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Graham & Doddsville

An investment newsletter from the students of Columbia Business School

Issue XXXII Winter 2018

Inside this issue:
The 27th Annual Omega Advisors, Inc.
Graham & Dodd At the end of 1991, following 25 years of service, Lee retired
Breakfast P. 3 from his positions as a General Partner of Goldman, Sachs &
Co. and as Chairman and Chief Executive Officer of Goldman
Leon Cooperman,
Sachs Asset Management to organize and launch an investment
CFA ’67 P. 4 management business, Omega Advisors, Inc.
David Poppe CC
’86 & John Harris P. 12 At Goldman Sachs, Lee spent 15 years as a Partner and one
Leon year (1990-1991) as of-counsel to the Management Committee.
Student Pitches P. 21 Cooperman, In 1989, he became Chairman and Chief Executive Officer of
Goldman Sachs Asset Management and Chief Investment
C.T. Fitzpatrick, CFA ’67 Officer of the firm’s equity product line, managing the GS
CFA P. 27 Capital Growth Fund, an open-end mutual fund, for one-and-a-half years. Prior to
Seth Fischer P. 35 (Continued on page 4)

Editors: Ruane, Cunniff & Goldfarb

Abheek Bhattacharya
MBA 2018 David Poppe joined Ruane, Cunniff &
Goldfarb in 1999 after a 12-year career in
Matthew Mann, CFA journalism. Mr. Poppe graduated with a
MBA 2018 BA from Columbia University in 1986.
Adam Schloss, CFA John Harris joined Ruane, Cunniff &
MBA 2018 Goldfarb in August 2003. Prior to joining
David Poppe
Ryder Cleary John Harris the firm, he spent two years as an analyst
CC ’86 at Kohlberg, Kravis, Roberts & Co. (KKR),
MBA 2019
a private equity firm based in New York
Gregory Roberson, Esq. and San Francisco. Before joining KKR, he served as an analyst in the investment
MBA 2019 banking division at Goldman, Sachs & Co. Mr. Harris graduated with an AB from
(Continued on page 12)
David Zheng
MBA 2019
Vulcan Value
Visit us at: Company Rolf Heitmeyer
C.T. Fitzpatrick Seth Fischer is the
founded Vulcan founder and Chief
Value Partners in Investment Officer of
2007 to manage Seth Fischer Oasis Management
C.T. his personal Company, an
Fitzpatrick, CFA capital. Since international investment manager
inception, all four headquartered in Hong Kong. Oasis was
strategies have peer rankings in the top founded by Mr. Fischer in 2002 following a
4% of value managers in their respective successful seven-year career at
(Continued on page 27) (Continued on page 35)
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Welcome to Graham & Doddsville

We are pleased to bring you the speaking with David Poppe Finally, we continue to bring
32nd edition of Graham & CC ’86 and John Harris of you pitches from current stu-
Doddsville. This student-led Ruane, Cunniff, & Goldfarb, dents at CBS. CSIMA’s Invest-
investment publication of Co- heirs to the legacy of Bill Ru- ment Ideas Club helps train
lumbia Business School (CBS) is ane—one of the superinvestors CBS students, providing them
co-sponsored by the Heilbrunn of Graham and Doddsville the opportunity to practice
Center for Graham & Dodd whom Warren Buffett touted crafting and delivering invest-
Investing and the Columbia Stu- in 1984. They describe their ment pitches.
dent Investment Management maturations as investors, dis-
Association (CSIMA). Since our cuss portfolio concentration, In this issue, we feature finalists
Fall 2017 issue, the Heilbrunn and pitch two of their favorite from the NYU Credit Pitch
Meredith Trivedi, the Center hosted the 27th annual stock ideas. Competition, Columbia Busi-
Heilbrunn Center Director. “Graham & Dodd Breakfast.” ness School’s CSIMA Stock
Meredith skillfully leads the C.T. Fitzpatrick, CFA of Pitch Challenge, and the MBA
Center, cultivating strong In this issue, we were fortunate Vulcan Value Partners sits Women in Investing (WIN)
relationships with some of to conduct four interviews with down with us, opining on his Conference organized by the
the world’s most experi- investors who provide a variety evolution from a strict value Cornell SC Johnson College of
enced value investors, and of frameworks. From scuttlebutt investor to his current empha- Business.
creating numerous learning research, tactical strategies, sis on sustainable margin of
opportunities for students euphoria, and sustainable margin safety. He talks about building The three finalist ideas from
interested in value invest- of safety, we discuss broader partnerships with employees our classmates include: A.J.
ing. The classes sponsored industry issues. Each investor and investors. C.T., as he is Denham ’19, Kevin Brenes ’19,
by the Heilbrunn Center has a strong passion for studying known, keeps an MVP list of and Gili Bergman ’19—Staples
are among the most heavily the history of markets and for high-quality businesses that he (SPLS) 8.5 2025 Long; Ishaan
demanded and highly rated continuous personal evolution. would love to own and steps in Bhatia ’19, Ryan Darrohn ’19,
classes at Columbia Busi- when the time is right. and Victoria Gu ’19—First
ness School. Leon Cooperman, CFA ’67, Data (FDC) Long; and Aditi
the founder, Chairman, and Seth Fischer, the founder and Bhatia ’19, Lisa Chen ’19, Victo-
CEO of Omega Advisers, Inc, CIO of Hong Kong-based ria Gu ’19, and Aleksandrina
discusses his battle with the Oasis Capital Management, Ivanova ’19—FleetCor Tech-
SEC, passive management, and discusses his early education in nologies (FLT) Long.
his relationships with other in- global arbitrage as well as his
vestment managers. He shares recent forays into activism in As always, we thank our inter-
details about what is important Asian companies. He explains viewees for contributing their
to him outside of investing, per- how he mixes tactical and time and insights not only to
sonified by a song written about fundamental approaches to us, but to the investment com-
him from a charitable group he investing, why frauds in China munity as a whole, and we
is passionate about. aren’t like frauds in the West, thank you for reading.
