*

website statistics

Wednesday, December 18, 2013

Wow!



In retirement, architecture has attracted a lot of my attention. At some point I was placed on the e-mail list of a firm specializing in soil stabilization. The firm sends me links to interesting sites, from an architectural standpoint, and ones that posed unique soil stabilization problems. The firm sent me pictures of the Sheraton “Huzhhou Hot Spring Spring” Hotel. Amazing. I went in search of more. Now, I want to share a link with my readers.

Lo Sheraton “Huzhhou Hot Spring Spring” Hotel.

Considering the quality of the place, the cost of a stay seems rather reasonable. I picked a couple of dates in February and found I could book a room for my wife and me for a little more than $400 a night. We won't be going anytime soon but if I'm ever in China and want to pretend that I'm a one percenter . . .


Tuesday, December 17, 2013

Rebuttal to Sun Media column on company closures and layoffs

Last week Larry Cornies examined the rash of plant closures that have battered the economy of Southwestern Ontario. The London Free Press columnist slipped in one of his core business beliefs when he made the following claim: Companies — whether it’s Libby’s, Ford, Heinz, Kellogg or U.S. Steel — all act in the strategic interests of their shareholders or investors — It's their imperative, he tells us.

Mr. Cornies may be wrong, as any long-time investor in the stock market knows all too well. My guess is Mr. Cornies is well aware his position here is questionable. That is why he tries to slip his claim quickly by his readers. He makes no mention of the growing number of experts who believe the "shareholder value imperative" is a myth — a common one, an oft repeated one, especially in the media, but a myth just the same.

An entire book has been written addressing this very subject — The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations and the Public by Lynn Stout, a Distinguished Professor of Corporate & Business Law at Cornell University Law School in Itaca, NY.

Ms Stout wrote in an article published by the Utne Reader and posted online:

If we stop to examine the reality of who "the shareholder" really is — not an abstract creature obsessed with the single goal of raising the share price of a single firm today, but real human beings with the capacity to think for the future and to make binding commitments, with a wide range of investments and interests beyond the shares they happen to hold in any single firm, and with consciences that make most of them concerned, at least a bit, about the fates of others, future generations, and the planet — it soon becomes apparent that conventional shareholder primacy harms not only stakeholders and the public, but most shareholders as well.

Ms Stout points out that between 1997 and 2008, the number of companies listed on U.S. exchanges declined from 8,823 to only 5,401. The Heinz Co. has now joined the growing list of public companies taken private. This a disaster for investors in the market. Retiree shareholders, like me, are especially hard hit. The cream of the investment world is being siphoned away.

Heinz was a cash cow for its shareholders. Those who bought shares in early January 2010 saw a gain of almost 39 percent in three years, and that is just share value growth. Heinz also paid an annual dividend of $2.06 at the time it was taken private .

Admittedly, Heinz shareholders saw an immediate pop in the value of their shares with the purchase of the food giant by Berkshire Hathaway and 3G Capital but it was a one time event. To a great extent, Heinz is now a private cash cow.

Nebraska-based Berkshire Hathaway holds $8 billion in preferred shares paying a 9 percent dividend, or $720 million a year. Compare this payout to the old common-stock dividend. It only cost the Heinz Co. about $665 million.

Larry Cornies assures us that a multinational like Heinz is forced to make some hard decisions. True but Heinz was not facing any immediate hard decisions. The company was awash in $325 million free cash flow.

The hard decisions materialized when Heinz became a private multinational saddled with a lot of new and growing expenses. Heinz faced some 2000 hard decisions. That's the number of jobs cut since the company was taken private.

One big driver of the recent closures, and left unmentioned by Mr. Cornies, is greed — and greed is not good despite what Kevin O'Leary, of Dragons' Den fame, proclaims oh-so-loudly. To understand the damage caused by unbridled greed one needs to look no farther than Mr. O'leary himself.

In his memoir, Cold Hard Truth, O'Leary called The Learning Company, his patched-together business, a money-making machine. The Tuck School of Business at Dartmouth University begs to differ. According to the business school TLC had "questionable profitability" and "two of Learning Co.’s deals . . . rank among the 10 worst U.S. acquisitions during 1994-1996 as measured by shareholder value two years after the deal." According to The Globe and Mail, an SEC filing shows that TLC suffered net losses of $376 million in 1996, $495 million in 1997 and $105 million in 1998.

