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

What's the Word from Buffett in 2013?

Buffett's Letter:  Corporate Finance 101

How often have we heard investors and equity analysts say they wish they had the Buffett magic touch? That's Warren Buffett, arguably considered the best, most successful and perhaps most patient investor of all time?  How often have we heard people wonder what special analytical skills Buffett possesses? What is that something (beyond patience and wisdom from experience) he has that myriad others don't have?

The story of Buffett's investment expertise has been told often. Buffett the investment expert operates via the investment vehicle Berkshire Hathaway, Inc.  He has been the investing world's best-known value investor and relies, as he did decades ago, on old-fashioned, traditional investment analysis, the same tools, principles and techniques he picked up when he first encountered the conventions of Graham-Dodd analysis in school. Buffett studied Graham-Dodd principles (thoroughly explained in the 1940 book Security Analysis by David Dodd and Benjamin Graham).

One way to understand Buffett's investment philosophy--his thinking, his approach, his decision-making, his proclivities, his worries, and his management of risk, cash flow and liquidity--is by digesting his annual letter to shareholders. (See 2013 Letter.) Many in the industry look forward to his annual report in the way some look forward to a holiday in the Hamptons.

They count the days until March, and they  guess at what topic he will pontificate on in any given year. Recall Buffett one year, expressing disappointment in the volatility of derivatives, called them "weapons of mass destruction," although he has since employed derivatives in his business operation to a modest extent.

The letter is not a sugar-coated rambling on the performance of business divisions. It's a thoughtful argument in support of decisions the company made and will make to enhance long-term shareholder value--with special emphasis on long-term.

In any given year, the letter explains his philosophy, approach, technique, financial model, and all important decisions. The letter also evaluates bad decisions and lessons learned.  Students and even old-time professionals in finance who read the letter probably learn as much about applied corporate finance and investment management than from any other current source.

Buffett writes the letter in a crisp, down-home style--with bits of humor and little flamboyance. He claims he wants to reach the moms and pops of investing, although it helps to have had a course or two in accounting, some familiarity with corporate-finance principles, and an understanding of economics. Sometimes when the business scenario he describes is complex, it helps to have an MBA.  Still, Buffett does his best to simplify every investment situation he describes, reviews or analyzes and simplify concepts of shareholder value.

Note, too, how Buffett doesn't resort to fads and gimmicks in investing. Berkshire's portfolio includes companies in the following industries:  newspapers, railroads, insurance, and community banks.  He hardly focuses on the latest technology start-up venture, probably because he is attracted to experienced management and proven track records. His letter often attributes the success in some investments to sound, shrewd management of existing operations.

So what was on Buffett's mind this year, when the letter appeared this month?

First, in 2013, he delivered no shock-the-world message, no headline-blazing assessment of the state of capitalism, and no plea to high-frequency traders to stay clear of equity markets. He might have used his forum to do so, but didn't see a need this year.

He offered calming advice on stock investing and explored a few corporate-finance topics in depth, topics that usually get deeper attention and appreciation in an intermediate MBA finance course. Yet he presents his cases in simple, clear language.

What could be more direct than for him to say, as he did this year, that if one invested in a portfolio of stocks at the beginning of the 20th century, he would have generated a return of 17,320% by the year 2000? The comment reflects his confidence and faith in equity markets and his boundless optimism--that one who invested in 1900 was still around in 2000 to reap returns. 

Intrinsic Value

As a prominent value investor, Buffett devotes much space to the concept of "intrinsic value" of business enterprises--whether it's his own Berkshire corporation or the numerous businesses he manages or is considering acquiring.

"Intrinsic value" implies a lot and may mean different things to different investors.  "Intrinsic value" is fundamentally the real value of a business based on expected, sustainable cash flow from operations, based on the value of certain assets, and based on the ability to manage those operations wisely, efficiently, and prudently and invest in their growth.

Buffett explained once again this year that he assesses performance of business lines (and Berkshire as a whole) by evaluating the percentage change in "intrinsic value" vs. percentage changes in the S&P stock index. Investors in Berkshire have an alternative. They can invest in the S&P index or in Berkshire. And he wants them to have a reason to prefer Berkshire over a stock index.

In the absence of a pure computation of intrinsic value, Buffett reminds his readers that he uses "book value" as a proxy for deriving intrinsic value, a grossly under-stated approximation at best. Percentage change in tangible book value is as best as possible a good approximation of percentage change in intrinsic value.

