Munger

Buffett walks the walk -- the Benjamin Moore CEO learns the hard way. Well done Mr. Buffett. Warren Buffett has sent one of his top execs on a cruise to Nowheres-ville. The billionaire owner of Berkshire Hathaway, famous for not micro-managing, stepped in last week and quietly canned the boss of Montvale, NJ-based Benjamin Moore paint after the CEO treated himself and his corporate coterie to a trip to Bermuda on the company tab, sources told The Post. Ironically, the 129-year-old Berkshire-owned paint company, after suffering through five years of shrinking sales in the wake of the housing market collapse, had just recorded its first quarterly sales increase since 2007. CEO Denis Abrams arranged the island getaway to celebrate the achievement, sources said. But the Bermuda trip — and an island dinner cruise while there aboard a yacht that some in the party believed was owned by singer Jimmy Buffett — proved to be one of the last acts Abrams would take on as CEO. The trip riled Benjamin Moore’s rank-and-file, who have weathered layoffs, slashed commissions and frozen salaries over the five years of tough sledding. Whether or not because of worker complaints, a half-dozen Berkshire officials descended on Benjamin Moore’s North Jersey headquarters last Tuesday to give Abrams his walking papers — and escort the CEO from the building, sources said. “[Abrams] kept asking what he’d done wrong,” according to an insider briefed on the ouster. “[berkshire officials] told him to clear his stuff out while they stood and watched every move he made.” Reached yesterday, a Benjamin Moore spokeswoman confirmed Abrams was ousted and had been replaced by Bob Merritt, a veteran restaurant exec. She declined to comment further. Officials at Berkshire, as well as Abrams himself, didn’t respond to requests for comment . Firings of top executives at Buffett-owned companies are rarely made public. While Berkshire is publicly traded, the CEOs of his companies operate mostly outside of public view. Buffett is said to give his CEOs a simple mandate: run your company as if it were the only asset you own without the option to sell or merge. Berkshire bought Benjamin Moore in 2000 as part of a big move by Buffett into the housing sector. US homeowners needed paint and Benjamin Moore, started by Brooklyn’s Moore brothers on Atlantic Avenue in 1883, just as the Brooklyn Bridge was completed, was supposed to spin off cash and profits. Abrams was the vice-president for operations when Buffett bought the company. He was promoted to the top spot in July 2007 — just in time for the mortgage meltdown. “Bermuda-gate” aside, sources said Abrams’ ouster followed years of worker complaints and strategic gaffes that have hurt the firm’s business — and tarred Berkshire’s reputation with employees. “Ding! Dong! The witch is dead!” one former exec told The Post, noting that Abrams routinely referred to himself as a “dictator” as he threatened dissenting workers with their jobs. Nevertheless, some insiders also blame Berkshire for Benjamin Moore’s woes, as Buffett has paid fat salaries and bonuses to top execs in exchange for clearing punishing profit hurdles. Abrams met targets partly by slashing the company’s sales force and ad budget, which in turn has hurt revenue and market share, according to critics. Meanwhile, Buffett stripped $150 million a year in dividends from the company’s coffers after acquiring it for $1 billion. Insiders said the recent sales increase was driven by price hikes and not unit sales — which continued to decline. Excluding recent acquisitions, annual revenue remains about half the peak of $1.1 billion reached in 2005 — an embarrassment for Buffett. In the throes of the housing crisis, critics say the 62-year-old Abrams made matters worse by introducing a dizzying array of high-tech and high-priced tints. Abrams fired veteran sales execs; retailers say he tried to strong-arm them into exclusive distribution deals. “These were family-owned businesses, a lot of them were my friends,” said Rod Mangan, a ex-regional sales manager in Stuart, Fla., who says he was fired five years ago after 31 years at the company. Small retailers charge that Abrams also undercut their business by signing distribution deals with larger chains and began selling paint on Benjamin Moore’s Web site. Meanwhile, inside Benjamin Moore, employees were whispering that the dinner cruise in Bermuda was taken on a yacht owned by none other than Jimmy Buffett. The famous singer shares a surname and a longtime friendship with the legendary investor. (In 2007, a DNA test found the Buffetts weren’t related.) “One of the wives [on the cruise] posted pictures on Facebook, and she said it was Jimmy Buffett’s boat,” a source said. “People were like, ‘Why didn’t I get invited on this cruise?’” In the end, it is doubtful the yacht is owned by Buffett. An employee of the 65-year-old composer of “Margaritaville” said his boats, which include the 124-foot “Continental Drifter III,” aren’t available to the public for charter. In a meeting hastily convened last Wednesday, sources said Merritt, the new CEO, told workers he aimed to beef up compensation for high-producing sales reps and mend ties with retail partners. Still, some Benjamin Moore veterans are skeptical after years of ruthless cost cuts that have hobbled the business. “Did Mr. Buffett just not have his eye on the ball, or is it just the culture of Berkshire Hathaway?” asked an ex-exec. “That’s what Benjamin Moore people get together and shoot the breeze about.”

