Put 90 minutes aside on 24 March for breakfast with veteran US investor Bill Payne while he talks about governance in early-stage businesses.. This is an Institute of Directors event at the Wellington Club, and neatly complements the IoD’s “Fresh thinking, First boards” programme aimed at lifting the performance of small and medium businesses through smarter governance.
Here’s some background on Bill:
Bill Payne is in New Zealand as the BNZ University of Auckland Business School Entrepreneur-In-Residence. to impart some of his experience to NZ entrepreneurs, investors and universities. Bill is a prominent angel investor - so well known he is often referred to as the closest thing America has to an Entrepreneur Laureate. His angel investing history stretches back almost 30 years after selling his own engineering business to DuPont in 1982 and includes being involved in setting up four of the most prominent angel organisations in the USA.
He has written a book, The Definitive Guide to Raising Money from Angels, as well as having written or been interviewed for articles in The New York Times, USA Today, Business Week and many other investor/education articles and websites.
From 1995 he served as Entrepreneur-in-Residence at the Kauffman Foundation for twelve years. The Kauffman Foundation is a not-for-profit foundation in Kansas City often referred to as the world’s largest foundation devoted to entrepreneurship. Its vision is to “foster a society of economically independent individuals who are engaged citizens, contributing to the improvement of their communities” and it does this through education (including mentoring), entrepreneurship, advancing innovation and research.
While Bill is in New Zealand he will be working with angel investor groups, running seminars, meeting with government organisations (NZTE, FRST etc) and serving as a mentor to some ICE Accelerator companies alongside the ICE Angels. He’s also got a blog up and running on the Icehouse incubator website.
It is very rare that we get a visitor of Bill’s experience and respect in New Zealand and for such a long time. Over 50 organisations including 6 incubators, 5 universities and potentially thousands of people will be able to gain directly from Bill’s visit.
A new initiative from the Institute of Directors in NZ aims to lift governance skills in small and medium businesses. Most are owner-managed, and many suffer from the owner spending too much time working “in the business” rather than “on the business”.
Perhaps the biggest fear for owner-managers is loss of control, but a good non-executive director isn’t there to usurp the owner’s authority, instead helping shape thinking and encouraging decisive action:
They are committed only to the company, but can be objective about it.
Combine this level of commitment with skill in critical areas - say, international trade, marketing or finance - and you can tap into a powerful source to guide the company and help it to grow and develop. A well-chosen board is also one of the cheapest sources of advice available.
A good board will challenge the perspectives and attitudes of the owners and managers. If the owners, perhaps unconsciously, have been used to getting their own way, they may find this a bit of a strain…to say the least. The smarter, progressive ones will get over it and recognise the benefits of being challenged, but also properly supported, by independent-minded people.
The role of owner, owner-manager or Managing Director can be pretty lonely. A board gives them the opportunity to test their ideas and get a sense of perspective from people not involved in the day-to-day
Another common fear is expense. However, just like hiring good staff, a good director will easily help you make or save many times the cost of their fees.
If you look at successful medium or large businesses, almost all have at least one independent non-executive director. Very few of those companies would consider not having that oversight and advice. Visit firstboards.iod.org.nz for more information.
Disclosure: I’m a member of the IoD Wellington branch committee.
Yesterday I signed a deal I’ve been working on since late last year. You’ll no doubt have noticed the paucity of posts to this blog while my time has been otherwise occupied. No, I’m not ready to reveal details yet, so don’t ask. I will share one thing, though - the power of a good term sheet.
Having got past the basic decision to do a deal in principle, negotiations often bog down because someone tables a detailed legal document and everyone turns into amateur lawyers. The wordsmithing takes forever with lawyers heavily involved on what is actually low value work. Deals can easily fall apart at this stage. Here’s the thing, though; a few basic forms of legal contract will cover most commercial transactions. Once the deal-specific principles are agreed, lawyers can quickly modify their boiler-plate templates to generate a deal-specific legal contract.
