Goodwill and its Amortization: The Rules and The Realities
The following entry is borrowed from Warren Buffett's Berkshire Hathaway 1983 Chairman's Letter as it was very informative and opened my eyes more clearly to the economic realities of goodwill. Amortization and goodwill are keys to understanding the intangible side of the financial statements.
"During inflation, Goodwill is the gift that keeps giving."
(This appendix deals only with economic and accounting Goodwill – not the goodwill of everyday usage.
Filed under Fundamental Finance, Nuggets
Profile: Jarden Corp.
From Horizon Kinetics:
Jarden Corp. (“Jarden” or “JAH”) is a holding company whose brands include the household names Coleman, Oster, Marmot, First Alert, Mr. Coffee, Bicycle and also Bee playing cards, and Crock-Pot, among others. Many of these brands have been prominent for generations; 14 have been in continuous use for over a century. Jarden has made investments in the brands but is able to benefit from the fact that they are long-standing, easily recognized brand names— efforts to increase visibility for an existing, trusted brand are frequently less costly than those to establish a new one. Furthermore, while some portfolio components (K2 skis and snowboards, for example) may be sensitive to economic conditions, many are not. For instance, many people consider their morning coffee to be a key part of their morning routine—if a household’s coffeemaker breaks, it will most likely be replaced even in a weak economy. As a measure of the value the company places on its brands, it acquires almost exclusively products that occupy the #1 market share in their category. It is very difficult to competitively displace this type of consumer brand. Jarden’s brands represent #1 market positions in 23 categories, including fishing, coffee makers, blenders, smoke alarms, and playing cards.
In addition to adding new product lines to the portfolio and making the necessary investments to maintain or expand the market share of their brands and the long-term profitability of the company, Jarden management’s assertive advocacy for shareholder (as opposed to executive officer) returns predates their own tenure. The current management team, headed by Martin Franklin (Executive Chairman) and Ian Ashken (Vice Chairman and Chief Financial Officer) has been in place since June 2001. Immediately preceding that date, as outside private equity investors, they had proposed, in a letter to the Board of Directors, to take the company private. Their letter of criticism and proposed action so impressed the Board that they invited Mr. Franklin and Mr. Ashken to join rather than acquire the company, and to manage it. Which they did. Aside from divesting poorer products, they undertook a series of leveraged acquisitions of the class of consumer products companies that now characterize the portfolio, deploying the cash flows generated by mature brands to pay down the debt. The company has also actively repurchased shares. These actions have contributed to the annualized book value per share increase of 30% witnessed since 2001.
Nugget: The Sneaker Wars and the Pele Pact
From the article Was Pele paid to tie his shoes during the 1970 World Cup final? – Los Angeles Times (October, 2012)
“This was especially evident during the 1968 Summer Olympics in Mexico City where Adidas actually had Puma sneakers confiscated by custom officials! Things had gotten so crazy that in the lead up to the 1970 World Cup in Mexico, the two companies actually decided to come to a sort of “peace treaty” and to avoid the dealings that had marked their relationship for most of the 1960s.
The most notable result of their interactions was the so-called “Pele Pact,” where both companies agreed NOT to sign a deal with Pele, the greatest football player in the world at the time. Their feeling was that they would both end up spending so much money on a bidding war that it would not be worth it in the end.
Led by Pele, Brazil’s 1970 national team was one of the greatest World Cup teams in the history of the tournament. They played Italy in the final match of the tournament. It was one of the most highly anticipated football matches in years. Right before the opening whistle, Pele asked the referee for a moment to tie his sneakers. All eyes were on Pele as he bent over to tie his sneakers….Puma sneakers. What happened to the “Pele Pact”?”
