rob zdravevski's blog

Watch me pull an acquisition out of my hat

The corporate strategy involving the manipulation of capital structures, balance sheets, income statements over the past few years could be summarised as hiding the ugly stuff and parading the pretty stuff.

Over this time, many companies have seen revenues remain flat while their earnings, or at least their earnings per share (EPS) have miraciously increased. Whether it has been firing employees, reducing costs or buying back shares, stock prices have recovered from 2008 lows as a result of this window dressing. 

Nevertheless, company CEO’s are still under pressure.

Commonly, it is believed that corporations are holding large amounts of cash but seldom do I hear discussion about what is the company’s “net debt” position. A company can hold $2 billion of cash on its balance sheet but it has $4 billion debt outstanding, I’m not that impressed.

Thorough balance sheet analysis needs to also include any corporate debt that been issued recently albeit, at all-time low interest rates. The cost of that money may not be onerous, but there is still a liability. 

The bomb that is endlessly swept under the carpet remains corporate pension liabilities. More importantly, the greater and obvious risk is to the employees of a company which is proving them with the “gift” of carrying an underfunded pension whilst the knock-on effect would affect the broader economy.

CEO’s are under pressure.

Their next act is to embark on ego boosting, chest beating, Mergers and Acquisitions.

In a world of little growth, they will opt to buy revenue and growth. Rather than reduce their liabilities, they will use their balance sheet cash and cheap financing to dress up the pig.

What often follows is a decline in shareholder value.

It is crucial to have, and maintain, a sound process….

Investor and Money Manager, Seth Klarman said in a 2009 interview…..

It’s so easy for one’s investment process to break down — and process is everything in investment firms.

And today, many firms have a broken process. When investors worry about what a client will think rather than what they themselves think, the process is bad. When an investor is worried about their firm’s viability, about constant redemptions, about avoiding loss to the exclusion of finding a legitimate opportunity, the process will fail.

When one’s time orientation becomes absurdly short-term, the process is compromised. When tempers flare, when recriminations abound, when second-guessing proliferates, the process cannot work properly. When investors worry about the good of the firm or its publicly-traded share price rather than the long-term best interest of the clients, the process is corrupted.

When the process is broken, you can’t invest well. It’s hard enough to invest well when the process is good. So it’s crucial to have a sound process that will enable you to perform this difficult task with intellectual honesty, rigour, creativity and integrity.

UK Banker Cartoon

Seriously, someone needs to be arrested!

Tweet that I posted today regarding David Jones –

$DJS.AX – can’t believe investors bought stock on rumours of a bid. Time to check who bought calls before the hoax, oh, I mean the bid.

DJS went into trading halt this morning and re-emerged in the afternoon by falling 10% after there was news of no bid existing. Newspapers will cite something such as the bidder was nervous or the bid was compromised.

What I Think About