The Insurance Model

This year's letter offers an excellent explanation of the insurance-industry business model. Buffett explains the model as if the industry didn't exist and is starting from scratch.  He rationalizes the insurance company as a behemoth asset manager--not necessarily a risk manager generating premiums and paying out losses.  He shows how profitability dynamics depend on the precision art of pricing premiums vs. risks and the probability of losses.

Intangible Assets

Accounting gurus who gush over discussions of intangible assets (goodwill, e.g.) will fall all over Buffett's 2013 discussions of intangible assets.  He explains how they arise in Berkshire's businesses. He even explains quirks in accounting rules that permit strange, unexpected amortization (expensing) of these assets (which has impact on reported earnings in some subsidiaries). He doesn't indict accounting principles or experts, but provides warnings about how intangibles can distort what might be the true, intrinsic value of a business enterprise.

Newspapers

In an industry that has been declining so fast for so long that nobody disputes the trend, Buffett has decided to invest in newspapers. His letter explains why newspapers will thrive in certain small communities, how they fill a niche in covering local news better than television and the Internet do, and how his portfolio of newspaper ventures will successfully combine online readers with those who will still pay for a copy at the newsstand.


Derivatives

In recent years, since he remarked on derivatives as "weapons of mass destruction," Buffett and Berkshire have warmed up to derivatives, if they are used as risk-management tools and not as arcane, volatile instruments of speculation.  Berkshire inherited derivatives positions in some of its recent acquisitions, and the company has had to manage those exposures. In the latest letter, Buffett acknowledges how derivatives can be used properly to manage financial risk and will be used in the Berkshire organization for that purpose. Other positions will be wound down.


Dividends and Stock Repurchases

Berkshire has a majority stake in numerous companies and has large positions in the stocks of such companies as American Express, IBM, Coca-Cola and Wells Fargo.  It relies on and appreciates the dividends paid out from those stakes. Yet Berkshire and Buffett don't pay a dividend, even when it has amassed substantial amounts of cash.  Buffett had some explaining to do, and he takes delight in having the opportunity to do so. Foremost, he is always on the prowl of using cash on hand to find the next big acquisition, the next "elephant," as he terms it.

He, therefore, goes through a step-by-step example showing when it's appropriate to pay a dividend, when it's appropriate to buy back shares, and when it's right to hoard cash and reinvest in or acquire business operations.  He all but declares that Berkshire will (a) not pay a dividend soon, (b) always consider stock repurchases if, by his calculations, the market under-values Berkshire stock, (c) always lean toward the view that he can reinvest cash in ways better than what the shareholder can do, and (d) will never issue new shares to make acquisitions.

To his credit, he makes the declaration, and then he explains it.  His parenthetical statements on dividends and stock repurchases might have been his under-stated response to the current controversies at Apple, Inc., where major shareholders are currently bickering over what that company should do with billions of dollars of cash it has on hand.

And to his credit, Buffett always reminds his readers he could be wrong, even if he hasn't been most of the time.

Tracy Williams

See also:

CFN: Apple's Stash of Cash, 2012
CFN:  The MBA and the CFA, 2010
CFN:  The Shareholder's Letter at Financial Institutions, 2010
CFN:  Jamie Dimon's Letter to Shareholders at JPMorgan Chase, 2011

Why He Left Goldman

It was the culture, he contends

Recall about a year ago. It was the op-ed piece heard all around the business world, when Goldman Sachs vice president Greg Smith dared to announce his resignation on the pages of the New York Times. After an 11-year stint in its institutional sales unit, Smith announced he had had enough and it was time to depart. He decided to share publicly why his disappointments in the business culture led to his decision to leave a fairly lucrative position.

(See  CFN: Goldman Sachs and the Letter, Mar-2012)

At the time of his departure, Smith was head of U.S. Equity Derivatives in Goldman's London office. (In London, he was an "executive director," which at Goldman was equivalent to a U.S. "vice president.") He had progressed swiftly through the ranks and was highly regarded for his expertise in markets, clients and derivatives in his special perch. By most accounts, he was not a difficult employee and colleague. He had made meaningful contributions in many ways--building a new business in Europe, preparing  market insight in the form of frequent, written commentary to Goldman salesmen around the world, and agreeing to transfer to the London office, when he didn't want to.

The revered culture of clients coming first had evolved, he said, at Goldman in ways he felt uncomfortable. The crisis was partly at fault.  Every partner, managing director, vice president, and associate, he observed, was out for him- or herself. Survival was the mission of the day.

