Book Review: The Buyout of America

The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis
Josh Kosman
Portfolio/The Penguin Group (2009)

In the Introduction, Josh Kosman offers what he calls a “little primer” on how private equity firms operate, explaining that they “buy businesses the way that homebuyers acquire houses. They make a down payment and finance the rest. The financings are structured like balloon mortgages, with big payments due at some point in the future. The critical difference, however, is that while homeowners pay the mortgages on their houses, PE firms have the businesses they buy take out the loans, making them responsible for repayment. They typically try to resell the company or take it public before the loans come due.” It soon gets even more interesting. “As long as the PE firms could refinance, or turn around and sell off their holdings before the biggest loan payments came due, spectacular flameout bankruptcies could be avoided…PE firms would like to have us all think the reason they try so hard to raise earnings in their businesses [by `starving companies of operating and human capital'] is so that companies can use these profits to pay down the money they borrowed to finance their own acquisitions. But the records show that during the 2003-7 buyout rush, that wasn’t generally the case. Instead, they used the profits s a basis to borrow more money. The new loans, which were piled in top of the original debt taken on to finance the LBO, were used to issue dividends” to the (you guessed it) PE firms. What if all, most, or even only some of the companies collapse? No problem. The PE firms have incurred no debt while receiving dividends as well as substantial management fees. “Despite the credit crisis in 2009,” Kosman notes, “PE firms are sitting on roughly $450 billion in unspent capital and itching for more deals.” Of course they are. Given their resources, why wouldn’t they?

Kosman explains how and why PE firms “put their companies into crippling debt and, unlike entrepreneurs, who manage their businesses to succeed in the marketplace and grow, they manage their companies largely for short-term gains.” PE firms hurt their businesses competitively by limiting their growth, cutting jobs without reinvesting the savings, do not even generate good returns for their own investors. According to Kosman, they are “about to cause the Next Great Credit Crisis,” one that could leave about two million of the 7.5 million Americans who work at PE-owned companies unemployed, and more than one thousand businesses bankrupt. “Leadership is needed to rally opposition to close the tax loopholes that make this very damaging activity possible.”

Kosman provides a wealth of information (financial data and statistics as well as real-world situations) to support his observations, recommendations, and especially his accusations. After reading the book and then re-reading several key passages that I highlighted, I wish Kosman had included other perpectives on the issues he raises. For example, the thoughts of those who head the most active PE firms, of federal officials associated with relevant regulatory agencies, and of analysts who are best qualified to discuss PE firms. It seems that PE firms could play an important role in the process of what Charles Darwin characterizes as “natural selection,” one from which some businesses survive (and perhaps even thrive) while others do not. Kosman asserts that these firms must not be allowed “unnatural” advantages that corrupt free market competition. Whether or not his call for action results in any significant reforms of what he calls “tax loopholes” remains to be seen.

Book Review: The Connectors

The Connectors: How the World’s Most Successful Businesspeople Build Relationships and Win Clients for Life
Maribeth Kuzmeski
John Wiley & Sons (2009)

As I began to read this book, I was reminded of the fact that Charles Lindbergh selected WE as the title of his account of that historic transatlantic flight he completed in 33 hours to Paris. He wanted to acknowledge the importance of everyone who was involved. More recently, Maribeth Kuzmeski notes (on Page 57) in The Connectors, “In his biography, It’s Not About the Bike: My Journey Back to Life, [Lance] Armstrong described the vital role that teammates play…In its review of Armstrong’s book, the Denver-based Rocky Mountain News wrote: ‘Armstrong’s book is both inspiring and entertaining…and he doesn’t forget to thank the good people who helped him most of the way.’” Neither did Lindbergh.

It is also noteworthy that in the companies on Fortune magazine’s annual list of those “Most Highly Admired,” there is widespread use of first-person plural pronouns. In her exceptionally informative book, Kuzmeski cites dozens examples of how “the world’s most successful businesspeople build relationships and win clients for life.” Actually, the examples she cites indicate that almost anyone can establish and then sustain mutually beneficial relationships within and beyond the workplace. She asserts that “true connections” between and among people must be made and then sustained with feeling and purpose and honesty. Bill George would invoke the term “authentic,” insisting that it is imperative to be true to one’s self (to one’s True North) as well as to others.

Readers will especially appreciate Kuzmeski’s generous provision of “Downloadable Forms” that can be put to immediate use as worksheets to implement what she recommends in the chapters in which they are included. Directions to obtain them are provided in the book. For example: “The Listening Assessment” (Page 80), Self Assessment of “The Questions You Ask” (93) and “Getting the Sale to Close Itself” Self Assessment (105). Other value-added benefits include “In Other Words” quotation clusters (Pages 18, 64, 81-82, and 94-95); “The Connector IQ (C-IQ) Assessment” with an explanation of how to interpret the score, accompanied by suggestions as to how to become a more effective Connector (Pages 32-35); a summary of the red Stone Connector Traits (Pages 44-46); Three Strategies for Connecting and Closing Sales (Pages 98-103); the smith&jones Business mantra (Pages 129-130); an annotated list of major women’s business organizations (Pages 164-171); Four Tips for Organizing Connections (Pages 179-180); the Red Zone Connectors Formula for Speaking (Page193); and suggestions about how to use the top ten social media sites (Pages 203-211). All by itself, the information provided about the social media sites is worth more than the cost of this book. It is obvious to me that Kuzmeski is a world-class, Five Star pragmatist. With all due respect to her thorough coverage of “what” to do, I think she is really at her best when sharing her experience and insights with regard to “how” to do it.

