What is the core business of news media? They are not in the business of “reporting the news”. News media’s business is to aggregate an audience to deliver to advertisers. That is why celebrity tabloids sell – the perceived quality of the “product” only affects the demographics and size of the audience. But in reality the audience is the “product”, journalists and producers are the manufacturing team. The sales team are supposed to be the rain makers. But news media believes their own manufacturing-oriented PR that their business is “the news”.

If news media companies are to thrive under a pay-for-content business model they must now do two new things well for sustainable competitive advantage. Firstly they must deliver compelling content, now mixed with rights management and security that does not interfere with the reader experience. Secondly they must become expert subscription marketers – better than Time Life or Readers Digest. Because the internet is littered with the corpses of companies who believed “if you build it, they will come”. If your business depends on paid subscription you had better become outstanding at the skills to deliver subscriptions. Dave Earley said

It is worrying that users will now be made to pay for news simply because marketing departments are unable to make online advertising work.

Sadly this is typical of sales and marketing reactions in a mature market, it always looks easier to chase the next big thing rather than get great at your core business. If their marketing departments can’t sell online advertising (B2B) how are they going to develop the skill to convince people (B2C) to pay for something they’ve previously got for free? I wouldn’t take that bet.

News media is like the buggy whip manufacturers complaining their markets are shrinking because cars have replaced horse-drawn carriages. Nobody promised newspapers a perpetual license to make money. Evolve or die.  Get good at your real, core business.

Rupert, baby, deliver an audience to your customers.

Strategic Mergers and Acquisitions for Fast Growth Firms, Series 1 – Buy Side, Capturing Value Beyond Price

Highlights from Series 1: Buy Side

• The M&A Process from the buy side
• The Wealth Esteem M&A Checklist Methodology
• Special types of M&A deals
  • the true “merger”
  • “Bolt-on” acquisitions
  • Vertical and horizontal integration
  • Diversification
• M&A target identification and deal flow
• Managing the M&A Project
• Key roles and members of the M&A team
• Valuing the business
• M&A Negotiation
• Earnouts
• Financing the deal
• M&A Due Diligence
  • Finance
  • Legal
  • Intellectual Property
  • Human Resources, learning & development
  • Marketing
  • Sales
  • Manufacturing and operations
  • R&D and innovation
  • Logistics and distribution
• Integrating the Acquisition – the forgotten part of the Deal
  • the whole is greater than the sum of the parts
  • mitigating risk
  • integration planning
  • measuring integration success
  • practical integration improvement
• Good to great: Post-Acquisition Review

Coming soon: Strategic Mergers and Acquisitions for Fast Growth Firms, Series 2 – Sell Side, Your Exit Strategy.

When Telstra was booted out of the National Broadband Network tender process for submitting a non-compliant tender, pundits were eagerly predicting Telstra’s demise or other “dark and awful consequences”. Telstra had submitted a tender that suited their business model, aspirations and view of the future. They signaled the only way they’d consider lining up for the $4.7 Billion AUD the government was offering. I congratulate them for having the balls to stick to their guns.

Today the Federal Government announced none of the remaining tenders were “value for money” and instead would form a new company to build a fibre to the home network to 90% of Australians. Much ink will be spilled in the future on this deviation from the tender outcomes requested, namely 98% fibre to the node.

Here’s my quick take home analysis:

1. Submitting a tender of this size and complexity is a very expensive exercise.
2. No tenderer was awarded a contract despite complying with the guidelines.
3. Telstra spent a little money outlining the conditions they would accept.
4. Who looks smart now?

This seems like a brilliant use of game theory by Telstra. Sol and his team have been called arrogant and out-of-touch, I think they protected their shareholders interests well.

Just because a deal is on the table doesn’t mean it’s always wisest to take it.

How many of the projects we’ve been sworn to keep secret really needed or benefited from that? How many top secret projects failed to launch? Again I’m not talking about early gestation with limited resources, there’s a time and place for keeping something under wraps until it’s time – however even then most people keep it too secret for too long.

Enthusiasm is the hardest attribute to sustain in any endeavor.

I’ve found many companies with a Culture of Secrecy are really staffed by people avoiding scrutiny or responsibility. If they don’t say what they are going to achieve, they can’t be held accountable when they miss.

Everybody misses from time to time. Me included. Looking at what went wrong often more valuable than succeeding by a fluke.

