Stuff Managements Have Told Us
Authored by Nick Colas of ConvergEx,
Meetings between public company managements and investors are the bedrock of the fundamental investment process. The reason for that, however, is often lost in translation. It is not, for example, because most investors or analysts are systematically better at reading “Body language” about the quarter or new products. Seriously – they aren’t. No – the reason that management meetings are useful is because, over time, managements let down their guards and act like regular people. And in those moments, truth – about character, about wisdom, about judgment – comes rolling out. Today we offer up a personal highlight reel of examples from +20 years of management meetings.
Management meetings are the coin of the realm on Wall Street. Most surveys of institutional investors put about 60% of the commission spend on the Street soundly in a bucket dedicated for brokers which pair up clients (investors) with the C-level executives of public companies. At first blush, this might look like the old-boys-and-girls network at play – big money cracking open a bottle of the good stuff to get tips from chief executives. In reality, regulations regarding what management can say are stiff indeed, and nobody wants to feel the brunt of a regulator’s ire for tipping off some hedge fund about a lousy quarter.
So why bother with the meetings at all? Some investors think they are better than most at reading body language or tone of voice in response to a tough question. I’ve never seen anyone really get this right on a consistent basis, however. You just never know if the queasy reaction you are witnessing is about the current quarter’s financial results or some questionable sushi at lunchtime. Yes, there is a bit of self-perpetuation in the management meeting process these days. If I saw 130 company managements last month, I’d better see 135 over the next 90 days. Not a great reason, but it does explain the persistent pressure to see more and more companies.
The real answer to the question of management meeting “Utility” is more complex. I have been an analyst for coming up on 25 years now, and I shudder to think of the number of times I have broken stale bread and rubber chicken with a Chief Executive Officer or other corporate operating head. But the lesson behind all those meetings is pretty straightforward: the more times you meet someone, the more you learn about them as people. Are the honest with themselves? With others? Do they encourage information flow, both good and bad? Those are questions that matter intensely to the investment process.
To highlight why I think this is the fulcrum point of the analytical process, I spent a few minutes over the weekend jotting down the tag lines of some of the more memorable things that managements have told me over the years. Those stories follow here.
#1 - “Mine comes with a warranty.” You may not know the name Romano Artioli, but at one point in the 1990s he owned – personally – two of the most stories brands in automotive history: Bugatti, which he resurrected, and Lotus, which he purchased. I visited him at his new headquarters outside Milan in early 1995 as he considered an IPO for his company. The building, which doubled as the assembly plant for the EB 110 supercar, was brand new and beautiful. The entire office staff – male and female – looked to have been lifted from the pages of Italian Vogue... All new and beautiful.
He asked me if I knew the secret to what men want. I responded that I did not. He said “A beautiful woman (waving at the covey of attractive office help outside his door) and a beautiful car. I offer the one with a warranty.” His firm filed for bankruptcy later that year. It turns out that men may want those things, but suppliers (mostly men in the auto business, as it turns out) also want to be paid when they ship parts. Cash flow isn’t sexy, but it does allow you to stay in business.
#2 - “Why don’t you just quit?” General Motors has, in my opinion, had only one good Chief Financial Officer in the decades I have known the company. He sits in that spot right now. The prior ones spent more time doing financial engineering than the actual company engineers spent designing cars. Just one analyst’s opinion...
At a dinner with one of these bean counters in the 1990s, I tried to push the topic of why the industry could never seem to earn its cost of capital in anything it touched. Not in selling cars, not in financing cars, not anything. He got short tempered at about the 7th question and asked “If you hate this industry so much, why don’t you just quit?” I wish I had come back with the Officer and a Gentleman line “I got nowhere else to go!”
But then I got realized – this must be how he treats his own staff. And I quickly came to the conclusion that no one, ever, was going to bring this guy bad news. I just smiled and said “I didn’t mean anything by it Mike… Sorry that I offended you.”
#3 – “We’re a technology company now...” The first dot com bubble in the late 1990s even brushed up on GM’s shores, in the form of “B2B” commerce. A whole raft of companies, from Oracle to the ill-fated Commerce One, tried to sign up General Motors as an anchor tenant in their online marketplaces. At the time, GM spent over $100 billion annually on purchases of everything from steel for its cars to pharmaceuticals for its retirees. Getting them on an e-commerce platform was “Job 1” for every aspiring B2B company in the book.
At one corporate event in Detroit I saw GM’s head of purchasing yelling – loudly and fairly publicly – at Ray Lane, the then-president of Oracle. For those of you not around in the late 1990s, Ray was one of the most powerful people in technology. (Still is, for that matter…) Only one person – Oracle founder Larry Ellison – would have dared to yell at Ray. And yet here was some car guy doing just that. But because Oracle desperately wanted GM’s e-commerce business, there he was just taking it. I was dumbfounded.
After the argument blew over, I approached the GM purchasing guy and asked what all the fuss was about. “We’re a technology company now!” he told me. They had value, just like all these crazy Valley startups and entrenched tech billionaires. In the end, of course, they weren’t. But they couldn’t see the forest for the trees.
#4 - “What do you MF-ers want now?” Lest you think every management team in the auto industry had their heads in the clouds – or submerged underground – let me finish with a story about Jerry York, the former CFO of Chrysler. Back in 1991, the company was teetering on the brink of bankruptcy as the first Gulf War led to recession and high gas prices. I was in a cramped room at Chrysler’s old HQ, along with all the other analysts charged with helping to sell an equity offering to fund the final tooling of the first Grand Cherokee. No equity raise, no stamping dies. No dies, no cars. No cars, no Chrysler.
When Jerry finally walked in an hour late to brief us, he shoved the door open, glared at us, and said – loudly – ‘What do you MF-ers want now?!” We stared back, not knowing what to say. Then he grinned… “Seriously… Tell me what you want to know. Anything.” I had never met Jerry before, but my impression was of someone who just wanted to get on with whatever job was at hand. Yes, his company was in trouble, but he knew he needed to level with the capital markets and with us if he wanted a chance at survival.
I will cut off the stories there... The bottom line is that meeting managements is a critical part of the due diligence process for any fundamental investor. Between the earnings forecast and the actual results sit only two things: time and management. Time is uniform; management quality is not.
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