Erik Gustafson, manager of the Stein Roe Growth Stock Fund, a major shareholder in Mattel at the time of the TLC acquisition, is widely quoted as saying, "The present management team [at Mattel] has vaporized two thirds of the value of the company." While shareholder value was tanking, long-time Mattel workers were also suffering. 3000 lost their jobs.

So, who benefited from the Mattel financial meltdown? Kevin O'Leary for one. Bain Capital for another. When Mattel handed O'Leary his walking papers, after just months with the company, his TLC division was killing the company. O'Leary's pain of being, what some have called, fired was eased by a $5.2 million golden parachute.

Landing on his feet, O'Leary appears regularly on CBC as their business go-to-man. The Ivey Business School at Western University thinks so highly of his philosophy of greed that they have placed him on their advisory board. Does this tell you something is wrong in our accepted business model?

One can learn more about why the Southwestern Ontario region is experiencing so many mergers and subsequent closures from reading the news reports of Norm DeBono in The London Free Press and staying clear of the opinion pieces by journalism professor Larry Cornies.

According to DeBono:
A U.S. investment firm has bought and closed three London businesses in four years, shortchanging workers on severance in at least two of those businesses — and might do it again. Apparently, there are no federal or provincial restrictions in Canada that a company has to respect the law in how it treats its former workers before it can buy another business in the country. . . .
"There are laws that protect employees when there is successor-ship (another company taking over). But if a company is winding down a business, their obligations to fund may disappear," said Tim Gleason, a Toronto labour lawyer.
  • Sun Capital Partners in Boca Raton Fla in 2007 bought McCormicks in London, laying off 275 workers, refusing them severance and vacation pay and their pensions. Workers won vacation pay after a two-year legal fight.
  • In 2008 H.J. Jones Packaging in London was sold to Knight Packaging of Chicago, a Sun Capital firm. H.J. Jones was closed, cutting 45 jobs. Workers were also refused severance, but finally won a deal that gave them half of what they were owed.
  • In 2011 the year-end closure of Specialized Packaging Group in London was announced, cutting 189 jobs. It's owned by PaperWorks of Philadelphia, another Sun Capital company.

It is one thing to watch American interests close their long-time Canadian branch plants but it is quite another when an American company buys a successful Canadian business, folds it into the U.S. firm, and then closes the Canadian operation — often moving the production Stateside.

For an example of this think of Bick's. This Canadian company made pickles in Dunnville, Ontario, until the giant American company J.M. Smucker bought the operation, closed it, and moved production to Ohio.

Wednesday, December 11, 2013

Deals from Hell

London, Ontario, has been hard hit by company closures, as has all of Southwestern, Ontario. With thousands of Canadians losing their jobs, Sun Media columnist Larry Cornies has come out in print as an apologist for the companies. The companies are only acting in the strategic interests of their investors, he tells his readers. Corporations must seek to maximize value for shareholders, he claims.

The problem with Cornies' argument is that the executives running companies do not always put the shareholders' interests first. They might but then they might not. In many cases, the executives are looking out for Number One, themselves.

Mennonite Mutual Aid
Mennonite Mutual Aid
The title of this post was inspired by a book of the same name by Robert F. Bruner, professor of business administration at the Darden School of Business at the University of Virginia. An article in The New York Times examining business mergers and whether or not they make good financial sense reported:

"Bruner is critical of this process [business mergers], which he calls financial cosmetics. 'It invites the creation of growth for appearance rather than growth that creates wealth for investors and society,' he says."

Another good name for this post would have been Pay Without Performance after the book by Harvard professor Lucien Bebchuk with Jesse Fried. Why? Because so many of the recent closures did not benefit shareholders to anywhere near the extent that the closures benefited the deal makers

Consider Heinz. If your grandparents had bought just 100 shares for $2500 when the company went public in 1946, you would have owned, after stock splits, 16,200 shares, which would have been worth almost $1 million at the time Berkshire Hathaway and 3G made their offer. Those shares were yielding $33,372 annually in dividends. (Admittedly, Heinz shares did enjoy a $12 pop thanks to the buyout.)

Over the years, Heinz, the-public-company, was a cash cow for its shareholders. Now Heinz, the-private-company, will be a cash cow for Berkshire Hathaway Inc. and 3G Capital. It will not be a continuing cash cow for its buy-and-hold shareholders.

To argue that Heinz, an American company, would not have closed its large, Canadian plant is impossible. I have no crystal ball. But I can tell you this: Bloomberg Personal Finance reports that annual interest expense at Heinz probably doubled to $560 million since the takeover. Plus, Nebraska-based Berkshire Hathaway now holds $8 billion in preferred shares paying a 9 percent dividend, or $720 million a year.

