Posts Tagged ‘shares’

Very good project managers have been trashed over the misuse of best practice. The example I have in mind is a client financial firm (Firm X) that wanted to buy another firm in order to grow and lower the probability of being bought themselves. The chairman was able to win the battle but lost the war. It happened by his leveraging the firm’s reputation and applying spin to “best practice.”

Strategic Positioning

A little background will help. This happened when consolidation was occurring in the financial world. Firm X had a very positive, understated reputation on Wall Street. They usually exceeded their performance predictions. Consequently, the chairman’s word had a great deal of cache.

In order to gain leverage in buying the other firm the value of Firm X’s stock needed to increase. Here is where spin comes into play. The chairman cashed in on Firm X’s reputation. Wall Street analysts were told that plans were underway to improve operational efficiencies in credit card processing – a large area of operations for Firm X. Also, there would be economy of scale by applying the improvements to the merged entity.

The chairman simply made empty promises. No one down the food chain was consulted (the critical nature of which we will look at later). The organization was simply told, “Make it so if you want to survive.”

Win the Battle

As predicted, the value of their stock increased. The other firm couldn’t compete with this and was purchased by Firm X. All seemed well and good.

A Blood Bath

Everything was fine until it was time to publish the results of the methods of improvements – those best practices that were to be put into place. Not only were there no improvements in operations, costs actually soared tens of millions of dollars.

Inside Firm X it was a combat zone. In IT they went through project managers like little kids eating M&Ms. As the reality of the actual numbers began to surface desperation set in. Bonuses were offered to anyone who would sponsor a project that would give the desired results. Imagine a Greek trireme going into battle and the captain promises a bonus to the piper (the guy who beats out the rowing rhythm) if the ship could just go faster.

Lose the War

The chairman got what he wanted – the merger. He also got something else – the boot. When the numbers were published Wall Street told the chairman in the future he would have a hard time borrowing even a dollar. The board had to react and did so by removing him from office except for overseeing the credit card operations debacle. His title became, “Chairman of Special Projects.” As in any other organization, one might as well have leprosy as have “Special Projects” as one’s title. Three months later, the chairman resigned. The top two tiers of IT were replaced with people from the firm that was bought. They were conservative in practice and a more stable organization.

Chaos and Best Practice

Most mergers fail. One possible reason being spin, i.e., propagating the belief that if one knows the rules better than anyone else then a highly reliable model can be generated that will predict the outcome. The blindness associated with this approach and how it can backfire was addressed earlier in the Black Swan blog.

It is important to remember chaotic systems are rule-based. The difficulty lies in the fact they are unpredictable and can turn on you in an instant. Knowing all the rules does not guarantee the desired outcome will be achieved. The chairman in this case thought he could dictate top-down what the results would be. The reality is solutions emerge from the bottom-up.

Wanting to buy a competitor or merge for some perceived gain is fine. The trick, though, is to be humble, realize the realities of chaotic systems, and strive to work together to dampen the distractions and amplify the opportunities through a bottoms-up approach while leading the way towards the goal.

Through his hubris the chairman blinded people to the reality of the situation by spinning best practice in a chaotic situation. “Doomed” is too small a word.

To my knowledge, none of the sacrificed PMs were rehabilitated or reinstated to there former positions.

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Tagged as: active garage, center for change management, chairman, Change Management, Chaos and Complexity, hubris, Leadership, Project Management, shares, spin, stock market, stocks, strategic positioning, wall street

Introduction

There are myriad reasons why the owner of a privately held company may want or need to have the company valued, including (partial list):

1. Acquiring another company
2. Selling the company
3. Buy-sell agreement
4. Repurchase of minority shares
5. Divorce
6. Partnership breakup
7. Estate planning
8. Probate

Regardless of the reason for the valuation or the urgency of the task, finding the right expert will pay off in the quality and utility of the opinion.  Here are a few tips to help you to make the best choice.

