TRUMP: The Last T. Rex?

This week’s top news story was again Donald Trump.  No surprise there. His voice is loud, honest and clear.

THE MAN, THE MYTH, THE ROBBER BARON?

Trump, a billionaire real estate mogul, prolific entertainer, and now politician is a modern day robber baron. I say that with the respect due for those few American barons that have mastered the financial and political system so completely that they are virtually above the law and social precepts. These men include the likes of Rockefeller, Ford, Sloan, Hearst, and Getty.

None of these names associated with his own would offend Mr. Trump, and frankly the majority of American free enterprise is modeled on entrepreneurs both young and old aspiring to become the next name numbered amongst these icons of enterprise.

A fundamental difference between these men and Trump is that the majority preferred to exercise their influence the same way Trump had become accustomed to wielding his own influence; through the funding of campaigns and back room deals. I do not think this prior approach was due to the humility of these men, but simply reflective of two fundamental facts; the first that the position of president would distract these men from building their empires, which in their respective eras were vastly influential. The second is that, although in certain arenas these men were competitors, it was hard to engage in free enterprise under the limitations imposed by public service, especially service so carefully watched as that of the POTUS.

WITH ALL THAT SUCCESS, WHY APPLY FOR A JOB?

It begs the question why Trump would decide to trade his clear influence for, arguably, the toughest job in the world. I believe Mr. Trump would answer this question the way he has answered this in the past, i.e., because he wants to, “make America great again!”

Of course, although I am far from an expert of the plethora of conflict of interest policies that swirl around the office of the presidency it might also be the case that a wall paid for by a foreign entity would be open to bidding by what is ostensibly a Trump-controlled entity. The “Great Wall of Trump” might be just the thing to make a man thought to be worth around $3 billion shortly after groundbreaking worth upwards of $50 billion.

He has argued, and I must say that I agree, that the United States is on the verge of becoming, if it has not already become, a second or third world country. Before anyone starts arguing that “we still have the greatest economy in the world today, that we still have positive population growth, that the Dow is still above, or at least near, 18000 (forget about that 1000 point one day drop…it was a fluke)”, and another million details that simply serve to obscure the forest by focusing disproportionately on the trees, the simple fact is that one of the core reasons for his popularity is that the average American doubts the attainability of the American dream.

The fact is that there is a large pool of people who believe immigrants, both legal and illegal, have a better chance of buying that house with a white picket fence than those who are native born.

The members of that pool with children are fearful that their children will have less opportunity than they had.

Trump, like Rockefeller, is an aggressive businessman, and generally is a shark amongst guppies. But perhaps the biggest difference between Trump and those others mentioned is that, as a class, what was once the “silent majority” is now feeling the pressures often felt by minority groups; albeit a vocal minority that may now feel the need to openly do what in the past was not necessary to openly declare given the circumstances.

THE DEMOGRAPHIC CLIMATE IS CHANGING

In the next 40 years Latinos will become the dominant racial affiliation in no fewer than six U.S. states. According to the most recent figures released by Pew Research, “Since 1970, the Hispanic population has grown 592%, largely because of the arrival of new immigrants from Latin America — especially Mexico. By comparison, the U.S. population overall has grown 56% over the same period.”

For Asian Americans the Brookings Institute recently released estimates predicting the doubling of their category of the population, achieving an effective growth rate of 129% by 2060.

According to the U.S. Census Bureau during this same period the forecast for the black population trends slightly upward, and the nation’s white population trends downward.

THE RISE OF TRUMP REX

If we had the ability to see a live tyrannosaurus rex in captivity I am sure it would be an awe inspiring attraction and generate some of the largest, if not the largest,  revenues of any venue it may happen to appear at. The T.rex of lore was a smart, insatiable, apex predator dominant until its extinction.

In the end a similar sense, that is, of impending extinction may be what is spurring on Trumps supporters. A sense of impending doom, as if perhaps our great country may go the way of the dinosaur if something is not done quickly pervades the current presidential campaign. Of course it is actual terrestrial climate change that we blame for helping foment the end of the reign of mighty tyrannosaurus rex. Right now the greater focus is obviously the political climate.

Yet as dominant as Trump Rex appears today, I am still not sure the meaty prize he has set his eyes upon will not be the very thing that diverts him from it. The same ability he has to cut through topics or people to simplify the debate is more often divisive than substantive. The Tyrannosaurus ate what it killed and did not leave enemies behind. As efficient and unapologetic a predator as Trump may seem to be he seems just as efficient at making enemies. It seems only a matter of time before Trump Rex bites off more than he can chew.