and why, for an activist, this
Professor Bruce Greenwald,
We also have the privilege of time is different in Japan. - G&Dsville Editors
the Faculty Co-Director of
the Heilbrunn Center. The
Center sponsors the Value
Investing Program, a rigor-
ous academic curriculum for
particularly committed stu-
dents that is taught by some
of the industry’s best practi-

Bruce Greenwald and Mario Gabelli ’67 David Abrams and Bruce Greenwald at
prior to the keynote address and the 27th the 27th Annual Graham & Dodd
Annual Graham & Dodd Breakfast Breakfast
I, Issue
3 2 Page 3

Columbia Business School Events:

27th Annual Graham & Dodd Breakfast


The keynote topic was the future of value investing—heavy stuff CBS Professor and Co-Director of the Heilbrunn Center Bruce
for breakfast conversation Greenwald, keynote speaker


Attendees of the 27th Annual Graham and Dodd Breakfast Columbia Business School Dean Glenn Hubbard


William von Mueffling ’95, President and Chief Investment Officer, A riveted crowd listens attentively to Professor Greenwald
Cantillon Capital Management, addresses the crowd reassure them that value investing is here to stay
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(Continued from page 1)

those appointments, Lee American Jewish Doddsville spoke with you, it

spent 22 years in the Committee (AJC) Wall was the fall of 2011. What has
Investment Research Street Human Relations surprised you the most since
Department as Partner-in- Award, the 2006 Seton then?
charge, Co-Chairman of Hall Humanitarian of the
the Investment Policy Year Award, the 2009 Boys LC: I would say at Omega we
Committee and Chairman & Girls Clubs of Newark have been on the right side of
of the Stock Selection Award for Caring, and the the market. Our basic view is
Committee. For nine 2009 UJA-Federation of that every recession leads to
consecutive years, he was New York’s Wall Street the next economic recovery,
voted the #1 portfolio and Financial Services and every recovery ultimately
strategist in Institutional Division Lifetime leads to the next recession. It
Investor Magazine’s annual Achievement Award. In was predictable to come out of
Leon “All-America Research 2013, Lee was inducted the 2008 recession. I believe in
Team” survey. into Alpha Magazine’s the symmetry of cycles, so the
Cooperman, Hedge Fund Hall of Fame length and duration of an
CFA ’67 As a designated Chartered and was honored by the upcycle probably bears some
Financial Analyst, Lee is a AJC at their 50th relation to the length and
senior member and past anniversary with the duration of the downcycle. We
President of the New York Herbert H. Lehman Award had the most severe recession,
Society of Security for his professional so having a longer—not
Analysts. He is Chairman achievements, necessarily stronger, but
Emeritus of the Saint philanthropic efforts, and longer—recovery than average
Barnabas Development longstanding support for would probably make some
Foundation, a member of AJC. In 2014, Columbia sense to me.
the Board of Overseers of Business School awarded
the Columbia University Lee its Distinguished But the growth of passive
Graduate School of Leadership in Business management is greater than I
Business, a member of the Award, and Bloomberg would have predicted six or
Board of Directors of the Markets named him to its seven years ago. I understand
Damon Runyon Cancer fourth annual “50 Most what’s behind it, but it’s
Research Foundation, a Influential” list (one of only something I would have
member of the Investment ten money managers thought would have passed by
Committee of the New globally to be so honored, now. I look at it as being
Jersey Performing Arts selected “based on what transitory. There’s a role for
Center, and they’re doing now, rather passive management, but I
Board Chairman of Green than past achievements”). don’t think Warren Buffett got
Spaces, a committee He was inducted into the to where he is using an index
organized to rebuild 13 Horatio Alger Association fund. The same goes for Mario
parks in Newark, NJ. in April 2015. Lee and his Gabelli, myself, and others
Lee received his MBA wife, Toby, have two sons who have been successful in
from Columbia Business and three grandchildren. money management. I’m
School and his committed to active
undergraduate degree Graham & Doddsville management.
from Hunter College. He (G&D): What is it about stock
is a recipient of Roger picking that excites you? Some time ago, I went to a
Williams University’s seminar entitled “Closing the
Honorary Doctor of Leon Cooperman (LC): It’s Gap,” looking at income
Finance; a recipient of a hunt. To be successful, you disparity and how to deal with
Hunter College’s must love what you do. It is it. A futurist who spoke at the
Honorary Doctor of both my vocation and my conference said that in his
Humane Letters; an avocation (as well as a means opinion, the biggest problem
inductee into Hunter of supplementing my income). facing the economy is that 45%
College’s Hall of Fame; of all jobs are going to be
and a recipient of the 2003 G&D: The last time Graham & replaced by automation, with
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no alternative for those dissatisfied. A lot of people say, “Well, if I’m not going to
displaced workers. I thought who went into hedge funds beat the index, why do I want
about it, and perhaps our had no idea what they were to pay you some variation of
industry’s “automation” is doing. In 2008, the S&P was two-and-twenty? I want my
passive management. down 35% or 36%. The money back.” Then they go
average hedge fund was down into index products where
Passive turnover averages 16%, but people said, “Hell. I they don’t have any idea what
about 3% a year; active didn't know you could lose they’re buying.
turnover, about 30%. If money. I thought it was a
everything goes passive, that question of how much money It will take a bear market to
implies a huge reduction in I’m going to make. Well, give end such behavior. Until
liquidity and in the pool of me back my money.” A lot of there’s a bear market, my
available commissions. Passive hedge fund managers either guess is this thing will play out.
management commands a five gated capital by not giving back But you must be patient. It
basis-point fee. So that’s a huge the money on time, or retired creates a challenge for the
reduction in the pool of money because they didn’t want to hedge fund industry because if
available to active money work with a high-water mark you’re an absolute-return guy
managers. in a one-way market, you can
“Look, all of us underperform. Plus, you have
But everything in the world is an asset base that’s very
cyclical. I show people an experience setbacks in transitory. It’s hard to be an
article titled “Hard Times investor if you have to
Come to Hedge Funds” and life. How you handle constantly look over your
everybody thinks it’s shoulder at looming
contemporary. The article was
the setbacks leads to redemptions.
written by one of the most future success.”
distinguished writers of Fortune G&D: So we need a bear
magazine, Carol Loomis, in and only for a management fee. market to slow down the
1970. At the time, the largest move to passive?
hedge fund was under $50 In 2008, if I told you we were
million. The second largest was about to begin the longest, LC: That’s my view, but I
A.W. Jones at $30 million. The most impressive bull market in could be wrong. Just like in
entire industry was under a history, you’d probably have 2008, hedge fund performance
billion dollars. me locked up. People blamed was below expectations—it
the government. They blamed was down less than half of the
Here we are in 2017 and the the insurance companies. They S&P, yet people were
industry is $3 trillion. And blamed the bankers. Nobody dissatisfied. Now they’re going
there are many hedge funds blames the individuals for not into indexes because the
that run tens of billions of doing a good job managing indexes are outperforming
dollars. The golden period for their own financial affairs. It’s active management. When
hedge funds was 2000 to 2007. as if they have no they lose money, they’ll have
Why? They were responsibility. the same attitude they had in
outperforming the indexes and 2008. They’ll want to get out.
