The Un-Deal of the Century

Liquidity goes down, prices go down – it isn’t a direct relationship, but it’s pretty close. The standard line is, if buyers have restricted access to capital, then only cash buyers are really in the market. So unless there are a large number of potential cash buyers, your pool of buyers dries up . . .

That has been the standard line.

And now, we’re entering a new era. After a pile of ridiculous deals fueled by cheap capital, capital is tight again. During the time of ridiculous deals, more disciplined, long term buyers sat on the sidelines, waiting patiently . . . some waiting much longer than they could have anticipated….

And now they are on the hunt. The unintended consequence is that the Private Equity firms must disperse the cash or they must give it back. The family offices can sit. So we see another wave of ridiculous deals as PE firms push to use all of the allocated capital. If you can wait them out, on average the excess will purge by 2012, but if you want to get your money working again, think sooner rather than later. Deals before 2011 are likely to be more favorable than those in 2011.

Blockbuster Bankruptcy – Educational Endeavors

And by Educational Endeavor, I am not referring to the bankruptcy of Blockbuster as providing that education . . . that’s really a pretty ordinary death from within. Instead it is a point of light, a potential new direction for the beleaguered beast.

For profit education has grown by leaps and bounds over the past 15 years with University of Phoenix outstripping the revenues of the entire Ivy League combined. Various online learning institutions also provide physical locations. More importantly for location rich Blockbuster though is the rise of charter schools and other offline, private learning institutions.

Crazy to suggest Blockbuster shift gears?
The idea of joining Blockbuster with for profit education goes beyond the real estate opportunity and draws on existing BBI relationships. Who’s heard of Disney?

Turns out Disney is interested in the education market – with annual revenues well over $2.5 billion attributable to “educational endeavors” – a murky title for data culled from the various revenue streams – Disney is poised to expand its presence in the for profit education world. Disney is making strides to tackle the for profit education segment without the singing frogs and princesses, and appears to be dabbling in the market previously reserved for companies like Kaplan and Sylvan.

Blockbuster has a limited dowry, but might be able to generate more value for its shareholders by partnering with a “Disney” who could benefit through Blockbuster’s choice locations and existing client-base.

Action Item: Court Disney or other for profit education venture who needs families (largest portion of BBI’s client base) and community presence.

Blockbuster Bankruptcy – Option the RE

In the Blockbuster bankruptcy saga, the company formerly known as BBI has been shedding top staff in an effort to shift focus from an operator to a fighter fighting for its life. While shedding staff does reduce costs, shedding staff won’t bring money back in so rather than focusing on staff, how about a focus on Real Estate?

The real estate controlled by Blockbuster is indeed impressive. Blockbuster controls the corners of several major shopping centers and pays significantly less than individual operators would for the same space. But no one wants to manage a sublease setup….

So why not sell the options on the leases to assume the lease in full?

This would be an immediate source of cash and could require less negotiation and management than breaking the leases. The options market would allow BBI to generate immediate cash and would allow local businesses the opportunity to get spaces otherwise held off market by the landlords and their leasing companies.

Of course, those leases may be the only value left in Blockbuster, which could cause creditors to go crazy – the wrong kind.

If by selling off a few locations, Blockbuster can save a few choice stores/locations, generate some cash for capex and retool, then the current creditors will allow the transactions.

Action Item: List Blockbuster properties on eBay.

Blockbuster Bankruptcy – Inventory

Today’s thought for Blockbuster: reduce the cost of inventory.

A reader sent his thoughts on the demise of Blockbuster, and summed it up as misunderstanding the customer – ironic given Blockbuster’s original business premise as a demographic wonderland. The founder, David Cook, was an expert in databases and strove to populate each store with titles appropriate to the neighborhood – a relatively revolutionary concept in the 80s.

So, what happened?

If you are checking out a DVD  for the evening, do you want to buy a new DVD player? How about another electronic device? No?

Unfortunately, Blockbuster thought that the rental stores would be good places to sell such items. They even considered buying Circuit City to bolster the in-store offerings and to create untold synergies in even more retail locations…. The challenge is that not only do you have to carry that inventory with a wholesale cost, but also, you have to train the staff to at least be able to answer questions about these additional items. Are movie rental clerks more likely to be experts in

A. Movies
B. Electronics
C. The latest movies AND the latest electronics

Do you remember record stores? Is that where you bought your hifi?

Never mind the questionable business idea of putting DVD players in stores, consider the today benefit of getting rid of those items. At the very least Blockbuster can generate a few dollars to keep the lights on for the restructuring team by selling off the electronics. DVDs take up very little room. DVD players take up a substantial amount of space – in warehouses and on the display floor. They also increase the cost of theft. How much does it cost to reprint a DVD? How much are you out when someone walks off with a DVD player?

