In the coming need to do homework, it is often good to read books about finance because they offer a summary and a perspective that you will not likely receive by reading the newspapers and blog posts. Recently picked up a book called King of Capital by David Carey and John Morris published by Crown Business, NY, 2012.
In the book, the authors go through many deals some made money. lots of money 6 times the investment and some lost money and when investing one of the objectives is not to lose money, however it happens does often. It is important to examine which companies investment lose money and learn from them however it is almost impossible not to have losers in your portfolio. The hope of the new year is to limit the losses and have more winners.
In the book, private equity investors examine multiple companies and eventually pick some, sometimes it is because the company is medium sized and under the right strategies could grow through acquisitions to new markets. A wonderful example is Gerresheimer AG, a German packaging company. The company was owned by a conglomerate by the name of Viag AG which did not spend a lot of time on it. Blackstone repositioned the company into the health care area where there were fewer competition but very loyal customers. The jars which drugs come in, partly because in the health care area, price is not the biggest concern – safety is. If safety is the biggest concern and the company can ensure it surpasses health regulations, customers stay loyal. The company made acquisitions of health care companies and over a few years, Blackstone was able to bring the enhanced company public. It was a success but it outlines the possibilities that can happen.
On the other side of the coin are the many failures which Blackstone invest in, having done their research and due diligence but something changed afterwards. The economy moved downwards so projections were not reached; the expected change in consumers did not change until later or something needed to happen first. For example, when the internet came eventually people moved from telephone companies to internet companies, but not right away. There was an expectation that change would happen, can happen, but win is always tricky answer. In the meantime, companies were loaded up on debt, debt payments could not be paid, companies are restructured debt becomes equity and original investors have lower holdings or almost no holdings. Sometimes even when projecting for higher debt payments, you do not know when the economy moves against your investment.
Linking to dividend paying companies, often these companies even though at low interest rates debt can be used in favor of the company, they tend not to go to much into debt. There is a balance and managing debt is something investors need to worry about. Does the company have the correct debt? does it have balloon payments in the future? how does the company benefit from the debt? Often times a company will go a stray if debt is not strictly controlled, but if debt is not used the leverage buyout companies will examine a company and project if they increased the debt money could be paid to shareholders. Only when you examine the transaction looking backwards do you see when debt is good and not good. Investors always need to do their homework.
There are more questions than answers, till the next time – to raising questions.