GSB599-Win13

Who is running the company?

Posted on by w13colleen

If you asked this question prior to 2006, the response would likely be the CEO. The Board of Directors does have oversight of the company, but they are the same group of people that elected that CEO. In recent years the investors are using an active investment and management strategies which is overshadowing CEOs and the board. In 2006 only 28 directors at public companies in the Russell 3000 Index did not receive a majority vote. In 2011, that number increased to 79.  According to Harvard Business School Professor Rakesh Khurana, “… investors are telling directors who should be the CEO and how management should run the company.”

 

As I read the articles on this material, it comes down to return. Investors, individual or companies, want to make a return. The return for their investment since 2008 has not met their expectations. It has prompted majority investors to take long hard look at the executive level.  New York hedge fund, Royal Capital Management sent the board of directors a letter directing them to oust former CEO Angela Braly. The letter said “ … financial forecasting process is manifestly dysfunctional, subordinates are openly (and rightly) critical of her performance, and a revolving door of senior management ensures these problems will persist.”  Royal also took steps to discuss this direction with Barrow, Hanley, Mewhinney & Strauss and T. Rowe Price. Although it is not unprecedented that investors push out a CEO, it is uncommon. It is more uncommon that investors collaborate before “imploring” the board to take action.

 

The other prevailing reason for more active investment strategies is that, control is the primary driver for the investment. Carl Icahn and Bill Ackman are known for their large investments and their investment comes with power and influence. Their role in the company goes beyond investment to authority over the management and crosses the line of who is actually running the company.

 

The shift of control has major implications on the company’s strategy. By investors selecting the CEO and/or board members, they are shaping the future direction of the company. It can be seen through competitive advantages, shareholder value and their decisions about what to do and what not to do. TPG-Axon’s Singh wrote in his letter to the SandRidge board of directors regarding their role,  “…in instances where we come to believe that management is acting in a manner that is destructive of value, we believe it is important to actively engage.” 

 

Shareholder value is maximized when the CEO and Board of Directors execute on the right strategy. Investors are now directing the directors on who should be running the company. It is a change in the way the CEO, directors and their investors interact.

 

QUESTION: If investors are more active in the management of the company, should they also be just as accountable as the CEO?  

 

Do you think it is within the right of the majority investors to collaborate and oust CEOs from their position? If so how much time does a CEO have to execute their strategy?

 

SOURCES:

http://www.businessweek.com/articles/2012-11-21/more-ceos-are-learning-whos-the-boss#p1

 

http://www.businessweek.com/articles/2012-05-14/the-good-barbarian-how-icahn-ackman-and-loeb-became-shareholder-heroes#r=lr-fs

McGraw-Hill Education Sells to Private Equity To “Go Faster”

Posted on by w13timothy

The McGraw-Hill Companies recently announced its decision to sell its education business to Apollo Global Management, a private equity firm that has a history of  investing in educational businesses, for a price of $2.5 billion. The remaining publicly traded company would then change its name to McGraw-Hill Financial and focus strictly on its financial and ratings services. The plans for the sale was first announced in September 2011 which has already resulted in in the company seeing an increase in overall shares by approximately 34%, a significantly higher value than was predicted by the S&P 500 index. How and why would a company like McGraw-Hill which has traditionally shown growth every year, has maintained a solid stock price, and pays dividends regularly, decide to just sell off its education business?

In reviewing articles written by several of the major finance publications, the sale is described to only help the company (or should I say companies) in the long run.  As with any company, the business strategy should be reviewed on a regular basis, making sure that the short term and long term goals can still be met. In the case of McGraw-Hill, the board of directors has been monitoring the education industry as well as the finance industry and has recently seen that state budget cuts across the country have resulted in a decline in sales for seven of the last eight quarters. However, the board also knows that the education business is in a transition period
from a print focus to digital focus and has been trying to ensure it has the capital to successfully make this transition to be profitable. Another very important part of the decision was based on shareholder feedback. Many were complaining that the returns were being impeded by the fact that McGraw-Hill was two completely unrelated businesses. As a result, the decision was made to split the two businesses into two, selling the education business to a private equity firm. In doing so, the financial business increases shareholder value and balance sheet flexibility, and the education business becomes more agile in its quest to become a completely digital educational services business. In other words, the education business gains speed, which means products and services can make it to market much more quickly in order to drive growth and market share.

