"Investment Banking is 10% Financial Analysis and 90% Psycho-analysis" – André Meyer  This blog is about the "other 90%"…

biddingI first came across this concept in the book of Donald Trump’s real estate attorney and saw it again yesterday in a Jay Abraham – Marc Cuban interview.  The idea is, that sometimes the strategy of over-bidding for an asset or offering a higher than minimally necessary salary can help you get a better deal, than nickel-and-diming the seller.

Pre-emptive bidding can work particularly well in M&A, when a buyer makes a relatively high initial offer to fend off competitors and prevent a bidding from developing, when the initial bids are close and the parties start outbidding each other. Such auctions have a dangerous psychology: When bids are gradually growing, bidders can get into a competitive frenzy and can lose their sense of proportion.  Such auctions yield pyrrhic victories to the “winners” who often end up overpaying and are forced to work twice as hard to create value in the future.

Sell side advisors like to use the pre-emptive bid, when there are few potential buyers which most bidders often figure out from the communication of the seller.  If they do, than the seller’s bargaining power diminishes and the deal often falls through or gets made at a depressed price level.

The beauty of this “overbidding-strategy” is, that even in the presence of a single buyer, the seller can negotiate up the price with the pretext of making the deal pre-emptive.

RageOn route to DC, finished my book early, and checked out the movie listing for a good sports comedy.  I like to watch sport movies for inspiration. Love it when the underdogs surprise the crowds and win from nowhere.  This is of course the story of ‘Major League’, a 1989 baseball classic starring Tom Beranger as a romantic charmer out to win back his former Olympian wife from a hot shot lawyer; and Charlie Sheen as a shortsighted macho ex-convict.

The story is about the widow of the deceased club owner who sets out to engineer the Cleveland Indians to finish last in the next season, so that she can exploit a loophole in the club charter and sell the team to Miami, where she wants to move from Cleveland.  She recruits a bunch of written-off, oddball, have-been players and a failed-coach turned car mechanic.

As usual, they are off to a shaky start, but then begin to play better, as the team starts to bond under their not-so-bad coach.  When they figure out the owneress’ scheme to undermine them, they decide to fight back against all odds and the hardships she throws at them, by winning the league.

The more they are abused, the more pissed off they get, the more resistance-energy they work up in order to show her what they are made off.  The mighty challenge she throws at them puts a fire in their bellies… because they are winners. Losing is not an option.  Remember 1980’s tennis star John McEnroe, who used a real or perceived bad line call to work up a rage and use this energy to beat his opponents?

Losers, on the other hand, are weak characters that depend on the good opinion of others.  If it is not forthcoming, they lose confidence and get crashed by criticism.  These people can sometimes be motivated by encouragement, but it is not sustainable to constantly praise people.  Except in big companies that develop systems for it, so that they can utilize losers and benefit from the low wages they accept.

EFV Cover Sept 2013 smallDear Firm Value Blog Reader,

Welcome to the first issue of the Engineering Firm Value Newsletter.  This is the sister publication of Firm Value, that in different forms and languages we have published since 2006.  If you like this newsletter, check out archive copies here: http://en.imapmb.com/firmvalue_archive.php

If you enjoy reading it half as much as I enjoyed writing the same, please drop me a comment.  I would also love to hear your suggestions as to M&A related content you would like to read about in future issues.

Wishing You Rising Firm Value,

Istvan Preda, Editor


maraisandorI am always amazed how much can be achieved when a vision is coupled with consistent focus on execution.  Setting out goals on paper, prioritizing and ticking them off as they are achieved is exhilarating. Over time, these small wins add up and produce huge results.

Just finished Sandor Marai’s “What I didn’t want to Tell” – a sequel book to the famous “Confessions of a Bourgeois”  The story of Hungary between Hitler’s  Anschluss of Austria and the end of WW2.  The book is heart wrenchingly honest, but what struck me most was a side statement he mentions as his writing credo: “35 lines a day”.  Hardly an enormous workload, almost anyone could do it, yet consistently applied it produced 42 volumes for him during his 70 year career.

Since there are a lot fewer writers than people with a hand and a pen, this must be easier said than done.  Marai had a vision of being and becoming possibly the greatest Hungarian writer of his times and he dedicated his life to reading, observing and writing, consistently; and lived long enough to reach this objective.

If it is hard for an artist to be consistently focused, it’s even harder for an entrepreneur.  His trade is much more complex with a plethora of competing demands on his attention:  Creating a sellable product or service, recruiting and managing staff, raising capital, controlling costs, conquering growth, fending off competitors and plaintiffs, handling banks and the tax man, etc.  With his attention splintered away by minute activities and firefighting, it’s hellishly difficult for the entrepreneur to focus on creative work and ticking items off his shopping lists.

When the business becomes successful and can afford thee management talent, entrepreneurial productivity becomes easier to achieve.  But by that time the entrepreneur either morphs into a manager, proving he was not a real “E” in the first place, or escapes “tedium” into another venture, giving us Investment Bankers our chance to crown his achievement.

CMany think that entrepreneurship is like the sciences. Someone succeeds in business, because they discovered a “secret formula” that no one else knew about, turned it into a business and is now raking it in. At MBA courses they teach so called “business models” implying that whoever builds a good one would make money, as if the “secret” was in the mechanics of the moneymaking that can be copied if you read enough textbooks and case studies about it.

True, there are a few INSEAD and Harvard MBAs, as well as Boston and McKinsey consultants who succeed in business.  But they appear no luckier in striking gold, than your average Boston or L.A. college dropout. If anything, I suspect the ‘School of Hard Knocks’ produces more entrepreneurs than the formerly mentioned “Business Labs”.  If success really came down to copying successful models, than the geekiest students would all turn into Richard Bransons and Jeff Bezoses  – which is clearly not the case.

Business success seems more the product of a winning attitude, perseverance and people skills, than academic knowledge.  In fact, too much knowledge makes people aware of too many potential pitfalls that they can’t wrap their minds around solving, leading them not to even try. A little ignorance on the other hand will help the wannabe entrepreneur dream more freely and keep her motivation up through the inevitable tumbles and disappointments of trial and error.  As Churchill explained: “Success is the ability to go from one failure to the next without losing one’s enthusiasm.”

The essence of entrepreneurship is the 3 “C”-s:  Courage, confidence and the cash to keep trying and failing until one succeeds. Inventing anything is not required, or even necessarily productive.  Inventions are mostly ahead of their time and cannot be commercialized by the inventor before demand catches up with the invention, often decades later.