So today’s action item: Dump the non-DVD physical inventory.

BBI Bites the Dust – The Roll to Bankruptcy

Blockbuster is unofficially, officially bust. This is no surprise to those who have watched from the sidelines as Blockbuster slid from a prominent Brand with bite to a Brand that no one understands. At 8 cents a share, market cap is around $15million. They are expected to declare bankruptcy in September….

I am a fan of the Blockbuster empire both as someone who grew up in Dallas and as a lesson for retooling businesses. At one point BBI ruled Hollywood and dominated Main Street. Much like 7-11 and Starbucks, Blockbuster stores were on every corner. Independent video shops were largely forced to consolidate or perish. Blockbuster starved their competition out in many markets.

What follows is my recommendation of the week – an actionable step Blockbuster can take, right now, to get back on track. It probably won’t save them from bankruptcy, but perhaps it will give you something to think about in your business. I’ll keep this going in no particular order of importance until BBI declares or gets bought out.

Today’s BBI tip:

What’s with the website? I have no idea where you want me to click when I land on the site. Do you want me to sign up with the Super Mario Brother’s character or do you want me to look at the movies you’ve put in front of me? I really have no idea.

In tests of a similar service, the barrier wall as a landing page proved most effective – here is the example:

There is no movement on this page. The group who tested this page tested it against a page with long copy (a whole bunch of text) and a regular member-type landing page (like what blockbuster has). The static sign up page won, hands down.

So my first question for the website team, have you tested what generates the best ROI? My second question, which should probably be the first, is do you know what you are selling and to whom? Landing pages should change based on the audience and intention. We have micro targeting available, there’s really no reason not to use it!

Action item for today: determine the audience you want to target with your landing page and test that landing page for ROI.

Dry Powder to Drive Second Half of 2010

With unprecedented levels of cash on the balance sheets of corporate America and dry powder in the private equity world, family owned businesses and PE management teams are likely to sell en masse before the tax increases solidify.

Yet, according to PricewaterhouseCoopers (PwC), deal volume was down for the first half of 2010. For the first half of 2010, lenders acted much more cautiously, making many wonder if credit is available. The current Private Equity overhang, $850 billion, represents 54% of all capital committed between 2004 and 2009, which leads us to believe that capital is indeed available and waiting to be deployed. There is plenty of cash for PE to make deals happen even with potential time bombs created by law makers. While the mega deals may garner the most press, the median deal size is $107 million, demonstrating that smaller and mid-market deals actually dominate the landscape and provide tremendous opportunities for their buyers.

Now is a great time to execute so-called mergers of productivity to capture scale and cost savings. Industrial products is one of the many industries ripe for divestiture. As reported yesterday, aerospace is also ripe for consolidation as the major players’ growth is stifled by fragmented suppliers who are constrained by size and investment capabilities. He who rolls up the industry reaps the bounty.

Manufacturing Constraints – Boeing

Expecting an increase in orders for both 737 and 777s next year, Boeing would like to increase sales….

An increase in orders for Boeing is typically an increase in orders for Airbus, their main competitor, and that puts pressure on suppliers to provide more for both. Sounds like manufacturing in aerospace will be growing….

But, Boeing reports serious bottlenecks in the supply chain. Jim McNerney, Boeing’s Chief Executive, reports that many suppliers will need to make investments in plants, equipment, and training, while others will need to renegotiate contracts. Some suppliers are already feeling the burn. As reported in the Financial Times, Boeing will no longer work with Koito of Japan after discovering falsified data on up to 150,000 seats for 1000 aircraft. This impacted  Boeing’s current earnings report and has caused Boeing to be more cautious than they would like to be regarding 2011 revenues.

Just as folks bemoan the US manufacturing under-utilization, we discover there are plenty of opportunities to expand, just requires creativity and retooling. Sounds like a great time to consolidate smaller suppliers.

Photo: Southwest Airlines’ standard equipment, 737.

Texas Wins Again

The Wall Street Journal reported success for Victoria, Texas this week. Caterpillar Inc., the world’s largest manufacturer of construction equipment announced plans to build a new facility in Victoria, TX. Net gain for Texas, 500 jobs. The good news is, the US is experiencing a major shift in manufacturing. What was moved overseas, is now coming back home.

