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jerryking : financial_engineering   7

Air Canada CEO Calin Rovinescu’s hardball tactics benefit everyone but Aimia - The Globe and Mail
ANDREW WILLIS
PUBLISHED 3 DAYS AGO

Mr. Rovinescu, whose career includes stints as a lawyer and investment banker along with an investor-friendly flight at the helm of Air Canada, can take credit for launching Aimia as a public company back in 2005. Air Canada’s CEO also pulled the rug out from under Aimia, setting the stage for this takeover, by announcing in May, 2017, that the airline planned to end its relationship and start its own loyalty program when its contract expires in 2020. That announcement knocked back Aimia’s stock price by more than 50 per cent, and shares have never recovered.

Air Canada’s decision to spin out Aimia, along with the airline’s maintenance business and regional carrier, amounted to inspired financial engineering. The offerings brought in the cash needed to spruce up the fleet with fuel-efficient jets and pay down debt. It’s fair to say these deals set the stage for Air Canada’s stunning stock-price performance on Mr. Rovinescu’s watch.

The decision to buy back Aimia is also strategically and financially sound. Loyalty programs and the data they generate are valuable assets for airlines and credit-card companies. Along with Air Canada, this takeover is backed by Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and Visa Canada Corp. The consortium leaves long-time Aeroplan partner American Express on the outside looking in........Air Canada sold high on Aimia, then knocked the stuffing out of the company by ending its partnership. Now, the airline is buying low. Long-time Aimia shareholders will emerge from this journey badly bruised. But Mr. Rovinescu’s tactics are good business.

Students of corporate deal-making may recall how TD Bank, a member of the Aimia takeover consortium, played capital markets to its advantage. In 1999, the bank raised $1.5-billion by spinning off a stake in its discount brokerage division, TD Waterhouse. The move gave TD Bank the capital it needed to buy Canada Trust the following year, a transformative deal.

By 2001, the dot-com bubble had burst, taking with it the premium valuation on discount brokerages. The parent bank bought back TD Waterhouse for a fraction of the price it had sold shares for, just two years earlier. TD Waterhouse shareholders complained, but at the end of the day, they sold. TD Bank’s bosses came out of the experience with a stronger company and burnished reputations.
Aeroplan  Aimia  Air_Canada  Andrew_Willis  Bay_Street  Calin_Rovinescu  CEOs  credit_cards  deal-making  dealmakers  loyalty_management  offensive_tactics  hardball  financial_engineering  transformational 
july 2018 by jerryking
Toys ‘R’ Us Case Is Test of Private Equity in Age of Amazon
MARCH 15, 2018 | The New York Times | By MICHAEL CORKERY.

The reality is that Toys “R” Us, which announced on Thursday that it would shutter or sell all of its stores in the United States, never had much chance at a turnaround.

For over a decade, Toys “R” Us had been drowning in $5 billion of debt, which its private equity backers had saddled it with. With debt payments siphoning off cash every year, Toys “R” Us could not properly invest in its worn-out suburban stores or outdated website. Sales plummeted, as Amazon captured more children’s desires — and their parents’ wallets — for Star Wars Legos and Paw Patrol recycling trucks.

Toys “R” Us is the latest failure of financial engineering, albeit one that could portend a potentially more ominous outlook for private equity in the digital era.....Most buyouts tend to work the same way. A private equity firm takes over a troubled company with the goal of sprucing up the strategy, cutting costs and overhauling the business over three or five years. But they often load up a company with debt to pay for the deal, which can prove problematic if the profits do not perk up.

In the age of Amazon, that formula can be dangerous. Consumer demands are changing so quickly that heavily indebted companies have trouble reordering their business to adapt and compete with better-funded rivals...... the deterioration of Toys “R” Us from a potential turnaround strategy to the end of an iconic brand — in a matter of months — shows just how difficult it can be for private equity to compete in a rapidly evolving industry. In retailing, Amazon is reordering everything on the store shelf. And children’s changing interest in games and toys, which now encompasses high-end electronics, adds to the complexity.....Enter Amazon. In recent years, the company had started to aggressively expand its toy business, creating a comprehensive, online showroom with low prices at the click of a button. Pressed by Amazon, Walmart also pushed hard into toys, dropping its prices to capture more market share.