Based on basic business strategy theory, the most successful businesses always keep their shareholders, customers, and employees happy. The decision seems to have addressed the shareholders, but what about the customers and employees?  How would you evaluate McGraw-Hill’s decision to split their businesses?   Should there be any concern for the education business now that it’s owned by a private equity firm?

 

Sources

McGraw-Hill to Sell Education Business to Apollo for $2.5 Billion

http://investing.businessweek.com/research/stocks/news/article.asp?docKey=600-201211260935PR_NEWS_USPRX____NY18223-1&params=timestamp%7C%7C11/26/2012%209:35%20AM%20ET%7C%7Cheadline%7C%7CMcGraw-Hill%20to%20Sell%20Education%20Business%20to%20Apollo%20for%20%242.5%20Billion%7C%7CdocSource%7C%7CPR%20Newswire%7C%7Cprovider%7C%7CACQUIREMEDIA%7C%7Cbridgesymbol%7C%7CUS;MHP&ticker=MHP

 

McGraw-Hill Sells Education Unit To Apollo: Bellwether For Educational Publishing?

http://www.forbes.com/sites/jamesmarshallcrotty/2012/11/28/mcgraw-hill-sells-education-unit-to-apollo-bellwether-for-education-publishing/

“We’re Happy with our Return on Investment”

Posted on by w13justin

So many companies have taken a similar approach to the continued weakness in the world economy of downsizing that it was a nice change of pace for me to hear about a local Chicago-based company, William Blair, who has taken the approach of increasing in size. This company’s approach of staying debt free and staying away from risky trading strategies has kept it profitable even in this time of economic uncertainty and William Blair continues to expand its staff in order to increase business and serve its customers better. “What fed William Blair’s growth spurt”, an article in Crain’s Chicago Business, explained this approach and stated, “We’re happy with our return on investment”. This statement seemed strange to me as many companies think that profits are most important, no matter the costs. This could contribute to some of the issues that we are currently facing with our economy.

Lehman Brothers and MF Global are examples of companies that used excessive debt and risky trading strategies to try and make excessive profits. These companies seemed to have never been “happy with their returns”. By overleveraging and having risky trading strategies that did not provide a correct risk hedge, these companies went bankrupt. In turn customers lost their life savings, jobs were lost, and some clients will probably forever have trust issues with banking institutions.

It is my experience in the grain industry that many customers are willing to pay extra for great customer service and this service from a trustworthy company can be well worth any extra cost. I have also noticed from my trading experiences that although excessive debt and risky trading strategies can produce huge profits and be very sexy when receiving a salary these short-term profits can affect the long-term strength of the company. This can affect perhaps the strength of the industry as a whole.

In the end, companies in the current market seem to be hesitant to hire more people with the complete uncertainty in the world economy. While companies, such as William Blair, are taking a strategic approach of sucking up talent in this market and have given up short-term profits by keeping debt low and limiting risk for that of a solid return on their business strategy, others have chosen the opposite and are now suffering the consequences. The question becomes do short-term profits justify possible long-term negative effects as shown by MF Global and Lehman Brothers? I think it’s refreshing to see a company with management willing to give up these short-term profits. To me it almost becomes an ethical question, where a manager can decide what is most important to the company.

 

Sources

  1. Marek, L. “What fed William Blair’s growth spurt”. Crain’s Chicago Business. 26 Nov. 2012

http://www.chicagobusiness.com/article/20121124/ISSUE01/311249989/what-fed-william-blairs-growth-spurt

  1. “Lehman, MF Global Dominate October Claims Trading”. WSJ. 29 Nov. 2012

http://blogs.wsj.com/bankruptcy/2012/11/29/lehman-mf-global-dominate-october-claims-trading/

In Mexico Auto Plants Hit the Gas

Posted on by w13rob

While the US has been heavily promoting manufacturing and trying to boost the manufacturing sector of the economy, it is our neighbor to the South that is making waves and building a strong economy from an industry that was born in Detroit, MI.  Just six short years ago Mexico was 9th in the world in auto manufacturing and today they are the 4th largest manufacturer in the world only trailing Germany, Japan and South Korea.  Now Mexico is forecasting that they will pass all of the countries ahead of them within the next few years because more and more automakers are building plants in Mexico.  Volkswagen, GM and Daimler have all announced new plants in the past year putting Mexico on pace for their lofty goal.

