Weekly Bookmarks –
118th Edition – May 9, 2021
1. KKR is Back in the News Again
I bought my first car without my dad’s help in 1989 after I started working at KPMG in St. Louis. While I loved my little red Plymouth Horizon, that car was not going to impress the partners (who probably didn’t care anyway). A funny thing happened when I made the decision to buy a Pontiac Grand Am. All of a sudden, there were thousands and thousands of Grand Ams roaming the highways in and around St. Louis.
That’s called the Reticular Activating System doing its thing deep inside of the human mind. It’s an amazing filter that lets information enter the mind once the brain says, “I know what that is, so let it in.”
The first (real) business book I ever read was Barbarians at the Gate, and KKR was one of the key characters in that book. Protagonist or antagonist, you have to decide. Accordingly, when I saw in the news this week that KKR was investing in Charter Next Generation, I just had to read the story, I couldn’t help myself.
2. Mark, Read This
Many people that I talk to think that I was always a reader – not true. While serving time at KPMG as an auditor in the early 1990s, I only read three business books:
- The Firm by John Grisham
- Wealth Without Risk by Charles J. Givens
- Barbarians at the Gate: The Fall of RJR Nabisco by Bryan Burrough
You are right, I don’t think The Firm counts. Don’t make fun of my Charles Givens selection who was later charged with fraud more than once. Plus, we didn’t have Dave Ramsey back then. He was still probably selling real estate at the time. Meanwhile, Suze Orman was not famous yet.
Barbarians at the Gate? That was a home run of a book. It’s still one of my favorite books which I consider narrative non-fiction. If you like corporate finance, it’s a must-read book. Periodically, I thank the auditor who suggested that book to me while working on a TV station audit in Cape Girardeau, Missouri.
3. The King of LBOs
I don’t know if KKR is still the king in leveraged buyouts. They were not the first to enter this arena when buying businesses. But they were one of the first.
So what is an LBO? In short, it’s buying a business with a boatload of debt and then some. According to Chapter 12 of Barbarians at the Gate:
… success depends on determining exactly how much debt the target company can take on, and figuring precisely what budgets can be cut and what businesses sold to pay down that debt quickly. To take the used car analogy a step further, the LBO buyer must estimate, in precise detail, how many miles the car has left, how many spare parts he will need, and how much maintenance will be required. The margin of error is so thin that a worn crankshaft or a blown gasket could prompt the bank to call his loan.Barbarians at The Gate, Chapter 12
Is this something you’d like to do?
4. My Big Takeaway
Have you ever been to an auction and lost to another bidder because you couldn’t justify the price and lacked the funds to win the prize? That’s what happens in an LBO.
But that leads to a nagging question. What is an item worth, tangible or intangible? How about a business? I don’t trust business appraisals – they cannot simulate the real-world bidding where scarcity, emotions, and adrenaline exist.
Take the leveraged buyout of RJR Nabisco. Ross Johnson was the CEO at the time of the buyout. His management team offered the Board $75 per share, a whopping $17 billion. The Board said, “That’s fair.”
Wait a minute, another offer was then submitted for more than $90 a share by KKR.
Now we have a race where other players jumped in. The final bid was for $25 billion or about $108 a share. That’s a 47% increase over the original offer. And it’s far north of what the market valued the stock which was around $55 per share.
The business was never worth $25 billion. That was merely the price KKR paid. There was not enough cash flow to support the debt service, so they started liquidating assets at a furious pace – in the long-term, they never got the return they wanted and gave up by selling their investment in 2005.
Price is what we pay. Value is what we get and perceive. Value is hard to define and wrap our arms around, just ask KKR.
5. Accountants Still Get No Respect
An accountant is a person who puts their head in the past and backs their ass into the future.Ross Johnson, former CEO of RJR Nabisco
I’m not offended by the comment above. Once a marine, always a marine. The same can be said of accountants. I’m proud of my accounting background and training. The key to us getting better and better is to find out what value we bring to the table of owners and CEOs wanting to make their businesses bigger and better. We play a vital role in that growth.
One way to do that is to be reading great books. Barbarians at the Gate is a mind-bender and it will leave its cognitive mark on you for years to come.
Thank You For Reading. Thank you for making this a successful newsletter.
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Always be learning and growing.
Title Photo by Alex Proimos