Warren Buffet is Still Right

Last weeks Star Tribune article on the negative impact the Albertson’s acquisition is having on Super Value was a powerful reminder of Moody’s report that half of all non financial business failures in 2009 were Private Equity owned.

It is significant that a high failure rate among the people with the most money and best access to information and superior process (private equity funds, large corporations) indicates a need for improving the decision making process at the front end.  Away from transaction driven (broker driven) deals to a more internalized and measured approach to criteria and candidate selection.

Is it easier to make better decisions within smaller companies?

In the Super Value story above, it appears that size of the acquisition must have driven the targeting of a very few mega candidates.

Rather than slow steady growth that would not ruin the brand if big problems were encountered with a single transaction, companies risk everything with each new acquisition.

With the decade long troubled history of acquisitions, I recommend Warren Buffet’s comments about evaluating each new acquisition target ;

” Just think of all the other parts of life where people offer only encouraging words — “You should do this!” — because that’s the only way they get paid (real estate agents, stock brokers, the list goes on).

And Mr. Buffett has trained his sociologist’s eye on this phenomenon more broadly, too. In his 1989 letter to shareholders, he famously wrote about the “institutional imperative,” which describes, among other things, how an entire organization can rise up to help a boss justify some deal he’s inclined to do, regardless of its merit”

And of course, my favorite Warren Buffetism; “

Don’t ask the barber if you need a haircut”

Geeks Bearing Formulas and other Warren Buffetisms

Geeks Bearing Formulas and other Warren Buffetisms

(Repeated from M and A’s April Dealmaker’s Journal and Warren’s annual Letter to His Shareholders);

“Private equity is a name that turns the facts upside-down: A purchase of a busines by these firms almost invariably results in dramatic reductions in the equity portion of the acquiriee’s capital structure compared to that previously existing.”

“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

“Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel… Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.”

“regulation…could be a catalyst for positive change…it doesn’t have to be a negative” General Electric CEO Jeffrey Immelt, quoted by Wall Street Journal.

Only one thing is more important than learning from experience, and that is not learning from experience. John M Templeton.

“America’s financial architecture is about to be remade…to be brought under federal supervision“Matt Cooper, Portfolio, as quoted in Mergers and Acquisitions Magazine.

All that we are is the result of what we have thought. Buddha

Thomson Reuters reported that about one third of M & A chapter 11 purchases involved financial services business. Mergers and Acquisitions Magazine, December 2008.

The nature of men is always the same; it is their habits that separate them. Confucious

“You’re not bankrupt until people know you’re bankrupt” By which he meant, I’ve come to understand, that money is a complicated reality. It’s a master illusionists game.

The artifice is everything. Transparency is the enemy of making it really big-which is one reason the word ‘private’ got joined to ‘equity’.

(Michael Woolf, in an article The Ultimate Bubble found in the February issues of Vanity Fair as reported in Mergers and Acquisitions magazine.)

No person was ever honored for what he received. Honor has been the reward for what he gave. Calvin Coolidge

You cannot discover new oceans until you have the courage to lose sight of the shore. Anonymous quote

Have something to add? Your own business wit?

Got a different point of view, want to play devil’s advocate, or just think we’re all wet? Post your experiences or examples.