Fear is the other great cause of the secrecy cult. Every manager worthy of the title has had an employee leave to work for a competitor. Weak managers of weak businesses respond by limiting the flow of ideas and information to the team that drives the business. They hope a defection cannot harm them again, without reviewing  if that harm was more than a bruised ego. This is overprotective thinking. When you fell over as a baby while learning to walk, you tried again until you mastered it. If a business is only as good as its secrets it has no better competitive advantage in the marketplace. Are there low barriers to entry for competitors?

Find your competitive advantange. That may be worth keeping close to the chest, but I doubt it. Your success flows from knowing what you do better than anyone else – what others cannot take from you.

Think of great global brands and great businesses like Coca-Cola, American Express, IBM, Toyota, McDonald’s. While some part of their operations are necessarily private they don’t have a culture of secrecy. Where do you want your company to be in 20 years?

For another perspective check out what Robin wrote a while ago at Snarkmarket on iPhone, Secrecy and Excellence

I see four major factors as contributing to the credit crisis.

1. Poor quality loans on high risk mortgages and lending practices
2. Securitized high risk loans tainted asset pools that investors purchased
3. Easy money to avoid a recession since dot crash
4. Unchecked naked short selling in the market (allegedly by hedge funds)

When the asset inflation driving US housing bubble stopped, it’s like the music stopped in musical chairs. The scramble to get out drove prices further does and undermined asset prices further.

Here is a funny and slide show that explains the first point

I’ve maintained a private database in the past but I’m thinking of making it publicly available, in which case I should then wiki-fy it so that people can update it.

One place to build it is Cogmap which lets you create and share organization charts in a wiki-like manner. Alternatively there is Jigsaw a collaborative people and business directory with social media elements (invites and points).

I’m not sure which way to jump, but I want to seed my data and then let the users improve it. Then open the data further with to allow interesting and unplanned uses to emerge – like draw a map of 500 most powerful/influential board members in a country ranked by the market capitalization of their companies. This is sort of like They Rule without the Marxist-Leninist slant. They Rule allows you to create maps of the interlocking directories of the top companies in the US in 2004.

I definitely will build this. If you have suggestions I’m all ears.

Treco Garden Sheds

The Garden Sheds division performed well. This business is a solid contributor to the Group. This was assisted by the division’s management focus on better manufacturing efficiency. The company congratulates the Management for their Group contribution.

I’d like to thank my team at Treco for all their hard work and support over the last two years. Without them it wouldn’t have been possible to make record divisional EBIT in each of those two years. Thanks to Ian C, George D, Les J, Mario A, as well as my fellow ex-Treco’s Susan R and Brett C.

In manufacturing, I’d like to thank the production team: Tan Dat Ho, Minh, Frank, Ted, Ho, Tan Dat Ha, Suri, Michael T, Noelene, Toni, Neil, Mark, Maurice, Micko, Mick C, and Gabriel.

What did we do?

1. Focused on low hanging fruit, grab what orders we could without huge retooling.
2. De-hassle the workflow. We spent time and effort removing obstacles from our processes.
3. Use subject matter experts. I didn’t tell them what or how to do it, I set the goal and trusted them to find a way. Then I cheered from the sidelines. This worked for both sales and manufacturing experts
4. Use common sense. Just because we’ve always done something doesn’t mean we should still do it. Everyone can ask “why are we doing this?”

I will do a personal WWW/TALA on this over the next month (What Went Well/Take A Look At). Manager Tools podcast by Mike Horstman and Mike Auzenne taught me that acronym.

Anyway on the the next challenge which is with a fast growth firm. More later.

An unreal valuation is a price that a strategic investor pays because they have non financial objectives.
- Fred Wilson A VC via twitter

That really puts the concept of the Strategic Sale succinctly. When the fit of the vendor’s business to the acquirer is so compelling, that traditional accounting based measures are not sufficient.

That first course is looking to be as easy as I thought. Which on one level really frustrates me. Why am I paying to do a subject I am already unconsciously competent at? It’s a good way to ease into studying again after all these years.

Strangely I found myself wondering about some of my fellow students. They don’t seem to understand the broad accounting aspects of their businesses. Maybe it was me, but all my career I’ve been interested in the Profit & Loss Statements and Balance Sheets of my employers.

Back to the question at hand. Why do it? Career prospects? More money?

For me it the answer is to change my life. To understand business and industry with a new depth and rigour. To use to time to change my world-view and internalise my studies in a way I could not appreciate when I was an undergrad. My business interests are in fast-growth, entrepreneurial firms. That is where my MBA is leading, although I can’t say exactly where yet.

