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August 29, 2007iPhone Envy
As I landed at LAX today and got off the plane, I was forced to bob and weave between several security guards. It seems that there was quite a bit of fanfare for the inaugural Virgin America flight from LA to NY. Caught up in the celebratory atmosphere, I grabbed a free cookie and soaked up the excitement. Then, to my surprise and nestled in between several security guards, I saw the Big Cheese himself, Richard Branson. Being only a couple feet away from him, I fumbled for my iPhone like a thirteen year old teenager. Then, out of the blue, I was interrupted by the man himself, "Hey! Is that an iPhone?" "Yes!" I replied. "How do you like it?" "It's great!" I responded. Trying to extend the conversation, I awkwardly followed up with a compliment on his persistence in opening the US aviation market to competition. This was obviously "not so smooth," as he smirked, took one more jealous glance at the phone and then moved on in preparation for the flight.
I got you figured out Richard; today it's our airlines, tomorrow our airwaves. He totally wants to be an American.... (and yes, I did manage to snap a quick (blurry) pic).
August 27, 2007Write Downs?
Yikes, the article on the front page of the WSJ today hints at the pending write downs of debt that may be coming for banks. The Home Depot Supply story is quite alarming as we see an 18% reduction the value from just two months ago due primarily to the tightening credit market. The terms are also not what they used to be, as the debt now actually has covenants and guarantees - shocking - that a borrower might actually be on the hook for the loan. Yet, the primary significance that the article highlights is that "if the banks can't sell the debt in bond markets, and it sits on their balance sheet, they have to mark down its value, which some can ill afford to do". Why does it seem that the press is all over private equity when in the end its the terms extended by bankers that truly has overheated the market? It seems that if the banks hadn't agreed to ridiculous terms on many of these deals and had negotiated in the downside protection necessary their wouldn't be near the threat of having to "absorb tens of billions of dollars of write-downs".
August 27, 2007How bad is it really for the homebuilders?
On August 1, 2001, a well-known Colorado homebuilder and Quist client, Sanford Homes sold to Beazer for $66 million. Beazer's stock price at the time, adjusted for splits was $22.58 per share. The Beazer ride has been wild. If Sanford shareholders had taken an all stock deal and held their position, their value would have peaked at more than three times the price in January of 2006 (nearly $250 million) when Beazer stock reached $82 per share. Of course, today their position would be worth about $30 million as Beazer stock on Friday was $10.18. Not quite the Internet Bubble (yes, Beazer has had some problems that others have not) but remarkable nonetheless. I guess the recent Business Week cover "Bonfire of the Builders" says it all.
August 26, 2007FASB Forms Fair Value Resource Group
As part of its mission to improve and enhance the quality, consistency, and comparability of financial statements, the FASB has formed a resource group to address what additional and more specific valuation guidance is needed for financial reporting. This will go beyond the guidance provided in FASB Statement No. 157, Fair Value Measurements. This formation of this group was formally anounced on June 21, 2007, and the first meeting is expected to be held in October 2007.
August 26, 2007Sub-prime Lending Fallout
As everyone has been reading about for weeks now, the effects of sub-prime loan defaults have begun to trickle down throughout the US Economy. On Thursday, August 23rd Home Depot felt the effects first hand. The Company has been in negotiations to sell its wholesale distribution business to a trio of private equity firms for $10.3 billion. However, given the significant write-downs lenders are facing as a result of sub-prime defaults, the deal has been stalled. The stall has been a result of lenders becoming more risk averse, given the significant portfolio risk that has surfaced. This of course is magnified by the Home Depot wholesale division's direct link to the real estate markets, which are greatly stressed by foreclosures.
August 23, 2007The Value of Perception
We have all heard the phrase "image is everything," and in fact have seen the concept ring true. Over the years, advances in technology coupled with the increasing number of media outlets have seemed to make the world a much smaller place, making perception more important than ever. In today's market the mere mention of scandal can throw a company's stock in a downward spiral. While it is easy to see the impact negative perception can have on a financially sound company, it is much more difficult to measure the value of a positive public image.
August 21, 2007PWERM vs. OPM
Tom Miller just finalized an article that will appear in the October issue of Business Valuation Review. Tom tackles the complicated subject that has many people divided in the valuation world - PWERM vs. OPM. As a preview of the content, Tom's position identifies the complexities of both approaches as well as the commonalities of the inputs. We expect some feedback from the valuation community as there are plenty of opinions as to the best approach to value. In the end, both are defensible in the right circumstances and more importantly when they are implemented properly.
August 21, 2007Ownership Thinking Conference
On September 14-15th this fall, I am speaking on valuation at the First Annual Ownership Thinking Conference at the Inverness Hotel in Denver. The conference organizer is Brad Hams, a nationally recognized leader in Open Book Management. Brad has assembled an impressive group of thought leaders in their respective fields and is himself a true champion for "erradicating entitlement". The conference will tackle the theme of "creating a culture of earning with ownership thinking" and is targeted primarily at business owners. Check out the flyer.
August 16, 2007Is the party over?
Last week Tom and I attended the Northwest Financing Forum in Seattle hosted by ACG. The conference was a sellout well in advance and as you walked into the event the signs read `No walkup accepted. Event soldout'. Well, given the two weeks prior to the event and tightening credit market, as one attendee remarked "this isn't the event I signed up for". There were a number of attendees, yet plenty of empty seats at lunch. The excitement that we have seen at financing events with good deals to chase and plenty of flexibility to do it with was absent. The mood was sort of a `nervous laugh' when you talked about the markets and the direction they are headed. The highlight was the incredible turnaround story of Brooks (the shoe company) as its CEO told the true success story of how a company reinvented itself. Yes, I am going to go out and buy a pair of Brooks shoes. By the way, if you haven't seen it check out the `What is Life?' ad on their website. It has absolutely nothing to do with valuation but is cool.
August 10, 2007LBOs Gone Bad
The most recent issue of Business Week focuses on the well publicized problems of the housing market, which is definitely fascinating. Yet, there is a short article on page 40 on the plight of Spectrum Brands, which is a must read. The article highlights the 12 year history of Spectrum and the growth through leverage acquisitions that has left the company with a mountain of debt. Spectrum followed the lure of acquisition and added new brands to build itself into a consumer brand powerhouse. As the article reveals on page 42, "...Spectrum might have been able to handle the ups and downs relatively well if it didn't also have to deal with so much debt." Its easy to wonder what might well happen to the `Spectrum's' of today's private equity market over the next decade. Carrying debt of 9 times operating profit is "unmanageable" for most companies and is a lot like living pay check to pay check. Everything is alright until your car breaks down.