If $720 million sounds like a lot, it is. Going private may have eliminated the common-stock dividend but that dividend only cost Heinz about $665 million.

Larry Cornies tells us: "For a multinational like Heinz, the comparative costs of labour, raw materials, power, land, machinery and other inputs in some other part of the world forced hard decisions here."

He's right. But what Cornies doesn't mention is that Heinz posted $2.01 billion in ebitda last year on $11.5 billion in revenue. Ebitda stands for earnings before interest, taxes, depreciation, and amortization. After deducting those expenses, the company was awash in $325 million free cash flow. Heinz wasn't facing any immediate hard decisions.

The hard decisions materialized when Heinz became a private multinational saddled with a lot of expenses associated with going private. Heinz faced something in the neighbourhood of 2000 hard decisions. That's the number of jobs Heinz has cut since being taken private.

___________________________________________________

One last thought. One that I couldn't fit into the post above. All shareholders are not as shallow as Cornies apparently believes or as amoral. Cornies is a Mennonite and proud to be a Mennonite. Yet, I believe, there are Mennonites who would take a different tack that he does in his Free Press piece.

The following is from Crossroads, Eastern Mennonite University:

"No business that wants to last can afford to ignore in its financial statements the depletion of its productive assets, yet that is precisely what the global economy is doing. . . . Disaster looms precisely because the current economic model has no built-in limits – no stopping point short of a crisis generated by environmental or social collapse."

James M. Harder and Karen Klassen Harder, Bluffton University

I'd like to see Cornies tackle the closure of so many Canadian plants, many successful. These Canadian businesses were bought by American interests, sometimes private equity firms, the work moved to the States and the Canadian operations closed.

Possibly Cornies should read David Steward's Doing Business by the Good Book. Steward writes: "The investment community can apply tremendous pressure to produce quarterly profits. This outside persuasion sometimes tempts management to think short-term, reduce expenditures, and forgo quality. . . . the demand put on management for three-month gains isn’t necessarily good for a company’s [or its shareholders] long-term interests.”

Monday, December 9, 2013

Civilizations don't die, they commit suicide

London, Ontario, the city I call home, has problems. These problems are common and challenge cities everywhere. London the town grew into London the city but it did so without a vision, without a plan. Like so many places, London sprawls out over the precious farmland of Southwestern Ontario, like ink leaking from a faulty pen destroying the shirt. Most cities on the planet leak people.

Sprawl has been going on for as long as there have been cities. It is not a new problem. It is the scale and global nature of today's sprawl that is new. As I write this my memory flashes back to the early '70s and my days at university in Toronto and I recall a book that I had to read for one of my classes: The Limits to Growth, a report on a Club of Rome project.

Selling more than 30 million copies, that book had a big effect on a lot of people, young and idealistic at that time four decades distant. Unable to find my copy, I found the following linked article online: Revisiting The Limits to Growth: Could The Club of Rome Have Been Correct, After All? (Part One) by Matthew Simmons.

Simmons' article was interesting in that it didn't find fault with The Limits to Growth but instead found fault with many of the criticisms that have flooded the popular press in the intervening decades. Simmons tells us:

Nowhere in the book was there any mention about running out of anything by 2000. . . .
The book postulated a continuation of the exponential growth of the seventies . . . would result in severe constraints on all known global resources by 2050 to 2070.

The task was to examine the complex problems troubling "men of all nations; poverty in the midst of plenty, degradation of the environment, loss of faith in institutions, uncontrolled urban spread, etc."

While many readers concocted various 'imaginary' assumptions, the book's conclusions were quite simple. . . . a limit to the growth that our planet has enjoyed would be reached sometime within the next 100 years.

The Limits to Growth is not the only book with a tone that reflects my gut concerns about the massive loss of  Southwestern Ontario farmland. For a more on-point discussion of the problem (without actually confronting it head-on) read Collapse: How Societies Choose to Fail or Succeed by Malcolm Gladwell and published originally in the New Yorker.

This is a review of the book Collapse: How Societies Choose to Fail or Succeed by Jared Diamond. According to Gladwell, Collapse is a book about the most prosaic elements of the earth’s ecosystem — soil, trees, and water — because societies fail, in Diamond’s view, when they mismanage those environmental factors. . . . The lesson of Collapse is that societies, as often as not, aren’t murdered. They commit suicide . . .