conventional managers. CNBC In 2008, the people that stayed And believe me, there’s no
brought them a tremendous in hedge funds elected to be in liquidity in the market to
amount of publicity. Money an absolute-return, not relative absorb these ETFs. It’s going to
was pouring in, and they -return, vehicle. If you’re be a blood bath. The S&P will
became cocktail-party talk. running a hedge fund and be down more than 100 points
“I'm with Omega.” “I'm with you’re less than fully invested, in one day.
Glenview.” “I'm with Third then you’re shooting for
Point.” “I'm with Jana.” absolute rather than relative
Then suddenly, the 2008 cycle returns, and you can’t keep up G&D: Your analogy suggests
hits, and even though hedge with a bull market. the move to passive is more
funds lived up to their cyclical than secular.
expectations, people were People become dissatisfied and
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LC: Everything is cyclical. It’s under the terms of our for up to six years to get a
just a question of when. In settlement, I can’t comment on college degree. I give them the
1987, with portfolio insurance, the specific facts of the case or opportunity to do well. My
investors thought they could on the merits or strength of objective is to help level the
insure their portfolio and get our defenses. We settled playing field by creating
out. It was exposed as being because doing so saved us equality of opportunity;
Attendees of the 27th
bogus. In 1972, the new big what were projected to be whether the outcomes are
Annual Graham & Dodd thing was the Nifty Fifty. J.P. enormous legal costs, and a equal is up to the student, but I
Breakfast speak with Pro- Morgan and U.S. Trust had this substantial diversion of time want to give them the chance
fessor Michael Mauboussin philosophy of not caring what and attention over possibly to soar. Have you seen the
they paid for a business so long years more of legal wrangling, movie Hidden Figures? I paid
as it grew at above-average had we gone to trial. I am still $10,000 to rent out a venue
rates. IBM, Merck, Xerox, conflicted over that decision, and invite all the kids in my
Avon, and those kinds of but it’s water under the bridge. program to come and see it.
companies traded at 70x
earnings. I will say, however, that the The money doesn’t matter to
entire experience has left me me—I’ve given all my money
In 1973, OPEC increased the with a highly jaundiced view of away to charity. I’ve given away
price of oil tenfold. We saw a our federal regulatory system, $200 million to the less
huge escalation of inflation, and which I think is in desperate fortunate in the last five years.
the market collapsed. It took need of remediation. Given the
stocks over a decade to vast resources of the federal I give money to an organization
recover. Some of them never government and the prospect called “Songs of Love,” which
recovered. Avon’s today a $3 of potentially ruinous legal has roughly 10,000 volunteer
stock; it used to be a $70 costs (and collateral damage) songwriters who write
stock. My philosophy is: invest that confront any defendant, it customized songs for
in any stock or bond at the is little wonder that so many terminally or seriously ill
right price. Their philosophy opt to throw in the towel and children. They use uplifting
was: only the right stock at any settle, rather than risk the songs to motivate the kids.
price. To me, price is the key. I vagaries and expense of The group learns about the
am willing to buy anything as extended litigation. On the kids’ parents, the names of
long as management is not positive side, at least my their dogs, their favorite
crooked. I am looking for reputation remains intact. To actors, their favorite singers—
above-average yield, above- many money managers, I’m things that relate to the child,
average asset value, or something of a folk hero. Cold and then compose a song
mispriced growth. I think that comfort! around those themes. About a
over time, buying stocks at 50- year ago, I drove out to
60x earnings is not going to G&D: What about some of Queens, where the
pan out. your philanthropic activities? organization is based, and I was
so impressed with what they
G&D: Can you tell us more LC: I’m busy changing the lives were doing that, on the spot, I
about your entanglement with of kids. My signature initiative, wrote a check for $1 million.
the SEC? Cooperman College Scholars, They were so blown away that
is in the process of sending unbeknownst to me, they
LC: All I’ll say here is that we 500 needy, deserving Essex started doing their homework
settled the case for a fraction County, New Jersey, kids to and wrote a song about me.
of the government’s initial college. The average lifetime Here, take a look [lyrics at the
financial ask (less than $5 earnings of a college graduate end of interview].
million), with no industry are over $1 million more than
suspension or bar, no officer- those of a non-college Not too long ago, I reached
and-director suspension or graduate. We take 70 kids a out to someone who was
bar, and no admission of year and we’re a few years into struggling. I like to do that—
wrongdoing, on terms that this, so I have 250 kids in the help those who are going
permit me to continue running program right now. I give each through tough times. I said,
my business. Beyond that, of them up to $10,000 a year “Look, all of us experience
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setbacks in life. How you expertise in some area of the LC: You try to be
handle the setbacks market, but you can’t use it. If dispassionate, but there are no
determines future success.” you’re really a skilled money- formulas. There are going to
maker, you don’t want to be errors. A few years back, I
G&D: Can you talk about work at Goldman or Morgan got hooked on an oil company.
your idea-generation process? Stanley. You want to work at a I had three energy analysts in
Third Point, a Glenview, an 2014; not one of them got it
LC: When I hire somebody on Omega, or a Pershing Square. right. There were very few
the investment side of my If you’re a money-maker, you people in 2014 who foresaw
business, we agree upon the come to my firm. the collapse in the price of oil.
area that that analyst will
cover. Every six months, I look G&D: To what extent does G&D: Many esteemed
at the opportunity that the management figure into your investors have struggled lately.
analyst has presented and how decision-making process about What’s going on?
he or she penetrated that a business?
opportunity. I also do a lot of LC: Speaking broadly, in the
reading on my own, and I have LC: It’s a factor. Ben Graham last five or six years, almost no
a lot of friends in the business in The Intelligent Investor said one has been right about the
and know who’s careful and that you evaluate management stock market. We’ve had an
does their homework. I may, teams twice, once through the unbelievable bull market. Carl
for example, say to my numbers and once face-to-face. Icahn returned money in 2008
financials analyst, XYZ Financial By the numbers, I mean because he didn’t like what he
was recommended by this looking at returns on capital, saw. Seth Klarman has now
bright guy, so maybe we growth rate, market position, given back money. He’s been
should look at it. If my gross margins, and so on. negative for three or four
financials guy likes it, we’ll buy years.
