The 'Greater Fool' Strategy
February 9, 2010
Three years ago, when Cerberus acquired Chrysler, the collective reaction was to ask how the firm could possibly pull it off. At the time, before the crisis, it wasn't so much about casting doubts as it was a genuine curiosity about what kind of pixie dust Steve Feinberg had at his disposal that would make the PT Cruiser cool.
A lot of deals elicited that same reaction back then. EMI, Clear Channel and a few others come immediately to mind.
As it turns out, nobody had any magical fixes. The investments, for the most part, were based on the "greater fool" theory that someone dumber would come along and pay more. It's no coincidence that this strategy seemed to attract the industry's DIGJAMs (damn, I'm good; just ask me); Feinberg, perhaps being the exception.
Now that we're knee-deep in a downturn, there have been a few deals that still evoke the same kind of wonderment.
Platinum Equity, for instance, in the past year has acquired boating manufacturers, newspapers and commercial real estate services companies. The most recent of these investments was Platinum's acquisition of certain Genmar Holdings' assets, which reportedly fetched $70 million for the Ranger, Lund and Wellcraft boating lines in addition to a few other brands and assets. (The company, coincidentally, is based in Flippin, Ark.)
Two years ago, Platinum even tried to buy into the Arena Football League.
Just like 2007, I don't necessarily have specific reasons to doubt the firm will be able to get a return on its money, but I'm genuinely intrigued. You have one company selling a product, boats, that define discretionary spending; another that's servicing a market, commercial real estate, being referred to as "the next shoe;" and we're all familiar with the state of the newspaper industry. The Arena Football League at least had Bon Jovi in its corner.
There are a couple possible scenarios. One is that Platinum successfully turns around these companies, proving out the "pioneering vision" eluded to in Tom Gores' bio on the firm's website. The other, of course, is that the investments fail and scuff up Platinum's track record, which has always been pretty good.
To the firm's credit, if you're going to buy into a greater fool strategy, it's a good idea to start at the bottom.
The Financial Times had a wide-ranging Q&A with Blackstone's Tony James.
I thought the most interesting part of it, given some recent developments in Washington, was James' take on politics.
"I think we're in an extremely partisan cycle right now where everyone's worried about very, very short-term concerns... I realize people have to get re-elected but nonetheless I don't think anyone's really worrying about the long-term issues facing America."
What's odd to me about this extreme partisanship is that it is going against the desires of the voters. Scott Brown didn't signify that Massachusetts is suddenly core to the Tea Party set. To me, he was the alternative to a candidate who would have voted mechanically along party lines. To go back to the Presidential election, the Sarah Palin pick as VP was offensive to most of the independents that had previously backed McCain in the first place.
I think James is right, though. The worst part about it is that this extreme partisanship creates a standstill in Washington in which nothing gets done, or worse, something gets done, but it's a puffed-up form of window-dressing providing a solution that offers no real remedy. The Volcker Rule, which he discussed, arrived with a lot of pomp and circumstance, but simple capital requirements, as James identifies, probably goes a lot further to stem systemic risk.
I was able to catch Undercover Boss on CBS. It doesn't quite live up to Shark Tank in terms of reality offerings for the business audience, but it was okay.
For those who somehow missed the commercials, in the debut, Waste Management president and COO Larry O'Donnell went undercover to take on entry-level jobs at the company. The idea was that it was supposed to give him a view of the front lines to see how decisions that come from the top impact the working men and women. He cleaned port-a-potties, rode on the back of a garbage truck, and pulled cardboard off of a conveyer belt at one of the company's recycling centers.
The whole thing seemed pretty staged. They should give him a couple days at each job to build some familiarity, and maybe employ a hidden camera instead of a full crew. The workers, by my estimation, were far too kind for the disgruntled masses to relate.
Future episodes are supposed to follow 7-11 CEO Joseph DePinto, Hooters' CEO Coby Brooks, White Castle head Dave Rife and Churchill Downs' William Carstanjen, a COO at the racetrack operator. I'm actually curious if they're going to force Rife to put down a couple burgers, and if so, will the cameras capture whatever follows?
The fight between Guy Hands and Citigroup, which the New TImes
recapped this past weekend, seems to highlight the conflicts involved with stapled financing.
Citi was both advising EMI and serving as a lender to Terra Firma. As the primary source of funding for the deal, they effectively set the price Terra Firma could pay. Hands, now, is upset that Citigroup didn't inform him that Cerberus had walked from the bidding. All sides look like dolts in this, but Hands' job is based around his ability to place a value on a business
If people weren't scrutinizing him, I'd guess that John Thain's first order of business at CIT would be a remodeling effort for the firm's Manhattan headquarters.
As it is, the blue lights seem like a constant threat that at any moment house music will get piped in and the elevator bank will turn into a late-nineties style rave. Just doesn't seem like a fit for someone who spent $35K for a commode on legs.
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