12th January 2013: Killed By Death

 

Vanity Fair‘s Rich Cohen gives some family estate planning advice about United States billionaire and private equity maven Teddy Forstmann:

 

In the months following his death, his art collection was sold at Sotheby’s, bringing in $83 million. His Manhattan penthouse was sold in June 2012 for $40 million. The house on Meadow Lane in Southampton is on the market for $31 million. It seems as if little he collected has been preserved, but has instead been broken up and sold. Teddy, at least in part, measured his success in dollars: he was forever in search of a higher percentage, a bigger return. That was the game, how he kept score. If you judge by how big and how much, then, in the end, no matter your charity or causes, that’s what you’ll become in the minds of other people. Teddy was one of the richest men in the country, with his paintings, his mansion, his helicopter and plane. And when he died, that’s what remained: the fortune and the estate. If you are money, then, when you die, you will be spent.

 

You might start with Gregory Curtis’s book The Stewardship of Wealth (New York: John Wiley & Sons, 2012) for estate planning and inter-generational wealth transfer.

24th August 2012: Gawker’s Bain Files

Nick Denton’s Gawker site has released 950 pages of documentation on Mitt Romney’s Cayman Islands private equity and hedge fund investments. Henry Blodget’s BusinessInsider is skeptical, but this cache could keep me busy for months. Dangerous Minds‘ Richard Metzger sums up how I feel: “The idea that these documents are, currently, as I type this, being analyzed by crowd-sourcing is either a fortunate or very unfortunate fact of political life in 2012!” Vanity Fair‘s Nicholas Shaxson has a useful backgrounder on why hedge funds use the Cayman Islands domicile for offshore tax minimisation.

24th March 2012: European Commission Antitrust Investigation on EMI

Vivendi SA (Universal Music Group)

I’m working on an academic journal article about Terra Firma‘s unsuccessful private equity acquisition of EMI. Terra Firma defaulted to Citigroup, which agreed to sell EMI’s record labels in November 2011 to Universal Music Group (Vivendi SA) and EMI’s publishing to a Sony-led consortium. Now, the European Commission will investigate Universal’s acquisition for antitrust implications, given the planned market size of the combined group. Vivendi SA’s shares traded sideways in a choppy market on Friday, 23rd March 2012, possibly in relation to the antitrust announcement and the possibility of regulatory arbitrage on the Universal-EMI deal.

25th February 2012: Mailroom Jobs & Superstar Economics

The Operator: David Geffen Builds, Buys and Sells the New Hollywood (2000)

 

For the past week I’ve been writing about academic entrepreneurs and superstar economics. Now, NPR’s Adam Davidson has a great New York Times article on why many careers are becoming lotteries in which a small group has a ‘winner-takes-all’ or ‘success to the successful‘ dynamic and others can miss out. Davidson’s key insight:

 

Hollywood is, in some ways, the model lottery industry. For most companies in the business, it doesn’t make economic sense to, as Google does, put promising young applicants through a series of tests and then hire only the small number who pass. Instead, it’s cheaper for talent agencies and studios to hire a lot of young workers and run them through a few years of low-paying drudgery. (Actors are another story altogether. Many never get steady jobs in the first place.) This occupational centrifuge allows workers to effectively sort themselves out based on skill and drive. Over time, some will lose their commitment; others will realize that they don’t have the right talent set; others will find that they’re better at something else. [emphasis added]

 

Davidson’s thesis is that this “economic lottery system” pushes talent to the top. He cites Hollywood actors and directors, and Big Four accountants who survive the ‘up or out’ system to make partner (William D. Cohan has interviewed the Wall Street losers). Davidson connects tournament theory — the study of individuals who have relative advantages in salary and wage negotiations — to disruptive innovation (PDF), globalisation, technology and other mega-trends that are creating a ‘race to the bottom’ dynamic. How can individuals cope with these changes? “In a lottery-based economy, you need some luck, too; now, perhaps, more than ever,” Davidson advises. “People should be prepared to enter a few different lotteries, because the new Plan B is just going to be another long shot in a different field.”

 

For Davidson the “economic lottery system” model is the New Hollywood. The reality is a little more complex. Classical Hollywood’s studio production system flourished from the 1930s until the ‘go go’ Sixties when the modern conglomerates collapsed. For a brief period from 1968-73, independent producers flourished before the studios fought back with the blockbuster film, new marketing, distribution, and control of ancillary revenue streams. A similar pattern occurred in the 1995-2000 dotcom period (PDF) in Los Angeles, New York, Austin, and London. Ben Eltham and I found in a 2010 academic paper that Australia’s film industry fluctuated depending on a mixture of Australian Government intervention, available labour, and international tax arbitrage. Eltham and I both read Nikki Finke’s influential blog Deadline Hollywood.

 

History also differs on the New Hollywood exemplars that Davidson selects. “Barry Diller and David Geffen each started his career in the William Morris mailroom,” Davidson observes. Tom King’s biography The Operator: David Geffen Builds, Buys, and Sells the New Hollywood (New York: Random House, 2000) details what actually happened over this six month period in late 1964-early 1965 before Geffen became secretary to television agent Ben Griefer (pp. 46-52). Geffen lied to WM’s Howard Portnoy that he was Phil Spector’s cousin. Geffen lied about having a college education and persuaded his brother Mitchell to write a letter and cover this up. When they met, Diller “thought Geffen was a rather odd duck for using his vacation time to work in the company’s other office” (p. 50). Geffen networked with agent Herb Gart, “stalked” New York office head Nat Lefkowitz, and got his break from Scott Shukat. Geffen relied on chutzpah, hard work, networking, and having a career goal: “signing actors.” No wonder that Geffen hated King’s biography.