Capital allocation will be the critical variable -- no doubt. But no one should kid themselves into believing they know what Dell's business (or any tech company) will exactly look like in 5 years, most especially Jim Chanos who readily acknowledges a holding period of 6-9 months. Dell is appealing in the context of a pari-mutuel betting system, an analogy Charlie Munger has discussed in the past. Some opportunities are attractive because the bookie (in our case Mr. Market) is giving fair odds on a great horse while others are attractive because the bookie is offering fantastic odds on a decent or even run down horse. Most often, a pari-mutuel system provides odds that offer little advantage to the investor. In rare cases, the bookie stops thinking clearly and offers great odds on a dominant horse and this is the time to act with large amounts of your capital. Based on what we know today, Dell is probably still a decent "horse" (with the potential to be a great horse) and Mr. Market is offering odds heavily in our favor. Instead of reading those interviews and thinking of all the ways we can make money from Dell, let's invert and think of how we permanently lose money. Given that capital allocation is the critical variable, Michael Dell would have to drive his current business into a massive ditch (never adapting as circumstances change) and blow through $17.2B of cash. Is this dire scenario possible? -- absolutely. Is it likely? -- any rational conclusion would have to be that the scenario is highly unlikely given Michael Dell's proven track record and the company’s current competitive strengths. Even if Dell suffers a permanent 60% cut in FCF from 2011 levels and only grows that new lower number at 2% annually in the future, you still make a lot money on this investment...assuming capital allocation is prudent. Dell will be a fascinating case study as the future unfolds...will either prove one of the rare, great investment opportunities or one of the great business tragedies in history -- the man who built a multibillion $ global enterprise from a company started with $10,000 in his dorm room and then blew it all. There really is no in between at current valuations because if the company just survives (even if 60% smaller), investors make money on Dell.

I personally don't assume Dell is headed for liquidation but rather will remain a viable going concern that will grow again (at least modestly -- 2-4% annually) at some point in the future. Under this scenario, the cash stemming from working capital will accrue to shareholders in some form. Of course there is risk with an investment in Dell but the general point is that odds are heavily in favor of making money for long term investors in large part because the stock very cheap, even if you did net out WC and fully tax excess cash by another 30%. And if Michael Dell delivers on his plan, the stock will deliver huge returns although it is impossible to know with any certainty if this scenerio will play out...as a result, I don't view Dell as an "all in" opportunity despite the valuation and cash flow characteristics of the business.