In the new media world not being in an EPG make you invisible. It doesn’t matter that I can scan while channel surfing, I rely on the description that pops up on screen or on the EPG. Until last year I would go online and look it up, but I finally got tired of that. So as a result my family watch precisely one (1) hour of channel Ten per week. We watch less channel 7.

What amazes me is that the management of these businesses obviously thought cutting a deal to be on Foxtel’s digital would not impact their ratings. Instead it allow the other Foxtel digital channels to capture eyeballs and forget about their programming. So the only way I discover their programming is to see their expensive advertising in other media.

My informal pub chat poll shows my household is not unusual. Foxtel subscribers love their remotes, their electronic program guides and their planners.  Media analysts counter that very few Australians watch Foxtel’s channels other than sport or movies. It doesn’t matter, enough of us have stopped watching Seven and Ten because it is not accessible.

Lesson: Do not get between your product and your customer.

Thankfully Ten is has now joined the party. Now seven needs to get over their C7 digital hissy fit and make their schedule available.

I look forward to watching the fall-out in the industry over this. When a major market player decides to flex their muscle, they should make sure they are a big enough player. I suspect that at a claimed 18% of the Australian book retail market Angus & Robertson will find it is not enough to succeed.

Bunnings on the other hand does have enough market share. But more on that later.

Update Michael Rakusin has granted permission to reproduce his letter below

6 August 2007
Mr Charlie Rimmer
ARW Group Commercial Manager
14th Floor, 379 Collins Street,
Melbourne, VIC 3000

Dear Mr Rimmer

We are in receipt of your letter of 30 July 2007 terminating our further supply to Angus & Robertson. As you have requested, we will cancel all Angus & Robertson Company orders on 17 August and will desist from any further supply to your stores.

I have to say that my initial response on reading your letter as to how you propose to “manage” your business in the future was one of voluble hilarity, I literally burst out laughing aloud. My second response was to note the unmitigated arrogance of your communication, I could not actually believe I was reading an official letter from Angus & Robertson on an Angus & Robertson letterhead.

My reply to you will perforce be a lengthy one. I hope you will take the trouble to read it, you may learn something. Then again, when I look at the level of real response we have had from Angus & Robertson over the past six or so years, I somehow doubt it.

The first thing I would say to you is that arrogance of the kind penned by you in your letter of 30 July is an unenviable trait in any officer of any company, no matter how important that individual thinks himself or his company, no matter how dominant that company may be in its market sector. Business has a strange habit of moving in cycles: today’s villain may be tomorrow’s hero. It is quite possible to part from a business relationship in a pleasant way leaving the door open for future engagement. Sadly, in this case, you have slammed and bolted it.

More to the point, however, we have watched our business with Angus & Robertson dwindle year upon year since 2000. We had to wear the cost of sub-economic ordering from you through ownership changes, SAP installation, new management, and stock overhang. In summary our business with you has dropped from over $1.2 million at the end of 2000 to less than $600,000 in 2007.

You would be quite correct to question whether our offering to the market had changed in any way. The answer can be derived from the fact that during the same period our business with Dymocks, Book City, QBD and Borders continued to grow in double digits, our business with your own franchise stores has grown healthily, and our overall business during the same period has grown by more than 50%.

Six years ago we were allowed to send reps to your company stores and do stock checks. Then these were “uninvited” and we had to rely on monthly rep calls to your Buying Office. Subsequently even that was too much trouble; your Buying Office was too busy to see us, so we were asked to make new title submissions electronically. Every few months the new submission template became more and more complex. This year, we have been allowed quarterly visits to your Buying Office at which we were to be given the opportunity to sell to all your Category Managers. At the first, we did indeed see all of the Category Managers – but they didn’t buy any of the titles offered. At the second, one Category manager was available, and again no purchases resulted. At the last (only last week), two Category managers attended. Through all of this, your overworked and under resourced Buying Department never got to see, let alone read, an actual book. While one may be forgiven for believing that Angus & Robertson is actually a company purveying “Sale” signs, I do believe you are still in the book business?

That Angus & Robertson is struggling for margin does not surprise me. It amazes me that the message has not become clear to your “management”: there are only so many costs you can cut, there is only so much destiny you can put in the hands of a computer system, there are only so many sweetheart deals you can do with large suppliers. After that, in order to prosper one actually has to know one’s product and have an appropriately staffed buying department. Most importantly, one has to train sales people of competence. You will never beat the DDSs at their cost cutting game, you will only prosper by putting “books” back into Angus & Robertson. And it would seem to me paramount to stop blaming suppliers for your misfortunes, trying ever harder to squeeze them to death, and actually focus on your core incompetencies in order to redress them.