 

These qualities are essential to Davidson’s “occupational centrifuge.” When academics ask me about their Dean’s budget and resource allocative controls, and why universities are now like Davidson’s “economic lottery system”, I suggest they invest time in watching the film Moneyball (a film in part about tournament theory), and understanding the performance and value creation goals of private equity firms (the mental model of consultants who possibly advise the Dean).

 

I haven’t finished the academic journal articles on those ideas yet . . .

23rd December 2011: Holiday Reading

My holiday reading for late December 2011 and the first week of January 2012:

 

1. George F. Kennan: An American Life by John Lewis Gaddis (New York: The Penguin Press, 2011).  I’ll need a few weeks to get through this masterful biography of the foreign affairs maven who conceived of Cold War containment. It took Gaddis almost 30 years to research and write this authorised book, based on archives and extensive interviews.

 

2. A bunch of private equity books for a planned journal article on the EMI-Terra Firma Capital Partners deal.

 

3. Aum Shinrikyo chapter notes for the PhD — hope to have a draft for the PhD committee by mid January.

 

4. Nancy Duarte’s Slide:ology (Sebastopol, CA: O’Reilly Publishers, 2008) for a new project.

29th October 2010: Weekend Reading

Dealbook Special Section (Fall 2010): Private equity experienced a bubble in 2005-07 reminiscent of the 1980s. This special section examines how private equity survived the 2007-09 global financial crisis; the role of inflection points; and the regulatory games ahead. I keep an eye on stuff like this as a reminder of graduate school classes in organisational strategy.

Diplomatic History: This is the ‘house’ journal (A-ranked ERA) of the Society for Historians of American Foreign Relations. I keep an eye on it for two reasons: (1) it often covers some interesting, relatively unknown incidents in American political history (some that may interest Russ Kick); and (2) the articles illustrate how to do archival and historical research, using the kind of sources that you won’t find online.

The Social Network: Aaron Sorkin‘s script (PDF) for David Fincher‘s film takes me back to the 1995-2000 dotcom bubble. I wrote a graduate school paper on the experience, here.

20th May 2010: On Michael Milken

PredatorsBall.jpg

In November 2009, the Australian cultural policy author Ben Eltham and I published a conference paper and presentation on Twitter’s role in Iran’s 2009 election crisis. One of our conclusions was that as a social network platform Twitter can be prone to rumours and two dynamics: information cascades (people making the same choices) and rational herds (a form of social learning in which individuals self-organise into groups, usually on the basis of shared affinities, identity or preferences). We cited Christopher Chamley and Mark Schindler‘s work, whilst Cass Sunstein has written important work on how information cascades and rumours spread.

Collectively, these authors observe the tendency for people to forward and filter information without checking the pertinent facts, evaluating the motives of their source, personalising the ‘other’, and also not considering the original, appropriate context.

One of the best examples of this phenomenon is the pre-Twitter career of financier and philanthropist Michael Milken (personal site). In the early 1970s, as a young analyst at the leveraged buyout firm Drexel Burnham Lambert, Milken foresaw a new market in high-risk securities that blue-chip investment firms would not touch: high-yield or ‘junk’ bonds of debt-laden companies. As depicted in Connie Bruck’s excellent book The Predator’s Ball (New York: Penguin Books, 1989), a source for Adam Curtis‘ must-see documentary The Mayfair Set (BBC, 1999), Milken became a major driver of the 1980s private equity boom. Despite being implicated in the Ivan Boesky arbitrage case, and being barred for life from the securities industry, Milken has subsequently reinvented himself through the Milken Institute think-tank and other activities.

The power-users of social networks like Facebook and Twitter may joke about gaining ‘world domination’. As a self-styled ‘Master of the Universe’, Milken actually achieved this goal, if only for a brief time. Consider the strategic dimension of how Milken did so. As a true innovator, he foresaw new markets and macroeconomic trends a decade before others did. He developed powerful, financial innovations in debt securitisation, mergers and acquisitions, and risk arbitrage. He built a loyal and private network, together with the organisational capabilities to leverage deal-flow. He also controlled the public dissemination of market information through conferences and media interviews. He understood the subtle power of crafting and framing a media image around themes which appealed emotionally to people — entrepreneurship, freedom, and being the revolutionary vanguard — which Curtis argues was really a personal agenda to cement Milken’s influence, power and social status. Many of Milken’s strategies tapped the dynamics of rumours, information cascades and rational herds, apparent in the 1980s private equity boom.

Perhaps this is why Milken tried (unsuccessfully) to convince Bruck not to publish her book.

Worth Reading

Personal Research Program

McKinsey asks Conde Nast for an across-the-board 25% cut to its expenditure budgets.

US M&A deal flow is on the rise, such as the Xerox-ACS deal (CNBC video).

The New Yorker‘s John Cassidy on the ‘rational irrationality’ of financial markets.

How private equity targets the vulnerabilities of integrated supply chains in America’s automobile manufacturing industry.

Australian strategist Paul Monk on the rise of the market state.

Tweet Memes

New York Times and Slate obituaries on speechwriter and columnist William Safire.

TNR‘s Daniel Pauly poses a dystopian scenario: the ‘aquacalypse’ or end of fish.