Business Insight Zone

Goldman’s tower of finance in Jersey City.

What financial crisis?

The Guardian gives the skinny on Goldman Sachs:

Goldman to make record bonus payout

Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm’s 140-year history after a spectacular first half of the year, sparking concern that the big investment banks which survived the credit crunch will derail financial regulation reforms.

A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring, according to insiders at the firm. [ . . . ]

(Hat tip: the Wall Street Journal’s indispensable MarketBeat blog.)

• Item: Looks like Warren Buffett made a really good investment in Goldman last year.
• Item: It’s not just Goldman that’s doing so well. According to the Guardian piece, Barclays, Credit Suisse, Deutsche Bank, JPMorgan, and Morgan Stanley are also reaping major rewards.
• Item: Just like two years ago, “there sits Goldman Sachs, immaculate in a tailored suit, cool as the other side of the pillow, basking in the glow of a quarter in which earnings rose [a ton] from the same period a year ago.”

The more things change, the more some things stay the same.

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Related:

• Must-read: Michael Lewis on the Meltdown
• Keep your powder dry in business.
• Good context on Goldman Sachs.
• Company of the Day [21 September 2007]: Goldman Sachs.

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Photo by Aby Jose, used under a Creative Commons license.

We’re living through an economy that’s evolving, uh, rapidly, not to say vertiginously.

Lots of comfortable notions we held about markets and industries have been broken down over the past year.

Housing, consumer goods, energy, automobiles, employment, credit markets . . . all of them are up in the air in important ways.

Sure, try to get the best insights you can from experts. Find economic news that’s relevant to you and make the best use of it you can.

But in these tumultuous days, be wary about headlines that report “unexpected” results in Economic Indicator X. Two examples from this morning:

• U.S. Economy: Goods Orders Unexpectedly Jump as Recession Eases
• Purchase of new homes in the U.S. unexpectedly fell in May

Each of these stories has something interesting to convey, but the most interesting part may not be that the indicator in question did something that the experts weren’t expecting.

The most interesting part may be that the entire fabric of our expectations will continue to be rumpled and pleated by the complexities of the economic relationships that prevail in today’s world.

Here’s the best “unexpected” headline I’ve found this week:

• Trichet Says Unexpected Turmoil Could Hamper Recovery

You’d better believe it.

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Monty Python image (”No one expects the Spanish Inquisition!) via Wikipedia.

If the IPO market is a cornfield, the corn isn’t quite as high as an elephant’s eye — but it’s a far sight better than the measly crops we’ve had lately.

IPO preliminary filings this month: four, two of which are slated for $500 million each. Half a billion dollars isn’t a big IPO in normal times, but it’s a lot bigger than what we’ve been getting.

IPO market debuts on deck for this week: also four. If they all go ahead with their offerings, it will be the busiest week since . . . [digging through files] . . . May of 2008.

So, are we back on track for a healthy IPO market with some regular flow to it? I think we’re at least growing in that direction. But I’m not prepared to declare a successful 2009 harvest yet.

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Related posts:

• We need better phrasing than “tech IPOs.”
• A (relative) flurry of activity in the IPO market.
• Silicon Valley, the IPO drought, and the culture of innovation.

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Photo by Kevin Dooley, used under a Creative Commons license.

Further to last week’s post about Malcolm Gladwell’s treatment of sports underdogs, I came across this in Gladwell’s online discussion with Bill Simmons of ESPN:

The consistent failure of underdogs in professional sports to even try something new suggests, to me, that there is something fundamentally wrong with the incentive structure of the leagues.

Turn it back to business: you’re an underdog in something, or your company is, or someone at your company is. Yet the underdog in question doesn’t try something new.

So, what’s wrong with your incentive structure?

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UPDATE, a little later on Monday: I forgot this tidbit from February

Nassim Nicholas Taleb on CEO incentives.

. . . A C.E.O.’s incentive is not to learn, because he’s not paid on real value. He’s paid on cosmetic value. . . .

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Photo by Nic McPhee, used under a CC-Share Alike license.

My friend Dave Livingston put me onto the series of “Collateral Damage” reports issued by The Boston Consulting Group over the past few months. Dave’s view — which he’s explained in great detail on his own blog — is that too many companies and their executives have been caught flat-footed by the current economic downturn. Worse, even though things have been bad for many months now, these execs are still not bracing themselves for the ongoing structural problems that Dave thinks will affect the economy for years to come. As for these executives’ ability to take advantage of the downturn so that their companies come out ahead in the long run . . . don’t ask.

Dave’s view is based on his wide reading and his professional consulting work, and it meshes well with the sobering conclusions reported in Part 6 of BCG’s series, “Underestimating the Crisis”:

Our key finding is that too many companies appear to be doing too little, too late.

The BCG writers based the report on a survey of more than 400 big companies across seven countries. After making the observation that “companies that outperform in a recession tend to see it coming and move rapidly to reduce their cost base,” they note with alarm that most of the 65 companies polled in an earlier survey (December 2008) “were assuming that the [economic] crisis would have a very modest impact in 2009.” Worse, the spring 2009 survey confirmed that “companies are still underestimating the size and scope of the economic crisis.”

