Eye2theLongRun

In the late 80s it was popular amongst the more buttoned down and starchy of my investment banker and legal colleagues to be fairly sniffy about what were termed “buyout firms” which designed and implemented leveraged takeover bids for underperforming companies then seeking to re-structure, lift performance and add value to often moribund under performers with lazy balance sheets and extensive empires.

A favourite (and not always popular) LBO firm of mine, expert in this area, was Kohlberg, Kravis Roberts or KKR. Their first high profile success was a bid for RJR Nabisco. Management had made a bid to buy RJR for some $66 a share. A competitive bidding process ensued with KKR, eventually winning control of the company for $129 a share – a 95% premium on management’s claim of what was “fair value”.

The company was taken private and a total overhaul, including sale of the company’s management air travel fleet – known colloquially as the “RJR Airforce”. Once performing well – some three years later – RJR was floated again and that, at a significant premium to the $129 a share KKR paid. Consolidation of assets, management and a ruthless focus on customers had served to both add significant value to owners and for customers.

Much more recently another American icon, Gibson Guitars, whose products helped drive two generations of blues, rock, fusion and jazz and a bevy of household name guitar heroes (including, yes, purveyors of the unmentionable  “Stairway”) to fame lost touch with its customers. Quality control was poor and pricing strategies were so bad that Gibson’s became known as “guitars for doctors and lawyers”. A travesty to us musicians and cause of much hand wringing.

Not a recipe for success and bankruptcy followed.

Enter my favourites – KKR. The company was bought by KKR (now regarded as a seasoned and  respectable – or at least more respectable “Private Equity” firm) and a new CEO, formerly of Levi Strauss and a guitar enthusiast as well as turnaround manager was installed. A significant turnaround was implemented  – quality improved, costly but failing innovation attempts were abandoned and pricing was re-worked to realistic levels.

The resulting recovery and success was accelerated by lockdown driven demand from Covid responses (home grown guitarist numbers soared), and currently demand outstrips supply by a heathy margin.

Lessons aplenty. Focus on shareholders is critical and the primary means to add value for shareholders is through satisfying all elements of customer demand in a comprehensive fashion.

And of course….. don’t be sniffy.