it and I’ll share the position “You want to get rich
with him; if he doesn’t like it, Look at Pershing Square, for
we won’t buy it. It’s quietly. I don’t go on instance. As you know, every
fundamentally a bottoms-up spring, the Friday night before
approach to stock-picking, with CNBC trying to talk a Berkshire Hathaway’s annual
a top-down macroeconomic meeting, Columbia Business
stock up.”
overlay. School hosts a dinner. Three
When measuring the quality of years or so ago, I was a guest
G&D: Is there a danger that management face-to-face, you speaker at that dinner. There
getting ideas in this manner make your own judgment on were 200 people in the
leads to groupthink? how they respond to questions audience, including Ackman. I
and what their integrity is like. gave my presentation, and then
LC: I look for merit and someone in the audience asked
individual ideas. An analyst G&D: When you’re getting about my thoughts on
recommends a stock, and we close to management while Herbalife. I said, “I’m not
try to separate the wheat from researching companies, what involved, but I have an
the chaff. To me, Wall Street is are the dangers? opinion.” I knew that Ackman
a distribution machine; I don’t was in the audience, and I said,
rely upon Wall Street. LC: Management might lie to “I know Bill Ackman. He’s a
you, or see things through very bright guy, he’s very
The most rewarding part of rose-colored glasses, or you, generous, I have respect for
my career at Goldman was as a major shareholder, might him. But anybody who gets up
finding stocks that I thought get too close, and become in front of 500 people telling
made sense and having the reluctant to disappoint them he’s short 20% of the
market prove me right. But management by selling. market cap of a company is
after Eliot Spitzer, all the firms allowing his arrogance to get in
prevented their analysts from G&D: How do you control all front of his intellect.” The
buying stocks. They’re telling of that? danger is you can get squeezed
you to spend a lifetime building on that short. Bob Wilson, a
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very famous short-seller, working on ADP, that they had conditions.
famously said that nobody ever serious issues and he wanted
gets rich publicizing their to meet with the board, but Activism, generally, is a late-
shorts. You want to get rich that the committee window cycle phenomenon. Hedge
quietly. I don’t go on CNBC closed in eight days and he funds are having trouble
trying to talk a stock up. wasn’t ready. He wanted an making money so they’re going
extension on the window. I after governance. In some
That’s why George Soros, told him there’s no way the cases, they’re right; in other
myself, and a bunch of people company could or should give cases, they get it wrong.
went after Ackman on his him an extension.
latest activist idea, ADP. ADP G&D: Do you feel that your
is one of the greatest success His whole argument was investment style has changed
stories in American industry. spurious. He was looking at at all over the last 50 years?
You don’t go after a company the margin differential versus
like that in a proxy fight. You Paychex. But they’re in a LC: No. I’ve been managing
meet with them and you tell different business. Paychex my firm like I’d manage my
them what your views are. competes in the down market, own money. Let me explain
Ackman is looking for visibility, for small companies. ADP is a the way I run the firm. I split
and he’s dead wrong in his high-touch service, so they our incentive fee in thirds. I
approach. Ackman tried to tell have a tremendous return on give a third of it to the idea
ADP—a company that’s gone equity. Bill is a great guy and generator, I give a third to the
from $10 million in market cap I’m friendly with him, but he non-revenue generating folks.
to $60 billion—that they didn’t obviously has a flaw. They don’t make investing
know how to run their decisions but they’re important
business. It’s preposterous. He G&D: Are you a shareholder in running the business. Finally,
should have sat down with of ADP or on the board? I keep a third.
them to explain his views, but
he chose instead to go public LC: I was on the board for 20 When an analyst makes a
and ask for board seats. years, and I chaired the audit recommendation, it must be
committee for 18 years. When written up with a price target
ADP went public in 1961, with I retired from the board, I gave and the downside risk. If we
a market cap of maybe $10 all my stock away to charity. buy the stock, it’s because
million. Take the market cap of What I said on CNBC was the we’ve accepted the upside-
ADP today and add in the stock should triple; I should downside equation. If the stock
market cap of CDK, the donate cash and hold the falls to the downside level, the
automobile dealership business stock. I’m not debating the analyst becomes secondary to
they spun out, and the merits of Bill’s arguments. the decision. I have a
combined market value is What I’m saying is this committee that helps evaluate
about $60 billion. $10 million company’s performance is so if we should hold on, double
to $60 billion is a compound outstanding they deserve down, or sell it.
rate of return of 17% a year different treatment. The
for 50 years. The company company is open to meet with G&D: What led to the
earns 40% return on equity their shareholders; they are decision to create this
against the S&P 500’s 16%, open to constructive committee?
with a debt-free balance sheet suggestions. I guess it didn’t
versus the S&P’s 40% debt-to- serve his purpose to meet with LC: Analysts get paralyzed
capital. ADP is trading at a management privately to when their recommendations
multiple of 27x-30x earnings. present his views. are down. They don’t want to
I’m not addressing the merits see their stocks sold out of the
of a bargain here, I’m just I meet with management teams portfolio. You need people
talking about the business. all the time. For certain that are long-term thinkers
companies, activism is justified. because short-term greed will
Ackman called me up, asking They can overpay, they can jeopardize the firm, while the
for assistance. He said that he perform poorly, or they can be long-term guys will not.
had spent the last six months slow to adjust to new
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G&D: Do you find analysts get interest rates. Using 17x our more important than being in
clouded when they are on fire? S&P 500 earnings estimate for the right stock. We look at
next year of $138, that’s about stocks versus bonds, and when
LC: My technology guy looks 2385. That doesn’t include any we look at bonds, we look at
like a genius because of FANG. benefit from the tax package. government bonds, corporate
I look like an idiot because I’ve The tax package could add as bonds, high yield bonds, etc.
bought most of the much as $10 to S&P 500 We’re looking for what I call
recommendations, but not as earnings. the straw hat in the winter.
much as he wanted me to. My Nobody is buying straw hats in
job is to figure out what’s As John Templeton said, bull the winter when they’re cheap.