A term sheet is a non-binding document, often only one or two pages long, that lists the basic points of a deal. We saved time, headaches and a fortune in legal fees because we documented the basic deal in a term sheet before the lawyers got really busy. They made some suggestions as the term sheet was negotiated, but only to make sure we were clear on what we meant and to avoid any pitfalls. Once we reached agreement in principle, as documented in the term sheet, the lawyers quickly drew up the legal documents in a few days, and it only took one round of minor amendments to achieve final documents that we all were happy to sign.
Entrepreneurs, business leaders and investors should know and understand what’s in a typical contract, but focus on the deal and hire a good lawyer My experience is that good deal-oriented lawyers not only can advise you on the deal, but also are great on the words.
“It’s only words, and words are all I have to take your heart away”.
“We started with 15 ‘maritime companies’ and now we are hosting 72. Ten of them have so far been successful at hijacking… The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials”…
“Piracy-related business has become the main profitable economic activity in our area and as locals we depend on their output,” said Mohamed Adam, the town’s deputy security officer. “The district gets a percentage of every ransom from ships that have been released, and that goes on public infrastructure, including our hospital and our public schools”…
Piracy investor Sahra Ibrahim, a 22-year-old divorcee, was lined up with others waiting for her cut of a ransom pay-out after one of the gangs freed a Spanish tuna fishing vessel. “I am waiting for my share after I contributed a rocket-propelled grenade for the operation,” she said, adding that she got the weapon from her ex-husband in alimony. “I am really happy and lucky. I have made $75,000 in only 38 days since I joined the ‘company’.”
I wonder how long it will take for investors in guaranteed-rental investment properties, high-yield finance companies and other such exciting opportunities to jump in.
Fletcher Building, one of New Zealand’s most prominent companies, marked its 100th anniversary this year. As part of the coverage, Hugh Fletcher, grandson of the founder and a prominent businessman in his own right, was interviewed by Radio New Zealand on Saturday morning. It’s become fashionable to disparage Hugh Fletcher in recent years, but he points out that, in his 20 years as deputy CEO or CEO, shareholders achieved an average 16% annual return; that beats most investments anywhere in the world. However, he freely admits he was “tired” at the end of his tenure. I’m not commenting on Fletcher’s career, but I will pick up an interesting distinction he made between mistakes and bad outcomes. A decision, a strategy may be the right one, but sometimes the outcome is bad. Maybe it was bad execution, maybe bad timing, maybe just bad luck. That doesn’t make the original decision a mistake. You might argue that this is equivocation, but Fletcher makes a valid point. Do you become risk averse and do nothing to avoid the possibility of mistakes? Clearly not. All business involves some degree of risk, and good businesses like Fletchers tend to boldness. However, in an era where many media commentators and shareholders are eager to demonstrate their superior 20/20 hindsight (from positions of much lower personal risk), I doubt many will take it on board.
The boards of Stanley Works (maker of the ubiquitous Stanley Knife which has expanded onto a full range of tools and building security products) and Black & Decker (power tools and work benches) have recommended a merger to their shareholders. Stanley shareholders will own 50.5% of the combined company and Black & Decker shareholders 49.5%. Synergistic opportunities are very clear. These two companies have the same mix of trade, manufacturing and DIY end-users and the same distribution channel partners (especially retail). They can merge accounting, IT, logistics and sales, and do some interesting new promotional bundles. Possible stumbling blocks? How similar are their corporate processes and cultures, their promotional style, the way they do things? However, both companies have previously acquired several complementary product operations without much grief, so I’m not expecting many issues at the operational level. If they focus on the merger rationale (ie. back office, front office and distribution channel synergies), then, off the cuff, this sounds like a very smart move.