Sydney Pollack on Leadership — It’s not like driving a car!

Sydney Pollack

Driving a car, flying an airplane – you can reduce those things to a series of maneuvers that are always executed in the same way.  But with something like leadership, just as with art, you reinvent the wheel every single time you apply the principle.
The late Academy Award winning Director Sydney Pollack, as quoted in On Becoming a Leader by Warrne Bennis, (as quoted in The 100 Best Business Books of All Time by Jack Covert and Todd Satersten)

Bob Morris gave me a copy of The 100 Best Business Books of All Time, and I took a medium dive on my flight to Indianapolis last week.  A really good read!

It is their choice of the top books.  I might quibble a little, but not much.  I really liked that they included The Creative Habit by Twyla Tharp, one of my all time favorite books.

But this quote above by Pollack prompted this short blog post.  Pollack is right.  With leadership, you do reinvent the wheel every time…

Superfreakonomics and the Parable of the Horse Manure — (There is So Much I Don’t Know)

One of my great embarrassments is that there is so much that I do not know.  There’s much that I don’t know that it’s ok that I don’t know, and then there’s more that I don’t know that I should know — but I don’t.  That’s the embarrassing part.

Take the subject of horse dung.  (“Dung” is one of the two words  word used by the Superfreakonomics authors; the other is “manure”).  It turns out that horse dung was the crisis of all crises.  In Superfreakonomics, they tell the story of this crisis.  The New Yorker review of this book by Elizabeth Kolbert tells us that:
This story—call it the Parable of Horseshit—has been told many times, with varying aims. The latest iteration is offered by Steven D. Levitt and Stephen J. Dubner, in their new book, “SuperFreakonomics: Global Cooling, Patriotic Prostitutes, and Why Suicide Bombers Should Buy Life Insurance.”

Well, it may have been told many times, but I had not read it – or remembered it if I had.  (I don’t know which is worse – not knowing, or not remembering if I once knew it).

It was a whopper of a problem.  Everything was transported by horse-drawn vehicles of one kind or another – people, goods, food – everything.  In cities like New York, the horse dung began to: stink, pile up, overwhelm.  (Read The New Yorker article – the description is pretty awful).

Here’s the book’s description of the problem:
The average horse produced about 24 pounds of manure a day.  With 200,000 horses (in New York), that’s nearly 5 million pounds of horse manure.  A day.  Where did it go?

When there were fewer horses, there was a workable solution.  Farmers would pay for the manure, than haul it off to the farm.  As the problem grew, the farmers could get it for free.  But finally, there was simply too much of the stuff – way too much of the stuff.  And it was a world-wide problem.  Again from The New Yorker article:
in 1894, the Times of London forecast that by the middle of the following century every street in the city would be buried under nine feet of manure.

In Superfreakonomics, the authors tell:
In 1898, New York hosted the first International urban planning conference.  The agenda was dominated by horse manure, because cities around the world were experiencing the same crisis.  But no solution could be found.  “Stumped by the crisis,” writes Eric Morris, “the urban planning conference declared its work fruitless and broke up in three days instead of the scheduled ten.”  The world had seemingly reached the point where its largest cities could not survive without the horse but couldn’t survive it either.
And then the problem vanished.

You know, of course, the solution.  It was not some government program — it was the new-fangled horseless vehicle.

Now, there is a lesson in this for all of us.  Problems are real.  And serious.  And must be taken quite seriously.  We should search diligently for solutions.  But we never quite know what the solution will be, and then we don’t always know what the next problem will be.

The solution to the horse manure problem was a technological solution – that came seemingly out of nowhere.

The Superfreakonomics guys argue in this book that there will be more unexpected and certainly unusual solutions to new problems.  Their suggested approach to global warming is creating quite a furor, with all sorts of people condemning their book as wrong, inaccurate, unrealistic…  (Their solution is to create some hefty “artificial volcanoes” spewing out volcanic like substance into the atmosphere, which will cool the planet.  Their reason? – conservation, going green, will not do the job. The problem is too big, and it’s too late, for that kind of solution).

Here’s The New Yorker’s concluding remarks, denouncing the book:
To be skeptical of climate models and credulous about things like carbon-eating trees and cloudmaking machinery and hoses that shoot sulfur into the sky is to replace a faith in science with a belief in science fiction. This is the turn that “SuperFreakonomics” takes, even as its authors repeatedly extoll their hard-headedness.

They may be right to condemn the book’s suggested solutions.  But I have this to say.  Pay attention to the deeper issue.  Forget their specific proposed solution; instead look at the lesson.  Yesterday’s problems that were completely overwhelming were solved, in most unexpected ways.  And today’s problems will bring the same unexpected solutions.  (At least, I hope they do).  And then, sad to say, there will be another problem looming right before our eyes.

Superfreakonomics reminds us that innovation is an absolute necessity.  That is a recurring theme in business books, and on this blog, for sure.

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I will be presenting my synopsis of Superfreakonomics at the December First Friday Book Synopsis.  Register here.