Wednesday, December 19, 2007
Contestable Markets...Follow up
Yesterday WSJ featured the most expensive city in the US to leave and that made me feel vindicated. The article can be found here. Back in September, I had published a post about CVG not being airline passenger friendly. I have chosen to fly to Dayton on occasions that I have had to fly to OH. I guess it is CVG’s loss but I am not sure when they will wake up to this fact.
Shareholder Education in Light of Triangular Mergers….
Today’s WSJ talked about Citi’s subsidiary taking over Nikko. This would be Japan's first major triangular merger, in which a foreign company uses a local subsidiary to buy a Japanese firm using the parent company's shares as payment. In answer to a concerned shareholder’s questioning of Citi’s business strategy and it’s understanding of cultural differences between Japan and US, Douglas Peterson, Citigroup Japan Holdings, Chief Executive cited as evidence of success Citi’s presence in Japan for 100 years and a nine year partnership with Nikko.
Is long term presence in a foreign country enough evidence of success? On the surface, the answer might be yes. However, there are quite a few issues to be considered. Transaction with affiliates, transfer pricing, subsidies extended by the parent company, long term business strategy are all valid considerations. Douglas Peterson could not have shared all of this information with the concerned shareholder at the meeting.
Is this an area of investor activism that needs attention? If someone is going to ask slightly more than cursory questions, then maybe there should be a forum to address these questions with suitable data. Or, is this an example of owners meddling with management who are assumed to work for the purposes of increasing shareholder wealth until proven guilty? Where do we draw the fine line? And, how do we educate shareholders about significant strategy details. Please bear with me while I work on the answers to these questions.
Is long term presence in a foreign country enough evidence of success? On the surface, the answer might be yes. However, there are quite a few issues to be considered. Transaction with affiliates, transfer pricing, subsidies extended by the parent company, long term business strategy are all valid considerations. Douglas Peterson could not have shared all of this information with the concerned shareholder at the meeting.
Is this an area of investor activism that needs attention? If someone is going to ask slightly more than cursory questions, then maybe there should be a forum to address these questions with suitable data. Or, is this an example of owners meddling with management who are assumed to work for the purposes of increasing shareholder wealth until proven guilty? Where do we draw the fine line? And, how do we educate shareholders about significant strategy details. Please bear with me while I work on the answers to these questions.
Tuesday, December 18, 2007
CEOs and musical chairs…
In light of Stan O’ Neal’s departure from Merrill, Class Action lawsuits against Countrywide CEO and WellCare Health Plans, a private equity veteran was interviewed on what makes a good CEO from a PE perspective. Two things stuck out.
They look for people who can add value quickly (cost cutting, low hanging fruit, no Friday bagels, etc.). He also mentioned people who can think clearly and act quickly and report information in a concise manner. Now that’s a requirement, I would imagine a lot of folks would meet right off the bat. For that matter, this is a requirement for pretty much every job, except if you’re a story teller, in which case, the more loquacious you are, the better it is.
I was pretty amused and a little surprised that there was no mention of leadership skills, understanding of the industry and most importantly personal integrity as basic requirements. I love the corporate world for all of it follies because that is yet another place to make a difference.
They look for people who can add value quickly (cost cutting, low hanging fruit, no Friday bagels, etc.). He also mentioned people who can think clearly and act quickly and report information in a concise manner. Now that’s a requirement, I would imagine a lot of folks would meet right off the bat. For that matter, this is a requirement for pretty much every job, except if you’re a story teller, in which case, the more loquacious you are, the better it is.
I was pretty amused and a little surprised that there was no mention of leadership skills, understanding of the industry and most importantly personal integrity as basic requirements. I love the corporate world for all of it follies because that is yet another place to make a difference.
Value Migration and Business Design
A business design could be in one of three phases. Value could be flowing in, staying stable or flowing out. A business design can be altered to attract and retain value by focusing on the end customer. Sounds simple, right? It is meant to be.
I like the airlines industry so I am going to focus on that to expand on this concept. The airline industry encountered an external event in 1978 that changed it. It was deregulation. Long story short, the legacy airlines focused on profits, forgot about the customer and almost three decades later, here we are. Meanwhile, several Low Cast Carriers (LCCs) emerged. A few of them survived, the most beloved example being that of Southwest.
Recently, we have Virgin Air plying on the coveted LAX – JFK route. This is the cherry on the cake amongst the airline routes. The customer base is movie moguls, I am told. Virgin Air is going to try it’s very best to please these folks. JetBlue and Southwest will do their part to woo these folks as well because this would be the profitable tranche of the customer base.
So, getting back to that elusive thing, ‘value’ in terms of business design. LCC provide value at low prices. The customer base on this route is not looking for value at the best price. These folks might travel via Virgin for the ‘novelty factor’ and the VS PJ party but they would just as well take a United flight for $2,500.
How do these airlines intend to retain value? And, more importantly how do they define value for the different tranches of the customer base? Is there one formula that would satisfy all? Because it is one airline and more importantly, the plane is a whole, although they might be able to divide the service components between the areas of the airplane.
For the humor factor, let’s imagine, we have a passenger who paid $139 to fly from LAX to JFK and we have another passenger who paid $439. Let’s say they are sitting in the Economy section of the plane. How will the service differ for these passengers? Will the $139 passenger not get the soda drink he requested? Similarly, the add-on services are no longer at this point (air borne) a factor of their ticket prices. It is a factor of how good they feel as customers receiving the default service and their financial comfort level.
So, again, what is value and how do you retain it? You look at the business model and align it with where you can capture the most of it.
I like the airlines industry so I am going to focus on that to expand on this concept. The airline industry encountered an external event in 1978 that changed it. It was deregulation. Long story short, the legacy airlines focused on profits, forgot about the customer and almost three decades later, here we are. Meanwhile, several Low Cast Carriers (LCCs) emerged. A few of them survived, the most beloved example being that of Southwest.
Recently, we have Virgin Air plying on the coveted LAX – JFK route. This is the cherry on the cake amongst the airline routes. The customer base is movie moguls, I am told. Virgin Air is going to try it’s very best to please these folks. JetBlue and Southwest will do their part to woo these folks as well because this would be the profitable tranche of the customer base.
So, getting back to that elusive thing, ‘value’ in terms of business design. LCC provide value at low prices. The customer base on this route is not looking for value at the best price. These folks might travel via Virgin for the ‘novelty factor’ and the VS PJ party but they would just as well take a United flight for $2,500.
How do these airlines intend to retain value? And, more importantly how do they define value for the different tranches of the customer base? Is there one formula that would satisfy all? Because it is one airline and more importantly, the plane is a whole, although they might be able to divide the service components between the areas of the airplane.
For the humor factor, let’s imagine, we have a passenger who paid $139 to fly from LAX to JFK and we have another passenger who paid $439. Let’s say they are sitting in the Economy section of the plane. How will the service differ for these passengers? Will the $139 passenger not get the soda drink he requested? Similarly, the add-on services are no longer at this point (air borne) a factor of their ticket prices. It is a factor of how good they feel as customers receiving the default service and their financial comfort level.
So, again, what is value and how do you retain it? You look at the business model and align it with where you can capture the most of it.
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