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Stuff Managements Have Told Us

Tyler Durden's picture




 

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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Thu, 03/14/2013 - 09:21 | 3329189 GetZeeGold
GetZeeGold's picture

 

 

Here's one I heard.

"If I hire more people, I'll be able to cut my budget more and get a bigger bonus."

Thu, 03/14/2013 - 09:35 | 3329249 JPM Hater001
JPM Hater001's picture

2009-"How will the company fair in a highly inflationary environment?"

"In an inflationary environment we will do well."

Um, not if the Fed doesnt think there is.  Then you suck wind at the trough of ZIRP.

Or

2010- "What do we have planned for a spike in European debt defaults brought by soverign debt crisis and economic contraction?"

"Who asks these kinds of questions?"

"Well, I do."

Thu, 03/14/2013 - 09:59 | 3329298 Lucius Corneliu...
Lucius Cornelius Sulla's picture

Here's another one, "If we outsource our IT department to India we will save money."

Thu, 03/14/2013 - 11:21 | 3329546 Omen IV
Omen IV's picture

circa -  the fall of 2000 - "metrics can be anything - lets just hire a bunch of people and say the valuation is based on personnel count and project the growth from there"  -

this was from a guy who sold out to Yahoo

Thu, 03/14/2013 - 12:35 | 3329788 Panafrican Funk...
Panafrican Funktron Robot's picture

It was an entertaining history lesson, but fundamental investing had the final nail hammered with two words:  Quantitative Easing.  Ditto for [insert metric here].  Take today, for instance.  

Thursday, March 14, 2013 Friday, March 15, 2013 Outright Treasury Coupon Purchases 05/15/2020 - 02/15/2023 $2.75 - $3.50 billion Friday, March 15, 2013 Monday, March 18, 2013 Outright Treasury Coupon Purchases 12/31/2017 - 11/30/2018

$4.75 - $5.75 billion

Is anyone seriously dumb enough to be short anything in the Russell 2K?

Thu, 03/14/2013 - 09:27 | 3329204 Badabing
Badabing's picture

speaking of management.

Concerning ZH censorship on the white smoke pope thread.

The first post 14:13 did not get deleted mine was second @ 14:13 and did, the thread header time is 14:17

In my post I said “Its only Obama choomwagen smoke” I cant imagine the Tylers deleting that intentionally i truly think is a glitch.

Thu, 03/14/2013 - 11:37 | 3329601 LFMayor
LFMayor's picture

Censorship?  Did you happen to read some of the shit that got posted? 

Do you know ANYWHERE else we could do that?

Now pull up your mantyhose nice and tight and get back into the ring.

Thu, 03/14/2013 - 09:14 | 3329214 observer007
observer007's picture

Your personal finance:

CIA, FBI, get full access to financial data on American citizens and others

 

The Obama administration is drawing up plans to give all U.S. spy agencies full access to a massive database that contains financial data on American citizens and others who bank in the country, according to a Treasury Department document seen by Reuters.

http://homment.com/cia-fbi-access-finance-data

Thu, 03/14/2013 - 09:36 | 3329251 Whoa Dammit
Whoa Dammit's picture

I wish I could ask questions on an investor call. Here are some things I would ask:

You say sales revenues are up, but what are the true sales figures relative to inflation?

If things are so great with the company, why are insiders dumping their stock?

For companies like the telecoms/ cable providers: You are showing an increase in new customer  adds. But it takes a good portion of your revenue to achieve these adds. Why aren't you instead focused on the less costly aspect of the business, customer retention, instead of willfully pissing off your existing customers?

 

Thu, 03/14/2013 - 10:46 | 3329444 adr
adr's picture

The reason why they count so many new additions is because anyone that hasn't been with the provider for a year is a new customer. In order to give the insane promotions, they have been raising rates on current customers. What used to be a $70 monthly bill becomes a $140 bill after a year. When you complain and say, "I've been a customer for XX years." The CSR will tell you to switch providers or just throw you three months of free HBO.

Instead of sticking with a provider customers switch every year. I know people that go from AT&T to Direct TV to Time Warner to Dish, and then back to AT&T.

The providers don't realy care. They sacrifice long term business for "first time" subscriber additions because Wall Street doesn't care about long term customers. The only thing that matters is new customers. That causes the stock price to move up. It doesn't matter if the new customer actually loses the corporation money.

