« April 2008 | Main | June 2008 »

Thursday, May 08, 2008

Financial Journalism for the Mathematically Challanged

liberal arts major

Friday, May 23, 2008

Dear Anti-Activist

overly serene Dear Ms. Chairman:

I am in receipt of your letter dated May 23, 2008.

I was particularly taken with your description of the venerable and populist history of your firm.  It is, indeed, remarkable to note that your firm has survived for 117 years, a term which necessarily includes the first and second world wars, and some rather interesting times in the economy of the Japanese mainland.  I will refrain in this letter from wondering in detail what a firm was required to do to remain in the military's good favor during the height of Imperial Japan, but I suspect such an inquiry would make for good reading.  At the very least, it seems clear that any firm that endured during this era (and particularly a firm whose founder garnered great personal wealth in this period) enjoyed the monopoly benefits of the World War I and World War II era zaibatsu wartime conglomerate system- and rather close ties with the Japanese military.  Frankly, it is hard not to make money in such circumstances.  But I digress.

Regardless of the particulars of your firm, I think this background highlights a particular class of assumption in your brand of corporate archeology, specifically, that firms necessarily should endure forever, or even for a century.  There is a reason that the modern world does not easily endure dynasties.  Ironically, Japan is a classic example proving the rule.

Without a doubt, investment in Japanese real-estate was, at the time, an outstanding trade.  Your founder's exceptional vision in this respect deserves every reverence (the economics of the period notwithstanding), and I am pleased to add my name to the list of his admirers on this particular issue.  What he did with this real estate later, however, concerns me, and should disturb any individual in favor of the separation of ownership and control, and hence the modern capitalist system.

Whittling out shareholder-owned real-estate to maintain full employment for the sake of full employment is borderline criminal.  Only the vanishingly small corpus of shareholder rights in Japan at the time even permitted your founder to embark on such a larcenous plan.  If full employment and lifetime job security were the goal of corporate industry then perhaps we should remove all automation from Toyota's plants and present each employee with a single flathead screwdriver.  I suspect we would have half of Japan gainfully employed quite quickly to maintain Toyota's production.  I will avoid rendering any opinion on the quality impact of such a move.

It is no secret that Japanese corporations, while technically "publicly held," historically kept large, interlocking holdings of their respective stock.  The fact that large corporations bought and held large tracks of each other's stock and allowed only the smallest float with the public seems, on its face, a noble measure.  Promises that such holdings would never be sold were iron clad, and that these promises were almost universally kept is a rather definitive statement on the importance of "honor" in Japanese society, and- eventually- the price thereof.  For decades these interlocking holdings permitted Japanese firms and their management teams to destroy value, pursue reckless (and generally ineffective) social policy, which, incidentally, is something corporations are about the least suited for, and generally avoid any accountability to shareholders- the owners, after all, of the company. The small "float" meant that even the most abysmal corporate policies would result in little, if any, impact on the share price of Japanese corporations.  Clever, that- if unsustainable.

In the short term, this was wonderful for shareholders.  It was not that long ago that Nippon Telegraph & Telephone traded at 158 times earnings.  I would have enjoyed owning that stock, right before I sold it.  This was, of course, part of the great "Japanese Post-War Miracle," helped by the strict protectionism of the Japanese government and a brand of massive "over loaning" that makes today's sub-prime crisis look like a few youthful indiscretions.  The Japanese Government at one point was issuing 100 year bonds.  Many large firms borrowed in excess of 1000% of their net worth, sums they could never in the wildest fantasies of permabulls hope to repay, but which were made up to the local city bank lenders (the first line creditors) for years by the Bank of Japan to avoid any defaults.  Tokyo land in Ginza could fetch $150,000 per square foot at one point, so flush with cash was Japan.  Today it is 1/100th of that price.

The keiretsu (conglomerate and quasi-monopoly groups that are effectively the progeny of the wartime zaibatsu system) effectively prevented any takeover threats, and, again through interlocking holdings, prevented any management accountability to earnings, revenue, solvency or any of the other modern measures of corporate success.  The Japanese Government supported, so far as it could, many of the larger firms that, without these direct subsidies, would have collapsed.  Many more became the now famous "Zombie Companies," existing only by the grace of the Government's pocketbook (and therefore the taxpayers pocketbook), and only permitted to survive so that some official in the Japanese Department of Labor could announce reasonable unemployment figures for the year and perpetuate the myth of Japanese solvency.

Of course, what followed was "the lost decade."  Could there have been any other result?

I applaud the sorts of social experimentation that "lifetime employment," conglomerate systems, state-encouraged monopolist and trade protectionism provide the anthropologists and sociologists of the Western world with.  These people need good dissertation material, of course (call it the Leftist Employment Act Fund: LEAF, if you will) and so I encourage these sorts of experiments within the carefully controlled bounds of leftist think thanks.  These are not topics for study using shareholder funds.  If I wish to fund social research into socioeconomic topics that were settled over 25 years ago, I will give my money to the Brookings Institution or perhaps Yale Law School- not buy stock.

