines in applications (to business school), decreasing opportunities across the board, and calls to contract two years of full-time business school into a fast-track, 10-12-month degree?

Or is this an apples-and-oranges debate?

Trends in applications and enrollment at law schools and business schools run along different, sometimes similar tracks. They are both affected by various factors--some the same, others very different.  While law schools experienced application declines over the past decade, business schools did so, too.  The recession and financial crisis had impact on both. Yet applications at some business schools began to rise a year or two after the peak crisis years of 2008-09, partly because some young professionals decided to try to "wait out" those years of turmoil in productive ways, by returning to school.

Both degrees are influenced by stark business factors. Banks, insurance companies, and hedge funds reduce staff quickly (and often rashly) when there is a decline in revenues, deal flow or clients. Law firms  experience a concurrent decline, too, and reduce staff or decide to hire fewer associates.  And reductions, lay-offs and bleak opportunities discourage prospects from applying to law and business schools. 

Both are influenced by the mind-boggling, irrational increases in tuition and fees.  Candidates for the MBA or JD will often have the interest, aptitude and time commitment. They will dream of coursework in legal theory, contracts, property, accounting, corporate finance or business policy. They will aspire to become partners in corporate law firms or consulting firms. But they can't rationalize the costs and the likely absorption of too much debt.  

But factors that influence financial institutions--like reform and regulation--might have a different kind of impact on law firms, which might step up to assist in regulatory compliance. Other factors--like a trend for companies to out-source basic legal chores to low-cost sites overseas-- have a detrimental impact on corporate law firms in the U.S.

Still, the swirl of nerves and a trace of panic that might be usurping some law deans doesn't yet seem to be doing the same in business schools. That might be partly due to the fact that business deans are accustomed to change and almost always encounter uncertainty about their purposes in the future.

MBA application trends at top schools slid significantly in the crisis years, but in the past year or so, there are fleeting signs of an upturn.  Consortium school UCLA, for example, had a 22% increase in MBA applications last year.  After a two-year decline, applications to Stanford Business School rose this year. (They fell below 7,000, but are approaching that magic threshold again.)

Two years ago, applications to Columbia Business School fell 19%--a cause for concern and something the school blamed on the languishing state of Wall Street, since the school has always had a bustling pipeline of MBAs going into banking and finance.  Yet applications rose 9% last year and seem to be on an upward trend again (above 6,000)--thanks in part to a more settled state on the Street. Applications at Consortium school Dartmouth have increased the past two years, and Consortium school Yale will likely boost applications above 3,000 as it moves into a new facility.

Recent reports show over 286,000 GMAT tests were scored last year--an 11% increase. That's partly attributed to the large number of foreign students interested in the MBA (16% increase).  In fact, only a third of the tests taken are from U.S.-based candidates, proving how the soaring interest from international students has helped to boost or sustain interest in the MBA.

However, a few other factors might explain why the MBA is not yet under attack any more than it has always been:

1.  Law schools, all of a sudden, find they must explore ways to reinvent themselves or redefine legal education.  Business schools, on the other hand, over the past two decades have routinely tried to reinvent, redefine and innovate--some more successfully than others, some more radically than others.  Many contend business schools still haven't kept up with the changing business times sufficiently, but few accuse them of not trying.

Witness the changes in curriculum and core courses at top schools every other year. Witness, too, how schools hopped at the chance to understand e-commerce and Internet businesses. Notice the grand push by the same schools to require international experience and courses in ethics, decision-making, and risk management. 

2.  Certain industry sectors still require the MBA degree as if it were a certification. They see specific value in the MBA and hire from the business-school pool routinely each year.  They include consulting, investment banking, and many firms in investment management, trading and research.  As long as Goldman Sachs and McKinsey thrive, it appears, they will a large batch of MBAs from top schools year after year to fill the ranks and to offset expected attrition. And as long as Goldman and McKinsey hire, others in the industry will follow suit. 

3.  Business schools try to respond to economic and business trends and to the voice of a large corporate constituency.  They listen to what business cycles suggest or what business leaders look for in a next generation of leaders.  They respond by revamping curriculum, introducing new courses in, say, entrepreneurship or international development, or by teaching the lessons learned from a recent crisis or marketing debacle. Some respond well; some respond inadequately, but most try.

4.  The influx of foreign students has changed the face of most top schools.  It's no longer unusual for top schools to have large numbers of students from India, China, Pakistan, Nigeria and Latin America.  They recruit internationals, and they have successfully rationalized the benefit of a diverse, world-oriented student body.

Foreign countries have been eager to send some high-potential junior managers to MBA schools like Virginia, Michigan or USC to learn from the gurus of management and finance--with hopes they will return to their home countries to fill the management gaps of a growing, developing economy.  Many have observed or written about China's obsession speed up economic develop by hiring trained middle managers to run an exploding (at least until recently) business growth. An MBA education, especially from a U.S.-based school, provides a solution or a quick fix.

If the topic is business schools and MBAs, there will always be debate about the relevance of MBA degrees and uncertainty about how schools encounter evolving business scenarios. Seldom a day goes by without a business-school dean grappling hard with how the school will adapt and fend itself from the factions who attack it.

Tracy Williams

See also:

CFN: The MBA--Remaining Relevant, 2011

Bound for NOLA, 2013

The Consortium's 47th annual Orientation Program for new MBA students will take place June 7-12 in New Orleans. As usual, the Consortium Finance Network hopes to have a presence there, as it invites new students interested in finance to join CFN.

Registration is now open for Consortium alumni and sponsors. The OP's theme this year is "Upgrading Your Career, 2.0 (13)."

New MBA students from the 17 Consortium schools this year will be assigned to industry tracks in finance, consulting, marketing and general management, permitting students to focus on events, seminars and sponsors that are tailored to their interests.

As in previous years, there will be sessions to prepare for interviews, discuss diversity issues and explore topics in ethics. There will also be ample opportunities to network with other students, schools, alumni and sponsors. The career fair and gala dinner are always culminating highlights at the OP. This is the first year the OP will be held in New Orleans.

In a typical year, when over 300 new Consortium students attend an Orientation, about 80 or more will express interest in finance. The Consortium is still in the process of assembling the Class of '15, as offers for admission go out this month.

For more about OP 2013, go to http://www.cgsm.org. For more about OP sessions in other cities in past years, see the links below.

Tracy Williams

See also:

CFN:  Getting ready for the Orientation Program, Minneapolis, 2012
CFN:  Consortium OP in Minneapolis, 2011
CFN:  Alumni and the Orientation Program, 2011
CFN:  Consortium OP in Orlando, 2010
CFN:  The MBA Class of '12 in Orlando, 2010
CFN:  Consortium OP in Charlotte, 2009