going to work, and what’s not markets are born in pessimism, We’re trying to find what is
going to work. But I have a grow in skepticism, mature in mispriced. I have eight or nine
value orientation. optimism, and end in euphoria. credit people. They’ve done
There are very few signs of extremely well over the last
G&D: When you look at the euphoria in this market. five years.
market today, what stands out? Optimism is high. Everybody
believes the market is higher in Third is undervalued stocks on
LC: There’s an expression on six months and in 12 months, the long side. Fourth is
Wall Street: In bull markets, but I don’t see euphoria. overvalued stocks on the short
who needs analysts; in bear side. We’ve never been
markets, who needs stocks? G&D: What does euphoria particularly productive at this
We first have to understand mean? How would you know it at Omega for some reason.
the market outlook. I believe if you saw it?
the market is adequately Fifth and finally, macro bets.
priced. I think we’re heading to LC: Look at 1987. The 10- We will risk about 2% of our
a normalization. We have been year bond was yielding 9% and capital trying to make a 4% to
living through a very strange the S&P trading at 27x 5% return. These are not
period. earnings. You can see it in how necessarily correlated to
stocks act—the character of equities, but they can be
A year or so ago, Switzerland leadership and valuation. profitable. If the dollar-yen
raised 50-year money at There’s some euphoria in the exchange rate goes from 108
negative interest rates. A guy market. Maybe Tesla or to 120, you can make some
who owns a home in Denmark Amazon. money. We could buy or sell
will get a check every month oil. It’s just another
because he has a negative G&D: You’ve been known to opportunity to make money or
interest rate on his mortgage. take macro bets and invest in lose money.
It’s crazy, right? It makes no different areas of the capital
sense. structure. How do you think G&D: How do you, schooled
about your overall strategy? in the Graham and Dodd way
I think we’re heading now to a of fundamental analysis, get
normal level. What’s LC: We try to make money at comfortable with those macro
normalization? In the U.S., it’s Omega in five ways. bets?
about 50 bps of growth in the
labor force and 150 bps of First is market direction. We LC: You’ve got to rely on the
labor productivity. Let’s keep in mind that stocks are team. But sometimes you
assume 2% inflation. That’s 4% high-risk assets and short-term know nothing. My worst year
nominal growth. The Fed funds bonds are low-risk assets. We was in 2014. I had three energy
rate will be around 2% and spend a lot of time trying to guys, we had no major position
we’ll be there soon. The 10- determine where the market is in energy. Not one of them
year bond will be at about 4%, going because that determines said sell or go short. Energy
and will take three to four your exposure to the markets. prices collapsed. Macro is
years to get there. In that difficult because there’s no
world, a multiple of about 17x Second is asset allocation. equity capital market line, so if
seems fair. It’s high relative to Every study I’ve seen indicates you don’t know what you’re
history but low relative to being in the right asset class is doing, you could be separated
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from your capital very quickly. looking at a minimum $2.5 compensation. People see
That’s why I only allow us to billion market cap. Julian Robertson, Ray Dalio,
risk 2% of our capital. My best and George Soros on the
year, 1993, I was up over 70%. G&D: Do you have different covers of magazines; people
I made 20% in equities, which strategies for the taxable and want to emulate them. They
was twice the S&P. I made 50% non-taxable portfolios? want to go for the gold. It’s
in bonds. You want to field as natural instinct.
many plays as you can in the LC: No, but I don’t buy
hope of finding opportunities anything in our long-term It used to be that if you
that work for the fund. followed the most popular
industry among the graduating
But you raise a good point. It is “You need people that Harvard Business School class,
very painful losing money in an are long-term thinkers you’d find that the industry
area where you’re not the was in the process of peaking.
captain of the ship. It’s easier because the short- Whether it was management
to lose money when you know consulting, investment banking,
exactly why you’re losing term greed will international trade, or hedge
money. In equities, I know funds. Maybe venture capital
where I went wrong. It’s part jeopardize the firm, will be peaking soon.
of the delegation of
responsibility. You just can’t while the long-term It is the worst time, in my
celebrate the profits only. guys will not.” opinion, for private equity
You’ve got to be willing to because one of the big
accept the risks. capital gains strategy that I windfalls for the private equity
don’t intend to hold for at guys was the exit multiple
Macro has had a rough few least a year. If I get lucky and being so much higher than the
years because of low volatility buy something that goes up entry multiple as interest rates
and interest rates. A lot of the quicker than I expected, I use declined. Who wants to bet on
macro guys are losing assets options to hedge it out to age lower interest rates over the
big time. Money goes where it to a one-year position. next five years? The odds are
money is treated best. interest rates will be materially
G&D: Besides the trend to higher, which will suppress
Everyone started off 2017 passive, what else do you make valuation.
bulled up about the dollar of the current environment for
versus the euro, and look what hedge funds? Secondly, we’re nine years into
happened. When everyone is a business recovery. Economic
on one side of something, LC: I saw an article recently setback is overdue. The idea of
there’s probably something that in the last decade, the buying something, levering up,
wrong. Bloomberg has an number of publicly traded and then having three or four
exhibit on next year’s outlook. companies has gone down by years of economic growth to
Nobody’s bearish. 50%. In the same period, the de-lever sounds like a suspect
number of hedge funds has bet. Private equity is also a
Over time, one change we’ve quintupled. We have many much more discovered
had to be conscious of is more people looking at half the phenomenon now.
increasing the size of company universe. It’s a much
companies we look at, given more competitive situation. G&D: Has this brutal
our size. You don’t want to competition in the hedge fund
have hundreds of positions. If If you had a choice between world changed what you do
you start out with average managing money at a mutual day-to-day?
position sizes of 3% and have fund for a 1% management fee
$4 billion in assets, that’s $120 or working for some Master of LC: There are 10,000 hedge
million in each name. If you the Universe for two-and- funds that are asking for some
multiply that by 20 because twenty, most people would variation of two-and-twenty.
