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Revolving Door Deals by Peter Ireland
Bebo’s $849M Implosion Teaches a Brutal Lesson in Business
This news story gave me a chuckle as I have a long-held fascination with revolving door deals. There are two basic kinds. The unintentional and the intentional. The Bebo one is an example of the unintentional variety with a spectacular payoff.
Also-ran social network Bebo has been bought back by one of its founders for$1 million five years after that same founder, along with his wife, sold Bebo to AOL for $850 million. Sure, the couple made out like bandits, but there’s a bigger lesson here: Buying a copycat social network is a terrible idea. (source)
In a nutshell, a revolving door deal is one in which a company is sold and then taken back when the buyer is unable to make his payments. The seller gets to keep the down payment and all the other payments received to date in addition to regaining full control of the business. I believe the term was first coined to describe Kirk Kerkorian’s various deals involving Las Vegas casinos and movie studios. When a buyer came along who needed seller financing help, Kirk would accommodate them but under some pretty onerous conditions. These were created by having a set of covenants that would create a death spiral in the event that the buyer failed to comply with even a single one.
The Death Spiral
Kirk Kerkorian the master of the revolving door deal.
Let’s take a quick look at an example involving public company. I will keep this as simple as possible to get the basic concept across. If the buyer misses a single debt payment a penalty would be triggered. The penalty could be the release of a sizable block of free trading common shares to the seller. If the share price then dropped below a certain level as a result of the market being flooded with new shares, it would trigger a second penalty such as the release of more stock to the seller. If this then drove the share price down below another level, it would trigger cascade of other events which would start returning control of the company to the seller. This could be more shares, more board seats, and even the ability to replace the CEO. Think of it as a chain reaction triggered by a single incident. Kerkorian was a master at this game who sold some companies multiple times. We analyze one of them in detail in the Playbook.
Lesser tycoons use this same tactic with certain types of smaller privately-held businesses. It’s not uncommon for inexperienced buyers to run into trouble making payments and then lose the company back to the seller. Indeed some business owners see revolving door sales as a source of extra revenue. As a result, the practice is common in industries where the business is basically faceless and the customers don’t care who the owner is. Think self-serve businesses such as car washes, gas stations, laundromats, and storage units. With these types of businesses customer interaction with staff is minimal or non-existent. In other types of business the human interaction component is very important, so if the buyer rubbed enough of the customer base the wrong way there may not be anything worth recovering by the previous owner. That’s the key factor in whether or not you can play this game with a particular type of business.
During the years I worked as a broker I knew of several such businesses that were sold annually and reeled back within 8 to 12 months.
Small Business vs Entrepreneurship vs Capitalism
If you are trying to get a handle on The Tycoon Playbook as some still are, I think this may help.
Think of the business world as having three separate rungs. At the bottom you have the small business rung. The consensus definition of small business is that it’s primarily about having a steady pay-check for oneself with a little extra left over, hopefully, for the Golden Years. As a result, typical small business owners are concerned with playing it safe, taking as few risks as possible, and basically maintaining the status quo. Once a small business owner has reached a certain level of income their focus shifts to merely maintaining it rather than increasing it. Many small businesses can be found along the proverbial “Main Street.”
On the next rung up is entrepreneurship. Entrepreneurship is an entirely different game. It’s about marshaling resources and taking calculated risks to create something new that will hopefully reward the founders with substantial wealth. Entrepreneurship has no allegiance to the status quo. Rather it’s about starting from scratch and disrupting the marketplace. Most entrepreneurial ventures will be found in emerging industries and fast growth markets.
A few years ago I found myself in a heated exchange with a college business professor who was claiming that there is no difference between small business and entrepreneurship. I was flabbergasted by his inability to see the obvious differences.
The highest and most lucrative rung is capitalism. Capitalism is simple to grasp if you think of it this way. It’s about using capital to acquire more capital. To make the concept as simple and clear as possible, it’s about starting with a single cashflow, in most cases, and then using it to keep acquiring more cashflows until the clock runs out.
If you study how billionaires have made their fortunes over the past 200 or so years starting with the first tycoon, Commodore Cornelius Vanderbilt, you will see that wheeling and dealing in assets is the most proven route to great wealth. Most people today don’t understand this because for the past 15 years the media has been obsessed with the Internet and technology wunderkind.
This narrow focus has led the masses to conclude that the Internet is the only road to wealth creation. However, for every online success story you hear about there are hundreds of failures, and I am only counting the teams which had a shot a success. I am excluding all the one-person blogs and sites that comprise 99.9999% of the 250 million domains registered as of December 2012.
