Below is a link to a video from "Squawk Box" on CNBC with Michael Porter and Bill Ackman. For those of you who don't know who Michael Porter is, Michael Porter is a professor at Harvard Business School and today's leading expert on competitive strategy. Bill Ackman was mentioned in an earlier post because of buying a large portion in JCPenney and gaining a few seats on JCPenney's board. The video centers around are capital markets efficient and are useful for businesses to raise capital today. Interesting points from the article include:
- Bill Ackman had Michael Porter as a professor at Harvard while earning his MBA. What struck me is how much Ackman said Porter was influential on him. Ackman said Porter's strategy emphasis really made him look at the business (or franchise) he was investing in. To take that a step further, it is just as important to understand the industry your investing in and the external forces that impact that industry.
- The point was brought up about the increased frequency in trading that occurs in today's markets, essentially separating short-term traders and long-term investors. Ackman said this dualism in the markets in the market is actually a good thing by creating arbitrage opportunities. Because so many traders and short-term investors are focused on quarterly earnings, the stock is sold off and does not reflect the intrinsic value of the business. Long-term investors can purchase the business at these depressed valuations and drive the price towards the intrinsic value.
- The whole notion of guidance is a bad idea and investors should do their own homework. Also, by setting quarterly earnings targets, a firm often deserves the type of investors it gets. By setting quarterly earnings targets, it may force management to make the wrong decisions to essentially game the share price. You have to think, "If I were running this business privately, what would I do?"
- Ackman goes against the Benjamin Graham notion of intrinsic value and realization of value. Instead, Ackman believes you purchase an undervalued company at the current moment, but do not sell the company when the company reaches the intrinsic value at which you bought. Businesses are not static. Instead, it is important to find businesses that will continually create value and re-assess the intrinsic value on an ongoing basis.
Private equity: stage left?
The article highlights a company's management teaming with private equity plaers for a private equity buyout. The issue has come to forefront as Kinder Morgan and HCA, both part of management led buyouts, will be seeking to tap the IPO market.
The risk to a management led buyout is often management is friends with the directors. This creates a problemdddd as management might try to force a low bid. If the directors refuse the deal, they may in effect be firing key managers. There is another additional agency cost. Often times, management will steer directors to accepting a deal from private equity versus a strategic buyer because private equity will retain that management.
So, can management led buyouts create value? According to the article:
Yet management-led buyouts can be economically beneficial, others argue. The primary justification is that a private company can be more efficient than a public one because of the capacity for an increased debt load, lower regulatory costs and diminished public scrutiny. And management is best positioned to reap these gains. After all, this is what private equity is about — creating benefits by taking companies private.
In Kinder Morgan and HCA IPO's, a Cautionary Tale (click here)
A Drilling Boom
Ensco will buy rival Pride International for $7.3 billion. The future for offshore drilling looks bright as we are building up offshore rigs at a level last seen in 2007.
The Beginning of a Deepwater Drilling Boom (click here)
Goldman to Playboy
On a lighter note, just read it.
Goldman Intern Turns Playboy Bunny (click here)
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