It boiled down to this, he observed:  The trading culture had evolved into a massive mission of accumulating "GCs"--gross credits, sometimes at the expense of doing the right thing for the client.  The value of the employee to the firm was determined by the total amount of GCs he or she accumulated during the year.

Mindful of this, the employee overlooks teamwork, partnership, and support for other colleagues and focuses singularly on maximizing GCs and, therefore, the year-end bonus, even if it means swiping GCs rudely and unfairly from colleagues or being willing to unload "toxic waste" securities onto unsuspecting or unknowing clients. 

So after he had his apocalyptic moment (on a business trip to Southeast Asia while Goldman executives had been summoned to a Congressional hearing), he decided to quit. As many expected, after the  op-ed blast in the Times, Smith went into hiding. He emerged from a  self-imposed rest when he published a book last fall to recount his experiences at Goldman and explain his well-publicized departure more thoroughly.  The book, Why I Left Goldman, received lukewarm reviews.  Reviewers and industry-insiders, and perhaps Government regulators, were looking for something more, perhaps a hint of scandal, a more detailed account of mishaps and fraudulent business practice. He presented none of that.

The book is similar to other detailed accounts of a young banker or trader's venture onto Wall Street. They are views from the ground up, from the trenches, from entry-level positions as the novice tries to adapt to the ways of a zoo-like trading room.  Smith's book reminds us Michael Lewis' Liar's Poker."

Smith is fresh out of Stanford and thrust onto a derivatives-sales desk.  Lewis had just graduated from Princeton and encountered the bowels of Salomon Brothers' legendary trading floor and lived to write one of the most spectacular, humorous accounts of Wall Street ever.  Smith's book is also similar to a lesser known, recent book, A Colossal Failure of Common Sense, by Lawrence McDonald of Lehman, an up-and-coming fixed-income trader, who viewed his last days at Lehman, not with sarcasm and humor, but with anger and humiliation.

Notwithstanding the so-so response to a book we knew he would write, for the newly minted MBAs, those who contemplate career paths in sales & trading at major banks, those who are considering institutional sales, the book has its strengths. It is an invaluable introduction to the trading floor, describing the environment, work pace, client groups, and specific roles.  Institutional sales will have an important role at big banks, as regulation prohibits much of proprietary trading.

Reform and new rules, whenever they are finally implemented in full, will permit the big banks (from Goldman Sachs to Bank of America and Citigroup) to engage in trading on behalf of clients, not necessarily on behalf of themselves.  Proprietary trading is being eased out of existence. Trading for clients will be permissible.  (Trying to distinguish between the two will sometimes be a nightmare for banks and regulators.)

Some will argue that as technology advances and clients get more comfortable with it, electronic trading and execution will replace sales professionals.  But as the book shows, sales professionals will be necessary to bring clients on board, help them with best execution, guide them through rough markets, and present new trading ideas.

Thus, the book provides a day-to-day overview of institutional sales and explains a conventional career path from analyst to managing director.  It describes the structure of a sales & trading organization, the management, and the relationship among sales professionals, traders, researchers, and floor brokers. It shows how the firm generates revenues from trades, the more difficult or exotic trades generating the largest commissions or mark-ups.

The book is a reflection on firm culture from the vantage point of the trading floor. Firm culture is important, but what is more critical is how the culture penetrates all activity, roles, relationships and transactions in the firm. Smith, in the book, contemplates firm-wide goals vs. personal goals, how the two intersect, but how they sometimes collide. And he shows how bad, selfish personal goals can be inferred from vague firm-wide goals.

Especially in the wake of the financial crisis, he highlights how personal goals sometimes became a higher priority than firm goals. In a vivid, poignant scene in the days after the collapse of Lehman Brothers as markets nose-dived, Smith watches a senior managing director on the trading floor glued in a silent trance to the computer screen, studying his personal portfolio of assets, having no care in the world with what was going on elsewhere with his clients or with Goldman.

Thirdly, Smith demonstrates the impact of corporate politics on a personal's career success. He had learned quickly, perhaps in his first few weeks, that success at Goldman or at any large financial institution would not be a result of effort, hard work, and time commitment. To get promoted to vice president or managing director, to have the opportunity to work abroad (in London, in his case), or to transition into a different role all required special networking skills. He would either have to learn those skills or rely on buddies, mentors or managers to guide him.

