25 Feb The 3 Keys To Profitable Growth – The Prelude
The 3 Keys to Profitable Growth – The Prelude
Do you remember back to the 80’s and the corporate raiders? The Michael Douglas portrayal of Gordon Gekko, made famous in the 1988 Oliver Stone movie “Wall Street”, was symbolic of the real life “Barbarians at the Gate”, describing people like Henry Kravitz, Carl Icahn, Michael Milken, T. Boone Pickens, etc. They used a lot of other people’s money (hence the “leveraged” in the term LBO) to acquire companies – many of which were mismanaged, bloated, vulnerable, undervalued or all of the above. Milken, in particular, created mountains of capital available for investment that allowed for new frontiers of success and innovation.
(By the way, I’m not at all negative on this – I believe they created enormous value and largely forced American managers to operate effectively, efficiently and creatively in order to compete and survive. Do you remember how worried we all were around this same time that the Japanese management models and disciplines were on the cusp of overwhelming our dysfunctional US economy? Not so fast Tokyo!)
I remember this period well, because I was caught smack in the middle of it. The company that I worked for went “in play” as a target of the raiders in 1984, just a few months after I joined. Our CEO was convinced that the company was dramatically undervalued and unappreciated by the Wall Street analysts, who he believed were vastly behind the curve in understanding the emerging outsourcing phenomenon. He resolved to compete for the company by leading a management buyout, initially enlisting the top 65 executives, some private equity and a few key suppliers to raise the funds necessary to take the company private. Ultimately, we borrowed an amount equal to about one-third our annual revenues, which in a relatively low margin cash-flow dependent business, was a staggering amount.
Talk about ‘skin in the game’ here’s how the wake-up call went to the executive participants… “Determine your total Net Worth – double it – add two years salary – then take that number and go to a bank we’ve picked out for you – take out a personal loan for that exact amount and bring us the check. Oh, by the way – your bonuses for the next two years have already been pledged to pay the interest on the loan.” OK, go have that discussion with your spouse – let me know how it goes. These stories are so much more fun when they are in the distant past. (By the way – all 65 signed up. I don’t think anyone wanted to ask – or have answered – the question of whether declining to participate was an option.)
Next week, we’ll write about how this all worked out and why. It wasn’t complicated and it didn’t require exotic strategies or new-age management theories, but there are some really valuable lessons to be learned. Until then…
Steve & John