To put it bluntly, there’s just too much competition online today. All of the low-hanging fruit that could be picked by the little guy or gal was gone ten years ago. Today you need a high quality team and financial backing to go after any online opportunity still worth pursuing. Another serious problem with doing business exclusively online is the culture. No one under a certain age wants to pay for anything anymore. They expect everything to be free. Finally, Google’s now quarterly algorithm updates have made it extremely difficult for new sites to rank well. If you are going to make it online today you need the true commitment necessary for 12 to 15 hour days of constant fine-tuning and testing. The Internet Gold Rush is officially over in case you hadn’t heard.
How to Get Rich Today
So, let’s get back to old school capitalism. Most people associate it with tycoons such as Warren Buffet and Carl Icahn and assume that the game is out of reach for them due to all the usual excuses. What they don’t realize is that there are thousands of mini and up-and-coming tycoons out there quietly rolling up assets and building empires of varying sizes. They will always be out there creating wealth while shunning the media limelight and time-wasting cyber-culture bullshit like the current social media fad that has all the lemmings distracted. One of the major pluses of going the tycoon route is that you end up selling goods that people have to pay for. You don’t deal in bullshit online fads that come and go every few months.
The Internet isn’t going to change how people chew gum. That’s the kind of business I like.– Warren Buffett on his acquisition of Wrigley
This why I hope Marcus Lemonis’ new reality show The Profit succeeds and inspires people. Marcus is a perfect example of an old school tycoon accumulating cashflows. He could be the poster boy for The Tycoon Playbook. The Gores brothers, Tom and Alec, are two more examples of tycoons. These men remind us that there is another way to get rich for those who aren’t technological wiz-kids. Not everyone is suited to programming smartphone apps for 15 hours a day, months on end, while tucked away in a cubicle. Some of us are people-persons who prefer interacting with other humans. Being a tycoon is more about having good horse-trading sense than almost anything else.
Capital is that part of wealth which is devoted to obtaining further wealth. —Alfred Marshall, economist
Learn how to play capitalism successfully.
Dambisa Moyo: Is China the new idol for emerging economies?
The developed world holds up the ideals of capitalism, democracy and political rights for all. Those in emerging markets often don’t have that luxury. In this powerful talk, economist Dambisa Moyo makes the case that the west can’t afford to rest on its laurels and imagine others will blindly follow. Instead, a different model, embodied by China, is increasingly appealing. A call for open-minded political and economic cooperation in the name of transforming the world.
Dambisa Moyo is an international economist who analyzes the macroeconomy and global affairs.
WHY YOU SHOULD LISTEN TO HER?
Dambisa Moyo’s work examines the interplay between rapidly developing countries, international business, and the global economy — while highlighting opportunities for investment. She has travelled to more than 60 countries over the past decade, studying the political, economic and financial workings of emerging economies, in particular the BRICs and the frontier economies in Asia, South America, Africa and the Middle East. Her latest book,Winner Take All: China’s Race for Resources and What It Means for the World, looks at how commodities markets influence much more than the global economy — and examines the possible consequences of China’s unprecedented rush for commodities such as oil, minerals, water, and food, including the looming specter of commodity-driven conflict.
She is the author of the brilliantly argued Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa and How the West Was Lost: Fifty Years of Economic Folly and the Stark Choices Ahead. Previously, she was an economist at Goldman Sachs, where she worked for nearly a decade, and was a consultant to the World Bank in Washington.
Billionaires Dumping Stock + Running From Wall St.
Billionaires are jumping ship from Wall St., with Warren Buffet and George Soros among the notable 1% dumping their stocks in an effort to avoid a feared market crash. We look at analysis of the moves by the power hitters and how too big to fail banks look set to take another hit in this Buzzsaw news clip with Tyrel Ventura and Tabetha Wallace.
The Future of Money: Todd Hirsch
In May 2007, Todd became Senior Economist at ATB Financial. As the bank’s top economic expert, he tracks and analyzes developments in Alberta’s and North America’s economy. He holds a BA Honours in Economics from the University of Alberta and an MA in Economics from the University of Calgary. For more than 20 years he’s worked as an economist at several different companies including Canadian Pacific Railway, the Canada West Foundation, and the Bank of Canada. For almost a decade, Todd taught economics at the University of Calgary.
In February 2012, Todd released his first book titled, The Boiling Frog Dilemma: Saving Canada from Economic Decline.
Black Gold The Secrets of Oil
Hong Kong – Megacities
A peninsula bounded by more than 200 islands – only a handful of them inhabited, Hong Kong is the most densely populated urban region on the planet. In the recent past it has been rocked by economic and financial upheaval. Yet it has come through with some of the most high-tech, counterfeit-proof currency in the world, as well as some of the most complex bank building structures. Hong Kong has more billionaires per capita than anyplace on earth. This episode shows how such a small city accomplished such immense technological feats. The journey begins inside the printing facilities of Hong Kong Printing Limited and follows the currency to the Big 3 banks in Hong Kong, before it is then circulated through the economy.