There was a time when you needed to take a high risk to get rich: be an actor, investment banker, rock star or start your own business. But no more. Just get a good, safe job with a large corporation, survive the politics, climb to the top and then hold it hostage for money.
Today's sickening news announced the payment of $135 million as a "golden parachute" to a retiring banker: Wallace D. Malone, Jr. - long time chairman of SouthTrust and the key decision maker in its sale to Wachovia. Unsurprisingly, Wachovia accepted his benefit package when the sale of SouthTrust was being negotiated. Go to charlotteobserver.com for a detailed list of the absurd extent of his benefits.
I don't hold this against Mr. Malone. In fact I congratulate him for taking advantage of the ineptitude of money managers like myself who have been useless fighting excessive executive compensation. I also congratulate him for providing motivation for managers like myself to figure out how to stop this. Globalization sure hasn't put pressure on these labor costs.
Tuesday, January 31, 2006
Monday, January 30, 2006
Funding Health Care Innovation
Three posts have addressed challenges faced by the pharmaceutical industry (global intellectual property rights, drug development and management). While difficult, "big pharma" has always been resourceful. Rather than focus on efficiency by delivering a higher volume of old drugs at lower costs, "big pharma" has concentrated on higher impact through new discoveries. But, inequities have developed.
While benefitting from U.S.-funded pharmaceutical gains, the rest of the globe has not paid its fair share of the economic costs. Canada not only receives drugs from the U.S. at a lower cost than U.S. citizens, but has not invented one major drug since the government started providing health care in 1971. Much of their "efficient" health care system's ability to deliver quality is because of U.S. innovation and charity. Some facts from a recent article in the Economist point to such a dynamic in overall health care, not just pharmaceutical areas.
The U.S. spends 16% of GDP on health care, a percentage which is nearly twice the average of other developed countries. While this is large, the Economist also reports, "One survey of doctors published in Health Affairs claimed that eight of the ten most important medical breakthroughs of the past 30 years originated in America." It seems logical that higher costs and innovation would be linked.
However, those higher costs are becoming less manageable. As corporations reduce employee benefits, costs are shifted to the public sector. To thwart what appears to be a looming crisis, people are looking to cut costs. But that could be short-sighted. All agree that the U.S. system is responsible for a global increase in the quality of health care. Why not get other countries to pay more of their fair share rather than cut costs? Wouldn't this be a better long term solution? The answers may lie in better global intellectual property rights.
While benefitting from U.S.-funded pharmaceutical gains, the rest of the globe has not paid its fair share of the economic costs. Canada not only receives drugs from the U.S. at a lower cost than U.S. citizens, but has not invented one major drug since the government started providing health care in 1971. Much of their "efficient" health care system's ability to deliver quality is because of U.S. innovation and charity. Some facts from a recent article in the Economist point to such a dynamic in overall health care, not just pharmaceutical areas.
The U.S. spends 16% of GDP on health care, a percentage which is nearly twice the average of other developed countries. While this is large, the Economist also reports, "One survey of doctors published in Health Affairs claimed that eight of the ten most important medical breakthroughs of the past 30 years originated in America." It seems logical that higher costs and innovation would be linked.
However, those higher costs are becoming less manageable. As corporations reduce employee benefits, costs are shifted to the public sector. To thwart what appears to be a looming crisis, people are looking to cut costs. But that could be short-sighted. All agree that the U.S. system is responsible for a global increase in the quality of health care. Why not get other countries to pay more of their fair share rather than cut costs? Wouldn't this be a better long term solution? The answers may lie in better global intellectual property rights.
Wednesday, January 25, 2006
Kerkorian's GM (a.k.a. Greedy Mgmt.) Moves
Kirk Kerkorian has an inspiring story of a self-made man's perseverance, boldness and brilliance. (A good summary can be found in Wikipedia.) I have often told myself that he would be an investor to emulate. However, his investment decisions are extremely difficult to replicate without having his wonderful characteristics. His latest moves illustrate that point.