For those interested in Dell, here is another interview. A man with a dream, a vision, and an uncanny ability to innovate through technology. Michael Dell is the man behind Dell, one of the most profitable computer companies in the world. Michael skipped his college education and started the company in 1984 with $1000 in his pocket and an extreme passion for gadgetry. Mr.Dell took some time with us to reflect on his strategies for success, his thoughts on implementing a sound economy, and the key characteristic that marks you as an Entrepreneur for life. Alister & Paine: You, along with many other notable entrepreneurs, opted to leave college to pursue your business idea. What inspired you to take that risk and why couldn’t it wait? Michael Dell: When I was 19, I saw what I thought was a huge opportunity to change the way personal computers were made and sold. I didn’t have an epiphany…the idea was cultivated over time. In high school I purchased and took apart one of the very first IBM PCs. I made two interesting discoveries: 1) none of the parts were made by IBM 2) the system that retailed for $3,000 actually cost IBM about $600. I immediately saw this as an opportunity. I started upgrading my own systems, using the same components as IBM, and selling them. The idea grew from there. Alister & Paine: What obstacles did you face, and how did you overcome them, while building your business? Michael Dell: We grew about 80 percent a year the first eight years of our business and 60 percent the following six years. Scaling our operations and our team to keep pace with that kind of growth was by far the biggest challenge for us in the early days. Fortunately, there were a lot of really smart people looking to join a high-risk, high-reward venture like ours…and we were always hiring! Alister & Paine: Technology changes at lightning speed by its very nature. How is Dell keeping pace, particularly in the mobility and cloud computing space? Michael Dell: You’re right, new technologies and trends—like cloud computing, mobile, and consumerization of IT—continue to change our industry every day. The good news for us is, with each breakthrough, IT becomes even more embedded in business and in life. It’s increasingly the way people connect, products and services are delivered, valuable data is stored and shared, business is done. For business and organizational customers in particular, the spotlight has shifted from the latest, greatest device to how IT can help them solve problems and achieve their goals. This has fundamentally changed our business strategy, compelling us to evolve well beyond PCs and devices to address the end-to-end IT needs of our customers around the world. We’re a very different Dell today with skills and capabilities in services, data management and security, software and peripherals, cloud and mobile solutions, networking and end user computing. Alister & Paine: The competition to win and retain consumer business is tough. How is Dell doing and where are you focusing your efforts for the future? Michael Dell: Today, roughly 80 percent of our business is with businesses and public-sector organizations. Ninety-five percent of all Fortune 500 companies and 100 percent of G20 governments are Dell customers. While we have a strong consumer presence and will continue to compete in that space, it’s important to focus and commercial is where we expect most of our growth will come from. Ours is a $3 trillion industry and only about $250 billion of it is consumer. We’re laser-focused on the $2.75 trillion opportunity that is commercial. So you’ll see us not only providing devices that generate consumer and enterprise data, but the technology infrastructure that supports, manages, connects and secures it, too. Alister & Paine: You recently described Dell as a serial acquirer. Can you give us some insight into your thoughts on Intellectual Property and how it fits into your business strategy? Michael Dell: IP, acquired or organically developed, is a fundamental part of our long-term growth strategy. We’ve acquired about a dozen companies in the last two years. Each acquisition introduced important innovations and expertise into the Dell family that enabled our end-to-end solutions strategy. But we’re also investing in organic innovation. In 2011 we committed $1 billion to R&D. In less than a year, we’ve opened 12 enterprise solutions and cloud centers around the world, with more to come. These investments mean we now have some of the best storage, security, networking and cloud capabilities around, and we’re addressing the spectrum of IT requirements, from the data center to the desktop and out to the mobile endpoint. Alister & Paine: After nearly 28-years of leading Dell, what inspires you to keep at it? Michael Dell: I’ve always been inspired by technology. I remember as a kid being fascinated by my dad’s adding machine. I could type in an equation and out came the answer. It did the tactical work while I thought up the next complex problem for it to solve. That’s still how I look at technology: as a tool for solving a lot of the big challenges in the world. Just think about all the opportunities in the world around energy, health care, education and solving the unsolved problems in science. More often than not, a computational problem is at the heart of it. Today’s IT, just like my dad’s adding machine, is all about solving those problems. It’s exciting and inspiring to lead a company that is delivering the solutions enabling those discoveries. Alister & Paine: What one character trait do you think a person must possess to be a great entrepreneur? Michael Dell: Curiosity. Without it, human potential is finite; but with it, anything’s possible.