you don’t want to own more rather be at the hedge fund Your client will pay a premium
than 5% of a company, you’re because of the greater fee if you supply premium
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performance. The average Second, William Ward’s max
hedge fund is underperforming philosophy is something all To the arts and education
the S&P and people are young people should think Leon Cooperman, hope you
unhappy. You can’t rest on about. Before you think, listen. and Toby can
your laurels, you can’t sit back. Before you write, think. Before See the difference that you’re
This business requires that you spend, earn. Before you makin’
you’re constantly on your feet. invest, investigate. Before you As you say…
When the markets are low, pray, forgive. Before you quit,
you’re supposed to figure it try. Before you retire, save. Do what you love
out and be heavily exposed to Before you die, give. Love what you do
the upside. When the markets Never retire
are high, you should be G&D: Thank you so much for Stay inspired
hedged. I get up at 5:15am your time. Do what you love
every morning and am in my Love what you do
office at 6:30am with the Day and night
newspaper. It’s total “Do What You Love, Love Keep feedin’ that fire
engagement. What You Do” - A Song for There’s one secret to success,
Leon Cooperman from the it’s true
In 1900, Andrew Carnegie said Songs of Love Foundation Gotta do what you love…
the most important thing is to And love what you do
surround yourself with people You started out in the Bronx
smarter than yourself and fairly Went to Hunter College Words by Alex Forbes
share the loot. Some people Met the lovely Toby Music and vocals by John Beltzer
feel threatened by strong Both had a hunger for
colleagues. I say no; I’m knowledge
benefiting from strong
colleagues. This is what you Columbia, Goldman, and
should aim for. Omega
You did better than the best
I tell people, no matter how Leon Cooperman, you’re like
much money you have, the one Superman
luxury you cannot afford is Let’s follow in your footsteps!
arrogance. Be nice to people. I As you say…
have seen guys play nice to
people above them but be Do what you love
nasty towards people below Love what you do
them. It’s just uncalled for. Just Never retire
be nice to everybody, and it’ll Stay inspired
come back to benefit you. For Do what you love
example, when I retired from Love what you do
Goldman Sachs, I agreed to Day and night
become a consultant to the Keep feedin’ that fire
firm to help with client There’s one secret to success,
retention, and they ended up it’s true
being a big investor in my fund. Gotta do what you love…
And love what you do
G&D: Any advice for students
trying to make it in finance? Toby taught in schools
While you started your work
LC: First, do what you love to routine
do. If you have a passion for it, You both raised Wayne and
you’ll be successful. When I’m Michael
looking to hire somebody, I Such a wonderful family
look for a desire, in addition to
talent. Now you’re generous to the
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Harvard College in 1999, traded publicly, of which there DP: I really felt that you could
Magna Cum Laude and Phi were many. In the Roaring 20s, have an informational
Beta Kappa. those were the original roll-up advantage around
vehicles, the 1920s version of understanding the culture of a
Graham & Doddsville 1960s conglomerates. A lot of business and the way that
(G&D): Can you both tell us them went bankrupt, and when people make decisions. If you
about your background and they did, many of them had big can align yourself with
how you came to be at Ruane? capital losses inside of them. management teams who make
So if you were smart, you good decisions, you’re going to
David Poppe (DP): I’ve been would buy one and then invest have a better result over time.
at Ruane for 18 years. I went through it and use the capital On top of that, you just have
David Poppe to Columbia for college and losses to offset your taxes. to be a bit of a cheapskate.
CC ’86 went to work in the They bought the Pittsburgh
newspaper business afterwards Railroad, and turned it into a G&D: Was there a moment in
and loved it. I was a financial publicly traded investment your journalism career when
journalist for 12 years, and as company called Pittway. The you realized how an
time went by, I really became way they thought about investment analyst could get
convinced of the idea that you investing was the way we think that information edge?
could have an informational about investing. They tried to
advantage and could find good businesses run by DP: I came to appreciate
understand a company by good people, pay reasonable investing partly by watching
understanding its people. prices for them, and work with short sellers as a reporter for
them for a long time. the Miami Herald in Florida. I
Ruane is a heavy due-diligence saw that you could really
shop—we adopt a journalistic My dad ran the family business identify bad actors and make
method of gathering after my grandfather, so good decisions if you just
“scuttlebutt” research, and we investing was all I heard about weeded those actors out from
try to understand the culture growing up—and it fascinated your pool of potential
of a company as well as its me. I knew this was what I investment ideas.
numbers. In 1999, they wanted to do, but back in
recruited me to join the firm. those days it was not very easy And as you start to weed out
It was a perfect fit and I’ve to get a job at a firm like ours the bad actors, you also realize
been here ever since. right out of college, so I who the good actors are. I
worked on Wall Street for a have found it true over 30
John Harris (JH): Investing is few years. years that if you align yourself
what I wanted to do ever since with people who consistently
I can remember. It was the When I came to Ruane for an make good decisions, you
dinner-table conversation in interview, I spent about four would do well. As Warren
our house growing up. hours with Bob Goldfarb. I got Buffett says: If you had to leave
a sense for the place pretty a million dollars with
My grandfather and great-uncle quickly, and the minute I got a somebody for five years, would
had a consumer products feel for this place, I was you trust this person to be a
business that made home hooked. If you like doing what fiduciary of your investment?
permanents for women that we do – if you’re curious That’s really the bigger
they sold to Gillette in the about businesses, question we are trying to
1940s. They were quirky understanding businesses and answer in our diligence.
entrepreneur types, and they trying to unpack the unsolvable
didn’t like working for big puzzle that is the stock market The numbers eventually play
companies, so they left – this is paradise. out from there. At Ruane,
Gillette. we’re trying to distinguish
G&D: David, how have you good people from really good
At the time, if you were a ended up marrying your people. A lot of times, capital
Graham and Dodd-style journalism background with allocation is the measuring
investor, the thing to do was investing? stick. Are the decisions
to find bankrupt railroad and consistently good? And if they
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are, you’re generally going to, JH: In the absolute simplest DP: I would say that this is as
over time, end up with a good terms, over a long span of disruptive a period in the U.S.
result. history, stocks in the U.S. have economy as most of us have
returned about 9% per year ever seen, so rules of thumb
G&D: When you conduct nominal, give or take. So that’s are probably less valuable
your due diligence, is there a our cost of capital, and we today than they were 30 years
way you quantify your findings? want to beat it by a significant ago. Warren Buffett has said,
For instance, how would your margin. We try to take a guess, “I’m not going to invest in
assessment of management and it’s nothing more than a technology because it’s too
enable you to decide whether guess. We don’t try to be hard to look out five years and
John Harris to pay 15x earnings for the precise about it and build eight know what’s going to happen.”