Exporters are lauded locally in most countries; but when they start establishing offshore operations in manufacturing or product development, they are quickly castigated for doing so. The critics have a very naive and short-sighted view. For over a decade, I’ve been arguing that exports are not enough:
The world’s most successful companies do not just export globally - they operate globally. That means having sales, service, logistics, production and development operating around the world. Look at the world’s greatest companies. How many do things only at home to ship out to the rest of the world? I can only think of one - Boeing. The others made the leap from exporting to international operations…. To minimise the cost of distance - freight, duties, foreign exchange risk and in-transit inventory; to reduce production costs, through greater volumes, lower material costs and lower manufacturing wages (an unpleasant reality); to get closer to customers for more efficient service and faster reaction to changing needs; to build critical mass for future investment; and to build credibility with large global customers.
I’m glad to hear, via The Independent’s Nikki Mandow, that others are pushing the same message. At the Export New Zealand-organised Go Global conference in Auckland today, Jonathan Ling (the head of corporate heavyweight Fletcher Building) surprised many of those present by arguing that lifting the country’s outbound foreign direct investment is essential for future economic prosperity. Despite some problems, overall Fletcher attributes enormous benefits to its offshore activities. On a smaller scale, others report similar nett gains. Even the government is getting the message, with more equitable tax arrangements for offshore direct investment.
Here’s why I think it’s a good idea for countries to encourage outbound foreign direct investment:
Global companies like Nokia, Vodafone, and Nestlé operate in many countries. The interesting thing is that large numbers of their high-value jobs are still at home- in development, marketing, and corporate administration. They are surrounded at home by a plethora of supporting organisations- in banking, IT, law, accounting, advertising, travel, short-run early-stage manufacturing, research, education, etc. Together, they bring home huge revenue and profit streams.
If New Zealand wants a high-value economy, it needs more than just exporters. It needs global businesses that operate offshore in all facets of their business. New Zealand should encourage its businesses to invest offshore, not deride them for it. Without global operations, we won’t get a Kiwi Nokia or Vodafone. With global operations, we look like getting a Kiwi Nestlé. We could sure do with some more.
The alternative is to repeatedly build small niche businesses and sell them off for a few million dollars; great for the founders, but not a sustainable and substantial national economic strategy.
I was sorry to hear that listed NZ technology business Provenco Cadmus has called in the receivers. On a positive note, the receivers think that the underlying operating businesses (none of which are in receivership) can keep going under new or restructured ownership.
By sheer chance, after Peter Maire sold Navman and we’d sold Deltec, he and I found ourselves both at the same time getting excited about the payments industry. My move was to support the creation of Fronde Anywhere (mobile banking, ID authentication and payments). Peter had a much bigger game to play, building stakes in two major NZ payment hardware businesses and promoting their consolidation to create a globally competitive firm. Timing was an issue - the merger took far too long to win approval, and then the global banking system went into meltdown. Peter’s naturally disappointed about how it’s all turned out; presumably his 6% stake is not worth much now. But life goes on.
“I’ll be helping out the receiver any way I can. It’s still a good business, and I expect there will be a lot of interested parties. Then I’ll be moving on. There’s never a shortage of things to turn my time to.”
That’s the thing. As Fred Astaire and Ginger Rogers sang, “Pick yourself up, dust yourself off, start all over again“.
I’m chairing an Institute of Directors dinner at The Wellington Club, 6.15pm on Tuesday 4th August. Our guest speaker is Rick Christie, addressing the question “Challenges for chairs of government companies - can a private sector model work?”
Rick had an impressive executive career, as a director of BP New Zealand, Managing Director of listed industrial group Cable Price Downer, CEO of Tradenz (NZ Trade Development Board), and CEO of investment group Rangatira. He’s even busier as a professional director - he is currently Chairman of Ebos, Chairman of ProvencoCadmus, Chairman of Argenta, and a Director of Tourism Holdings, Wakefield Health, and the NZ Pork Industry Board.
To name but a few of the positions Rick has held, until recently he was Chairman of crown research business AgResearch, Chairman of the government’s Growth & Innovation Advisory Board, Deputy Chairman of the Foundation for Research Science & Technology, and Chairman of the Victoria University Foundation Board of Trustees, He was a a Director of Television New Zealand, and a member of the Prime Minister’s Enterprise Council.