BEING POPULAR NOT NECESSARY TO WIN

To win the popular vote Trump will need the support of Latino and Asian Americans. Of course, the electoral college has been known to “trump” the popular vote from time to time. Since the founding of our country, from as far back as 1824 (Adams vs. Jackson) until as recently as 2000 (Bush vs. Gore) the popular vote has not been sufficient to elect and seat the president no less than four times.

Ultimately no matter what November has in store, as it has always been the case it will be up to us, united and not divided, to make it (the world) a better place. I hope we can keep America great while we’re at it!

Todd

Why time management doesn’t work for the talented.

Without a doubt time is our most precious resource. Money cannot buy a second of it back. Little wonder that time management has become so important to the majority of us.

Today’s topic is a diversion from my ordinarily more serious and entrepreneurial tone.
The talented underachiever often finds time management difficult. I may not be numbered among this group but I definitely struggle with the productive use of my time and in the spirit of opening a dialogue I thought I might share a few thoughts on the subject.

I submit that the conventional approach to time management is all wrong, especially when it is applied to the very creative or the otherwise especially talented. I further proffer that the conventional approach when applied to the categories of those aforementioned generally leads inevitably not only to lowered performance and achievement, but a sense of  malcontent that further exacerbates the performance problems one tried to address by adopting a time management system in the first place.

“How can this be?”, ask you my dear reader.

The majority of time management systems express implied bias towards maximizing the efficient use of your time. This efficient use invariably can be reduced to maximizing the number of tasks one can accomplish in a day, from walking your dog to your daily exercise routine, work tasks, family and relaxation time, and finally the extremely important task of sleep.

The majority of us, as neophytes to time management apps, tend to overestimate the amount of things we can do in the ideal task structure that the majority of tools present us with. Although i acknowledge that with the continuous and disciplined use of our time management tools we may one day develop those skills necessary to make better planning decisions, the combination of the initial learning curve combined with the disappointment that follows in the first few weeks of consistently missing our self-inflicted productivity targets is usually sufficient to immolate any future efforts to use these tools while further reinforcing the often misguided sentiments of under achievement that many of the most talented carry within us unto death.

 But then you ask, gentle reader, why am I not preaching diligence and perseverance in the use of a written or digital task master?
 The flippant response is that this particular musing is more about maintenance of your status as an underachiever and as such is meant simply to explain why under achievement in this aspect of your life is completely reasonable and normal.
 But the deeper issue may simply be that detailing a number of tasks fails to account for how important those tasks are to you.
The above is different from saying what tasks should be important to you. That is what we tend to do when we sit down and plan our days…we detail tasks that should be important to us but are not necessarily. Consequently often times we make excuses about how “the day got away from us” because we allow those unplanned events to derail us from the list of things we had planned. The discipline and perseverance required is not in the use of the tool but in sticking to the plan when life’s inevitable events occur.

Modern mergers and acquisitions have changed. So has the cost of money. What remains the same is the need to carefully align the business goal with the target.

Modern mergers and acquisitions have changed. So has the cost of money. What remains the same is the need to carefully align the business goal with the target.

BACKGROUND

The buyout or purchase of a controlling share in a company as a component of private equity investing has evolved significantly from its origins. In the past buyouts were referred to as “bootstraps”; financial entrepreneurs or management insiders would buy a company with borrowed money (i.e., loans/debt) generally for 90 percent or more of the purchase price. Oftentimes the buyout would be financed with virtually no equity capital. These transactions were commonplace in the late 1970s and early 1980s, and at that time often focused less on the quality or nature of the business than on the financial “engineering” of the deal. Frequently, the thinking was that if a company was bought with 5 percent equity and the business was able to pay down some debt and improve the margins a fraction or so, then one would realize a very large return. Ultimately if the business failed to thrive, the lenders bore the greatest risk of financial loss and the brunt of the actual losses, which was a much better outcome for the buy-side entrepreneur.

Ahhhh….for the good old days of yesteryear.

Buyout investing has transformed from the bootstrap purchasing of businesses using large amounts of leverage and tiny amounts of equity as a hedged bet on the, oftentimes, misguided  hope of profitability. Today, equity is king and the triumvirate of the modern competitive landscape, the pricing of transactions, and credit parameters of lenders all require that buyouts be structured with significant amounts of backing.

In the current market climate a feasible buyout must have a disciplined investment strategy coupled with a clear vision for each company it buys and a well-defined path towards value creation.

“THE NEW APPROACH DEMANDS A NEW METHOD TO CHART THE COURSE. ONCE CHARTED, ACTIVISTS ARM THEMSELVES TO WIN.”

Successful companies execute their vision of value creation. Generally a unique mix of strategic support services and planning are required to successfully target, acquire, or merge portfolio appropriate companies.