business rather than 20x? -page models, because I think
there’s a false precision in that. But now technology is
JH: The quantitative side of We just try to make a rough disrupting so many other
what we do is easy, to be guess at what we think the industries that you have to
honest with you. You don’t understand it. You’ve got to
have to have much more than “I have found it true think about owning businesses
a sixth-grade mathematics based on an Internet model,
education to spot a potentially over 30 years that if for instance. I don’t think it’s
interesting investment an effective rule of thumb any
proposition. The real trick is, is
you align yourself with longer to say “I’ll just be an
it as good as it looks? That’s people who make investor who doesn’t focus on
the hard part. technology and disruption,”
consistently good because disruption has come
My experience is that the to every corner of the
closer you look, the more risks decisions, you would economy.
come into focus. It’s very rare
that the deeper you dig into a do well.” G&D: A lot of these new
business, the better you like it. Internet businesses are asset-
It’s usually the other way cash flows of the business will light. Does that make a
around. So I would say the be from now until Kingdom traditional value-investing
qualitative side of what we do Come, and then discount that heuristic such as return on
consumes 95% of our time back to the present. We try to invested capital less meaningful,
because that’s the hard part. adjust for the fact that it’s an because these asset-light
inherently uncertain exercise. businesses don’t require as
Predicting the future is difficult. much invested capital?
You have to look into this G&D: What are the heuristics
opaque haze and form a point that you’ve developed to help JH: I don’t think it’s one way
of view about what’s going to you predict the future? or another. I think there are
happen. And I would say most asset-light businesses that are
of the mistakes that are made JH: I think rules of thumb can tough to figure out, and there
in our business are when be helpful when they help you are asset-light businesses that
people look at numbers and allocate your time more are easier to figure out. All
naively extrapolate the past efficiently and focus your else equal, we would always
into the future. Inflection thinking. But they can also be rather own a business that
points happen. If you aren’t dangerous, so we try to avoid doesn’t have to put any money
able to peer around those making judgments based on in to get the money out. That’s
corners every once in a while, simple heuristics, because a wonderful proposition.
typically you won’t bat at a usually the world is more
high enough average to make it nuanced than that. It gets back But that’s not to say that the
work in this business. to the same concept we were fewer the assets a business
talking about before, where employs, the better it is.
G&D: How do you think you can get in trouble just Sometimes it’s good to have to
about multiples and discount blindly assuming the future will spend a lot to make a lot,
rates? look like the past. because that means it’s hard to
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copy. So, I don’t know that we I think we have always been it off. So first off, it’s a model
necessarily prefer one or the thought of as value investors, that seemed unique and
other. but if you go back and read interesting.
our letters from previous
What we prefer is the wide decades, our analysts were Second, it’s only halfway built
moat over the narrow moat. always looking for companies out across the U.S., so there’s
Sometimes asset-light that can grow. I think that’s the an opportunity to maybe
businesses have really wide same today too. We are double the store base over a
moats and sometimes they always looking for healthy period of time. Third, it
don’t. Google, economically, is businesses that are in an early appears that the stores are
a far superior business to stage of their lifespan and have profitable in every market that
Amazon, just in terms of its good growth in front of them, they’re in. It is a replicable,
economic efficiency. But that because that’s really where scalable model. Fourth, when
doesn’t mean the moat is any you can make a big return. we bought in, CarMax was
wider, because to recreate the trading at 15 times earnings at
infrastructure that Jeff Bezos I think a lot of value investors, a time when the U.S. market
has built over the last 15 years not just us, have evolved over was trading at 17 or 18 times.
would require an astronomical the last 50 years to a little bit
sum of money. That’s a very more like Phil Fisher or So the math isn’t that hard.
hard business to copy. Google Charlie Munger, who focus on You’ve got a chance to double
is also a very hard business to the highest-quality businesses the store base. You’ve got a
copy, not so much because it that you can buy for a business that’s growing—same
would cost you a lot, but for reasonable price as opposed to store sales are growing at
other reasons. strictly looking for cheap healthy rates—mostly with
stocks. I think we’ve been middle-class and upper-middle
G&D: How have Ruane and consistent over time, but class good quality credit
the Sequoia Fund evolved over clearly there’s been a bit of an buyers. And no one else has
the years? evolution. There was a time in been able to copy the model.
the late 1990s when we were And then you layer over that
DP: First, I think 30% Berkshire Hathaway, 20% the incredible diligence that
philosophically the ideas Progressive, and probably 10 one of our analysts conducted,
underpinning the fund are the or 12% Fifth Third Bank. At we ended up feeling very
same as they were 40 years our size today that level of confident in the management
ago. I don’t think we’ve concentration doesn’t make team, very confident in their
deviated far, but I think there’s sense, but three stocks could ability to harness technology in
been some evolution. The fund be 30% of the portfolio. case the business does move
was smaller in the 1980s, and to more of an Internet sales
Bill Ruane was very G&D: As value investors model. And so we hold that
comfortable with a 10-stock who’ve made the transition to company at a 5% weight, which
portfolio. Nowadays, we think paying for quality or growth, is a pretty good weight for an
a 20-stock portfolio is more how exactly do you define a initial position at a fund the
realistic for us. But we still “reasonable” price? Can you size of Sequoia.
want to be concentrated in put a cap on how much you’re
our best ideas. Insights are willing to pay? JH: I also dislike the idea that
very hard to come by in our there’s a fundamental
business, and when we have an DP: I’ll use a straightforward distinction between value
actionable insight we want to example, CarMax, which we investing, growth investing, and
own the stock in a big way. So bought in 2016. CarMax has a growth-at-a-reasonable-price
we’re very comfortable with very unique business model. investing. It’s all the same
the top eight or 10 positions Four or five different quality mathematical equation, right?
being 50 or 60% of our assets companies have tried to copy Every business is worth
under management. I think this model of selling used cars something. And ideally you’d
that’s been consistent for with a more transparent like to buy for some discount
almost 50 years now. buying experience, and they to intrinsic value.
really haven’t been able to pull
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I think one reason you can has changed. Can you talk year. Having these people on
make money with businesses about that? our Investment Committee in
that grow rapidly is that the the room when we make the
future value of those DP: Well, we’ve made a lot of final decision struck us as a
businesses tends to be a little changes over the last two very good idea.
harder to estimate, because years. Our CEO Bob Goldfarb
more of the value is far into retired, and we were fortunate G&D: What are some of your
the future than businesses with that we had a bench in place favorite stock ideas right now?
a small P/E that are earning a that was ready to take on John, you mentioned Google
large percentage of their more responsibility. (GOOG) and its asset-light
market cap in the here and model earlier.
now. And, I think for I’m biased, but I think over the
psychological reasons, the past 20 years we have built JH: We’ve owned Google
market typically tends to maybe the deepest and the since maybe 2010. And we
underestimate the rate and best research team around. recently bought more, and it’s
duration of growth for We have a really strong bench. now maybe 10% of Sequoia
businesses that can grow We had a bunch of people Fund.