Dell has bought back large amounts of stock over the past few years. The Perot acquisition was actually pretty good. Dell laid out his plan in a recent interview with Forbes -- we'll see if he delivers. Question: Dell has changed a great deal over the last decade; I expect it will change a great deal during the coming decade. If you were to describe Dell in 2022, what would that Dell look like? Answer: In 2022 Dell has become a true end-to-end solution provider, vertically-focused, solutions-focused and creating value for customers.We are not a copy of HP or IBM. We don’t have to protect aging legacy businesses; we can buy firms that are leading in a critical technology area and be faster to market with a more advanced solution to leapfrog those companies. We will have end to end solutions, but rather than being based on thinking that goes back decades, our solutions will be based on contemporary thinking by young companies that have already proven their success. By 2022 we expect to lead this solutions market, not by chasing IBM and HP from behind but by using acquisitions to jump ahead of them. On tablets and smartphones Question: Everyone is excited about smartphones and tablets at the moment and Dell has pulled back from this segment. Why do you feel that is the strategic play to make and what conditions will have to exist before you reenter (or will you ever reenter)? Answer: Currently the tablet market is really an iPad market and the smartphone market in our space is defined by troubled vendors like RIM and Nokia who are struggling for survival. Microsoft Windows 8 is exciting, and you’ll see a lot of activity from us as Windows 8 becomes available, for now we are more interested in the business solutions to Smartphones regardless of who builds them. If the market changes so that a vendor like Dell can compete with smartphones more successfully we’ll likely reenter but, until then, our focus is going to be on managing, securing, and keeping these devices fed. We have many avenues to success and that falls closer to our emerging core competence. The recent Wyse acquisition strengthened significantly, for instance, our ability to uniquely manage, provision, and securely provide services to both tablets and smartphones, expect to see our biggest emphasis, at least for the short term, on that aspect of this business. On acquisitions: Question: You have been unusually successful with acquisitions. What do you do that is unique and how did you come around to the idea of doing acquisitions in this way? Answer: First you have to understand that value doesn’t come from acquiring companies it comes from what you do with them. We look at over 250 companies a year to fill gaps we have identified in our product lines. We then generally partner with many of them to understand their strengths and weaknesses and then purchase the few that make sense for us to own. We lead with a massive amount of analysis and follow with execution based on what we have learned to focus sharply on addressing the acquired firms known shortcomings, which often come down to just scale. We can give these firms scale very easily. Since we have no legacy technology in these areas none of our effort is focused on protecting existing executive turf or legacy products. There are few if any internal conflicts and that makes every part of the acquired company important. Much of our initial work is to determine, later protect, and eventually enhance the value of what we have acquired. This is systematic and repeatable process that we first implemented with EqualLogic and Dave Johnson, who joined the firm later, has been instrumental in making this into a process we have repeated since. Using EqualLogic as an example we were able to grow their 3,000 customers to over 50,000. This established a process where we start with a successful company and rather than the more typical process that other firms use of blowing the acquisition up in order to integrate it in existing legacy lines we attach the company to Dell resources which act like a huge business booster. The end result is our acquisitions increase in value dramatically while other approaches generally have the opposite effect. The acquired companies like this as well because without us they typically have 4 bad choices either they can’t grow fast enough to compete with larger competitors and fail, never grow to critical mass and fail, get acquired by someone else that destroys everything they painstakingly built, or maybe after a long period of time they make the cut to success. We fast track them to this last most favorable alternative and that is why our retention of both employees and top executives from these firms is so high. In the end while others seem to prioritize integration we prioritize preserving and enhancing value which is why we are so much more successful preserving and enhancing value. We simply believe that making something better trumps taking absolute control of it. On the coming Annual Analyst Conference Question: The Dell Annual Analyst Conference is coming up. What should the analyst community expect from Dell since the last conference? Answer: They should expect a massive change from the desktop focused Dell of the past. Our solutions portfolio, particularly in the mid-market, has grown substantially and our ability to provide complete solutions from client, to security, to management, to back end processing, to storage, to networking, has increased dramatically. We are now a company with the most advanced market tested technologies in a number of critical IT segments and expect that we’ll provide proof points that will demonstrate that leadership. We are nothing like we once were and we are very proud of the changes we have made. We’ll show them a Dell that is now a full service provider, one that has unique solutions that lead our industry and segment, and one that is uniquely able to address tomorrow’s problems with tomorrow’s technology both now and in the future. We aren’t planning on being the next anyone else; we are planning on making everyone else want to be the next us. Wrapping up: I’ve known Michael Dell for a number of years but this is the only time I’ve actually interviewed him. This conversation reflects the unique advantage of a founder more interested in building strategically than focusing exclusively on short term quarterly results. His ability to acquire companies and increase their value remains relatively unique this decade and his approach to acquisitions has become an industry best practice that most other firms seem unable to emulate. What generally makes a founder different is the ability to create and execute a long term vision. In our conversation Michael Dell demonstrated this unique ability which likely will remain as one of Dell’s greatest assets.

"Not really cheap" -- I would respectfully disagree. Accurate to assert that the future is cloudy for Dell but this is true for all tech companies...so I wouldn't challenge the notion that the business should be valued at a discount to the market until the company demonstrates more consistent performance. However, the risk/reward is heavily in favor of making money on an investment in Dell for anyone with the capacity to hold the stock for 3-5 years. Market cap: $24.0B Cash: $17.2B Debt: $ 9.0B So the balance sheet shows net cash of $8.2B -- to be conservative, let's assume that all of this cash is held overseas and tax at 30%, which produces a net cash figure of $5.74B. Using this number to calculate EV, we get: EV: $18.25B FCF (trailing 12 months): $ 4.90B EV/FCF: 3.7x So tomorrow you'll likely be able pay 3.7x trailing FCF to secure ownership of a company with a global brand and huge difficult to replicate scale led by an individual who: 1) is one of the most accomplished CEOs in the history of tech, with a reputation that gets him in front of every potential client for which Dell has a product/service offering 2) is also a multibillion $ shareholder, with personal purchases over the past few years totaling upwards of $200 million 3) has a 20+ year track record of generating gobs of free cash flow year in and year out...important to emphasize -- he has generated massive free cash flow (true excess cash) every single year, good economy or bad Who knows what the exact future holds for Dell and there is unquestionably risk in an investment...but hard to believe the company won't continue to play an important role in the tech ecosystem well into the future...and at 3.7x trailing FCF, the risk/reward is pretty good for long term investors.