Yesterday it was announced that he increased his ownership in General Motors stock back to 9.9% the company (56 million shares or about $1.2 billion). His cost basis was nearly $31 and the stock is in the low 20's. There was speculation that his sale of 12 million shares last December was not really for tax purposes, but was his first in a series of reductions in a quasi-admission of a mistake. (I did not agree.) Now it's clear that it was for tax purposes and that he may purchase yet more at these lower prices.
Now here's the amazing part. I have not read of an unsuccessful investment by him. He has created his $8 billion net worth out of a great series of investment decisions. He's already made piles of money on a contrarian bet on Chrysler. So if he has a nearly perfect investment record, is within his area of competence, is putting 20% of his net worth in an investment that can be purchased for 35% less than he did, why not follow him in?
First, the pros of buying GM. Toyota, a company without the legacy and structural costs of GM, is valued at $183 billion and sells roughly the same amount of goods - $175 billion. GM, on the other hand, is valued at about $12 billion, even though it sells more goods than Toyota - $190 billion. If GM even got half the valuation of Toyota, it would increase eightfold - a wonderful return.
Next, the cons of buying GM. Ill-defined brands. High capital intensivity. Bankruptcy really a possibility. Delphi, the big GM parts company filed and few thought that would happen. Further, GM could lose lots of money if Delphi employees strike or force GM to pick up some of the Delphi post-retirement liabilities. GM's liabilities are huge. With over 2.5 retirees per active employee, GM pays about $6 billion per year in health care costs and has a pension which is possibly underfunded by billions.
Kirk Kerkorian has hired Jerry York to spearhead the turnaround. He was the CFO of Chrysler and IBM in their successful turnarounds. There is probably not a better person to work on GM. He says a key phrase in a recent speech (found in a 13D of Tracinda), "GM has a mountain of liquidity on hand—both cash and non-core assets that can be sold. So it has the wherewithal it fix itself." As a one to three year hold, GM stock has significant potential to appreciate. But, as a long term hold, the business is not attractive, even though there is clearly money to be made.
Yesterday it was announced that he increased his ownership in General Motors stock back to 9.9% the company (56 million shares or about $1.2 billion). His cost basis was nearly $31 and the stock is in the low 20's. There was speculation that his sale of 12 million shares last December was not really for tax purposes, but was his first in a series of reductions in a quasi-admission of a mistake. (I did not agree.) Now it's clear that it was for tax purposes and that he may purchase yet more at these lower prices.
Now here's the amazing part. I have not read of an unsuccessful investment by him. He has created his $8 billion net worth out of a great series of investment decisions. He's already made piles of money on a contrarian bet on Chrysler. So if he has a nearly perfect investment record, is within his area of competence, is putting 20% of his net worth in an investment that can be purchased for 35% less than he did, why not follow him in?
First, the pros of buying GM. Toyota, a company without the legacy and structural costs of GM, is valued at $183 billion and sells roughly the same amount of goods - $175 billion. GM, on the other hand, is valued at about $12 billion, even though it sells more goods than Toyota - $190 billion. If GM even got half the valuation of Toyota, it would increase eightfold - a wonderful return.
Next, the cons of buying GM. Ill-defined brands. High capital intensivity. Bankruptcy really a possibility. Delphi, the big GM parts company filed and few thought that would happen. Further, GM could lose lots of money if Delphi employees strike or force GM to pick up some of the Delphi post-retirement liabilities. GM's liabilities are huge. With over 2.5 retirees per active employee, GM pays about $6 billion per year in health care costs and has a pension which is possibly underfunded by billions.
Kirk Kerkorian has hired Jerry York to spearhead the turnaround. He was the CFO of Chrysler and IBM in their successful turnarounds. There is probably not a better person to work on GM. He says a key phrase in a recent speech (found in a 13D of Tracinda), "GM has a mountain of liquidity on hand—both cash and non-core assets that can be sold. So it has the wherewithal it fix itself." As a one to three year hold, GM stock has significant potential to appreciate. But, as a long term hold, the business is not attractive, even though there is clearly money to be made.
Tuesday, January 24, 2006
Unusual Drug Company Challenges
An article in today's WSJ illuminate some of the unusual challenges presented to the drug industry. The Journal reports that an estimated 6-10% of the world's drugs are counterfeit, amounting to over $35 billion worth of drugs. That is an enormous number. For perspective, that is almost equal to the entire industry's research and development budget.
