Other People’s Money

Other People’s Money

Study Guide 3: Traders & Corporate Raiders

This guide will soon be available for purchase as an instant download for $5.95.

Guide overview:

The word “takeover” strikes fear in the hearts of entrenched managers and the employees who work for them. It also holds forth the carrot of immediate, large returns for shareholders in targeted companies. Often the media (and the movies) champion the cause of the targeted company, depicting the “raiders” as greedy, unprincipled bastards bent on destroying not only the companies they seek to acquire, but also the productive capacity of a nation. Would that business life were so simple!

While dozens of movies depict the economic chaos that takeovers wreak on employees, few outline the benefits that accrue to workers employed by companies that benefit from reinvestment of shareholder profits from such deals. The movies tend not only to gloss over the arguments surrounding takeovers, but also to confuse the details of how such deals are done. A careful look at the movie-depicted takeover does, however, form the basis for an intelligent discussion on the role of capital; the conflict that often occurs between ownership and management of companies; the concept of stewardship underlying the successful management of employees, shareholder relations and the bottom line; and the ways companies can avoid becoming targets. Informed viewing of the movies discussed in this Guide can help familiarize managers with concepts like breakup value, green mail, poison pills, stock manipulation schemes, insider trading and employee stock option plans.

Excerpt from the Guide’s opening:

Imagine yourself as CEO of a relatively small, publicly-traded company in a moribund manufacturing sector, the kind of company most stock analysts ignore. Your company’s stock is not actively traded and your family and managers control the largest portion of its shares. Sure the share price has been declining and that worries you, but you’re not a speculator, you’re a manufacturer. You’ve been so busy running the company – working to maintain full employment, support charities in your headquarters town, acquire new businesses to shore up your declining core operations – that you’ve failed to notice that your company’s breakup value is now worth more than the collective value of its stock. Your company is a corporate raider’s dream – and one raider, armed with sophisticated technology, has discovered your secret. He’s ready to make a play, oust you from the company you love, sell off the assets and put your employees – who have aligned their futures to yours – on the streets. Can you stop the raider? How could you have avoided all of this turmoil? You’ll learn that and more from a careful viewing of the 1989 biz pic Other People’s Money. Based on a Broadway play, the movie is considered by many to be Hollywood’s best and most balanced examination of the overlapping stewardships with which senior managers must deal.

Excerpt from the plot summary:

Danny DeVito plays Lawrence (“Larry the Liquidator”) Garfield, head of Garfield Investments, a New York firm that makes its way buying companies whose breakup values exceed their stock prices — and then breaking them up and selling off the undervalued assets. Larry is smart, principled and even, in a quirky way, likable. He is obsessed with making money. He is also lonely. His constant companion is a bedside computer named Carmen that helps him sort through masses of data on publicly-traded companies and select those whose breakup values exceed their stock prices.

As the movie opens, Carmen has turned up the pick of a lifetime: New England Wire & Cable, an 81-year-old, second-generation, family-operated, paternally-managed manufacturer of steel wire and cable. The Rhode Island-based firm also owns subsidiaries engaged in plumbing, adhesive manufacturing and other activities. New England Wire & Cable is cash-rich, debt-free, has several profitable divisions and owns $10 million worth of land. Its stock, which once traded as high as $60 a share, has fallen to only $10 over a 10-year period. There are, however, signs of life: the stock has just made a slight upward move and is trading at $12 as the movie opens. Larry begins aggressively acquiring more stock as a prelude to a takeover bid.

Excerpt from the commentary:

. . . Coles is right to feel that Jorgy has delayed in dealing with the important issue of Coles’ compensation and parachute provisions. Later, however, we learn that Coles is far from destitute: he holds 100,000 shares of NEW&C stock. As an officer, he has probably been able to buy that stock at attractive prices. He’s only just picked up 40,000 of his shares. Even if he paid the market price of $12, they will soon be worth $15 to $30 if he unloads them. That’s a potential profit (less capital gains tax, of course) of $1.4 to $3 million! Those profits, reinvested, can provide Coles a lifetime annual income equal to, or well above, what he’s making from benighted, family-held NEW&C. Coles should not be begrudged his good fortune, but Jorgy should be put on the hook for having ignored Coles’ expressed concerns. Coles is president of the firm. If his stock has previously lost value, he is in some part culpable. By avoiding Coles’ desire to talk compensation, Jorgy has avoided something far more important: a discussion of Coles’ performance.

The surest way for both men to get what they want will require Jorgy to sit Coles down and say something like this:

“Bill, you’re a good man and you do a good job managing the plant on a day-to-day basis. But you can’t put your future in my lap. In fact, my future and this company’s are in your lap. We need you to help us diversify our product line and increase our production efficiencies. If you can grow our margins and the value of our stock, you have a built-in incentive: your stock becomes more valuable and your annual income grows in proportion to our bottom line. If we succeed, you’ll have all the protection you need against my selling the company.”

If that isn’t what Jorgy really wants, then he needs to say so, give Coles a flat guarantee and tell him not to change anything. Jorgy simply cannot have it both ways. Of course, if we were Jorgy, we’d have gotten rid of Coles a long time ago because he was paying more attention to his parachute than to the company’s performance.

The commentary is supplemented by BREAKOUT BOXES dealing with these topics:

  • The Articulate Manager: Jorgy’s Address to the Stockholders
  • The Articulate Manager: Larry’s Address to the Stockholders
  • The Inside Raider: Do It to Yourself Before They Do It To You (A checklist, based on work by A. David Silver, of ways to improve cash flow and keep outside raiders at bay.)
  • Theory of the Firm Basics: The Three “Musts” of Corporate Behavior
  • Matrix Analysis: A Tool for Managers (Commentary and chart showing the ways matrix analysis can be used to operate companies more efficiently.)
  • Breakup Value: How Larry Thinks, and Why It’s Important

THE GUIDE also includes an essay that looks at business as depicted in the movies. For an introductory section on how to use the Management Goes to the Movies™ program, click through to Using The MGTTM Training Program.

This guide will soon be available for purchase as an instant download for $5.95.