Coda: September 2008

Models That Seduce

In a risk-averse world, transparency is the thing, and the business models of choice will be either Big Tents or Boutiques. The former are named for their flexible boundaries, which permit risk to move on or off the balance sheet according to market conditions. Just don’t call them conglomerates (GE and Berkshire Hathaway), although they are similarly inspired: wonderfully efficient capital allocators; M&A machines with product, geographic, and customer diversity; and, most important, consistent earners. Boutiques will demonstrate pricing power and near monopolistic control due to technology, innovation, or branding and “buzz” (think: Lululemon, American Superconductor, Tiffany & Co., and Whole Foods). In a circular logic only a Wall Street analyst could love, the Big Tents buy the Boutiques and also spin them off.

Where Credit is Due

Until this year, anyone could play the credit game, but it turns out what we really needed was a banker wearing green eyeshades. Chastened mightily, banks will be the recognized gatekeepers for all manner of commerce, as their Wall Street brethren and the hedgies shut their credit windows. Those who “own” their markets include Wells Fargo, Century Bank, Bank of America, Northern Trust, and JPMorgan.

www.business.gov?

Remember that great business of doctoring? After the government took it over, medicine changed its name to healthcare. Be prepared for a similar encroachment in other sectors, only this time globally. First, the U.S. government will demand penance in the form of increased regulation in return for the credit rescue. Secondly, the world found an effective defense against unfettered U.S. capitalism, and it looks ironically like Chinese communism. Governments across the globe are fast so we are seeing a movement Eisenhower would have warned us about: “the governmental-industrial complex.” Boards must learn how to compete or collaborate with governments, government-owned businesses, government-funded businesses, Safes, and government-friendly businesses. If you can’t beat ’em…Winners include Boeing, Lockheed Martin, OTC, BE Aerospace, Occidental Petroleum, Accentuate, and all major private equity players.

Re-unionization

Unions, activists, and their friends at the plaintiffs’ bar have spent a few decades on the backbenchers of policy and lawmaking. Payback is around the corner in the form of a Democratic sweep this November. They will, not surprisingly, be pushing vastly increased agendas and more activist judicial appointments. The end result? Growth in unionization due to friendly legislative action and a significant increase in litigation. Worrisome for Wall-Mart and UPS; levels the playing field for GM.

Sleeping Bears Wake

Russia’s “Shareholder in Chief,” Vladimir Putin, continues to prove that “if it’s on my soil, I can soil it.” Companies that gorged on off-shoring in China and India may also find that, either from a regulatory perspective (China and India tightening up antitrust) or in light of transportation costs, the currency exchange disadvantage, or local talent shortage—not to mention outright Russo-nationalization— their bets are going to be longer term than planned. Benefits legacy global players with clout; newbies beware. Good for Arcelor Mittal, Sinopec, Gazprom, and Siemens.