The question becomes why is Mexico all of a sudden the most attractive place to build a car versus the traditional powerhouses like Germany,Japan and the US?  The global shift towards smaller more fuel efficient cars has cut small margins even smaller in the auto industry.  Car makers are attracted to Mexico because of the currency advantages, the ability to operate plants 20+ hours per day and the skilled labor force that already exists in Mexico.  At first car makers were concerned quality would suffer in Mexico but they tested cars built in Mexico versus those built in Japan and cars being produced in Mexico are passing with similar scores to those automobiles that are produced in Japan. 

Mexico is forecasting huge growth in the sub compact auto industry not only because of the slumping global economy but also because the US government continues to push efficiencies in mileage and fuel economy.  The higher demand for these smaller cars has forced car makers to adjust how and where they produce their automobiles. In addition to the labor savings and higher demand for subcompact cars Mexico is extremely appealing because of its close proximity to the US.  In addition to ease of delivery Mexico has a number of free trade agreements with over 40 countries. Mexico’s free trade policy is a stark contrast from other countries like Brazil who has mostly shut down free trade.  Car companies can now make cars at a cheaper rate Mexico and have them delivered to the US in a number of days versus the weeks it takes to ship a car across oceans from Asia or Europe. 

The fact that Mexico is rebuilding their economy around the auto industry and that early entrants such as Nissan have seen huge success off of their investment in Mexico,  is a nice reminder that we truly live in a global economy.  Every day companies are faced with tough decisions on where to manufacture their products in order to achieve the highest quality at the most efficient rate.  When improving margins or developing a new product a major business strategies are made on where to manufacture and it is bringing new opportunities to countries all over the world.  The US will have to continue to reinvent our economy and image on the world stage in order to compete with up and coming countries like Mexico. 

http://online.wsj.com/article/SB10000872396390444083304578018462369529592.html

 

You made need a rope before jumping off the Fiscal Cliff

Posted on by w13lewis

The economy is still not doing that well, the Fiscal Cliff is looming, and large companies still continue to pinch their pennies. So why are many publicly traded companies ready and willing to give their extra cash away? Good question…

In the recent weeks, in the light of the looming Fiscal Cliff where many believe Congress will not be able to reach a resolution and the dividend tax rate will jump (among other things), people are starting to get a bit greedy…or cautious, or weird…and some publicly traded companies are declaring large special dividends to their shareholders, which in some cases also means the CEO pads his pocket too along with all other employee-owners.

The most recent case in the 68 cases known so far is that of Costco. The big-discount, warehouse style retailer just recently announced $3 Billion in Special Dividends to be paid in December bringing the payout to $7/share versus the regular dividend rate of just $1.10/share. This will of course make for many happy shareholders as it will prevent them from paying a higher tax on their dividend returns should the tax rate increase next year. It will also have the effect of reducing Costco’s $5 Billion in cash before any fiscal uncertainty of next year. Experts suspect the likes of Bed Bath & Beyond, Staples, and Williams Sonoma to soon join the ranks (WSJ).

We are also likely to see companies move up their dividend distribution date from 2013 to 2012 to ensure payout to shareholders with the current discounted tax rate instead of risking uncertainty of next year. Wal-Mart is a big proponent of this strategy, and we are sure to see similar stories before the end of the year.

In addition, some market analysts are calling for a bullish market no matter what the outcome of the Fiscal Cliff is. Since Government spending will no-doubt decrease, the bond rates remain flat; the only chance of a strong return on investment is to go with stock. This is playing right into the hands of many mature companies looking to excel in the near-term.