Clearly Rick must know a lot about chairing government entities! Given Wellington is the nation’s capital, it’s no surprise that the dinner sold out almost straight away; but one place (price $110) has come available. The dinner is restricted to IoD members with at least 5 years experience as a director. The Chatham House Rule applies to the evening’s discussion which, knowing Rick, is bound to be lively. Contact me via comment or email if you’re interested.
In January, financial commentators were praising Porsche management for a “darkly brilliant” plan which saw the company ending up with over 50% of Volkswagen and possibly €6-12 billion from hedge funds, in what became known as “the Porsche Squeeze”. At the time, I wasn’t so sure it was a brilliant plan; more likely Porsche’s management were just riding a lucky break. Six months later, it turns out that luck was bad luck. The Porsche family have just fired their CEO and CFO, and agreed to a plan which will see a radical change in the German automobile industry. VW will gradually take over Porsche (over several years), with the Qatar Emirate buying Porsche’s VW share options (equivalent to 17% of VW), the funds being used to reduce the €10 billion debt Porsche is carrying after its gambit.
Another factor in all this seems to have been been a feud within the family. The chairman of Volkswagen is a grandson of Ferdinand Porsche. The now re-united family, albeit losing control of the family business, ends up as the largest shareholder in a much bigger business. Management lost their jobs (but were paid heaps to go).
Maybe someone will make a television drama series out of all this. It certainly sounds like the plot of one.
The Valuecruncher team has posted an interesting comparison of Microsoft versus Apple, Google, HP and IBM. They rate MS a buy. What’s also interesting are the implied relative over-valuations of Google and Apple.
EV[Enterprise value]/Revenue shows how a dollar or revenues is being valued by the market against the comparator set. On an EV/Revenue basis $MSFT is trading at 3.2x. This compares to $IBM at 1.7x, $AAPL at 3.5x, $GOOG at 5.5x and $HPQ at 0.9x. $MSFT’s profit margins (at the EBITDA line) are 43.3% of revenues compared to 20.6% and 12.0% for $IBM and $HPQ respectively - so those feel right. $GOOG has similar margins to $MSFT and significant growth options - but a dollar of $GOOG revenues being worth 70% more than a dollar of $MSFT revenues feels rich. But the standout - to us - is that $AAPL with profit margins halfthat of $MSFT is valued similarly on an EV/Revenue basis. A dollar of $AAPL revenues is being valued slightly more than a dollar of $MSFT revenues - despite that dollar of revenues producing less than half the profit of the $MSFT revenues. That is some big growth expectations for $AAPL.
… EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis $MSFT is trading at 7.4x. This compares to $IBM at 8.2x, $AAPL at 16.5x, $GOOG at 14.8x and $HPQ at 7.4x. Talk about no respect - a dollar of $MSFT EBITDA is worth only slightly more than a dollar of $HPQ EBITDA and less than the other comparators.
While acknowledging that Apple and Google have more exciting stories to tell, the Valuecruncher team is in effect questioning whether the fanboy syndrome may be causing some irrational exuberance in those stocks’ prices. I’d add that HP and IBM have more diversified and contractually repeating earning streams as well, which should make them safer investments in troubled times. Maybe the market is betting Goggle and Apple will enjoy bigger share lifts when economies and stock markets recover.
Disclosure: I have investment interests in Microsoft, Apple, Google and ValueCruncher. That’s having a bob four ways.
Kiwi entrepreneurs - startups and owners of established businesses - might want to be in Auckland for the afternoon of Wednesday 29 July. The ICEHOUSE has asked me to tell you about their free afternoon of seminars, networking and other events aimed at showing you what the ICEHOUSE can do for your business. If you’re not familiar with The ICEHOUSE, it’s a combination of business incubator, management educator and angel investment coordinator, run under the auspices of Auckland University, with support from leading firms and business luminaries.