Taking the easy way out.

This means that too many companies have taken “easy measures” for cost control, like cutting corporate travel and entertainment expenses. And far too few companies are looking for — much less investing in — the strategic opportunities that exist during any downturn.

And it gets still worse. While I’ve argued that many workers should ignore the gloom and doom of the daily economic headlines, the BCG writers point out the damage that arises because “many companies are unable (or unwilling) to consider sufficiently the effects of external economic events on their businesses.” Too many companies, in fact, view the economy primarily or exclusively through their own internal lens:

In analyzing our respondents’ answers, we realized that the external perspectives of many companies tended to be shaped not by external forecasts (or, indeed, the realities) of the macroeconomic environment but rather by what happened to their own business in the preceding year.

Yipes.

Psychology scales from the individual to the firm.

As I was reading the BCG report, with its treatments of the “tendency to wish away the external environment,” the failure of companies to adapt plans or forecasts to gritty realities, “the use of unsupported assumptions in company plans,” and, in general, the disconnect between corporate leadership and the real world, I was reminded once again of the parallels between individual and organizational psychology.

People don’t like to be reminded that their bad habits, like smoking or overeating, will likely shorten their lives. If they haven’t been saving money for retirement, they often don’t permit themselves to think about it . . . until retirement is nearly upon them. Many marriages die years before the partners agree to consider divorce. And so on. The BCG writers aptly quote Chip Heath of the Stanford Business School: “There’s a bias for optimism in humans and in organizations. Individuals don’t ever go looking for bad news, and we don’t like telling it to others. So bad news is unlikely to get to the people who can actually do something about it.” (Source.)

Contrast this to the wisdom of the Godfather, which I’ve cited before:

“Mr. Corleone is a man who insists on hearing bad news immediately.”

After reading the BCG report, I’m even more committed to that approach for myself, and even more approving of it for the companies I study.

What to do?

The BCG authors list many different steps that the best companies are taking to succeed through the downturn. Here are a few:

• “Undertaking more frequent reviews of their budgets and plans, typically every quarter.”
• “Actively exiting underperforming businesses and divesting assets.”
• “[B]uild scenarios explicitly linking the changing macroeconomic and industry environment to business forecasts.”
• “[C]utting short-term costs while preparing the foundations for being a long-term low-cost competitor.”

Along the way, they also give more pointers on what not to do. Among them:

• “[T]oo many companies have not adequately considered the impact of the downturn on their customers and suppliers. . . . How do these dynamics affect your plans for 2009 and 2010?”
• “[C]utting marketing expenditures is a very common response, but it is one that can backfire.”
• “[C]ompanies that were focused on reducing costs (through contracting head count or cutting capacity) tended to pursue this course single-mindedly; only a third of the companies addressing cost reduction were selectively adding employees or capacity in one area while reducing in another.”

Let me pause over that last one and ask you to read it again. That kind of “across-the-board” thinking is poisonous to success — not least because it substitutes an easy rule of thumb for the hard work of judging between the many different activities within a firm. (I’ve railed about this before.)

Opportunity abounds.

Before encouraging you again to read the whole report — or the whole series — I’ll include just two more tidbits:

1. The BCG authors rightly point out that “Many components of the crisis manager’s toolbox amount to sound management techniques under any market circumstances” — but done more briskly. The flat-footedness of many companies makes me wonder whether many business managers haven’t been kidding themselves about their acumen: maybe they’re not as good as they think they are at business — or have simply never been tested by conditions as tough as these?

2. The BCG authors make a point — expanded at length in a separate report [PDF link] — that institutional investors are much more patient with publicly traded companies right now. They’re not asking for immediate, quarter-over-quarter gains, but they do want companies to take advantage of the “once-in-a-lifetime opportunity” that some firms will have thanks to this downturn.

Are YOU taking advantage of the once-in-a-lifetime opportunity presented by current economic conditions?

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Possibly of interest:

• Fast Company, December 2007, “How to Get Bad News to the Top”
• The Happy Path . . . to Perdition.
• Hard times call for an entrepreneurial outlook.
• This blog: “Across the board.”

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Photo by Jay Gorman, used under a Creative Commons license.

Overall condition of the IPO market: still torpid.

Relative condition of the IPO market so far this month: boffo.

Last week came the market debut of online gaming company Changyou.com. Today we’ve got the IPO of online college Bridgepoint Education. Overnight we expect to see the debut of language-learning software maker Rosetta Stone. That makes April the first month since last July with three IPOs on U.S. markets, and three is more IPOs than we’ve seen cumulatively since last Thanksgiving. (For more details, see our IPO Central.)

