Category Archives: Cornucopia

This was an interesting news week for me. I found too much worthy news to single out any one article. So I’ve decided to start a new blog post category (Cornucopia). Let’s see if it sticks to become a regular item.

Newsworthy Items:

Thriving on Adversity (from The Economist)

Although they are often called “slowdowns”, recessions shake things up rather than slowing them down. They reward strengths and expose weaknesses, create new opportunities and kill old habits, release pent-up energy and destroy old business models. Distressed assets can be bought for a song, talented people hired cheaply and new ideas given an airing.

The basic idea is that, however painful, recessions sow the seeds of creative destruction and present lucrative business opportunities.

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Profit for Buyout Firms as Company Debt Soared (from The New York Times):

Simmons [the famous bedding company] says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company — the seventh time it has been sold in a little more than two decades — all after being owned for short periods by a parade of different investment groups, known as private equity firms, which try to buy undervalued companies, mostly with borrowed money.

Thomas H. Lee Partners of Boston [Simmons private equity owner] has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company’s fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.

This is not entirely uncommon. The dividend recapitalization strategy was wildly popular among private equity firms over the past few years. The strategy was quite simple: buy a firm with lots of cash and/or little leverage, lever it to the hilt, and use the cash generated to pay dividends to the private equity owner. Since the days of easy money are now gone, such a strategy is unlikely to return anytime soon (see Private Equity: The End of an Era and Private Equity – Stupid Money Chasing Stupid Deals). In fact, watching several stories unfold similar to that of Simmons led me to call an end to the cheap money, cov-lite, excessive leverage-feuled private equity binge.

For a nice video complement to the Simmons story and a look at the dividend recapitalization PE strategy (although with some minor factual inaccuracies) see the New York Times video series Inside the Private Equity Game.

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Business School Reform (from The Economist):

This has been a year of sackcloth and ashes for the world’s business schools. Critics have accused them of churning out jargon-spewing economic vandals. Many professors have accepted at least some of the blame for the global catastrophe. Deans have drawn up blueprints for reform.

The result? Precious little.

That is too bad. You do not have to accept the idea that the business schools were “agents of the apocalypse” to believe that they need to change their ways, at least a little, in the light of recent events.

The real question is not whether business schools need to change, but how.

I have written a bit about the need for changes to the curriculum at business schools (see Op Ed on Business Schools and The Financial Crisis). I have suggested that we need to encourage our students to think more deeply about concepts, tools, and formulae rather than simply seek to apply them. Moreover, I have advocated for a curricular approach that favors analytical skills over technical skills.

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Hain to Sell Organic Food in China

A London-listed unit of Hong Kong’s Hutchison Whampoa Ltd. and Hain Celestial Group, the U.S.-based maker of Mountain Sun juices and Health Valley soups, are hoping that China has an appetite for organic products.The two companies announced a joint venture Thursday to sell Hain’s natural foods and organic household products in mainland China.

As my students can attest, I am generally not a fan of investments into retail businesses in China (especially in branded food goods). And I’m not convinced China is the right growth opportunity for Hain at the moment. I think they have plenty to keep them occupied in the domestic market.

The China retail market has caused headaches for most Western branded-goods firms. On its face, Hain’s investment seems no different, and it has the potential to bog Hain down for years.

I hope Hain’s executives have the fortitude to cut their losses quickly if the deal doesn’t meet profitability targets. Otherwise, it could develop into a money pit, not uncommon among Western investments of the sort.

The equity market clearly thinks I’m nuts. It applauded the deal, sending the share prices of both firms up handsomely. Although I could be mistaken, I think the market might have gotten this one wrong given the track record of Western firms in China, especially in this industry. The nice thing for shareholders of Hain is that their commitment to China appears to be limited, as according to the WSJ article, the capital committed was “not material to either company”.