How a business that calls itself a book business is going to do without titles such as the Miles Franklin Prize winning book or titles like Rich Dad Poor Dad (according to this week’s Sydney Morning Herald it is still the fifth best selling business title in Australia nine years after publication) is beyond me. And how in good conscience Australia’s self-purported largest chain of book shops proposes to exclude emerging Australian writers who are represented by the smaller distributors, is an equal mystery.

We too have expectations Mr Rimmer. We have had the same expectations for many years, none of which Angus & Robertson have been willing to deliver:

• That we are treated with equal respect to the larger publishers within the obvious parameters of commercial reality;
• That your Buying Department is able and willing to assess our books with equal seriousness to those of the big publishers and buy them appropriately;
• That you recognise the fundamental differences between the smaller distributors and the larger publishers and stop demanding of us terms that we are unable to deliver;
• That you would support and help develop Australian literature.

Had you made any effort to meet these expectations you would have found the niche we should have occupied in your business, as have all other book shops, and you would have found our contribution to the profitability of your business would have been dramatically different.

In summary, we reject out of hand this notion that somehow, even giving you 45% discount on a Sale or Return basis, with free freight to each of your individual stores, where we make less than half of that on the same book, puts us in the “category of unacceptable profitability”. We have seen Angus & Robertson try this tactic before – about 12 years ago Angus & Robertson decided that unless we gave them a 50% discount, they would not buy from us any longer. We refused. Angus & Robertson desisted from buying from us for seven months. We survived, Angus & Robertson came back cap in hand.

We have seen Myer effectively eliminate smaller suppliers. We survived and prospered but look at the Myer Book Departments today.

We have seen David Jones decide that it had too many publishers to deal with and to exclude the smaller suppliers. We survived and prospered but look at the David Jones Book Departments today.

David Jones and Myer sell other goods; Angus & Robertson does not.

That the contents of your letter of 30 July are both immoral and unethical, I have no doubt. That they probably contravene the Trade Practices Act, I shall leave to the ACCC to determine. (Five percent interest PER DAY !!!)

If you wish to discuss any of the contents hereof you may call my secretary for an appointment at my office in Frenchs Forest. I shall be marginally more generous than you and at least allow you to pick a convenient time.

Michael Rakusin
Director
Tower Books Pty Ltd
Carpentaria, Alexis Wright : Winner of 50th Anniversary Miles Franklin Literary Prize, 2007

Copy: Graeme Samuel, Chairman, ACCC
Rod Walker, Chairman, ARW Group
Ian Draper, ARW Group Managing Director
Rickard Gardell, Managing Director, Pacific Equity Partners
Simon Pillar, Managing Director, Pacific Equity Partners
Barbara Cullen, CEO, ABA
Maree McCaskill, CEO, APA

A friend describes it as “Bookselling, The MBA way”. This is bound to be one of the case studies I’ll use in my MBA.

Here is the text of the letter for the screen readers and the blind:

Angus & Robertson

30th July 2007

Michael Rakusin
TOWER BOOKS
Unit 2 / 17 Rodborough Road
Frenches Forrest
NSW 2086

Dear Michael

I am writing to inform you of some of the changes to the way we manage our business.

We have recently completed a piece of work to rank our suppliers in terms of the net profit they generate for our business. We have concluded that we have far too many suppliers, and over 40% of our supplier agreements fall below our requirements in terms of profit earned. At a time when the cost of doing business continues to rise, I’m sure you can understand that this is an unpalatable set of circumstances for us, and as such we have no option but to act quickly to remedy the situation.

Accordingly, we will be rationalising our supplier numbers and setting a minimum earnigs ration of income to trade purchases that we expect to achieve from our suppliers.

I am writing to you because TOWER BOOKS falls into this category of unacceptable profitability.

As a consequence we would invite you to pay the attached invoice by Aug 17th 2007. The payment represents the gap fro your your business, and moves it from an unacceptable level of profitability, to above our minimum threshold.

If we fail to receive your payment by this time we will have no option but to remove you from our list of authorised suppliers, and you will be unable to complete any further transactions with us until such time as the payment is made.

I have also attached a proforma for you to complete wand return to me, with your proposed terms of trade for our financial year commencing Sept 1st 2007. We have the following expectations:

• All agreements contain a standard rebate, a growth rebate and a minimum co-op commitment to enable participation in our marketing activity.

• Growth rebates activate as soon as our purchases with you increase by $1 on the previous year.

