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Tuesday, 24 October 2017

All about MBOs

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  • Peters 475px June 2014

Google’s corporate restructuring reminds SwissInvest strategist Anthony Peters of another kind of MBO.

IN THE CITY, we’re all very proper and know that MBO stands for management buy-out. But I grew up with a ski on each foot and for many years – going back to the early 1970s – skied at a small resort preferred by those for whom the quality of the mountain was more important than the smartness of the nightclubs. That small village in Switzerland’s Val de Bagne was Verbier.

Verbier is now part of Hedge Fund Central where only the poor and unsuccessful drive Range Rovers, where there are more US$10,000-a-night chalets than you can shake a stick at and where French is near as dammit a foreign language. But it was there, while chasing hot and cold running chalet girls, that I first encountered the MBOs of the ski resort – muscle-bound oafs.

Larry Page and Sergei Brin and their plans for Alphabet (alpha plus bet) made me think of these other MBOs, such as the Googles and Facebooks of this world. Page told us that, apart from being a huge admirer of Warren Buffett, he did not want to fall into the trap into which Microsoft has fallen, which is focus on refining a single product until it is overtaken on the inside of the bend by a competitor it never even knew existed. Thus Page’s (and presumably Brin’s) desire to add diversity to the portfolio makes sense.

Where he is totally wrong is when it comes to Microsoft and monoculture. Bill Gates did not get where he is today by being an idiot. The Gates fortune is run as a family office – albeit quite a big one – and I once met, many moons ago, someone who worked for it. That investment company lost no money in the dotcom crash, for it held no dotcom stocks. In fact, it held no tech investments at all. Why should it have done? By way of his holdings in Microsoft, Bill Gates was more than adequately exposed to the technology sector and his personal investments (not that it was anybody else’s business) were spread across anything other than tech.

Microsoft might only make techie stuff, but then Ford more or less only makes cars and Boeing more or less only makes planes.

What does Mr Page know about being a conglomerate that others don’t?

WHY, ONE WONDERS, would investors in Google wish to stake Larry Page in trying to back the next great white hope? If they want to take a punt on driverless cars, they can do that themselves. Warren Buffett isn’t a widget manufacturer who spread his wings. He is, was and always has been a value investor and when he raised his first capital, he did so by pitching his analytical ability and intention to do better for his backers than other money managers.

That said, I am not against diversification – although it is one of the oldest rules in the book that conglomerates never work for the investors and that they always end up trading at a price below their aggregate net asset value. Corporate raiders, now elegantly rebranded as private equity firms, make a living out of buying up diversified corporations and splitting them into single-capacity companies. So what does Mr Page know about being a conglomerate that others don’t, apart from the assumption that a conglomerate which includes Google in its list of holdings is outside the capacity of private equity?

Google isn’t too big to fail; it’s too big to fall. Sure, but so was RJR Nabisco until F Ross Johnson, its very own CEO, and the then still relatively modest raiders Kohlberg Kravis Roberts, turned up as what has gone down in history as the “Barbarians at the Gate”.

Or could it be, when the small print has been studied, that the idea is that instead of Page using his own money to back the new idea of his choice, he’d rather do it with other people’s? Could it be that he’s appreciated the benefit of what used to be called the trader’s option, under which, if all goes well he gets a chunky participation in the profits, but if it goes horribly wrong it’s someone else’s dough?

IF YOU WANT tech diversification and feel like betting on the future, look no further than the German incubator Rocket Internet. It was the next big thing which was supposed to make mountains of money by betting on the last big thing becoming the next big thing – or so it seemed when it floated in October last year by selling 32.9m shares at €42.50. When German stocks were flying high in February, 12m were added at €49. The whole scheme is now on offer at closer to €30.

If it were Mr. Page’s intention to take the tech earnings from Google and diversify them in bricks and mortar, I’d understand – but still not give him my money. He appears to be right in his assessment that Google risks becoming a muscle-bound oaf, unless it already is, and his search for other ways to generate revenues is admirable.

What is not, in my humble opinion, is the way in which he is trying to go about finding a way out. Maybe he should forget Buffett and go for advice to Hasso Plattner, co-founder of SAP, who backs his hunches out of his own pocket and who has shown that in order to make a small fortune investing in start-ups, you don’t necessarily need to begin with a large one.

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