It's Not Luck (14 page)

“For the purpose of depreciation we are using a ten-year period,” I explain. “It’s written in one of the footnotes.”

“Footnote number twenty-one, to be exact.” He demonstrates that he knows my balance sheet better than me.

“But that is not the point.” He looks at Brandon and Jim for help, but they don’t say a word.

“Mister Rogo,” he tries again. “A machine that your company bought ten years ago now appears on your balance sheet as having zero value.”

“Of course, by now it is fully depreciated.”

“Yes, but it still might have value. When we come to sell it, we might get a nice price for it.”

Before I can comment, he continues. “On the other hand, a machine that you bought only a year ago, which therefore appears at almost its full purchase value, often can be sold for only a song. You see, the balance sheet doesn’t give me a clue to the realistic value of your equipment.”

“I don’t see the relevancy,” I say, “but hypothetically, if we put the machines alone on sale, we are not going to get much. Many of them are quite old and most are built according to our special needs. There are few manufacturers that can use our equipment.”

“So how much can we get?”

“I don’t know.” Under the pressure I add, “Less than 7.21 million dollars, that’s for sure.”

The cobra probably realizes that I don’t intend to give him a better answer, so when Brandon and Jim don’t show any sign that they are going to clarity it further, he scribbles something on his pad and moves to the next item.

“What should we estimate the value of the inventory to be?” he asks.

“Why don’t you use the book value?”

“Because, Mister Rogo, your books are handled according to the proper regulations.”

I bet yours aren’t, I think to myself. No, I don’t like this person one bit. Aloud, I say, “What’s bad about it?”

“Nothing, except for the fact that it gives useless information. You evaluate inventory according to what it costs you to have it. I’m interested in its value if you try to sell it. Do you agree that the two numbers are vastly different?”

“No, I don’t. At least not in our case.”

He throws a desperate look at Brandon and Jim.

“Why?” Brandon asks me.

“Because we have very little work-in-process,” I explain. “Most of our inventory is finished spare parts, whose selling price is minimum our cost, even if we sell at wholesale. The rest is common raw materials.”

Brandon looks at him.

“Makes sense,” he replies. “What about the land?”

I know what he means. Usually the number appearing on the books is some historic number that has nothing to do with the current value.

“No surprises here,” Brandon says. “The land was appraised when we purchased the company four years ago. Since then, real estate values in that region have stayed about the same.”

“I prefer to get an up-to-date appraisal.”

“Certainly,” Brandon agrees.

I don’t understand what is going on. This person is approaching it all wrong. The company is profitable, it is a going concern. Why do Trumann and Doughty let him value the company through its components? This way we are bound to get a very low value. I get the answer right away.

Brandon says, “Shall we discuss the real asset of the company? Its market share? We have about 23 percent of the North American market and our share is very stable.”

The snake turns to me, “How difficult is it to penetrate into this market?”

“Very.” I give him my sincere evaluation. “The market is dominated by four companies, all about the same size, all in this business for over forty years.”

“I see.” He chews on his pencil. I hate it when people chew their pencils. “Why is it so?” he asks.

“Several reasons,” I calmly answer. “There is customer loyalty. This business is actually a spare parts business. You sell the basic equipment to the client and he is locked into buying additions and spare parts from you.”

“That will do it,” he agrees.

“And,” I continue, “it’s not so simple to build this equipment. Every order is different; you have to tailor everything to the client’s specific needs. It’s more craftsmanship than anything. It takes a long time to grow the expertise.” I barely control myself from adding, “The real assets of the company are its people.”

“Is there a lot of excess capacity in this industry?” he asks.

Where is this question coming from? Then I understand. “Yes, there is,” I answer. “All the pressure steam companies took advantage of CNC and CAD technology, so it’s no wonder that a lot of excess capacity exists. But everyone is very careful not to start a price war. Extremely careful. As I said, they are all in the business for many years, they are all in it for the long run. I don’t see any danger of a price war.”

“Good,” he says. Turning to Brandon and Jim he asks, “How much?”

To my surprise they answer, “One hundred million dollars.”

This is a very high number. Unbelievably higher than the real value of Stacey’s company. Maybe this slick person is not as shrewd as I thought, because his only response is, “Let me check around. I’ll get back to you next month.”

No, this inflated number is just a starting position. I’d better remember that the market of buying and selling companies has a remarkable resemblance to an eastern bazaar.

On the way down we don’t talk. I don’t like this type of meeting. I don’t like this person. I’m disgusted with the whole situation. Analyzing the value of companies as if they are just a collection of machines, inventory, land and market share. It’s so wrong. It’s so distorted.

And the cherished balance sheet, what a joke! Until now I hadn’t realized to what extent it’s useless. The real assets, like people’s expertise, market share, reputation, etc., don’t appear at all. And the numbers that do appear—the value of machines, inventory and land—have only a remote resemblance to their real value.

I want to leave this artificial number world. I want to go back home.

14

This day didn’t start well, and as it stands now, it’s going to end up even worse. Two meetings were scheduled to negotiate the sale of Bob’s cosmetics company. My problem was that I hadn’t yet decided what to do about Bob’s new distribution system. His system represents a remarkable improvement in service and inventory levels, but the reduction in inventory leads to a short-term loss of about ten million dollars.