Walmart could absorb the price cuts on toys because it makes up the profit on other items. But for Toys “R” Us, a price war on toys and games, its only offerings, was devastating.
private_equity  bankruptcies  toys  digital_economy  Amazon  Wal-Mart  KKR  Bain_Capital  Toys_"R"_Us  financial_engineering  LBOs  buyouts  shifting_tastes  category_killers  price_wars 
march 2018 by jerryking
The Economy Needs Amazons, but It Mostly Has GEs
the country as a whole badly needs some rules-defying risk-taking. For business, that means a bit more Amazon in the boardroom and a bit less GE....The purchase of Whole Foods by Amazon introduced a level of volatility and turmoil (at least singularly to the retail sector) which had been absent from the market for a long time....The rest of the market remained placid. And months of historically low volatility has begun to look like dangerous complacency....... another, potentially more troubling explanation: stagnation. Muted markets may be an inevitable product of steady, sluggish growth, low and predictable interest rates, declining business startups and failures, and decreased competition. In other words, the problem is, there aren’t enough Amazons disrupting the stock market and the economy.....Jeffrey Bezos founded Amazon in 1994, he has prioritized expansion and innovation ahead of profit. In its early years, free cash flow—cash from operations minus CAPEX—hovered around zero. Mr. Bezos approaches new products like a VC. Many will flop (like the Fire smartphone), but some will be home runs (e.g. AWS). Amazon launched Prime, which offers free delivery in exchange for an annual fee, in 2005. John Blackledge, notes Amazon has repeatedly innovated in ways that make Prime even more valuable to subscribers.......Amazon is now profitable, yet cash retention remains secondary to building great products and delighting and retaining customers.

....If Amazon is one extreme in how companies invest, General ElectricCo. is the other. It has long been fastidious about capital and cash deployment......CEO Jack Welch perfected this approach in the 1990s.. it continued under Jeffrey Immelt. Last week, Mr. Immelt said he would retire, after 16 years struggling to restore growth. In part, that reflected how financial engineering had inflated profits under Mr. Welch. Yet Mr. Immelt ’s investment decisions too often chased the conventional wisdom on Wall Street and in Washington. ...........growth is hard for any company that dominates its markets as much as GE does. GE’s size also attracts debilitating political scrutiny. ....In response to new regulations and pressure from Wall Street, Mr. Immelt largely dismantled the business...........Investors still want GE to return cash to shareholders, and it has obliged,.....while good for shareholders in the short run, this is no recipe for growth in the long run. GE’s cash flow is shrinking despite the company’s focus on preserving it, while Amazon’s is growing despite that company’s readiness to spend it.......North American boardrooms desparately needs some rules-defying risk-taking. For business, that means a bit more Amazon in the boardroom and a bit less GE

[ See John Authers article which references Vix]

The "Minsky Moment" occurs when investors realize that they have paid far too much for the credits that have bought, no buyers can be found, and the system collapses. Aka Wile E. Coyote running-off-a-cliff....The greatest dangers to us are not from things we perceive to be high-risk, because we generally treat them carefully. Trouble arises from that which we perceive to be low-risk.
digital_economy  Amazon  GE  Amazon_Prime  risk-taking  volatility  Greg_Ip  stagnation  cash_flows  long-term  growth  start_ups  complacency  instability  conventional_wisdom  Jeffrey_Immelt  Jack_Welch  conglomerates  delighting_customers  capital_allocation  Jeff_Bezos  financial_engineering  rule_breaking 
june 2017 by jerryking
An expert at the quick flip cooking up a whopper deal - FT.com
August 29, 2014 | FT | By Neil Munshi.