stahleyp -- i've tried to treat you w respect but you honestly strike me as pathetic...and you clearly have no clue re investing. honestly wish you well but you are not worth my time -- sorry my opinions re JEF are clearly expressed in this thread

hahahaha. JEF is up about 5% today too! I did note the following this morning: On the positive side -- if reported tangible book value is correct, shareholders could make some money from current levels if management plays its cards right...theoretically a buyer could pay some premium to acquire and then liquidate the firm for a positive return. As I've long asserted, it will be very interesting to see how managment plays this out.

My point was that the seeds for Bear would be were planted under Ace. Your point is wrong.

MBS which was the bulk of Bear being a "bond powerhouse" started in the early 1980s with Marano. For the record, Marano was still in college in 1982 and didn't graduate until 1984. Marano was not even mentioned in Too Big To Fail and showed up on all of 2 pages in Sellout -- with his named misspelled as Morano.

MBS which was the bulk of Bear being a "bond powerhouse" started in the early 1980s with Marano. This was Ace time, not Jimmy time. Jimmy grew the firm, but didn't change it. LOL!!!!! Cayne empowered Warren Spector to build the MBS/asset backed effort. And the MBS market in early 80s was totally different than the asset backed/mbs securitization market that evolved in the 90's and 2000's, which was the essence of Bear's bond powerhouse. And Cayne radically changed Bear as highlighted by the change in the culture of risk management under Cayne vs Ace. In fact, Ace was ultimately kicked out of the risk management meetings! You claim to have read these books but somehow completely missed: 1) large sections devoted to Warren Spector 2) the differences between the asset backed market as originally conceived and what it ultimately became 3) the embrace of Cayne's view of risk management over Ace's, which ultimately led to the downfall of Bear You obviously didn't read those books -- you're lying.

Do people really think that BAC can fall, but life goes on as it is? From a practical perspective, the equity could easily get wiped out and life go on for the rest of us. I don't think anyone believes BAC as a company stops functioning -- if the equity gets wiped out, deposits will be guaranteed and people will be able to get their money...life will go on and a recapitalized BAC would come public again or be split up and sold to other companies. I'm not predicting the equity is a $0 (although it is unquestionably a legitimate risk) -- just noting that if the equity is a $0, life could easily carry on.

This just isn't correct. The soul of Bear was Ace. The seeds of everything Bear became were planted under Ace, not Jimmy. Check your history. This comment is complete, utter, and total nonsense. The inaccuracy of the above comment is hilarious. Ace would even assert that the Bear Jimmy Canyne built was far different than what he wanted for Bear. Ace was marginalized the day Cayne became President -- these are all widely known facts. And over time, Ace willingly checked out despite still being an employee. And if you want DIRECT quotes from Ace, Cayne, and other Bear executives -- spend some time with Too Big To Fail (Sorkin) and/or Sellout (Gasparino).

I think its fair to say that Ace's track record was better than Jimmy's. I would agree 100%. But Bear was a tiny and far different company when Ace handed off to Cayne. The Bear that was glorified as a bond powerhouse was built by Cayne.

LOL ! I was simply commenting on the implications of an assertion made by Karl Denninger, which I included in the post. And in no way was his assertion ever the foundation of my view on BAC, JEF or any other bank...as all of my prior posts will show. From Denninger "Note that given the utter fraud of allowing a bank to count "equity value" as capital, when it cannot be spent and is subject to 10% or more swings in value in a single day, means that precipitous stock price drops like this can instantly render a bank insolvent. We could have fixed that in 2008 and 2009 but of course that would have meant that banks would have had to actually go find capital from real people to make loans with, and that was unacceptable - so in addition to allowing them to "mark assets to fantasy" we also allow them to count as "capital" things you can't spend, thereby allowing them to generate profits from that phantom "capital" - and huge losses when the deception is revealed."