It is complete bullshit, but if the CEO sees his stock holdings increase in value, who gives a shit.

Thu, 03/14/2013 - 12:44 | 3329809 secret_sam
secret_sam's picture

        Why aren't you instead focused on the less costly aspect of the business, customer retention, instead of willfully pissing off your existing customers?

Customer retention generally requires delivery of a product/service that is of HIGH-KWALITY.

Kwality is often far more expensive than marketing.  Labor costs are the real problem.

Thu, 03/14/2013 - 09:38 | 3329253 Clowns on Acid
Clowns on Acid's picture

Hey Nick - Your articles are getting better and better...

Nice stories...but in todays Central Bank and Fed Gov't fascism (supported in full by MSM) does it really matter what CEO's say? Int rates are zero...borrow money.... buyback stock, cut costs.....borrow some more money....

Thu, 03/14/2013 - 09:49 | 3329270 oddjob
oddjob's picture

Time is not uniform, it is an arbitrary measurement.

Thu, 03/14/2013 - 10:06 | 3329318 post turtle saver
post turtle saver's picture

For the sake of this article and conversation, "time" will be discussed within the framework of its Newtonian definition. Leibniz and Kant can suck a lemon while they wave their hands for all I care.

Thu, 03/14/2013 - 12:45 | 3329813 secret_sam
secret_sam's picture

You're both right--time is uniformly arbitrary.

Thu, 03/14/2013 - 13:59 | 3330085 ebworthen
ebworthen's picture

I time travel, so time is fungible.

I'll come back earlier and not type this - or later and delete it.

H.G. Wells sends his regards.

p.s. - Gold is still money in the future.

Thu, 03/14/2013 - 10:12 | 3329329 Catullus
Catullus's picture

"Asset Optimization" is my favorite one. It's a red letter to tell me that cash flows are about to underperform. It's typical of an integrated supply chain that begins to sell to its own downstream because upstream demand is weak.

Thu, 03/14/2013 - 10:36 | 3329412 adr
adr's picture

I have met about 175 CEOs and upper management types over the last fifteen years. Some small, some large.

There are three types of CEOs:

#1 The Public Corporation Narcissist
#2 The IPO Scammer
#3 The Businessman

I'd say 95% is made up of the first two. 90% of #3 become a #1 if their corporation goes public. In terms of actual business sense, the #1 and #2s don't possess any. Doing real business is not why they got in this game.

I can't say every public corporation has a narcissistic sociopath at the helm, but it is close. There is something about the stock market that precludes honesty and integrity from the equation.

I've watched accessible executives turn into Golem like recluses after an IPO and I'm pretty sure I've heard whispers of "my precious" while clutching stock certificates. As the company grew, I had the CEOs ear, and as a product manager my opinion counted. After the IPO only the opinions of the directors mattered. The CFO became the only man with access, the gatekeeper if you will. The CEO no longer attended product meetings, new employees never saw the man but his cult like worship grew. New employees would ask if I'd ever met the president of the company. I'd say, "Of course, we used to have lunch every day." They would laugh and say, "Yeah right, that's funny."

Once a company hits the point that the stock is all that matters, everything else takes a dive. Employees no longer matter, unless you can increase the stock. Product quality eats up valuable profit margin. Honest people must go, because they might rat you out for cooking the books or other illegal activities.

I have done work for honest companies but they are like guppies being eaten alive by sharks. It's hard to beat a cheater, if nobody catches them.

Thu, 03/14/2013 - 11:22 | 3329550 TrustWho
TrustWho's picture

This is SO True! The "my precious" is perfect imagery.

Thu, 03/14/2013 - 10:49 | 3329456 monad
monad's picture

Cut the phrenology, just show me the books and I'll tell you all about your managers - and yourself. 

Thu, 03/14/2013 - 10:51 | 3329462 spoon-fed
spoon-fed's picture

"Time is uniform".. NOT

Thu, 03/14/2013 - 11:18 | 3329536 Benedict Farse
Benedict Farse's picture

Time flies like the wind; fruit flies like rampant homosexual love.

Thu, 03/14/2013 - 12:41 | 3329801 secret_sam
secret_sam's picture

"This company rewards loyalty."

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