We specialize in providing strategic and tactical support services that are generally some combination of fee or equity-based.

PROJECT PARTICIPATION CRITERIA FOCUSES ON MAKING A POSITIVE IMPACT

After many hard lessons learned I now prefer to participate in the pursuit of profitable companies with a value of between $5 and $250 million.

Generally this means companies that have EBITDA (earnings before interest, taxes, depreciation, and amortization) ranging from $2 million on the low side to $30 million or more on the high side. Generally I will not invest my time or capital resources in smaller companies or “Mom & Pop” businesses for a variety of reasons, the most important of these being that businesses smaller than the aforementioned generally cannot attract, afford to pay, nor effectively utilize the level of professional management I believe companies need to have in order to benefit from my participation. Ultimately businesses outside this range tend not to have developed the scope and scale to be leaders in their industries, and suffer from increased instability.

 After determining that a company falls within the requisite size parameters, there are three additional criteria I look for:

  • First, does the company have what I believe are sustainable competitive advantages?
  • Second, are there clear, identifiable opportunities to build the business in an industry disruptive way, i.e., to take the company to a game-changing level while working as partners with management?
  • Third, are there mechanisms to help these mature and profitable organizations stay adaptive and increase their social impact?

In my view, for a company to be considered to have sustainable competitive advantages it needs to be one of the leaders in its market. Given that private equity investors will someday seek an exit to provide returns to their investment in us, this leadership must be based on competitive advantages that can be sustained not just during our ownership and/or partnership, but a future owner’s as well. These advantages often take various forms, but often include scale that few competitors can match, proprietary processes, products, services, technology and/or distribution channels, as well as time in business. These advantages invariably present significant barriers to new entrants to the company’s markets. I want the company to be able to differentiate its products or services from competitors’ on a basis other than price that allows it to command pricing that results in strong free cash flow.

Companies that meet this criterion generally have excellent returns on investment capital, strong customer relationships that have stood the test of time, and usually do not suffer from excessive customer concentration.

The second criterion is arguably the most important for my internal consideration. I am looking for companies where my team can build the business while working as partners with the management team. I will not, and should not, pursue any transaction unless I can identify opportunities to achieve significant growth or create value. I learned this lesson the hard way, but now this criterion is ingrained in my approach.

The third criterion I seek is that my involvement represents capital for change and impact. Frequently companies I invest my time in were previously family owned or business units of larger companies. They may have been restrained from pursuing growth opportunities because the family or parent company

  • prioritized cash distributions to the owners;
  • was averse to the perceived risk; or
  • chose to focus on other priorities.

Unleashing companies I invest in to take advantage of opportunities is integral to our future success. I trust that acquisitions, including add-on and strategic acquisitions, are a very important growth strategy for the companies and I put specific emphasis in building relationships that create a clear path to achieving success utilizing this approach. I strive to find areas where companies can also improve the breadth and scope of their social impact as well as evaluate the positive social and/or environmental outcomes of my participation as an integrated component of the investment process. Growing a business and managing that growth are ever-present problems, but the opportunities to be found for creating value during these transitional periods in a company’s life are the greatest by far.

NEW OPPORTUNITIES FOR THE INDIVIDUAL INVESTOR

Although still in its infancy, the Jumpstart Our Business Startups (JOBS) Act, passed in 2011, is a game changing piece of legislation. The new legislation amends the Securities Act of 1933 to establish guidelines for what constitutes an Emerging Growth Company (EGC). As defined in the Act, an EGC is a company with annual gross revenues of less than $1 billion. A company can remain an EGC until the earliest of the following:

► Five years from its IPO.

► It reaches $1 billion in revenue for a given fiscal year.

► It issues more than $1 billion in non-convertible debt over a three-year period.

► It is deemed a “large accelerated filer,” defined as having $700 million or more in outstanding common equity held by non-affiliates.

With the ability for both accredited and unaccredited investors to participate jointly in offerings for the first time in nearly a century we believe that we can provide investors from all strata unique opportunities to generate value.

COMPANY POTENTIAL & MY PHILOSOPHY FOR SUCCESS

Ultimately the goal is to make money for ourselves, our investors, and our stakeholders. That is the first goal of any business in a country based on the democratic and persistent practice of free enterprise. The philosophy and approach to accomplishing this goal is tried and true. It requires a team committed to developing a corporate culture, practice model, and customer depth and breadth that drives:

  • Thoughtful, conscious strategic decisions specifically geared to avoid one-offs — Our commitment to generating value should be thought through, carefully planned, and deeper than the execution of a single transaction.
  • Steady, sustained growth — Clients and new service additions should be cultivated slowly and carefully to avoid disrupting our current client relationships.
  • Broad and deep client relationships — This is an essential point of potential differentiation and our dominance here requires the efficient and effective delivery of services that result in high levels of customer satisfaction.
  • An institutionalized/systematized service model — This will help us ensure that the infrastructure is in place to support new relationships while effectively managing and sustaining client expectations and high service levels.
  • Awareness of new products, solutions, and industry players — Technology developments are a cornerstone of modern industry and it has become a critical business practice to have the ability to identify technologies that may enable more efficient and profitable operation. In addition, vigilance in regards to competitors and service developments are necessary as part of a discerning approach to identify and implement the best new solutions for value creation.