Again, looking at Costco; they borrowed $2 of the $3 Billion used to pay the special dividend, but they also have plans to expand their stores and distribution centers. They are looking to expand business, not decrease it despite taking on some additional debt and decreasing their credit rating from A+ to AA-. The outcome looks the same for other large retailers like Wal-Mart and Home Depot. As investment options narrow, new business strategy takes hold. (Barrons)

As we near next year and the uncertainty of our fiscal policies seem no better defined, these trends will continue for companies that are cash heavy with stable growth. We will continue to see special dividends distributed to aid those favored with stock options, distribution dates moved forward, and stocks preferred over many other short-term investments. Only time will tell how they all fair. (Yahoo)

Other Sources:

http://www.bloomberg.com/news/2012-11-19/special-dividends-surge-fourfold-as-tax-increase-looms-in-u-s-.html 

http://on.wsj.com/TtLxai

 

 

 

Black Friday and the Capsim Connection

Posted on by w13trista

Okay, so if you’re like me, you’re already tired of all the annoying holiday shopping ads on TV that are all telling you that right now is the best time to buy (fill in the blank product here) right now!  And of course with Black Friday just past us, the ads were in full force with “door buster” deals and other extra perks for shopping early.  Added to the drama this year was the fact that value stores such as Wal-Mart and Target opened on Thanksgiving evening as opposed to 4 AM or whatever obnoxiously early time it was last year.  But now that the drama of the biggest shopping day of the year has died down a bit, I started to wonder if any of the ads and marketing strategies actually paid off for these brick-and-mortar stores.

In a Forbes.com article posted on November 28th, the author suggests that rather than Black Friday sales results giving us a glimpse of the holiday season’s hottest items or predictions on whether this holiday season will be better or worse than last year, consumers’ shopping and purchasing trends and habits are changing and that retailers should be cognizant of these changes if they are to have a successful holiday sales season.

For example, the traditional big shopping days such as Black Friday are less and less appealing to consumers with Black Friday sales down 1.8% from 2011.  Whether stores open on Thanksgiving night or at 4 AM on Friday, consumers find neither time convenient.  They are choosing to shop at more schedule-friendly times or even online.  With e-commerce and personalized electronic ads becoming more and more prevalent, is it any surprise that Black Friday online says were over $1 billion, which made it the largest (dollar wise) online shopping day of 2012 so far?  This is a 26% increase from online sales on Black Friday 2011!

Another message retailers need to interpret is that consumers may be becoming calloused to the inundation of sales ads.  As we learned in our marketing class last quarter, mass media is not nearly successful as it used to be.  Retailers need to create more personalized, relevant ads for their target market and cut through the incessant advertising noise that bombards consumers every day.

This article got me thinking about our Capsim simulation and how some of these concepts might apply.  Although we just started and we’re all still forming our strategy, there are some key concepts that we’re putting into practice this quarter.  It will be key for us all to identify our target market, know and understand the needs/wants of that market and then create products and a marketing campaign that our target market will be receptive to.   Although there is no Black Friday in the Capsim simulation (which I think we’re all thankful for!) for us to use as a basis for purchasing trends such as the Forbes.com article suggests, we will hopefully put into practice some of these key business concepts as we move through the 7 Capsim rounds.

CAPSIM and Chinese Government Infrastructure Spending?

Posted on by w13richard

While it might seem that a business simulation website and government infrastructure spending in China might be worlds apart, the underlying strategy theories and challenges between the two are very much the same.  Capsim is a web learning application that challenges users to attempt to duke it out with other real teams and computer opponents.  The essential challenge that is presented is to attempt to out maneuver your opponents in an effort to gain additional market share and subsequent profits. The Chinese government’s efforts to invest in infrastructure to stay ahead of the curve of its growing middle class needs present the same problems my team faces but with significantly greater consequences. One need not look farther than Detroit or Las Vegas to see what happens when exuberance and poor forecasting meeting economic decision making.

What is the common challenge between these two situations? Well, in a word, uncertainty. Uncertainty is the lack of true knowledge of the future environment as well as the actions of other players in the global or virtual world. While in both situations, one could attempt to forecast probabilities of what would be required to support future business ventures or population transitions or growth, no one can know for sure.  This uncertainty can doom a seemingly smart and well planned out investment today to become a nightmare tomorrow.  The Chinese policy of building 20 cities a year for the next 20 years is a perfect example of poor planning to models that don’t properly predict changes in an economy. The absolute waste of resources that that is going into these ghost cities within China reminds me of the comparison between the cost of bombs and schools made by Eisenhower at the end of this term.