In his case, Smith wasn't a schmoozer. He was, however, fortunate to have advocates nearby on the trading floor, champions on his behalf, people who liked him and were willing to grant a favor or speak up on his behalf.  Generating "GCs" (or client-related revenues) could lead to a big bonus, but finding someone to spread the word about him could lead to a promotion. Over time, he learned to win favors in bars, accompany managers on business trips and bachelor parties, attend social functions and farewell receptions, and even allow clients to look good in parlor ping-pong games.

Diversity. Smith's book hardly touches the subject.  He had the opportunity to address it, because he describes himself as an outsider trying to find his way within a powerhouse firm. (He is a foreigner who grew up in South Africa before coming to the U.S. to go to college.)  He might have been so consumed by his frustration with how he perceived Goldman had evolved that there was much he couldn't get to. (For example, he barely discusses other parts of Goldman, including its investment-banking machine or its sectors in asset management, private equity or private banking.)

It appears, nonetheless, that women in sales & trading have had scattered chances to reach the highest rungs.  A handful of his bosses or senior colleagues, over the decade, are women. And he observes how they have had to evolve to survive or change to battle the machismo ways of trading-room trenches.

The fanfare around the op-ed piece book will likely fade into memory and become a mere, colorful chapter in the history of Goldman. Smith will likely move on beyond Wall Street. He learned a lot about global markets, clients, derivatives, financial products, exchanges, and business management. You can bet he has another book in mind. He highlights the foibles of certain banking cultures in this one. In the next, he'll probably present solutions.

Tracy Williams

See also:

CFN: How Does Goldman Do It? 2010
CFN:  Goldman Tweaks the Ladder, 2012
CFN:  The Role Goldman's Board, 2010
CFN:  Morgan Stanley Tries to Please Analysts, 2012
CFN:  The Volcker Rules, 2011

Why is Dell Going Private?

Many know the story already. The story about how Michael Dell formed his own company in his college dorm room to sell personal computers. The story's plot soars toward an apex. Dell eventually took his company public, seized substantial market share, and eventually became a billionaire. His stake in the company today exceeds $3 billion (while he has maintained substantial wealth outside the company).  But the story is far from over.

In recent years, the company has struggled to maintain market share and has suffered ups and downs in earnings and share prices.  It has reached a pivotal point, where it must decide what it wants to be, who its customer base should be, and what products, beyond conventional desktops, should it sell.  In recent days, founder Michael Dell decided it's time to buy back the company from the public and take it private with investments from himself and the private-equity firm Silver Lake. While reviewing alternatives (remaining a public firm or seeking higher bids from other groups or Michael's group), the company's board is near an agreement to permit Michael Dell and his group to purchase Dell, Inc. for $24 billion.

Fans of private-equity can't help but emit a cheer in unison, as they see this as a signal that the era of big deals (big buy-outs in the billions) is back. That era has not yet returned, partly because big deals require mammoth financing, especially from banks, who have been shy in recent years about stepping up to provide funds to support leveraged buy-outs.

Meanwhile, why has Michael Dell decided that it makes sense to go private via a buy-out?

The proposed deal is not too complex. Michael Dell has found a way to raise $24 billion.  He will contribute the $3 billion-plus stake he already has and will add more (up to $1 billion) from his own investment fund, the fortune he extracted from Dell and runs separately.

Silver Lake will invest $1 billion. Dell, Inc., the company, will repatriate as much as $3 billion in cash in overseas subsidiaries to repurchase stock of existing shareholders. And then comes a mountain of debt:  $14 billion from a bank group and $1 billion from Microsoft. Microsoft still yearns to work with Dell in partnership, perhaps to ensure Dell will continue use its software. But Microsoft elected to invest in the form of a loan, not in equity. (Microsoft's loan suggests, too, it desires an exact cash return on its investment and a fixed time horizon.)

Nevertheless, the deal shoves three times the amount of its existing debt burden onto the Dell operation and onto its balance sheet.  That is essentially the traditional impact of private equity--the rearrangement of a company's capital structure such that debt has a prominent role and operations must generate a consistent flow of cash to meet higher levels of interest and principal payments. Deal-doers and industry analysts had already determined the company is capable of generating a stable flow of cash from current operations from quarter to quarter to service debt. But more debt  requires the company to meet sometimes onerous financial covenants and requirements.