Wednesday, December 4, 2013

Quebecor_Mindless twits runnng Canada's newspapers

Sun Media, owned by Quebecor, announced yet another Christmas layoff. I understand about 200 jobs are being cut with about 50 of those being editorial positions.

The Quebecor/Sun Media execs are twits. My guess is they know little or nothing about newspapers. They seem to have but one response when asked to improve profits and that is to cut costs and one of the simplest ways to cut costs is to cut staff.

If these twits were running a car factory, they would leave the back seat out of the cars produced. It would save money. Maybe they would eliminate the paint booths. Now that would really cut costs. Of course, these moves would also cut quality and that would cut sales.

Cutting editorial staff is cutting quality and cutting quality is cutting circulation. And what is the answer to falling circulation and the monetary loss that follows? Why more layoffs. Like I said, these folk are twits.

I understand Google may make in excess of  $55 billion annually. Wow! Makes one wonder what would have happened if years ago newspapers had worked with Google at figuring out how to market news with linked ads.

Instead of the newspapers across Canada and across the continent working together to deliver the best and the latest information to their readers, newspapers cut their links to each other, unless the other papers were part of the same chain. Newspapers cut links and slashed the quality of the print product. Circulation collapsed. No surprise.

Google seems to be a very inventive company, very creative. It may not be too late to approach Google, hat in hand, seeking some much needed help. Maybe the folk at Google would be willing to put on a thinking cap while examining the problem wearing Google Glass.

I sold an antique car this summer. I sold it without placing even one car ad. Why bother? It was a special car, a heritage vehicle. It was valuable — read expensive. An ad running just in The London Free Press would simply not reach enough potential buyers. So I didn't buy an ad. But let's say that newspapers across Canada were linked, at least their electronic editions.

Place and ad in the paper in London and find a buyer in Vancouver. Ah, now that is the way an automobile ad should work. But, they don't and so I didn't. Like I said, the folks running newspapers, the ones behind the multiple layoffs and buyouts, are twits — unimaginative twits.

Before writing this I found an ad in The London Free Press, copied some specific information, and did a search of the Toronto Sun website using the pasted information. I found the two newspaper sites poorly designed and the Toronto Sun site did not find the The London Free Press ad. Yes, the folks at the helm of the newspaper chains are certified twits.

My heartfelt sympathies to those newspaper folk losing their jobs. Knowing the folk at the top are heartless twits doesn't make it any easier.

Can Leamington Heinz plant jobs be saved?

Recently, the Letter to Editor column in The London Free Press has carried a number of submissions discussing the closing of the 104-year-old Heinz plant in Leamington. Despite what is being said, the truth may be that the plant was headed for closure. No amount of wage cutting and/or benefit trimming would have saved the plant.

Reportedly Rob Crawford, president of the union representing Leamington Heinz workers, offered to open the collective agreement. The new Heinz owners, Berkshire Hathaway and the giant Brazilian private-equity group 3G Capital, were not interested.

Possibly the folk in Leamington should take inspiration from events unfolding in Girgarre, Australia, where Heinz closed a tomato processing plant in 2011. A coalition of workers, growers and community leaders created the Goulburn Valley Food Co-op. Their first goal is to build a factory replacing Heinz while continuing the local tradition of turning local ingredients into quality foods.

The reason the Aussies are looking to build a new factory is simple. Heinz practised a scorched earth policy when it came to the plant. Before being put onto the marke, the place was hollowed out, stripped of all equipment necessary to operate the plant. Even the rat barriers were removed.

The claim is made that the co-op in Girgarre, Australia, was inspired by the actions taken by Argentinian workers a little more than a decade ago. You may recall that in 2001 the large South American country suffered a financial and political collapse with thousands of companies declaring bankruptcy. The Argentinian owners walked away from these concerns to escape the burden of debt these companies had accumulated.

In some cases, the workers occupied the plants and kept them running despite of abandonment by the owners. More than a decade later, many of these worker-run factories, these co-operatives, are still operating.

According to AlterNet:

As a result of the severe 2002-2003 economic crisis, worker-run companies began to mushroom in a broad range of areas, including the food industry, steel, textile, footwear and plastic factories, meat-packing plants, ceramic, glass and rubber manufacturers, graphic design companies, transport firms, restaurants, health businesses and even a five-star hotel.

The companies were reclaimed by their workers after the owners disappeared overnight, leaving behind jobless employees, piles of debt, factories stripped of everything not bolted down -- and, often, charges of tax evasion or fraud.