Part of the problem is that some countries, particularly China, do not aggressively track down such counterfeiting. In response, drug companies have spent their own resources tracking down fake drug operations. The article highlights some of the actions taken by Pfizer, which almost amount to having their own investigative police force in China. What other global industry has to provide such services?
Fortunately, help appears to be on the way. A Chinese authority was quoted, saying "fake drugs is a business that is equivalent to murder," referencing the many deaths that have resulted from the use of counterfeit drugs.
Part of the problem is that some countries, particularly China, do not aggressively track down such counterfeiting. In response, drug companies have spent their own resources tracking down fake drug operations. The article highlights some of the actions taken by Pfizer, which almost amount to having their own investigative police force in China. What other global industry has to provide such services?
Fortunately, help appears to be on the way. A Chinese authority was quoted, saying "fake drugs is a business that is equivalent to murder," referencing the many deaths that have resulted from the use of counterfeit drugs.
Sunday, January 22, 2006
Media Disintermediation
Warren Buffett has long held media properties as part of that profitable "food chain" called branding. To be profitable, investments must slow the process of competing to zero profits that occurs with commodities. Brands help. Brands can encourage consumers to "pay up." But to create brands, media properties are necessary.
But media properties have been having investment problems of the same type. As I have blogged recently, newspapers, (as well as radios and televisions) are part of a disintermediation process driven by the Internet. As a result, media properties are losing their "tollway" characteristics. But a friend of mine argued that the "tollway" still exists because people need to trust their news source.
However, disintermediation is addressing the issue of trust in a novel way. Unlike the historical use of a gatekeeping media property separating companies from consumers, the Internet now allows direct linkage of company and conumer: whether through company website, or pdf file, or search engine or RSS feed. If interpretations are important, blogs can provide significant online and on-time commentary.
This thesis, persuasively made by David Meerman Scott in a complimentary ebook called "The new rules of PR," (and available at his excellent web log www.webinknow), appears financially confirmed: Buffett has purchased the company Business Wire for an estimated (by me) $500 million. Media disintermediation is at the core of Business Wire's growth. Formerly, Business Wire helped businesses disseminate information to the old "tollways" of the media world. Now, Business Wire helps businesses manage press releases in order to grow customer reach and direct branding. Further, new legal requirements for accuracy and timeliness on business releases help all involved. Business Wire gets more business because of heavier requirements and the businesses have releases which are considered more trustworthy - addressing some of my friends concerns.
As a financial aside, Business Wire appears to be already highly profitable. Business Wire charges $225 for each release. The top line of Business Wire is $125 million (yes, over a 1,000 releases per day!). The margins appear high, as the releases are already written. Business Wire has had a bottom line strong enough to allow former owner Lorry I. Lokey to donate $160 million over the past 10 years (mostly to schools: his alma mater Stanford and Leo Baeck Academy, a school in Haifa, Israel). At a contribution rate averaging $16 million per year, the business probably threw off at least $32 million of after-tax profit (most people don't donate over 50% of their income for tax reasons), leaving a pre-tax operating margin of nearly 50%. For financial types, I would estimate that Buffett paid about 8-9 times operating profit and comment that their largest competitor is London-based PR Newswire, a subsidiary of United Business Media, PLC.
But media properties have been having investment problems of the same type. As I have blogged recently, newspapers, (as well as radios and televisions) are part of a disintermediation process driven by the Internet. As a result, media properties are losing their "tollway" characteristics. But a friend of mine argued that the "tollway" still exists because people need to trust their news source.
However, disintermediation is addressing the issue of trust in a novel way. Unlike the historical use of a gatekeeping media property separating companies from consumers, the Internet now allows direct linkage of company and conumer: whether through company website, or pdf file, or search engine or RSS feed. If interpretations are important, blogs can provide significant online and on-time commentary.
This thesis, persuasively made by David Meerman Scott in a complimentary ebook called "The new rules of PR," (and available at his excellent web log www.webinknow), appears financially confirmed: Buffett has purchased the company Business Wire for an estimated (by me) $500 million. Media disintermediation is at the core of Business Wire's growth. Formerly, Business Wire helped businesses disseminate information to the old "tollways" of the media world. Now, Business Wire helps businesses manage press releases in order to grow customer reach and direct branding. Further, new legal requirements for accuracy and timeliness on business releases help all involved. Business Wire gets more business because of heavier requirements and the businesses have releases which are considered more trustworthy - addressing some of my friends concerns.