Capacity from a plant in Japan and one in Illinois will be reduced to compensate for the move. Victoria has a strategic advantage to win even more manufacturing with its central location within the US, access to a major port, Houston, and the relatively low overall cost of production. Towns throughout the South are experiencing similar interest from manufacturing concerns. The dirty not-so-secret is that companies prefer to locate in areas without heavy unionization. Of the plants closing, many are unionized and some have extended, painful union stand-offs. In this economy, how can a union boss ask for wage hikes or require hours when many companies are fighting to stay in business?

Today most unions are aligned with one of two larger umbrella organizations: the AFL-CIO and the Change to Win Federation, which split from the AFL-CIO in 2005. Both advocate policies and legislation on behalf of workers in the United States and Canada, and take an active role in politics.

Union membership is at its lowest level since 1932. Perhaps the workers know how to take care of themselves better than their Union bosses….

Other winners in the “Let’s Flee the Union Bosses” race: Mississippi, North Carolina, and South Dakota. North Carolina had been a heavily Unionized state, but 10 years of pure agony has finally been enough to see the light. In the late 90s, the double whammy of textile and furniture manufacturing moving overseas wiped out manufacturing in NC. Entire towns and even regions have been wiped out. So the leeches who “helped” the workers had to move along. And with some time, North Carolina has been reborn.

This is a prime time for Manufacturing concerns to consolidate operations in lower cost, more efficient areas.

Good versus Evil – How to Boost Deal Value

The value of a deal can be as much about marketing as the financials. As recently put forth in an article about smart marketing – no massively successful campaign happens without tension. Them versus us, good versus evil. Case in point, the sale of the Texas Rangers.

The Rangers have been officially and unofficially on the chopping block for over a year, even several months before Hicks walked on the debt in April 2009. Until recently there was only one major contender for the team, Nolan Ryan and his backers. Mr. Ryan is the perfect face to put forward for the Rangers. He had recently rejoined the team as GM, he played for the Rangers and he is just a super popular, well-liked guy in Texas and especially in Dallas.

But the sale of the Rangers failed to really generate much excitement until . . .

Mark Cuban announced his intention to bid.

Mr. Cuban’s announcement lit a fire under fans. All of a sudden it became a question of good versus evil. One radio announcer went so far as to describe the event (the actual auction) as Forces of Good versus Forces of Darkness. You might expect discussion of the sale on Sports radio channels, but this was the teeny-bop music station.

Has a pop station ever broadcast the sale of a sports team in bankruptcy court?

The Rangers’ debtors would have been wise to lure Mr. Cuban in long ago so counter parties could get excited and form bids. If your deal is in a lurch, find an enemy and start the PR campaign.


Rangers are being sold, possibly to Nolan Ryan (no one care about the money backers), Fan interest = Level 4 on a scale of 1 to 10.

Mark Cuban versus Nolan Ryan for the heart of North Texas Baseball, Fan interest = Level 9.

By comparison, Steinbrenner comes back from the dead to buy the Boston Red Sox, Fan Interest = Riot, total destruction, Level 13.

(Full disclosure, my family is a Red Sox family)

Going Native – The Joy of SOX

So far in 2010 we have seen a dramatic increase in the number of shop-to-shop deals and private equity firms pulling public companies out of the public realm. What better timing?

With SOX costs still climbing despite a eight years to settle down, smart CEOs are considering a leap away from the public markets. How much help is the access to public market capital when private equity shops are loaded up with cash and not enough quality deals to do? That money has to go back into play or shops will have to give it back. So, why not take firms with decent assets currently being punished by the market off the market?

Take the gun off your head. Get back to business and get rewarded for what you do best.

This makes sense in light of the coming deluge of legislation. How much more expensive will it be to run your company? If you are a small company as qualified by revenues under $1billion annually, you’ve already experienced the joy of SOX.

Costs of Public Access
Sarbanes-Oxley passed in 2002, and with its passage, the cost to do business as a public company in the US increased over 240% within 3 years.

Actuals for small companies, those with under $1billion in annual revenue.

2001 2002 2004
COSTS Pre-SOX Immediate Impact Normalized
Audit fees $270,000 $540,000 $1million
D&O insurance $315,000 $639,000 $850,000
To be publicly held $1million $1.9million $3.4million


“Since 2001, lost productivity at smaller companies has increased more than 1,100 percent, and represents the second-highest cost area for companies with under $1 billion in revenue, behind audit fees.”

Not only is cash bleeding out the door to pay dramatically increased audit fees, but staff time is tied up with monkey work instead of driving your bottom line. Regulation is a fact of doing business, but what you getting from the market? More importantly, how do you feel about the pending legislation?

Paladin Principals specializes in working with privately held companies. We love SOX. It’s like strapping a couple of sand bags around our clients’ competitors.