It did not take long for Mr Schwartz’s confidence to bear fruit. In 2013, when he was only 32 years old, he was put in charge of Burger King by 3G Capital of Brazil, its private equity owners. This week, only 16 days after turning 34, Mr Schwartz unveiled one of the biggest deals in fast-food history – Burger King’s $11.4bn acquisition of Tim Hortons, the Canadian coffee-and-doughnut chain...As might be expected for a young man playing in a well-established game, Mr Schwartz’s forte at Burger King has been financial engineering. A native of Long Island, he focused on finance at university before honing his number-crunching skills during stints in the mergers-and-acquisition arm of Credit Suisse First Boston and Altair Capital Management, a Connecticut hedge fund. He joined 3G as an analyst in 2005 and made partner three years later. In 2010, he led 3G’s $4bn leveraged buyout of Burger King and became its chief financial officer. Two years later, he helped 3G sell a roughly 30 per cent stake in the second-largest US burger chain for about $1.5bn. He became chief executive last year.
Burger_King  CEOs  Cornell  alumni  dealmakers  Tim_Hortons  M&A  private_equity  Daniel_Schwartz  3G_Capital  financial_engineering 
august 2014 by jerryking
Angeliki Frangou: A Greek shipping magnate who sails into the wind - The Globe and Mail
Jul. 05 2013| The Globe and Mail | ERIC REGULY.

As a teenager, Ms. Frangou would cross the Atlantic on one of her father’s vessels, but needed time to be convinced that a shipping career was for her. She was more interested in mechanical engineering and so studied the subject at New Jersey’s Farleigh Dickinson University, and then completed a master’s degree, also in mechanical engineering. She decided to bolster her career prospects with an MBA from New York University, but never graduated because she took a job as an analyst on the trading floor of Republic National Bank, where she worked from 1987 to 1989.

The bank job changed Ms. Frangou’s life because it exposed her to the world of financial engineering. She worked with credit default insurance, which taught her how to judge risk and how to hedge, as well as the dangers of excessive leverage in a highly cyclical business. Indeed, applying the principles of high finance to the more down-to-earth business of filling cargo holds with soya, wheat and oil products gave her an edge in an industry that has suffered greatly since the financial crash of 2008.

After the Fulvia success, Ms. Frangou went to ship auctions in Brazil to buy and restore orphaned vessels. In 2004, she zeroed in on special purpose acquisition companies, or SPACs, as a vehicle that could bring her business to the next level. These entities, also known as “blank cheque” companies, traded over the counter in the American market, had no income and were designed to make acquisitions.

Ms. Frangou launched a SPAC with $200-million (U.S.) in investor funds and used the vehicle to buy International Shipping Enterprises, which United States Steel Corp. established in the mid-1950s to transport iron ore from Venezuela to Canada and the United States.

The new company, renamed Navios, became one of the very first dry-bulk shipping companies to list on a stock exchange. Traditionally, Greek shipping magnates had cherished their privacy. “A SPAC can take you public very quickly,” she says. “I totally changed this market, which became a $10-billion business.”
Greek  maritime  Eric_Reguly  shipping  women  entrepreneur  financial_engineering 
july 2013 by jerryking
Failure Chronicles -
April 2011 Harvard Business Review by Roger McNamee,
Elevation Partners.

The idea behind Silver Lake was to create a new kind of private equity.
Instead of a typical financial engineering strategy of using high
leverage to squeeze cash out of mature companies, we focused on “midlife
venture capital”—helping mature tech companies create new products that
would transform their businesses. Our approach was based on two
insights: Mature tech companies had low valuations, and investors
overestimated the cost and complexity of product transformations. At any
other time, Silver Lake’s radical idea might have scared investors, but
in the spring of 1999, institutional investors—state pension plans, in
particular—were desperate to put money into the tech sector. It’s hard
to imagine better circumstances in which to test a new investment
strategy.
failure  private_equity  Silver_Lake  fallen_angels  midlife  turnarounds  vulture_investing  Roger_McNamee  insights  institutional_investors  valuations  technology  financial_engineering  transformational  overestimation  radical_ideas 
april 2011 by jerryking
Seven Ways to Fail Big
September 2008 | Harvard Business Review | by Paul B. Caroll
and Chunka Mui.
(1) The Synergy Mirage (2) Faulty Financial Engineering (3) Stubbornly
Staying the Course (4) Pseudo-Adjacencies (5) Bets on the Wrong
Technology (6) Rushing to Consolidate (7) Roll-Ups of Almost Any Kind.
Avoiding Disasters: The Devil's Advocate.
See also "Questions Every Company Should Ask" at the end of article.
HBR  magazines  overoptimism  synergies  failure  devil’s_advocates  roll_ups  decision_making  thinking_big  strategic_bets  taxonomy  financial_engineering  questions  red_teams 
may 2009 by jerryking

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