Many of the companies are producing and even exporting again after they were taken over by the workers, who were owed months and sometimes years of back wages.

What AlterNet doesn't mention is that many of the abandoned companies claimed by workers have been hit with legal actions by the owners wanting to reclaim their former businesses.

For instance, the sons of Marcelo Iurcovich, once the clear owner of the then five-star hotel Hotel Bauen in Buenos Aires, were in court in 2012 battling to regain control of the building. Previously, an attempt had been made to evict the workers but without success.

The hotel was built in 1978 for the FIFA World Cup and financed with public money provided by the military dictatorship then ruling the country. The loan was never repaid. The ownership of the building will now be decided by the courts.

The hotel may be open but it is just limping along, it is no longer a five-star destination. Once the ownership question is settled, possibly there will be an influx of capital to refurbish the aging place.

All this Google searching made me aware of Robert Owen, an owner of the New Lanark Mills in Scotland in 1799. Thanks to his visionary management policies, Owen inspired the co-operative movement and was an early force in trade unionism and the garden city movement. Today New Lanark is a World Heritage Site.

The co-operative movement still has followers in Scotland. The Co-operative Party, the political arm of the movement, is the fourth largest party in the Scottish parliament. Globally, the United Nations calculates nearly 1 billion people own shares in cooperatives. The top 300 cooperatives around the world — known as the '300 List' — are said to be worth an estimated $1.6 trillion.
 
According to the U.N., cooperatives — member-driven business enterprises that put people front and centre — offer an alternative economic model.

When I consider the long list of business closures that have rippled through Southwestern Ontario in recent years, I cannot help but wonder if it is not time to give the co-operative movement serious consideration.

Thursday, November 28, 2013

Pedantic? Yes. Still, some in the media once cared.

The Caduseus should not be used to symbolize medicine.

Not being up on ancient symbols and Greek mythology, I once thought the winged staff with two intertwined serpents was nothing more than a visually balanced, slightly fancier version of a simpler symbol with a single snake wrapped in a similar fashion about a staff. Both symbols are associated with medicine and health care but one is wrong.

The symbol with two snakes on a winged rod is the Caduceus or the magic wand of the Greek god Hermes, who, according to the Toronto Police, under the Romans morphed into Mercury, the God of Commerce. The police, in explaining their logo online, make no mention of any medical connection. (Click the link and scroll to page nine.)

The simpler symbol is the staff of Asclepius, the early Greek God of Medicine. According to an Internet site English-Word Information, legend has it the physician Asclepius cured so many people that Pluto complained to Zeus that Hades was becoming under populated.

Angered at the physician tampering with life and death, Zeus struck the good doctor with a thunderbolt.

After death, Asclepius became a god. The sick and maimed visited his temples to pray and give sacrifice, trusting the physician/god would cure them. If temple records are to be believed, thousands and thousands of sick people throughout the centuries were freed from pain and restored to health. (Maybe Asclepius should be the god of the placebo.)

So how did the Caduceus become the symbol of medicine? Well, according to Dr. Lanny Close, writing for the Johns Hopkins Medicine Magazine:

"The misconception that the Caduceus is the symbol of medicine stems from the adoption of the Caduceus by a U.S. Army Medical Corps officer in 1902 as a symbol for that group. Since the Caduceus is associated with commerce, theft, deception, and death, we, in medicine, are well advised not to use it to represent our profession."

Are folks who worry about this just being pedantic? Maybe. But, a lot of folk in the medical profession get their knickers all in a knot over the use of the Caduseus. The Amercian Medical Association went so far as to drop the winged wand with two serpents from their logo almost nine decades ago.

The Royal Army Medical Corps (Britain), Royal Canadian Medical Corps and just about all medical doctors and clinics, at least, in Europe use the single snake symbol.

And how did I become aware of this controversy? Some years ago one of the American networks announced it was no longer using the intertwined snakes symbol, the Caduseus, as their on-air symbol for medicine. They said those in the know convinced them the Caduseus is tainted. It is associated with theft, deception, and death.

I'm going to leave the last word to Dr. Timothy Rodgers:

"In these days of malpractice suits, HMO’s, avaricious insurance, pharmaceutical companies, and societal values where cosmetic surgery seems to be more important than health care, the cynic might say that the Caduceus is the more representative symbol of modern medicine."

Hmmm. Maybe The London Free Press wasn't so far off after all.

Now, the use by the Toronto Police maybe another matter. I wonder if they know about the theft and deception connections?