See The ICEHOUSE in action:
Hear stories from business owners who have experienced the award-winning ICE Bridge Owner Manager programmes and the phenomenal changes it brings
General Motors has announced its withdrawal from NUMMI, its joint venture with Toyota. NUMMI was an incredibly generous initiative by Toyota to educate its global rival about modern management and production techniques, while giving Toyota insight into operating in the US. Although the NUMMI plant was generally seen as a (qualified) success, and GM learnt about efficient plant layout and just-in-time inventory, it (GM) never really absorbed the “lean business” mindset that infuses every aspect of Toyota.
The NUMMI plant is now 25 years old, and probably long overdue for a major overhaul/replacement. Toyota doesn’t need it, with low demand and its own plants elsewhere in North America making similar models. Politically, Toyota might wait a while to close the only unionised shop in its portfolio, but GM’s reputation is so low, now is probably the least reputation-damaging time for Toyota to do so.
The Dominion Postreports that the founders of HELL Pizza have bought back their NZ master franchise 29 months after selling it to TPF, the owners of Burger King in New Zealand.
Callum Davies, Stu McMullin and Warren Powell opened the first Hell Pizza in Kelburn, in Wellington in 1996. With a menu and branding themed on the seven deadly sins and a penchant for provocative marketing campaigns, which included giving away condoms to promote its lust pizza, the chain had expanded to 66 stores by the time it was sold for about $15 million in December 2006.
The founders would not say how much they bought it back for but it is understood they paid less than they sold it for.
HELL’s founders sold their NZ operation to generate cash to expand internationally, establishing HELL in Britain, Australia, Ireland and Canada. Under TPF, HELL NZ seemed to lose its way. Those who bemoan the sale of businesses will no doubt use the HELL buyback to push their barrow about the evils of companies being sold to “corporate” or “overseas” owners, who then “destroy” a good business. What’s not mentioned are the far greater numbers of business that prosper under new ownership, or the productive use of the sale money to reinvest in other ventures, new or existing. And founders can destroy businesses just as easily as subsequent buyers.
However, it’s not unusual to see founders buy back businesses that they’ve sold, especially if they’re still involved somehow, and often for a much lower price than they received when they sold it in the first place. I can think of several examples where I know the principals personally. The extra capital they can apply (gained from the original sale and from their other ventures), combined with their renewed passion for the business, often takes the business on to new heights.
HELL built its brand on up-market pizzas and cheeky promotions. Here’s the message to entice you to open an online account:
Your soul doesn’t do much. You can’t feel it. You can’t see it. It sucks at making coffee, and when you’re buggered after a hard day, it’ll never have dinner on the table. So give it to us. Then you can begin your descent into HELL. The deeper you go, the more retribution you’ll receive for your measly soul. The retribution could be anything from free morsels of food to exclusive access to random stuff. That all depends on how good you are at being bad. And if you make it right into the darkest depths of HELL, then you’ll receive free pizza for life. So sell your soul to us.
Fiat is looking to take over Germany’s Opel from out of the General Motors stable of dead and dying brands and add it to the remnants of Chrysler it is taking out of Chrysler’s bankruptcy. The hard-charging boss of Fiat, Sergio Marchionne, (sounds like the guy who made the spaghetti westerns with Clint Eastwood) reckons he can build Europe’s second largest car maker, the WSJ reports.He’s dreamin’. Big cross-border car company almost never work. Just ask BMW, which bought Rover in the 1990s and lost billions of euros, and Daimler Benz, which bought Chrysler and lost tens of billions. I predict this will all drag Fiat into bankruptcy too. The big 3 car companies in 10 years time will be Toyota, Ford (if it’s lucky) and Renault-Nissan.
