Gambling.Now!

Whether you are toiling away trying just to keep up on the treadmill of marketing or new to the job training in marketing and consultants may be able to help you out.  Nevertheless, there are still a bunch of things which can be annoying and sometimes you just need to stand back and get perspective.  Funny little piece on perspectives in Product Management.  No matter what your challenge – prioritizing features, getting customer feedback or understanding your buyers, try and have some fun.

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What is Enterprise Value?  Enterprise value is a comprehensive measure of a company’s value since it also includes the amount of cash, debt, and other items associated with a business.  Two firms could have the same market capitalization but wildy different enterprise values.  For example if one firm had $45 million in cash and no debt and the other firm had $125 million in debt and $20 million in cash, it would take more money to buy the second firm than the first firm because to buy the second firm you would not only have to pay for the stock (market cap), but the debt as well.

Here is the basic formula to calculate enterprise value:

Enterprise value =

common equity at equity value
+ debt at market value
+ minority interest at market value, if any
- associate company at market value, if any
+ preferred equity at market value
- cash and cash-equivalents.

How would you figure out ownership, valuation and equity for private companies?

Great post on Google’s hiring practice, here is a little intro.

Google’s hiring process has been talked about online by many folks and the experience of being a member of Team Google is varied from a great freakin thing to just a bad experience.   While the interview below is fiction, I did have a strange call with Google HR myself in 2005 which I only remember as odd.

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From our marketing and branding friends. Art I Like from Slideshare

I have no idea who I am voting for in the next election, but all of the plans to fix the economy are a little wimpy. We can get just a tad more protectionistic with our ideas, tax policy and build things for America. $700B bailout is just the beginning and doesn’t make a real dent. There has to be at least another $1.5-2.25 trillion in excess in the market, so why not invest in people, the environment and preparation for the next economies requirements – access, information and sustainability. The new deal helped unify the country and bring new skills to the general population, that just might be what we need. Detailed rant can be found here, but the abridged version is below:

The New Green Deal: A Growth Grid

View SlideShare presentation or Upload your own. (tags: republican democrat)

marketing slides

Our stories as marketers continues to be a theme of late, whether it’s understanding how YOUR history and biases impact your stories and now from Seth, how your EXECUTION is central to the story/brand experience. Below is an excerpt which asserts lack of a story can impact consistency of the brand:

But what if you haven’t figured out a story yet?

Then the work is random. Then the story is confused or bland or indifferent and it doesn’t spread.

On the other hand, if you decide what the story is, you can do work that matches the story. Your decisions will match the story. The story will become true because you’re living it.

Does Starbucks tell a different story from McDonald’s? Of course they do. But look how the work they do matches those stories… from the benefits they offer employees to the decisions they make about packaging or locations. more…

WP-o-Matic – not a good idea during a maintenance window.

visit http://www.spatiallyrelevant.org

This blog will be morphing over the coming weeks to speak to the gambling in private equity, technology and the general market watching.  You can keep in touch on the blog, but can also track our activity on twitter @ http://twitter.com/gamblvest

The private equity bubble was a wonderful thing.  The following post walks through the mechanics of how PE investors and management teams leveraged the cheap debt market to put tons of money into their pockets.

Leveraged Recaps

The general market is waking up to a standard tactic used by private equity firms to achieve low-risk and high value returns on their investments – the leveraged recap.  Companies take on new or additional debt and use the proceeds to pay shareholders a dividend.  While leveraged recaps have been used since the 1980’s in the past two weeks alone there have been numerous blogs and articles written about this practice.  Check out Abnormal Returns and Going Private for some prime examples.

PwC, in conjunction with MergerMarket, recently released a study entitled Private equity insight: Dividend recapitalizations.  They surveyed 75 private equity firms and found that 97% percent of respondents expect to recapitalize portfolio companies in 2007, with 75% expecting to increase their use of recaps.  Dividend recaps are seen as viable alternatives to IPOs.  94% of respondents consider dividend  recaps an important part of their exit strategies. Indeed, 52% consider recaps an alternative to an IPO, while 16% consider them an alternative to a strategic sale.

So what does this mean for management teams?  The use of recaps to return value to the shareholders will rise dramatically in 2007.  Recaps are a mixed bag for management teams but big winners for boards and investors.  Investors like recaps because they enable them to take a significant return on their investment now with limited risk.  The process of raising debt to finance the recap is very straightforward.  The collapse of the subprime mortgage lending market has hardly put a dent in recap activity.  Check out this article by New York Times columnist Floyd Norris on the recent Attachmate recap (Times Select required).  The majority of the debt issued to finance recaps carries near junk ratings and have ‘lite covenants‘  The biggest risk investors face with recaps is damage to their reputation and their subsequent ability to raise debt for other portfolio companies if their recapped company defaults on the debt.  When you balance the speed, simplicity, and risk profile of a leveraged recap versus an IPO it’s not hard to see why recaps are so attractive.

From a management team perspective leveraged recaps have both pluses and minuses.  The biggest plus is that most teams get to participate in the dividend windfall.  Generally investors will pay management teams a pro rata share of the recap proceeds based on management’s equity stake.  Typically the payments will be streched out over a number of years and specific benchmarks, generally those associated with the loan covenants, must be hit for the payments to be made.  Management always has to have the proper motivation to make sure the business performs.  The opportunity, however, to monetize the value of one’s equity or vested options now is something most teams don’t want to pass up.

Leveraged Recaps Part Duex

While cash is good, there are a number of downsides for management teams associated with leveraged recaps.  The most obvious is that a chunk of the business’ heretofore free cash flow now needs to go to service the new or incremental debt that financed the recap.  With effective interest rates in the 10% to 14% range that is no small cost.  Cash that could have been invested to grow the business now has to go to service the debt.  Maintaining compliance with even ‘lite covenants’ can also impact the business — such as limiting the amount of cap-ex that can be invested each year or watching your cash balance drop when the lenders do an ‘excess cash flow sweep’ on a periodic basis.  However, if your firm is in a very mature market with little organic growth opportunity then investing in growth might not be realistic.  If that is the case dedicating free cash flow to debt service versus investing in growth initiatives that will not pay off is a much better choice.  It takes a seasoned management team and board however to come to such a conclusion.

There are two other downsides management teams should consider in evaluating leveraged recaps.  Once your investors have received a solid return on their investment via a recap their interest in driving your firm to grow by taking a lot of risks declines significantly.  They tend to be satisfied with their investment return and their tolerance for risk decreases dramatically.  Ensuring that the debt is serviced appropriately becomes a high priority since problems can impact the investors reputations in the debt marketplace and potentially spill over and cause problems on other refinancings.  Also, a highly levered business is inherently less interesting to potential acquirers.  This can make an eventual exit via a sale to a public company or another private firm challenging. 

While IPOs are on the rise, firms that chose to do a leveraged recap tend not be the best IPO candidates.  It’s not the debt load that decreases the IPO opportunity — it’s the business conditions.  Most firms that do leveraged recaps are in a situation where investing in revenue growth is not the most attractive option because of market or competitive conditions.  Solid IPO candidates need to show good to strong organic revenue growth to attract market interest.

At the end of the day the core decision to do or not to do a leveraged recap can be boiled down to one question: What is the best use of a company’s free cash flow — investing in growth initiatives that will actually pay off or creating a significant return for investors now by dedicating free cash flow to debt service.