I was reading a Financial Times article today about perceived overinvestment by the Chinese government  that really got me thinking about the strategy to be played in our virtual competition being fought on the web.  While moves that my team makes are truly inconsequential to my existence, investments and the forecasts that fuel them are being made in one of the largest emerging economies in the world and they may be proving to be the wrong decisions. While there are opinions and models that show both sides of the argument, the fact remains that models can be wrong.  To this end, the study mentioned in the article notes an effect of this investment on 4 percent of potential GDP as well as 10 percent of actual GDP. Considering the complete poverty that is experienced within many areas of Chinese society, one is forced to consider how this value can be better directed to ventures that would help those individuals improve their economic situations.  Added on top of this, no one can completely account for the human cost of misallocated resources. Just imagine if Albert Einstein was not given the opportunity to receive any education in his lifetime…

While this may prove out to be utter hogwash criticism of long term planning and development by Beijing, one has to recognize the reality that all of these decisions and really all of life’s decisions in general, are based on uncertainty and essentially game theory. After reading this article, I sat back and thought of other examples of terrible investments made in ventures that at the time seemed to be the greatest thing since sliced bread. Of course, each decision varies significantly in financial value; the point that really can be driven home is the absolute uncertainty of operating in a dynamic world.

What sorts of decisions have you seen or made in your personal or work life that proved to be terrible even though everything pointed to a great outcome at the time you made the decision?

 

China’s over-investment problem

http://ftalphaville.ft.com/2012/11/29/1288653/chinas-over-investment-problem/

 

The Google Ceiling

Posted on by w13michael

Google has a problem.  Google’s problem is that for all their variety of products, their only revenue stream of consequence is advertising.  And for all of the fancy ideas and products they throw at the market, it appears that unless they can take back the mobile handset market with their Motorola purchase (which they do not appear to be positioning themselves to do), advertising is going to be the primary revenue stream for Google for a long time to come.

Google has a business model problem, and the cornerstone of this problem is the fact that while Google is in the advertising market, it has outgrown the market.  In the early years, their growth was fueled by the rapid growth in electronic commerce, and the fact that traditional advertising was not able to drive electronic commerce.  Since then the market has stabilized and Google is the established leader in electronic advertising, with the traditional channels still maintaining print, outdoor, television and other media channels.  If it can be reasonably assumed that the largest growth in electronic commerce is behind us and that the current landscape will be increasingly more mobile where Google has lower market share, Google has limited potential for continued growth in advertising.

Google’s revenue is almost entirely in advertising, and they don’t appear to be branching out any time soon.

For all its searching (and finding) adjacent markets, it appears they only make halfhearted attempts at monetizing these markets.  Take for example the ability to perform mathematics and graphing functions through their search engine.  Before Google entered, WolframAlpha provided this capability through free trials followed by premium memberships which have additional flexibility and capabilities.  However, Google appears to have entered only for the purpose of  limiting the revenue potential of a minor competitor, if WolframAlpha can even be called this.

Meanwhile, Apple and Amazon have established themselves with business models that, while very different from Google, flank and de-position the Google business model.  Apple has built a successful model of obtaining revenue from software, hardware, services, as well as content which Google has not been able to replicate quickly enough.  Not only this, but Apple has clearly been moving away from Google in all elements of their operations, recently even taking Google Maps from their mobile devices – clearly in an effort to eliminate the potential for advertising revenue through popular Apple devices.  Likewise, Amazon has built a successful model entirely based on selling products and online content; if Amazon is the premier internet source for products and content, they also control the advertising of the content and Google is again left out of the picture.

Google needs a 2.0 strategy in order to continue their growth.  This strategy must appreciate, but not limit itself to their advertising market strengths.  This strategy must not simply copy the strategy of Apple, but must provide differentiated value in order to become a significant source of revenue.

REITs and the Changing Business Environment

Posted on by w13peter

In class we discussed the challenges businesses face when keeping up with current trends, such as Kodak moving to a digital format and Blockbuster losing out to Netflix.  In both cases it was apparent each company was reluctant to change a strategy that they felt was working.  These companies were overconfident in their current approach and thought they were so large they could never be unseated from the throne.  I started to wonder how these changes in the business environment may affect my place of business.