Michael Dell had likely decided the following:

a) Under a different ownership and capital structure, he could implement a different company strategy to achieve earnings growth and, therefore, a substantially higher company value to the new owners.

b) With the new structure, he can make changes more quickly and easily without having to encounter many constituents, including other major shareholders, the public markets, research analysts, a board of directors he has less control over, and a band of other naysayers.

c)  As a private company, he could take more risks with new ventures, ideas and products without the laborious task of vetting public markets, ratings agencies and research analysts.

d) And as private company, he won't have to present a quarterly scorecard of earnings projections, targets to meet, and overall performance and be routinely scolded or penalized for not meeting targets.

A typical private-equity investor has a goal of going private, stripping down the company to reduce costs, increasing cash flow and re-emerging as a more valuable public company. Founder Michael Dell has yet another fundamental objective. He must determine and then implement that relevant strategy. That strategy will likely rely less on a consumer client base and seek to tap into a corporate client base.  It wants to escape desktops and laptops and venture more deeply into corporate systems, data storage and cloud computing. Dell, its founder reasons, must become less like Apple or H-P, more like IBM.

It will be easier to engineer such a transformation beyond the sneering eyes of public markets. Reporting requirements will be less strenuous. Moreover, it will easier to digest a quarterly loss, while the new company funds new investments or a radically different structure. 

Not having to pay a dividend will help, too. Cash normally paid out in dividends will be diverted to meet interest and principal payments on the debt load. The burden of debt will seem to be more bearable than the burden of meeting research analysts' expectations four times a year.

There are still risks in a different approach and risks in implementing a substantially different strategy. But as Dell and Silver Lake see it, there are risks in the status quo.

There will also be the challenge in managing the expectations of three large stake-holders:  Silver Lake, Microsoft as lender, and the bank group.  Silver Lake will not want to be a permanent investor. It will want out and seek to enforce a five-year plan.  Banks will impose somewhat strict financial requirements, will require approval of certain business strategies, and might choose to be difficult in a downturn. 



The deal is not yet done, but will likely proceed as announced. Dell, Inc., the company, not Dell the founder, will be permitted to explore other offers and strategic options to be fair to current shareholders. (There could be another suitor interested in offering more than $24 billion.)

Michael Dell gets five years to prove going private was the best move for current shareholders, for Silver Lake, and for himself.

Tracy Williams

See also

CFN:  What Should Apple Do With Its Stash of Cash? 2012

Where Do You Want to Work in 2013?

Lists can be amusing. Sometimes they might be taken seriously.  Magazine and media companies like to produce them--even if they are flawed or biased, because they sell thousands of copies of issues or generate thousands of Internet clicks. They spawn discussion and banter and get people talking. Some lists should be shrugged off and dismissed. Some are worth examining, because they might offer helpful information about the topic being ranked.

Employees like good pay, good benefits and, yes, fitness centers

Fortune Magazine compiles many lists from year to year. One recent list in its latest issue is its "Best 100 Companies to Work For." To believe in the list and to ensure it's credible and useful, you must believe in its criteria. You must be assured that Fortune has amassed significant data and measured the information properly. Ask employees why their company is a favorite place to work, and you may get dozens of reasons, including especially compensation, benefits, vacation privileges, opportunities for promotion, and challenging assignments.  Some would contend a favorite place is one that is thriving, doing well and generating upward-trending, consistent stock-market returns.

For all the splash in a big cover story on top companies, Fortune's criteria was relatively simple:

a) Does the company plan to hire in substantial sums in the year ahead?
b) Are employees generally satisfied?
c) Can management be believed?
d) Is there camaraderie among colleagues--genuine collegiality?
e) Is turnover less than 5% annually?
f) Is compensation in the top quartile in the industry?
g) Do benefits apply also to same-sex couples?
h) And, yes, does the company offer free access to on-site fitness centers?

Did it miss anything? Of course, it did. It missed a lot.  It didn't address diversity and inclusion clearly. It didn't factor in long-term, sustained performance (Will the company be around 20 years from now?). And it didn't address whether a company is sufficiently managed and strong enough to survive downturns, market-related disasters, or unforeseen, colossal risks. All these factors might be important to at least a few prospective employees. Yet it knew it couldn't complete a list if it tried to capture too much, especially if the list relied on the completion of thousands of surveys.

Google is no. 1 on the list for the fourth time. BCG, the consulting giant, is in the top 10. Companies like Accenture, DreamWorks, Nordstrom, and Intel also made the top 100. Quite notable is a prominent lack of financial institutions.