To be successful, a buyout firm must have a disciplined investment strategy and a clear vision for each company it buys, with a defined path towards value creation. A key criterion I look for is whether I can build the business, working as partners with the management team. I will not pursue a transaction unless I can identify opportunities to achieve significant growth and value creation. I have often found acquisitions to be a very important growth strategy for those companies I have worked with. A successful acquisition strategy entails planning the targets in advance, and pursuing candidates that create real benefits to the combined company.

My experience is that this is achieved in acquisitions fitting one of the following profiles:

  • Geographic expansion (the target company enhances penetration of the acquirer’s products or services in specific geographic markets)
  • Augmentation or expansion of products or services (the target company provides the acquirer with broader services or products to put through its sales and marketing channels)
  • Acquisitions of direct competitors, especially where there are infrastructure savings or opportunities for vertical integration

CONCLUSION

In times of change winners disrupt the paradigm.

It is essential that the team, from the employees to the officers to the esteemed members of the board, have and contribute specific expertise and knowledge with respect to the business, its clients, and my clients’ acquisition targets. While comprehensive due diligence is essential in all transactions, acquisitions also require integration plans that must also be carefully developed.

 

My focus is not only minimizing the inherent risk of any acquisition, but the realization for the client companies in the shortest path possible the benefits of the acquisition.

Prevailing wisdom is that acquisitions often do not create value, and in fact compound the inherent risk of buyout investing. By utilizing our strategic services and support approach to acquisitions not only has our team never had a portfolio company under-perform due to an acquisition program. Our ambition, our call to action, our purpose is to spearhead a series of acquisitions that prove to be an integral aspect of building numerous portfolio companies and creating significant value.

As companies seek more growth and greater value for what they spend, they’re looking for new ways to monetize what they have, beyond incremental or simply iterative product innovation. In the new world order, innovation can mean turning a product into a service, or taking an experience and turning it into a product. It can also mean discovering and opening entirely different channels for existing products, even if that causes the need for disruptive change in existing dealer networks.

In the near future, I expect M&A activity to accelerate. That said, I am not an M&A Adviser, which is a regulated task limited to (SEC) FINRA-licensed broker dealers, and consequently you should do perform your own due diligence before attempting to apply anything you read here.

SAFE HARBOR STATEMENT

This paper is part of a series of my own internal policy and approach viewpoints and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of May 2015 and may change as subsequent conditions vary. The information and opinions contained in this paper are derived from proprietary and nonproprietary sources deemed by myself to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Todd Hill nor any organization which I may consult with, work for, or own including any such organization’s officers, employees or agents.

This paper may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader.

This document contains general information only and is not intended to represent general or specific investment or professional advice. The information does not take into account any individual’s financial circumstances or goals. An assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial or other professional adviser before making an investment decision. This material is solely for educational purposes and does not constitute an offer or a solicitation to sell or a solicitation of an offer to buy any shares of any stock or fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that they have not been registered with any securities regulator in any country and no such securities regulators have confirmed the accuracy of any information contained herein.

Ruminations on the reckless and indefatigable pursuits of an entrepreneur.

My last two entrepreneurial endeavors have been learning experiences. In entrepreneur code speak experience is “what you get when you don’t get what you want.” Experience is a great teacher, but it can be the teacher you least like to learn from directly.

I decided to build this site to share, and I hope that if you have found this site you will also find it of some use as a resource to you regardless of your current state of success or failure.

I do not believe that in living our lives, whether we are engaged in the pursuit of happiness, our lifes ambitions, a business, marriage and raising a family, making art or trying to learn something new, we should fear failure. Failure is a natural and common occurrence and ultimately anyone who has ever truly succeeded has or has been prepared to fail. A healthy respect for the potential consequences that result from failure is prudent, and required for those who are committed to the path of success.

Whatever your personal definition of success may be, I do not believe anyone is truly successful until they have assisted someone else, not for money nor for personal gain, simply because one of the greatest acts of a lifetime can be realized when one selflessly helps another achieve their dream.

Here’s to those helping to make the world a better place.

Todd