I work for a company that has been successfully running real estate investment trusts (REITs) since the 70s.  My company started with small investments in multi-family housing and later moved to REITS comprised of various retail centers and malls.  The biggest concern that my company faces has been the growing number of online sales and internet only retailers such as Amazon.com.  Many online retailers offer free shipping and no sales tax.  Furthermore they can offer better prices, because their overhead is much lower as they don’t have to pay rent for a customer facing brick and mortar building.  So why would anybody shop at retail centers anymore?  It is far more convenient and cost effective to shop online.

This is where strategy plays its part in my business.  We have recently moved away from centers that feature retailers such as Best Buy or other stores that have been severely impacted by the online sales revolution.  We have been focusing more on assets that require a physical presence with customers, or the items that they sell are not as easy to sell over the internet.  These are retailers such as grocery stores, discount stores and convenience stores.  However, there are already services that may start to reduce sales at grocery stores, such as Peapod from Stop and Shop.  Other assets we have been investing in lately are office spaces.  Office space can be lucrative, but it has its risks.  Recently we were looking to purchase the office buildings of a top tier national printing company.  We discovered that they were struggling to keep up with current technology and walked away from the deal because of concerns that they might not be able to pay their rent in subsequent years. 

I believe to position ourselves for the future we need to make investments in real estate that is directly associated with technology and the advancements that are made every day.  I believe we should invest in assets such as the warehouses that act as Amazon’s distribution centers, or the data centers that house the servers for the massive online companies.  These types of assets pop up occasionally for sale, but are very hard to buy because of competition from other real estate investors.  I hope that management is not overconfident in our current approach and are willing to change their strategy to keep up with the business environment specific to REITs.

To Green or NOT to Green that is the Question

Posted on by w13kristen

A corporation’s decisions regarding sustainability impact both their brand and their bottom line.  There are direct and indirect strategic reasons for a corporation to “go green.”

 The global ecosystem has been threatened which makes reducing waste and increasing energy efficiency more and more important.  Corporations can conserve by cutting down on packaging, using energy-efficient lighting, recycling, purchasing energy-efficient office equipment, and adapting to alternative heating and cooling solutions.  Many companies are warming up to the idea of working in LEED Certified buildings.  “LEED is an internationally recognized green building program.  It provides building owners and operators with a framework for identifying and implementing practical and measurable green building design, construction, operations, and maintenance solutions” (https://new.usgbc.org/leed).  A 2011 study released by MIT found that sustainability is now a permanent part of 70% of the corporate agenda (www.earthshare.org). 

 Interbrand released their 2012 annual Best Global Green Brands report, and automotive and technology companies dominated the list.  Toyota, Johnson & Johnson, and Honda were the top three players.  This report “… examines the gap that exists between corporate environmental practices and consumer perception of those practices…” (www.interbrand.com).  Reports like this not only strengthen a brand, but also encourage and challenge corporations to further develop new energy-efficient practices.

 As more and more companies realize the financial benefits of “going green,” they also recognize the positive way that this strategy impact their customers, employees, and overall image.  A positive environmental message attracts superior associates, creating a healthier, safer, more team-oriented work environment.  92% of young professionals would be more inclined to work for environmentally-friendly companies (www.earthshare.org).  Many employers offer team members the option to work remotely which saves in vehicle maintenance, gas, and parking costs and may also relieve external family pressure and stress.  These factors, not only, cut overhead expenses, but also increase employee efficiency and overall morale. 

 A modern family tends to be more environmentally conscious than those from past generations.  Recycling and reducing waste have become commonplace practices.  A focus on sustainability attracts and engages customers and is a brand-strengthening asset.  35% of consumers are willing to spend more for green products as long as the product is comparable or better than the competitor’s product (www.earthshare.org).  “Going green” also tends to attract investors and can create a positive media buzz.  It is important, however, that a corporation does not misuse this asset.  “… A brand’s efforts in this area could serve as an under-utilized asset, or conversely, suffer due to accusations of ‘greenwashing’” (www.interbrand.com).

 It is clear that businesses no longer believe that “going green” is a fad.  Consumers demand green alternatives and illustrate this through their spending patterns.  The focus should always remain on the bottom line, but attention to sustainability has proven to be a way to positively impact these figures.

 

 Sources

http://www.earthshare.org/greening-business.html

http://www.interbrand.com/en/best-global-brands/Best-Global-Green-Brands/2012-Report.aspx

https://new.usgbc.org/leed