As your largest single shareholder, I cannot allow the wanton spoilage of shareholder wealth to continue a policy of "lifetime employment" for the sake of "social justice." And while the notion of corporate sponsored social welfare is quaint, it is equally backward.  Incentives produce results, nothing else.  I would have thought Japan's history might have taught you that.

I might add that having many happy customers, seemingly a key metric for you given the tone your letter, is not the key to success.  I can promise you near 100% market penetration in six weeks.  Simply set the price of your product to 50% of any of the competition, and sell for massive losses as quickly as you can.  You will have, I assure you, many happy customers.  Your shareholders will, however, be sharpening disemboweling cutlasses.

In the end, what is important to remember is this: The perpetuation of a corporation for sentimental purposes is not, of itself, utilitarian.

I am sorry that your firm has responded poorly to the new exposure to global trade.  I am sorry that its encounter with the realities of a market economy, which Japan has thankfully, and finally embraced to- at long last- bolster Gross Domestic Product growth into the 2% range, has been difficult. But it is entirely possible that yours is a firm that should not survive once required to provide shareholders with competitive returns.  The problem with protectionism is that, in the absence of a sure competitive advantage or unique product, its benefits always come due- with interest.

Indeed, you may not thank me for your firm's present fate.  You may, however, thank me for Japan's.

Most Sincerely,

Hugh G. Fallis
General Partner
Chief Activist Officer
The Greenmail Fund
Main Street
Greenwich CT

Thursday, May 29, 2008

Politics and Modern Opera

gores If the Huffington Post is to be believed- and this is not, in my view, self-evident- "An Inconvenient Truth" is to be made into an Opera with a La Scala debut.  My early reaction was somber disbelief, but that has since evolved into a kind of wry appreciation that this might not be exactly the most flattering development for Gore.  Says Huffington:

La Scala officials say the Italian composer Giorgio Battistelli has been commissioned to produce an opera on the international multiformat hit for the 2011 season at the Milan opera house. The composer is currently artistic director of the Arena in Verona.

My favorite part of that passage has to be "international multiformat hit" which, you must admit, is an interesting way to spin "slide show inspired movie."

It took me awhile before I considered what it really meant for the piece to be converted to opera, but deconstructing it makes the click rather obvious.  What is the essence of opera?

1.  The libretto is rarely in the native language of the audience, in fact the lines themselves are rarely even understood at all by the audience in any real depth.  Even when in the audiences mother tongue, librettos tend to be tortured enough to defy solid listening comprehension.  Typically, the libretto author themselves wrote in their non-native language.  Teleprompters are required (in less stately productions) to lead the audience through the story.

2.  As a consequence of #1 above, it relies for its audience effect predominantly on production, costume, presentation and drama.  (This is particularly true of opera seria, for instance).  This permitted the protagonist to garner a great deal of fame and recognition and spawned a "star culture" that could easily be said to underpin the origins of the phrase "prima donna."

3.  As a consequence of #1 and #2 above, the dramatic elements of the narrative are simple, accessible and larger than life.  At the very least, significant dramatic license is used.  If it were otherwise the audience would struggle to understand the narrative direction well enough to make it until the first intermission.  This was particularly so as opera left the exclusive and more erudite providence of the royal courts and slipped into public (and less literate) audience and this period saw significant "dumbing down" of librettos as well as the increasing influence of politics on the themes addressed.  For much of Opera's history, if the production was not "politically correct," it was not shown.

4.  Often, owning to the expansive egos of those involved in production, it tends to run quite long.

5.  European audiences (particularly old Europe and in what might be termed the "romance" nations) tend to be much more involved and taken with it.

6.  The protagonist tends either to be plagued by dense (and therefore humorous) misconceptions, or a deep rooted and tragic (if not fatal) flaw.  Either affliction tends to be connected with ignorance (comic or hubristic in origin, respectively).  Either way, much mischief is done to the other players as a consequence.

7.  The protagonist has the loudest (even if not the best) voice in the production, and the most lines.  This can really wear in the bel canto productions.

8. The Germans have a... unique take on it.  The English reject it almost out of hand.

On this basis, I must say, I approve.

My Photo

Offering Memorandum

- New? Start Here -
(Updated 03/13/08)

Earnings Calendar for: February 2009

Sun Mon Tue Wed Thu Fri Sat
1 2 3 4 5 6 7
8 9 10 11 12 13 14
15 16 17 18 19 20 21
22 23 24 25 26 27 28

Wall Street Journal: Market Headlines

Investor Relations


powered by typepadListed on BlogSharesthe world's leading business publicationthe deal

rss 1.0rss 2.0

Link to going private:
going private

© 2006, 2007
Rights to other works/marks are
reserved by their respective creators.