Background Check

Just as in hiring, you accept a resume on face value at your peril.  Always check references and publications.  In addition, go beyond the references provided by the expert.  You can do this simply by asking the listed references for the names of others who may have valid input on the competence and relationship skills of this individual.  These are called secondary references, and will typically be a more reliable source of information than the primary references.  You can even take it a step further by asking the secondary references the same question and, thereby, developing tertiary references.  Some questions you may want to ask will include the following.

• Did the expert communicate clearly on all aspects of the prospective assignment at the initial meeting?
• Did the engagement letter accurately reflect the shared understanding of the purpose of the assignment?
• Was there a firm fee quote, or did the expert work by the hour?
• Did the expert exhibit a genuine commitment to impartiality?  In other words, did the expert indicate clearly that s/he would simply go where the evidence led?
• Was the request for data, including financial, reasonable?  If you didn’t have a particular document or piece of information readily available, did the expert insist on getting it, even if it seemed tangential?
• Did the actual performance of the expert (data gathering, analysis, report, etc.) match up well with what you expected, based on the initial meeting and the engagement letter?
• Was the report clear and easily understandable – even by non-financial people?
• In the case of a divorce valuation, was the expert sensitive to the emotional aspects of the process?
• How did the expert relate to other professionals on the case, such as a Collaborative Practice team, attorneys or mediator?
• If you had to make this choice again, would you select this expert?

Absence of Ego in the Process

There is no place for ego or pride of authorship in the business valuation process.  One way to scope out this aspect of an expert’s approach is to determine if s/he is willing to submit a preliminary report that is open to criticism.  It is always possible that even the most competent expert will over-emphasize or under-emphasize some important data or, perhaps, miss something altogether.  It is also possible that something unexpected has cropped up during the valuation process that was knowable as of the valuation date, but the client(s) neglected to mention same.  The expert should be open to (even anxious for) the client(s) to provide such feedback.  The objective, after all, is the best valuation report possible, not the easiest to crank out.

Fundamental Understanding of What is Really Going On

Fair Market Value (FMV) is defined as what a hypothetical willing buyer will pay a hypothetical willing seller in a hypothetical free market in which both sides have essentially all the information they need to make an informed decision, and neither is compelled to conclude a transaction.  FMV is an appropriate standard of value in many situations, such as probate or any other circumstance in which the opinion will be presented in court or involve the IRS or other federal or state agency.  However, a number of other scenarios call for a different standard of value.

In a divorce, for example, or for a buy-sell agreement for a company with 2-4 owners, investment value is far more appropriate than fair market value.  The reason is very straightforward.  In either of these situations, the objective is not to determine what some outsider would pay for the company, or a portion thereof.  Rather, it is to ascertain what it is worth to one spouse (or one owner) to own a greater share of the company.

Avoid an expert who fails to grasp this critical distinction.

Flexible Fee Schedule

Anyone can charge several hundred dollars per hour.  It is more challenging to provide a fee schedule that offers the client genuine choices.  There are a few key questions in this regard.

1. Will this opinion be offered in court or to some government agency?  If so, an “official” opinion will be required, and will be the most expensive.  If not, does the expert offer an “unofficial” opinion for a lot less money?
2. Can delivering a much shorter report cut the cost significantly?
3. Is there a choice between a broadly based analysis and report and one that considers financial documents only?  Is door #2 cheaper.

In sum, you have a right to expect quality performance from an expert with whom you have an excellent relationship, and for a cost that is commensurate with you needs.  Go for it!
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This article has been contributed by Steven D. Popell CMC (Certified Management Consultant.) Steve has been qualified as a business valuation expert since 1974, and has published extensively on this topic. CMC, a certification mark awarded by the Institute of Management Consultants USA, represents evidence of the highest standards of consulting and adherence to the ethical canons of the profession. Steve was a 2007 winner Collaborative Practice California Eureka Award for contributions to Collaborative Practice in this state and is a Senior Partner in Popell & Forney, with offices in Los Altos Hills and Pleasant Hill, California.

Tagged as: Acquisition, active garage, agreement, Business Valuation, divorce, estate planning, partnership, probate, selling, shares, steve popell