Worth Reading: Stafford Beer-Brian Eno, M&A and R&D

Personal Research Program

The Stafford Beer-Brian Eno Connection: Alex Hough of Manchester Business School mentions how the cybernetics scientist Stafford Beer influenced musician and producer Brian Eno. Beer also influenced a generation of researchers and practitioners in modular organisational design, management, and systems thinking. Eno’s collaborator Robert Fripp was influenced by a precursor, John Godolphin Bennett‘s systematics.

START Bulletin Fall 2009: The US National Consortium for the Study of Terrorism and Responses to Terrorism (START) has just released its Fall 2009 bulletin
on its programs of research and major research reports. I’m always on
the lookout for ‘good practice’ examples of how to communicate the
research results to different audiences.

R&D Management
: Michel Bauwens tipped me off to a special issue on Henry Chesbrough‘s ‘open innovation’ and ‘open R&D’: looks very interesting. Journal article idea: Under what conditions might the innovation tournament be a more efficient allocative mechanism for R&D resources, human capital and commercialisation than other institutional structures, such as university-industry consortia and joint ventures?

SmartyGrants: An intriguing new package developed by the Australian Institute of Grants Management for grant-makers and grant-writers to manage the end-to-end grant cycle. SmartyGrants uses a subscription-based ‘software as a service’ delivery model, akin to Salesforce.com.

Mergers & Acquisitions

M&A Market Themes: NYT‘s Steven M. Davidoff on the US M&A market and Warren Buffett’s acquisition of the railway Burlington Northern Santa Fe. Davidoff’s new book Gods at War: Shotgun Takeovers, Government by Deal, and the Private Equity Implosion (New York: John Wiley & Sons, 2009) surveys the recent M&A market and deal trends.

‘Sell’ for Research Renegades
: Edward Robinson’s Bloomberg Markets cover-story showcases a group of ‘sell-side’ researchers who have gone solo. Robinson notes the good security analysts have gone to hedge funds whilst others have founded independent research firms. This is a model I suggested the Smart Services CRC look at during its initial planning stages for its lessons on commercially relevant research and human capital management.

The Myer IPO: Fairfax’s Michael West blames Myer for ruining the Australian IPO market for others. Three observations: (i) I agree with West that Myer’s private equity owners were driven by a macroeconomic/monetary policy timing window to cash out after their cost cutting and change management; (ii) Brokerages and commission-based sales provided an ‘echo chamber’ to talk up the Myer IPO so that the underwriter’s market-making activities are supported in the aftermarket; and (iii) always factor in market volatility into daily commentary — an 8% shift is normal in the current market conditions due to buyer-seller resistance, post-IPO speculation and different views of Myer’s fair market value — and the likelihood that the underwriter and other investment banks will attempt to stabilise the stock’s support level.

Noosphere Memes

Vale Claude Levi-Strauss: The anthropologist’s structuralist approach is credited with changing how we perceived primitive societies and their cultural and religious practices. He is probably best known in popular culture for naming the Fine Young Cannibals‘ most successful album.

Foreclosure Of A Hedge Fund Dream

Media personalities who took a career detour into managing hedge funds are the latest casualty of the subprime fallout, reports New York Times journalist Andrew Ross Sorkin.

Sorkin profiles Ron Insana the former CNBC news anchor who founded Insana Capital Partners at the height of easy credit in 2006 and closed ICP in August 2008.  Insana raised $US116 million from major investor Deutsche Bank and media contacts.  Rather than invest directly in complex financial instruments Insana chose an intermediary position: a fund of funds investor in a diversified portfolio of hedge funds.

Insana made several errors that led to ICP’s blow-up.  Sorkin notes the US$116 million was a smaller capital raising than its blue chip competitors.  The fund of funds positioning meant a rational herds strategy on the hedge funds that ICP invested in.  Subprime-caused market volatility set off a cascade: the hedge funds didn’t make alpha returns above the market and ICP didn’t have the diversified portfolio to weather the volatility.  Consequently, ICP still had to pay out investors in full for their original investments (the ‘high water mark’ rule) before it could earn its ‘1.5 of 20’ fee (1.5% management fee on funds and 20% of fund profits).

Sorkin is insightful about the cost structures of hedge funds:

That would have been enough if it was just Mr. Insana, a secretary and
a dog. But Mr. Insana was hoping to attract more than $1 billion from
investors. And most big institutions won’t even consider investing in a
fund that doesn’t have a proper infrastructure: a compliance officer,
an accountant, analysts and so on. Mr. Insana had seven employees, and
was paying for office space in the former CNBC studios in Fort Lee,
N.J., and Bloomberg terminals — at more than $1,500 a pop a month —
while traveling the globe in search of investors. Under the
circumstances, $870,000 just wasn’t going to last very long.

This ‘contrarian’ observation highlights the leverage of institutional investors, and, in contrast to the usual media portrayal, the regulatory burdens of institutional compliance on funds.

Sorkin’s profile raises some interesting questions beyond his comparison of Insana and the media-savvy millionaires who blew-up after the April 2000 dotcom crash.  Did ICP adopt the trend following strategy from CNBC’s media coverage and Insana’s popular books?  If so, could Insana distinguish between market noise and critical events?  How did Insana grapple with the career change from CNBC news anchor to hedge fund head?  What risk mitigation steps did ICP’s investors demand, and did Insana exercise prudential caution? When he had to close ICP was Insana able to be self-critical about his past decisions and errrors?  Are there firm-specific, operational and positioning risks for fund of funds?  That would be a really interesting post-implementation review for aspiring hedge fund mavens.

Don’t expect to see it in CNBC European Business or Bloomberg Markets anytime soon.

Jamie Dimon’s Deal & Risk Strategies

Bloomberg Markets‘ Lisa Kassenaar and Elizabeth Hester profile Jamie Dimon the CEO who spearheaded JP Morgan Chase‘s acquisition of investment bank Bear Stearns.

Dimon compares the managerial bias for action and velocity of a pre-deal team to the 101st Airborne Division of the US Army — reminiscent of John Boyd‘s influence on business strategists with his ‘observe-orient-decide-act’ loop used in air combat.  This bias and velocity is crucial for: (1) strategic execution and rollout of high-growth strategy; (2) anticipatory responses to hedging and catastrophic risk; and (3) negotiation in surprise events such as the Bear Stearns collapse.

Dimon focuses on costs in structuring a deal, leveraging strengths and triaging this with risk management and growth strategies that are quickly scalable.  Dimon claims this is why JP Morgan Chase did not venture into the securitisation markets for collateralised debt obligations, subprime mortgages and exotic options.  Instead, his ‘fortress balance sheet’ is ‘defined by efficiency, stable sources of revenue and risk management that protects assets’.  Equally, the risk dimension of ‘risk-return’ is central to banking, securitisation and the leverage of future cashflows.

Kassenaar & Hester’s interviewees suggest Dimon has an ‘information filter’ that oscillates between ‘details’ and ‘the big picture’ to keep track of deals.  In particular, Dimon uses one sheet of paper with ‘things I owe people’ and ‘things people owe me’ rather than a Blackberry.

Dimon’s career management insights: (1) take time off after termination to create a new space; (2) make a financial commitment via an equity stake as a signal to others in your 90-day period to transition-in. Continue reading “Jamie Dimon’s Deal & Risk Strategies”