Given:

a) what the industry has endured the past several years,
b) the topsy-turvy reorganization most large financial institutions must go through,
c) all the uncertainty financial institutions face in finding a way to generate revenues in the decade ahead,  and
d) the discouraging, frequent announcements of lay-offs and staff reductions...

Given all that, it's not a surprise that most of the best-known financial institutions don't find themselves on Fortune's list.

Strike one:  Many large banks, as we know, are not in aggressive hiring modes.  Check the business headlines weekly to see which ones have decided to rethink, re-situate and reduce staff in institutional trading and investment banking.

Financial institutions engage in some form of hiring every year. There is attrition all the time, and it makes economic sense to hire at entry levels annually to keep pipelines flowing and production efficient (and maintain long-term ties with top business schools). "Production" is efficient when junior bankers can do senior-level work at one-quarter the cost. And if you were to peek more closely, many institutions are indeed adding more staff in compliance, regulatory reporting and risk management. 

But for Fortune's benefit, not many plan to expand substantially on the front lines.   


Strike two:  Because of staff reduction, massive reorganizations and employee-related stress arising from uncertainty and confusion, employee turnover is bound to be more than Fortune's 5% benchmark.  If there is a corporate-banking unit with 100 professionals today, you can be assured a year from now, more than five (and as many 10-20 or more) won't be in the same slot a year later.

Strike three:  The culture, workplace and environment in many financial institutions are not the same as that of a Silicon Valley enterprise.  It's not likely the bank, insurance company or investment manager will support free access to a gym on the premises, free gourmet lunches or freedom to engage in playthings during work hours. Employees may wish for such privileges, and they would benefit from immediate access to a fitness center.  At many banks, still rebounding from the crisis, all that is not a priority.

That's not to say no financial institution made its list.  A few did. Many of the familiar names didn't.

St. Louis-based brokerage firms Edward Jones (No. 8) and Scottrade (53) fared well. And that may be no accident.  Both firms rely on the performance, contributions and production of a large, far-flung network of brokers, consultants and representatives. They obsess in making sure the brokerage force is happy, content and well-compensated.  They ensure the same force has ample administrative, securities-processing, and funding support.  Employees don't work under the haunting, continual threat of being laid off.

Another Midwest-based brokerage firm, Robert W. Baird, with similar privileges and values, appears on the list, too (14). The firm is applauded for rewarding employees with a significant ownership stake.

American Express is one of the few large, well-known financial companies on the list (at 51), despite its own restructuring hurdles the last few years. The company's business faces mammoth challenges in the years to come. It makes the list, nonetheless, because of its remarkable efforts in diversity and because of its widespread support of employee affinity groups (groups with common interests or shared backgrounds).  It also has fitness centers.

In pre-crisis years, on any list where MBAs in finance express where they want to work, Goldman Sachs always found itself at or near the top.  For MBAs from top schools, Goldman offered new associates prestige and compensation. It also offered MBAs a chance to learn and master all the nuances of finance, a chance to thrive in a highly charged environment, a chance to travel to all parts of the world, and a chance to exploit the strengths of the Goldman name to get deals done, make trades, invest on behalf of clients, and finance companies and municipalities.

Post-crisis, Goldman, too, would be vulnerable to the strikes above.  As a "bank holding company," it is re-inventing itself or reshaping itself to contend with regulation and profit-margin struggles.  Yet it squeezes its way onto Fortune's list (93), partly because of a commitment to reward employees exceptionally--via benefits and the resumption of huge payouts every January.  MBAs in finance still want to work there, perhaps for a handful of years, just enough to taste the experience, learn, earn and then move on to the next rung on the career ladder.

Of the Fortune 100, only about 10 are bonafide financial institutions (about half of which are insurance companies). The industry is not in the same turmoil as it was a few years ago. In fact, most have begun to report upward trends in earnings and share prices, while they spruce up balance sheets.

But much jockeying continues.  Much tweaking and twisting of old business models are occurring.  And for now, the maneuvering behind closed doors among the senior ranks, as they adapt to new rules and new markets, comes at the risk of neglecting to make themselves employers of choice. At least that's what Fortune's new list implies.


Tracy Williams

See also:

CFN: The Best Places to Work, 2010
CFN:  The Best Places to Work, 2011
CFN:  Affinity Groups in the Workplace, 2011
CFN:  Time to Make that Move? 2010