Filed under Nuggets, Sport Business
Profile: ESPN (sub of Disney)
A bit of history
From the Schumpeter column in the Economist (The Real Disney, March 2013):
“When the story began, it was not obvious that it would have a happy ending. In 1979, when cable TV was in its infancy, ESPN’s founders had the idea to launch a 24-hour cable network that would focus on university sports in Connecticut, where they lived. No one thought a network could survive showing only sports, but it took off. In the beginning it was bootstrapping and rowdy. In “Those Guys Have All The Fun”, a history of ESPN, James Andrew Miller and Tom Shales write about how staff bet on the games they covered, and a couple of secretaries were involved in a prostitution ring organised by a mailroom employee.
ESPN has cycled through nearly as many owners as Cruella de Vil had Dalmatians. It started life with the backing of Getty Oil, which listed ESPN in its “other” category of investments, along with almond groves. Later it was majority-bought by ABC/Capital Cities, which Disney acquired in 1995 for $19.5 billion. Disney really wanted the broadcast network ABC, not ESPN.
The two firms’ cultures are as different as Lady and the Tramp. Disney has been around for 90 years, has 166,000 employees and is headquartered in California. ESPN is still based in Connecticut and is lean, with 7,000 workers globally. As one might expect of a clan of sports-lovers, ESPN is hyper-competitive. It has a “can-do mentality”, says Bob Iger, the boss of Disney. Being in suburbia has helped it shun the trappings and groupthink of Hollywood.
Disney smartly gives its subsidiaries autonomy. The boss of ESPN, John Skipper (a former Disney executive), and Mr Iger (a former ABC sports producer) both love sports and speak often, but are 2,900 miles apart. Disney’s biggest contribution to ESPN has probably been its fat wallet, which paid for new sports rights and technology. ESPN was one of the first firms to offer live video on its website, and it has launched an application so cable subscribers can stream ESPN on mobile devices.”
Competitive advantage
Pricing Power (The Real Disney, March 2013):
“ESPN’s muscular profits depend on three things. First, fans watch sports live: no one wants to see Monday Night Football on Wednesday. Because viewers cannot fast-forward through the adverts, advertisers pay more for slots on ESPN.
Second, ESPN offers spectacles you cannot see elsewhere. Rights to broadcast games are often exclusive. ESPN shows more sports, including baseball, car-racing and poker, than any other network. SportsCenter features some of America’s sparkiest sports commentators, whose banter is as irreverent as an English football chant, minus the swearing. (Keith Olbermann, an over-the-top political pundit, used to be one of them.)
Third, ESPN pioneered “affiliate fees”, which cable operators pay for the right to carry each network. In 2013 ESPN will probably earn $6.6 billion from them, more than three times what it makes from ads, according to SNL Kagan, a research firm. Because it has so many exclusive sports rights, ESPN has been able to haggle its fee up to $5 per subscriber, per month: far higher than any other network’s. These fees are more predictable than ad sales, which is why investors are such fans of cable networks.”
The main threats
More competition for sports rights (Fighting for possession, the Economist, May 2013):
“The cost of sports rights has been rising and so, as a result, have ESPN’s operating expenses. For the six months to March, ESPN’s operating costs were up 9% to more than $5 billion; pricier sports rights were an important reason why. Some deals have become so expensive that ESPN has chosen to walk off the field. BT recently outbid ESPN to acquire rights to English Premier League football. Without them, ESPN would not have enough viewers. It decided to sell its British and Irish channels to BT.”
The unbundling of cable (Interview with John Malone of Liberty Media on CNBC)
“Malone said that as more alternatives become available and broadband connectivity grows, over-the-top systems, which bypass cable operators for control and distribution, may begin to offer sports content and challenge the established system.
If sports networks decoupled from cable distribution and offered consumers standalone services at market prices,”you have an unsustainable model” for cable companies, he said. Despite long-term sports deals signed by cable networks, Malone said, in the next five years, bundling may begin to be relaxed because sports programming in every home becomes “not mandatory.”
Sports programming is considered by many in the entertainment industry to be the holy grail of cable, a highly guarded space that is thought to be a major justification for U.S. households in keeping their cable subscription. For this reason, sports networks are able to generate high subscription fees from cable operators, and networks are often able to sign more lucrative content deals by “bundling” less popular networks to must-have sports channels.