As a financial aside, Business Wire appears to be already highly profitable. Business Wire charges $225 for each release. The top line of Business Wire is $125 million (yes, over a 1,000 releases per day!). The margins appear high, as the releases are already written. Business Wire has had a bottom line strong enough to allow former owner Lorry I. Lokey to donate $160 million over the past 10 years (mostly to schools: his alma mater Stanford and Leo Baeck Academy, a school in Haifa, Israel). At a contribution rate averaging $16 million per year, the business probably threw off at least $32 million of after-tax profit (most people don't donate over 50% of their income for tax reasons), leaving a pre-tax operating margin of nearly 50%. For financial types, I would estimate that Buffett paid about 8-9 times operating profit and comment that their largest competitor is London-based PR Newswire, a subsidiary of United Business Media, PLC.
Saturday, January 21, 2006
New Area of Estate Planning
Estate planning changed rapidly in the late 1980's and early 1990's as changing tax laws intersected with changing interest rates and computerized modeling. Then the rate of new estate planning ideas slowed considerably for the past few years. But today's WSJ mentions a "cool" (pun intended, Brooke) new idea: estate planning for users of cryogenics.
Cryogenics is the process of suspending human remains with the hope that advances in science will allow for such remains to be "thawed" and revived. Most people dismiss such concepts as ridiculous, but there are some who think they can "take it with them." By placing funds into a "personal revival trust," these wealthy individuals hope their money grows virtually expense-free so that they will wake up to being the wealthiest individuals in the world.
Years ago, we used to joke about the idea that a family member could be frozen until all gifting plans had been completed. That joke might become a reality. Estate taxes are essentially a tax on the transfer of assets out of the estate to someone else. If the assets are retained within the estate, it would appear that those assets could continue to compound without taxation for centuries with some potentially lucrative benefits for family members.
Cryogenics is the process of suspending human remains with the hope that advances in science will allow for such remains to be "thawed" and revived. Most people dismiss such concepts as ridiculous, but there are some who think they can "take it with them." By placing funds into a "personal revival trust," these wealthy individuals hope their money grows virtually expense-free so that they will wake up to being the wealthiest individuals in the world.
Years ago, we used to joke about the idea that a family member could be frozen until all gifting plans had been completed. That joke might become a reality. Estate taxes are essentially a tax on the transfer of assets out of the estate to someone else. If the assets are retained within the estate, it would appear that those assets could continue to compound without taxation for centuries with some potentially lucrative benefits for family members.
Thursday, January 19, 2006
Steve Jobs on A Roll
The latest news about Steve Jobs rumor Pixar being acquired by Disney. If such an acquisition occurs, Mr. Jobs will likely become a director and own over 9% of Disney stock. It's appropriate. If there were a modern-day incarnation of Walt Disney, it would be Steve Jobs. Steve Jobs has an eye for what makes us feel good. Just as Walt Disney created cartoon characters that made us feel good, so, too, do the animated characters of Pixar and the products of Apple make us smile. In fact, the holiday season at our house was practically a Steve Jobs event. Despite the vigorous protests of my Apple-hating and trend-averse son Ross, the Granowski household acquired two iPods and one iBook. I'm learning that for evaluating a "consumer franchise," that most profitable kind of business, there's more than Microsoft/Intel functionality. There's good feelings - and people are willing to pay for that. If you don't believe it, look at the net margins of Pixar - an amazing 50%! (For the non-financial reader to have a sense of this number, the average net margins for a company in the stock market are about 7% and only rarely exceed 20%.)
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At dinner tonight, I asked my children if they would eventually read newspapers. They said yes, probably, even if the news was not up-to-dat...
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This graph is disappointing. Charles Schwab (SCHW) has benefited investors by providing lower cost structures for investing and has prided i... -
At the beginning of 2006, I blogged about the investment opportunities for GM. Had I pursued it, the investment would have been excellent. B...