• All rebates are paid quarterly for the previous quarter’s performance, you must make sure that your remittance, with calculations, is received by us by the 7th of the month following the preceding quarter. Any remittances not received by this date will attract a daily 5% interest charge.

I am also including a copy of our ratecard, and our marketing calendar, to enable you to begin planning your promotional participation now.

If you would like to discuss this with me in more detail, I am delighted to confirm an appointment with you at 1.00pm on Friday 17th August for 10 minutes at my offices at 379 Collins St, Melbourne.

Best Regards

[signed]

Charlie Rimmer
ARW Group Commercial Manager

Enc: A&R Ratecard
A&R Marketing calendar
Trading Terms Proforma
Invoice

Keep detailed minutes of the meeting and if there is an error or over-simplification move an amendment before adopting the minutes of the previous meeting.

I am aware of a board currently trying to deal with a decision that was not properly minuted. An executive director overstepped her delegation but the minutes of the relevant meeting did not spell the limitations out. But every board member remembers the discussion and the limits placed on the delegation. When the deal came unstuck 12 months later the board have a major problem with their process.

Directors in common law countries have a duty of care to ensure they are adequately informed. Directors are expected to make their own enquiries to ensure they are receiving accurate information from the executives reports.

Some risks haven’t been mentioned.
Sarbanes-Oxley Act (SOX): Directors have significant and onerous obligations even if they are on the board of a small public company.

NEWS ALERT: SOX could apply even if your company is not domiciled in the USA. If you do business in the USA there is the potential to be within that jurisdiction.

This includes selling products to a USA domiciled customer especially if you sell FIS, CIF or C&F. As the risk and title of the goods does not pass until the goods are in the USA a case can be made that you are trading in the USA.

If your email or webhosting is in the USA an argument can be made that you have a US presense and are subject to SOX.

This is a stretch but ignore it only if you never intend to set foot in the USA. They’ve arrested hackers on tourist visas in the past. Google Jon Lech Johansen (DeCSS) and Dmitry Sklyarov.

Secondly boards of non-profits in receipt of government funding must not only be aware of their fiduciary duties (including duty of care and duty of loyalty, but also to avoid conflict of interest), there are laws for the jurisdiction or the funding body that carry civil or criminal penalties.

Thirdly in some jurisdictions your personal credit history/score includes an evaluation of the companies where you are a director. This happened to me when I agreed to attempt a turnaround that did not succeed. The company was liquidated and I still have to explain I was a non-executive director (sometimes banks even listen).

Insurance policies can be void in the event of fraud or malfeasance.

As a result of my experience I only serve on boards that I am passionate about. It also means I am more conservative in my board role than I am with my own money.

As for suing directors for breach of duty? If there is fraud or malfeasance then let the ambulance chasers loose. Sadly all other cases highlight the move of the Common Law world from one of responsibility to a world of blame and entitlement. An unfortunate by-product of the oversupply of lawyers.

At this point in time the deal is not going through once we asked the target what their price expectation was. The target has retained the services of an accounting firm and are obviously being fed strategy from their advisers. This is a good idea, except when the advisers queer the deal.

From my analysis, the target company is barely making money. From the accountants approach, they’ve produced a set of accounts with huge add-backs to support a high purchase price. Add-backs are expenses incurred by the owners/managers of a private company that an acquirer can reasonably expect not to incur. For example the all-expenses paid “Manager’s Conference” on the Gold Coast by the directors and their spouses, it’s just a legitimate perk that a public company would not continue.

So there is an initial dispute over the actual earnings of the business. I don’t see that as an insurmountable obstacle. That can be verified during the due diligence phase of the acquisition.

The accountant is pushing for a valuation of 5 times EBIT (Earnings Before Interest and Tax). Let’s assume we’re looking at a valuation around 3 times EBIT which is in line with typical family-owned businesses and business-broker transactions. So once we resolve the multiple, we determine the purchase price during due diligence.
What other flies are in the ointment? What if the family have debt that needs to be cleared out of the sale of the business? In that case discussions about multiples of EBIT are irrelevant. The debt needs to be addressed and that calls for a different set of solutions.

Additionally if I am correct and the business is not really making any money, we could acquire the assets in 6-24 months if the company goes broke. Not an ideal outcome as I’d rather have a going concern rather than a shell. However the risk of running out of cash is significant.

I don’t have enough information to determine this yet. I’ll update later once I’ve done some more research.

As an exercise, value your inventory at fire sale prices. Then realise that someone, somewhere in the world is offering a product that is a replacement for yours at a fire sale price.

Inventory is only an asset at the moment it is turned into cash – not sold, but when you actually get paid.