“As the cable guys and the satellite guys start to lose customers to the over-the-top guys, some of those economics will be reflected back on the sports guys. They’ll start losing advertising revenue. They’ll lose affiliate revenue. And they have to face reality that maybe you need to segregate your market like everybody else,” he said in the “Squawk on the Street” interview taped Wednesday and broadcast Friday.”
Nugget: Sodastream charts missing from Seeking Alpha article
With regards to article written on Seeking Alpha on March 12, 2013:
Filed under Fundamental Finance, Nuggets
Nugget: Very good article on ESPN in the Economist
The Real Disney – The Schumpeter column @ Economist (april 2013):
“Disney smartly gives its subsidiaries autonomy. The boss of ESPN, John Skipper (a former Disney executive), and Mr Iger (a former ABC sports producer) both love sports and speak often, but are 2,900 miles apart. Disney’s biggest contribution to ESPN has probably been its fat wallet, which paid for new sports rights and technology. ESPN was one of the first firms to offer live video on its website, and it has launched an application so cable subscribers can stream ESPN on mobile devices.
At Disney’s coaxing, ESPN experimented with brand extensions such as restaurants and mobile phones that pinged match results to subscribers, but both flopped. Not all brands, it transpires, can be trotted out to theme parks and toy shops. Disney learned this, and focused instead on new content and platforms. ESPN has a fleet of channels and websites aimed at specific audiences, such as Hispanics and women, as well as a magazine, and is savvy when it comes to mobile and online viewing.
ESPN’s muscular profits depend on three things. First, fans watch sports live: no one wants to see Monday Night Football on Wednesday. Because viewers cannot fast-forward through the adverts, advertisers pay more for slots on ESPN.
Second, ESPN offers spectacles you cannot see elsewhere. Rights to broadcast games are often exclusive. ESPN shows more sports, including baseball, car-racing and poker, than any other network. SportsCenter features some of America’s sparkiest sports commentators, whose banter is as irreverent as an English football chant, minus the swearing. (Keith Olbermann, an over-the-top political pundit, used to be one of them.)
Third, ESPN pioneered “affiliate fees”, which cable operators pay for the right to carry each network. In 2013 ESPN will probably earn $6.6 billion from them, more than three times what it makes from ads, according to SNL Kagan, a research firm. Because it has so many exclusive sports rights, ESPN has been able to haggle its fee up to $5 per subscriber, per month: far higher than any other network’s. These fees are more predictable than ad sales, which is why investors are such fans of cable networks.”
Filed under Nuggets, Sport Business
Nugget: Great interview with Wilbur Ross
I am American business is a series of interviews with American business people by CNBC. They did Wilbur Ross and you can find the whole interview here:
CNBC interview with Wilbur Ross
Highligthts:
WILBUR ROSS:
“Right. The way we’re looking at things is to really own them. If we buy a bond at 30 cents on the dollar, it’s not that we hope it goes to 35 so we can sell it. If we buy a bond at 30 cents on the dollar, it’s because we want it to default and we want to own the business. When you own the business, it means you have to be in there for a number of years, because it takes a while to fix it, then it takes a while to get it public or get it sold. So it’s a completely different mentality. In our shop, it’s a big event if there’s a trade in the whole day. Most places are trading, trading, and trading like mad, so it has a very different rhythm to it.”[...]
WILBUR ROSS:
“When we’re looking at an opportunity, first of all we look at it on an industry basis, because we’ve learned over the years that when companies go bad, they generally go bad as a whole industry. At one point it’ll be all the airlines that are bad, another point all the steel companies, and another point the textiles. That’s because what happens is you have industries that have been high users of leverage and then some catalytic event occurs, so the industry tends to have problems simultaneously. This creates two sets of opportunities, one is to fix the individual company, and second is the potential for changing the dynamics of the whole industry. If you can do both, then you get two big increments to value. So that’s what we really try to shoot for.”