If Fiat picks up Chrysler and Opel (essentially GM Europe), Hickey may well be right about Fiat’s potentially fatal indigestion and the new Big 3 (although VW, BMW and Mercedes have ambitions too). I thought that Fiat’s bid for Chrysler was brilliant strategic opportunism, but GM Europe is “a bridge too far” for the Italian automaker. The other thing I don’t get is why GM would divest its main European operations to Fiat:
They’re in less of a mess than the rest of GM.
They have the vehicles and designers GM needs both now and in future (retrofitting eco-friendly engines when practical).
They give GM true global scale, which everyone seems to agree is essential for success in automobile production.
GM is desperate for funds, but the Fiat deal won’t give them any, and there are almost certainly other buyers who might stump up hard cash.
An interesting little battle is brewing (!) between venerable UK beer-maker Adnams and “activist” Kiwi investor GPG. This developing scenario has several ingredients that appeal to me - Suffolk, real ale, UK, NZ, strategy, governance, ownership and activist investors.
Adnams, based in the small coastal town of Southwold in Suffolk, has one of those quaint share structures whereby the Adnams family’s shares carry double the weight of other shareholders - all well and good, as long as everyone knows that’s the deal.
According to The Times, Adnams’ 2008 operating profit fell by two-thirds, and GPG (which controls 5% of Adnams but only 2.5% of the votes) has written to all shareholders (.pdf) prior to the upcoming AGM. GPG describes Adnams’ results as “so poor as to suggest that the substantial expansionary investment projects sanctioned by the board since 2000 have actually weakened rather than strengthened Adnams’s traditional brewing and pub businesses in East Anglia”. GPG is particularly scathing of the brewer’s launch of Cellar&Kitchen, a chain of shops selling kitchenware and wine. It describes that venture as “far removed from the company’s core competencies as a regional brewer and owner of pubs”.
GPG blames the company’s recent disappointing performance on poor corporate governance and calls for the dismantling of the “anachronistic dual share structure” that gives the Adnams family effective control. Blake Nixon, GPG’s UK executive director, also led an ultimately successful campaign to dismantle a similar dual share structure at Youngs, another brewing firm. Adnams’ chairman has, unsurprisingly, rejected GPG’s criticism (pdf).
Adnams makes Broadside ale (a very suppable beverage, I can personally attest) - “brewed to celebrate the Battle of Sole Bay in 1672″, That sea-battle, between the English and the Dutch, ended inconclusively, with both sides claiming victory. I expect a similar outcome from Monday’s AGM (UK time); although, come to think of it, in the Glorious Revolution some years after the battle, William of Orange became king of England with the support of the English Parliament. Maybe Adnams should hold off brewing another commemorative ale?
Those seeking angel or venture capital need to learn what’s in a term sheet - an agreement between investor and investee which spells out the key element of a funding deal. Guy Kawasaki has pointed me to leading Silicon Valley law firm Wilson, Sonsini, Goodrich, and Rosati, who offer a free online term sheet generator. It’s designed for USA venture investments, but it’s still useful for other countries, since it captures many of the key elements. Have a go - you’ll see some terms you don’t understand, but that’s good. Find out what they mean. Understanding this stuff is important, so you know what you’re signing up to and why.
Thanks to those who enlightened me re the appeal of Sun for Oracle. I’d only focused on Sun’s hardware business, but, 24 hours after the news broke, commentators have homed in on Sun’s ubiquitous Java and MySQL software, in theory Open Source, but in reality very much controlled by Sun. Like me, most observers expect Oracle to flick off the hardware business, which clearly doesn’t fit with Oracle’s other businesses and, indeed, conflicts with Oracle’s strategic relationships with other hardware makers.
Can anyone explain to me the strategic rationale for Oracle acquiring Sun? I can only think of one - it was cheap in today’s market, especially after IBM walked away, and may be worth a lot more to another hardware maker in a year or two, when the market recovery makes the price and the regulatory hurdle-jumping worthwhile. In other words, a buy/hold/flick deal. I’m not sure I’d take the risk.
An interesting little battle is brewing (!) between venerable UK beer-maker