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Archive for February 19th, 2013

A Note on the Purchase of Heinz

Tuesday, February 19th, 2013

I participate in an online group of Johns Hopkins students and Alumni, mainly discussing company analysis and valuation.  This is what I posted on the Heinz acquisition by 3G and Buffett:

There are two ways to look at this: like Buffett or like 3G. Let’s look at both:

(1) 3G will be the active partner. Their stake is equity only, and own 70%. They very well may have cost savings or product or marketing synergies. They are businessmen, not speculators. They will use Heinz to create a better & more global company.

(2) Buffett gets 30% of the equity for $4B, and $8B of preferred stock paying a 9% coupon. It doesn’t matter much where he places the equity in his holding company, but the preferred will go into some of the insurance companies, where it will be financed by cost-free float, require minuscule amounts of capital, and be taxed at preferential rates.

Over a long enough period of time (~20 years), the preferred pays for the whole deal, and any value of owning 30% of Heinz is gravy. (They sell gravy too.)

After the Burlington Northern acquisition, I wrote this post to justify the price paid: The Forever Fund. Regarding Heinz, ask the same questions — what would take to create a company like Heinz from scratch, i.e. replacement cost, including all of the regulatory hurdles.

Between Buffett and 3G, you likely have the financing and the savvy for a significant joint venture that will be mutually profitable. Nothing is a slam-dunk, but this looks good.

Full disclosure: long BRK/B

To sum this up: Buffett gets focused talent; he doesn’t have to concern himself with managing Heinz. He gets a stable asset that he can cheaply finance that will throw off a minimum of 6% on average (assuming 3G performs adequately; they have done better than adequate in the past).

3G gets patient capital.  They can take short and long-term steps to maximize the value of Heinz without a lot of interference or second guessing.  And if they do it very well, their upside is levered by Buffett’s preferred financing.

If they blow it… that’s another thing, but Buffett would hold the option of restructuring Heinz with a new partner, or finding talent to run it internally at BRK.  After all, it”s not like he doesn’t have the liquidity to do it.

Full disclosure: long BRK/B

Book Review: Time Out For Happiness

Tuesday, February 19th, 2013

This is a different book for me to review, but as my wife once said to me, “Only you could see the economic angles of ‘Little House on the Prairie.'”  Guilty as charged.

Many people have read “Cheaper by the Dozen,” and “Belles on Their Toes.”  Indeed, I read them as a child, and to my children as an adult.  That era in America had huge families as families moved from the country to the cities, and primitive methods of birth control were temporarily forgotten, often amid economic success.  Many people wanted large families if they could afford them.  Affording them was the problem.  My grandparents were kids in large families.  Seemed to be the rule back then.

What makes “Time Out For Happiness” special is that it traces the lives of Frank & Lillian Gilbreth, the parents, and explains why they were so special, not as parents, but as intellectuals that changed our world.

Frank Gilbreth was an ambitious young man who was always looking for a better way to do things.  In learning bricklaying, as an amateur, he analyzed what experts did, looking for the best way to do it.  The experts were annoyed at the neophyte who wouldn’t simply imitate, but had to think it through.  The neophyte was markedly worse initially, but then discovered an idea: if you set up the work to minimize unnecessary motion, a worker can work faster, and with less effort.  Frank devised a way of putting all that a bricklayer would need within easy reach, and he became the fastest bricklayer around.  He then made money selling his system, but then he went on to do the same for many building tasks, raising productivity dramatically, without demanding that workers work harder.

This contrasts with the ideas of Frederick Winslow Taylor, whose disciples measured employees with stopwatches, and urged that all work faster.  Gilbreth assumed that most workers wanted to do a good job; how could he make doing a good job easier.

Politically, Gilbreth was a centrist; he wanted the growth in productivity to be shared by all; he worked mostly with those that would deliver part of the increase in profits back to workers. As such, Gilbreth’s ideas were often supported by unions, and Gilbreth himself supported unions, so long as they limited themselves to the welfare of workers, and did not create onerous work rules that unnecessarily harmed productivity.

Phrasing it differently, the Gilbreths wanted the increase in productivity to result in greater happiness for all.  After all, if we are saving time by being more productive, what will we do with all the extra time or goods produced?  We should use them to be happy, owners and workers alike.

One key thing that Frank Gilbreth did was do time & motion studies.  With film being a new thing, and expensive, he measured the way people moved at work an analyzed it closely.  He did this with the interests of owners and workers at heart.  This enabled them to come up with process improvements that other experts could not.

As his ideas gain more respect, and as his corporate profits grew, he and Lillian wrestled with the question, “Run a company, or teach ideas?”  They both concluded that being consultants for improving productivity was the most desirable goal, though it took some struggle to give up the immediate profitability of the construction business.  The early days weren’t easy, and its took a while before they got any business, because the disciples of Taylor did not respect him.

When WWI arose, Frank volunteered to help make the military more efficient, and as a Major did so for four months before he became very sick, and Lillian dropped everything in order to save him.  She succeeded, and Frank lived for six more years, building the business, and benefiting their home.  He died while talking to her on a pay phone, traveling to give a talk.

This left her in a financial lurch.  She survived by getting advances on Frank’s inheritance, and building the business Frank left behind, including starting a school for efficiency.  There was no inheritance from here side, because they concluded she needed none, being married to the prosperous Frank.

But as she continued to speak, write and teach, she gained enough  to support the family and send her kids through college.  She received many awards where she was the first woman to receive them.  Lillian was different from Frank because though she knew most of what he knew, and vice-versa, her strength was the employer/employee relationship.  How do you create good relationships that create productivity, and good companies?

Both Frank and Lillian were driven; they worked hard, and focused on the public good.  Frank died working.  Lillian worked into her mid-80s, with her children protesting her demanding schedule.  She gave her last talk at age 90, to honor the work of Frank at his Centennial.  She lived four years beyond that.

She had many famous friends, including many US Presidents, on whose committees she served, from Hoover to LBJ.  Much of it dealt with disability, which both she and Frank had worked on, because they had an interest in helping those who had it bad.  Frank devised ways to aid the disabled to dress, and more.  Lillian improved on that.

Do you want to get to know two quirky humanitarian people who changed our society?  They created the coffee break (rest helps productivity) and anticipated many later improvements in the workplace.

Don’t Buy This Book

This book is too scarce.  Don’t buy it.  Use interlibrary loan to borrow it.  But it is a very good book, and I haven’t told you the half of it.

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.


Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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