Filed under Fundamental Finance, Nuggets
Mental Model: Spin-offs
A spin-off study – Chris Mayer (2005)
Spinoff Companies: Four Reasons Companies Spin Of
But before I tackle the reasons why this apparent inefficiency exists, let us consider the various reasons why companies engage in spinoffs at all:
1. To spinoff an unrelated business. Big unwieldy conglomerates that are involved in everything from insurance to restaurants may decide to separate an unrelated business to unlock the value in that business.
2. To separate a “bad business” from a “good business.” Sometimes a company with a profitable core of operations will spin off a laggard that is draining resources and management attention from the main group. Once separated, each of the businesses can stand on their own merits, often to the benefit of both.
3. To unload debt and/or other liabilities. Sometimes a spinoff will be loaded up with debt, freeing the parent company but leaving an overleveraged business in its wake. The spinoffs that have failed have often been of this kind. However, this maneuver can be lucrative for the parent company, as you might imagine.
4. To take advantage of tax benefits. A spinoff can qualify as a tax-free event and may be the most efficient way to pass value on to shareholders. If the company were sold outright, for example, the cash distributed to shareholders would be taxable. There are sound economic reasons for spinoffs, and this may explain their initial outperformance.
Think about it: You have a new company with a new, dedicated management team that is likely to be highly motivated. As Greenblatt writes, “Pent-up entrepreneurial forces are unleashed. The combination of accountability, responsibility and more direct incentives take their natural course.”
Curiously enough, as Greenblatt points out, the biggest gains from spinoffs often came in the second year, not the first. This indicates that perhaps it takes some time for the changes to kick in and deliver tangible results.
In Spinoffs, a Chance to Jettison Liabilities – Davidoff (2012)
“A spinoff is a product of Wall Street math that says one plus one can equal three. Yet as shareholders ofTime Warner may be about to find out, it can also be all about subtraction, as a company ditches an unwanted business, in this case, magazines.
The business argument for a spinoff is typically that a separation of the assets allows both the former parent and the newly independent company to be better run, freeing management to take bolder steps with the new company. And because Wall Street is a place where magic works, the market will recognize this, giving each of the separated companies a higher price.
There is evidence of this effect. Studies of spinoffs have found that they produce short-term gains, although these gains evaporate over the long term.”
Filed under Business administration, Mental Models
Braves´New World – Forbes.com
Braves’ New World – by Monte Burke at Forbes.com (2008)
But the biggest changes are within the stadium. In 2005 the team spent $10 million on a 70-foot-high high-definition screen that looms over center field. The city owns Turner Field and won’t let the Braves sell naming rights to it for another six years, but in 2005 the team opened $3 million Tooner Field next door as a place for kids to play during games, with the Cartoon Network as sponsor. Last year the Braves launched all-you-can-eat seats, sponsored by ampm convenience stores, where patrons pay $35 to $70 to eat and drink to their heart’s content. They’ve also started the Suntrust Club, 143 premium seats only 43 feet behind home plate (closer to it than the pitcher’s mound). That cost $6 million, with its underground high-end lounge and bar, but the seats go for $25,000 a season apiece.
In all, the Braves have spent $30 million over the last five years making the fans want to come back, and it seems to be working. Not only is attendance up, but 20% of the 10,000 season ticket holders lost in the early 2000s are back. All of which helped make 2007 the team’s most profitable year in at least a decade. The Braves did a superb job replacing TBS, divvying up the games to three stations. This season the baseball players will bring in $57 million from broadcasts on FSN South, SportSouth and Peachtree TV, a local Atlanta station.
Still, Malone knows that maximizing his return ultimately depends on how the Braves do on the diamond. Shortly after he bought the team it acquired a big-hitting first baseman, Mark Teixeira, who makes $12 million a year, and this off-season it won back Glavine, who earns $8 million. “Off-season moves like that mean a lot to people who have been here,” says third baseman Chipper Jones, who has been with the Braves since 1990. Malone says he has set no limit on the payroll: “We won’t be cheap. We’d like to win. If Terry calls up and says they need something, they’ll get it.”
Filed under Nuggets, Sport Business