All of these are modest deals, which is probably appropriate, given the queasy feelings that the equity markets have been inducing in investors lately. But at least there’s more stability and some positive movement in the stock exchanges over the past few weeks. That’s a lot more welcoming to would-be IPO debutants than the nasty swings of late 2008 and early 2009 were. Unless you’re a juggernaut like Visa or Google, you want to come to the market when you’re sure investors are ready to give you a favorable hearing.

My guess is that the IPO market will continue to pick up bit by bit in the coming months, but I’d also bet that 2009 will still be the lowest year for IPOs — in terms of money raised, number of deals, or whatever — for many years.

Thinking about what I wrote the other day about the connection between the IPO market and the startup culture of Silicon Valley, I wonder whether we’re seeing a tectonic shift, such that most middle-of-the-road companies will be satisfied with a solid market debuts that make them viable public companies, rather than the sorts of rock-star IPOs that have driven the hype cycle (and lots of instant fortunes) in the past.

If the days of the glamour IPO are over, I, for one, will not mourn.

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Update, Thursday midday – Ben Steverman of BusinessWeek weighs in with this well-reported piece:

• Are IPOs Slowly Making a Comeback?

(Caveat lector: the article quotes me.)

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Related:

• FT: Diminutive debuts to test IPO water
• WSJ: Rosetta, Bridgepoint IPOs Heat Up Market for New Stocks

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Photo of a fascimile of the Rosetta Stone by Brett Weinstein, used under a CC-Share Alike license.

My kids are fascinated by The Biggest Loser.

I don’t blame them: it’s amazing to see the contestants transform their lives, especially when they’ve struggled with weight problems for many years. The before and after photos can be stunning.

But I’m even more impressed by the folks following along at home.

The contestants on the show are housed, fed, and exercised on a comfortable ranch. They’re led through their workouts under the expert (and ferocious) coaching of Bob and Jillian. They have constant access to the best nutrition and expert medical care. And for as long as they can stay on the show (one contestant is voted out each week), they can make weight loss their full-time job. I’m impressed by their commitment and their results, but the deck is still stacked in their favor.

By contrast, imagine a single mom doing the same thing at home, working out along with a fitness video before she gets her kids up and takes them to school. Or a sales manager hitting the gym before dawn so he can put in 60-hour weeks at the office and still be home for dinner with his family. Imagine folks as busy as yourself, but carrying 100 extra pounds and determined to do something about it. That’s the real challenge.

(This, by the way, is why it’s a stroke of genius that The Biggest Loser has a separate league just for people following along at home.)

You may have noticed that times are tough. There was some surprise in the markets this morning when new retail numbers came out, apparently confirming that the recession will go on for a while longer. Around the business world, belts are as tight as I’ve ever heard of. Layoffs are common. Et cetera.

Yet it is amid exactly this mix of conditions that every one of us can take on the challenge of doing what seems impossible: losing 100 pounds, turning around a department, bringing something revolutionary to market.

We won’t have the luxury of retreating to a ranch in the hills to do it. We won’t have hard-ass trainers like Bob and Jillian to drive us. We’ll have to do it for ourselves.

Are you up for it? Are you ready to impress the world?

This is your ride. What are you gonna do with it?

The other day I came across a good line from that master maker of apothegms, Zig Ziglar:

There’s not a lot you can do about the national economy, but there is a lot you can do about your personal economy.

Amen.

So your vehicle is old and rusty, and maybe you’re stuck out in the economic sticks.

So what? It is what it is. Work to make it better.

In the same vein — in fact, maybe the best thing I’ve read in this vein — Tom Peters on “Dealing with Recessionary Times.” (Warning: hard work ahead.)

It’s Monday. Time to go get ‘em.

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Image by Cody, used under a Creative Commons license.

Worth a watch: this multi-segment 60 Minutes interview with Federal Reserve chairman Ben Bernanke, who impresses me yet again as not just smart but deeply humane.

Watch CBS Videos Online

(Click here if the embedded video doesn’t work.)

We’re in a bad economic fix, but I’m glad to know that this guy is playing a key role to make things better.

(Thanks to Dave Livingston for pointing me to this.)

If you’re going to make an IPO in this market,
you’d better be photoluminescent.
It’s dark down there.

Stop me if you’ve heard this one before: the IPO market stinks.

That’s the thesis of this BusinessWeek article on the subject, which quotes me, among others:

IPOs: No Deals on the Horizon*
The U.S. market for initial public offerings is “dead as a doornail,” with companies eager for capital stuck in limbo. What could spark a revival?

By Ben Steverman

“Dead as a doornail.” “Nonexistent.” “Abysmal.”** “Broken.”

Those are assessments of the market for initial public offerings, when new companies float their shares in the stock market. Just one U.S. company, an atypical IPO called Mead Johnson Nutrition (MJN), has dared make its stock market premiere so far this year. [...]

Worth a read if you care about the state of things in the IPO world.

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* Dunno if this was the intent of the BW headline writer, but I like the veiled reference to U2’s just-released album.

** I was the one who said “Abysmal.”

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Image by Derek Hatfield, used under a Creative Commons license.