The financial reports that we sent to the prospects are from last quarter, so the impact of the new system doesn’t appear in them. Can I afford not to mention it? What’s the best way to reveal it?

On the way to our first meeting I consulted with Brandon Trumann and Jim Doughty. I can tell you, they were not too happy with the new surprise I landed in their laps.

“A new distribution system? Inventory down by seventeen million dollars? The expected loss is ten million dollars larger than is currently presented? Alex, we should be used to you by now. But, next time, give us a little bit more warning.”

Thank God that it was a relatively short taxi ride. Otherwise I suspect that they would have elaborated more about how much they like facing such news at the last minute. Pressed for time, they didn’t have the opportunity to tell me what they really would like to do to me. Rather, they made sure that I understood how important it is to raise the issue in full.

“If there is one thing that can ruin a deal,” Brandon said, “it is a last minute surprise. This is our first meeting with prospective buyers for I Cosmetics. Give it to them in full, don’t hide a thing.”

Even in the elevator they kept on telling me to emphasize the benefits, but to be very explicit about the expected negative outcome from the one-shot decrease in inventories. I followed their instructions and my explanation was well received. It seems that most investors are aware of the fictitious profits and losses associated with a change in inventory levels.

The prospects were not concerned with the short-term drop in profits. On the contrary, they were impressed with the changes we implemented, and the speed in which we did it.

They received it so well that Trumann insisted the expected one-time negative impact should not be a factor in determining the price. To my surprise, in both meetings the prospects agreed.

Of course they questioned me, in depth. But the concepts of our new distribution system are so logical, and make so much sense, that I didn’t have any problem convincing them of the validity of what we are doing. The only question that I couldn’t answer was, “Why didn’t you do it before?”

I guess that is always the question with a new, common sense solution.

Maybe I’m too paranoid about selling my companies? Maybe the world has changed and it’s not as short-term numbers driven as it was? If everybody is like the people I’ve spoken with today, I think Bob and Stacey will be allowed to run their companies their way.

No, that is not correct. It’s just my attempt to persuade myself that it’s okay to collaborate in the sale of my companies. I know, too well, the distortions coming from the pressure to meet the budget. This quarter-to-quarter, month-to-month pressure that forces even prudent top executives to interfere. If the sale of the companies goes through, Bob and Stacey don’t stand a chance. I must find a way to stop the sale.

But now I can’t even think about it. I have something urgent to do. In an hour I have to be in Trumann’s suite.

I throw my clothes on the bed and get in the shower. It is hot here in London. Very hot. In more than one way.

No, it’s not what you think. They don’t intend to hang me for what seems to be my blatant attempt to sabotage the sale. There is another issue. Alex Rogo, the world champion at putting himself in impossible situations, has done it again.

You see, when the last meeting was over, Doughty and Trumann came down really hard on me: “Alex,” Brandon started, “I want to ask you more about this new system for distribution.”

“It’s just common sense, nothing more to it.” I tried to avoid what was rightfully coming to me.

“Just common sense, nothing more to it,” Brandon sarcastically repeated. “Have you noticed that your solution is very awkward? In your solution, plants are no longer judged by what they are traditionally responsible for, their production.”

“But this doesn’t mean,” I hurried to correct his impression, “that they are not measured on something that is essentially under their control. It is their responsibility to have, at the plant, enough inventory of each item.”

“Which only brings me to the next point,” Brandon continued. “In the name of reducing inventory, you increased inventory in the plants from less than a day to twenty days. On top of that, in the name of quick response to the shops, you now delay shipments until almost the last possible minute. Alex, if you don’t mind, all of this, every aspect, flies in the face of common practice.”

I didn’t know how to answer this line of attack. I thought they had understood the distribution solution. My problem, I thought, was that they also understood why I hadn’t told them about it until the last minute.

Should I start explaining the distribution solution from the beginning? No. Their remarks in the meetings clearly indicated that they did understand it completely. So what’s going on?

Cautiously I said, “Yes, our approach to distribution does fly in the face of common practice. But it is common sense.”

“That’s exactly what bothers us,” Doughty interjected.

Now I was totally confused.

“How did you do it?” Brandon Trumann asked. “What enabled you to ignore tradition so blatantly? Changing what was always done to the extent that you were capable of developing such a simple and powerful system?”

So they did like our solution!

“I didn’t develop it.” I put the credit where it belonged. “It was Bob Donovan and his people.”

“And the sales solution for your printing company? The one that enables you to compete against the fast printers, commanding higher prices for large quantities. That’s not yours either, but Pete and his teams’?”

“Yes, it was developed by them,” I insisted.

Brandon didn’t let go. “And the turn-around in the pressure steam division, bringing it, in just one year, from a bottomless pit to small profits. This, I suppose, was done not by you, but by Stacey and her people?”

“That’s a fact.”

“And to whom are you going to attribute the phenomenal achievements in your previous division?”

I would have been flattered if not for his tone of voice. It came out as if they had something against me.

“What do you want?” I finally say.

“Isn’t it obvious?” Jim Doughty was not less aggressive. “It seems as if you and your people have a method, a system enabling you to break free from the common practices.”

“Thinking Processes that enable constructing and communicating common sense,” I heard myself repeat Jonah’s words.

“That’s what we find so hard to believe.”

“And the alternative,” I started to laugh, “is that I’m some type of management genius. That is even harder to believe.”