“I don’t think it’s an That’s because we like to
So typically, the errors in compare businesses we own
estimating intrinsic value tend effective rule of thumb with each other. And we
to be toward the downside in owned a couple of other
those cases. That is, you end any longer to say ‘I’ll businesses that we sold this
up in situations where you year that are relatively mature
thought you were buying it for just be an investor that grow organically in line
half of what it was worth, but with the economy and trade
really you bought it for 10% of who doesn’t focus on for maybe 23-24 times
what it was worth. And that’s technology and earnings in a market that
when you really do well. seems to value stability,
disruption’ because business quality and liquidity.
The distribution of potential
outcomes tends to be disruption has come We felt that we could sell
narrower for a more mature, those businesses and buy
slower-growing business to every corner of the Google instead—a better
where more of the cash flow is business growing at a much
coming in now. That’s not to economy.” more rapid rate, with superior
say that there’s anything wrong economics, for a P/E that
with owning those types of whom we hired in their mid- probably isn’t all that different
businesses, and we own them. 20s and now they’re 40 years from the ones that we were
old and absolutely ready for selling.
I think one of the unique more responsibility.
features of our portfolios over Google is one of the best
time has been that they’re We approached the leadership businesses the world has ever
eclectic. One of our partners change as an opportunity to created. It’s a phenomenal
likes to say that we have two make Ruane more of a true franchise. It’s a little bit difficult
hands. We don’t just play with partnership, with a structure with Google to peer into the
one hand. But I think the that’s a little flatter, with a future and have a great handle
reason you can do better with little bit more democracy on what the rate of growth
businesses that grow is around decision-making. And I will be going forward. That’s
because the right side of the realize people don’t like the partly because they don’t have
distribution is wider and more word “committee,” but we total control over their pricing
interesting. really had a core of very strong since at the end of the day, it’s
analysts, very good decision- an auction mechanism that
G&D: The leadership at Ruane makers, and we don’t need to prices the product. Also it’s
make that many decisions in a difficult to have a handle on
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what the pattern of usage will don’t necessarily know any G&D: Do you think Google
be in the future. There are more than the next guy. could be the Standard Oil of
many variables that factor into the 21st century? Its size and
that. But that doesn’t mean there’s reach are already inviting lots
not an advantage in doing your of regulatory scrutiny.
Right now, Google is growing own work and doing incredibly
20% a year, and we have been intensive primary research. JH: Yes, that’s probably the
surprised about the durability There is an advantage to biggest risk that you face as a
of the growth rate, especially gathering your own Google investor. Standard Oil,
at that size. It’s remarkable information and making AT&T, take your pick for the
that not only is it growing that decisions based on facts that analogy. AT&T was one of the
fast in absolute terms, but in a you have gathered yourself. world’s great companies, and
lot of cases, it’s accelerating Investing is more of an there are obvious similarities
even in relatively mature emotional than intellectual between the AT&T of a few
geographies where you exercise, and it becomes very generations ago and Google
wouldn’t expect it to. We hard to stay on an even keel today.
don’t think that things will and to make rational, unbiased
continue the way they’re going judgements if you’re making DP: AT&T was a great
now. The nice thing is that the them based on someone else’s company, because it charged
business could slow down information. me a dollar a minute to call my
dramatically and it would still parents when I was in college.
grow over the next five years So if my buddy at hedge fund Thirty years ago, it was
at a significantly faster rate XYZ tells me that such and crushing the consumer.
than the companies we sold to such company is a great
fund the purchase. investment, or if you go to any G&D: That’s an ominous
of these conferences where parallel. Like AT&T’s forced
G&D: How do you think someone really smart comes breakup, what if 10 years later
about securing an up and makes a bold case on Congress decrees YouTube
informational advantage with a whatever company, it may has to be a separate company
company as large and well- seem compelling at first. So from the search engine, and so
known as Google? you think, “Maybe I’ll go out on?
and buy it.” Then the stock
JH: Informational advantage goes down 40% and you get JH: There are different layers
can mean a lot of different nervous. How much time did to the risk here. One is
things. Fifteen or 20 years ago, that really smart guy who monetary penalties. We don’t
we were relatively unique in made the original pitch spend worry so much about that,
our commitment to thinking about this issue that is because Google is an incredibly
“scuttlebutt” research. And I pressuring the stock? You well-funded company. I think
do think there were cases don’t know, because you didn’t that they can afford to pay
where we just knew more do your own work. penalties.
about a business than other
people did. There were other When you’re lost in the fog, I think behavioral remedies are
people that did the kind of you tend to make bad the bigger concern here. And
work we did – that sort of decisions because you’re the one that we watch the
“feet on the street” research – scared. That’s why to me, you closest is how the Android OS
but not anywhere near as don’t necessarily have to know comes pre-installed with
many as there are now. And as more than the next guy to Google products, or the
you guys know, there are lots have an informational gateways to those products. If
of independent services that advantage. But you are most that link were to break, it
have grown up over the last certainly at an informational wouldn’t be a good thing.
decade that will allow you to disadvantage if you haven’t Although, it’s possible that
outsource that function. With made the effort to gather Google has achieved escape
something like Google, and I enough information to make velocity at this point and
would say most of the an informed decision. become so popular that even if
companies in the portfolio, we it was forced to change its
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behavior, the change might growth in the future, other somebody to disrupt it in a
have less impact today than it than that we do think this is a major way.
would have had a few years business that ought to grow
ago. faster than the economy for a G&D: Any other favorite ideas
long period of time. So we paid in the portfolio?
Microsoft reached a similar a price that only assumes that
point when they attracted legal Google grows at a GDP-type DP: Credit Acceptance Corp.
and regulatory attention, and growth rate, maybe a little (CACC) is a classic Ruane kind
were forced to unbundle some more. I think we paid a price of stock. It’s a quirky business,
of their products. However, if that doesn’t require you to and not especially well
you look back, Internet make bold predictions about understood. This company is
Explorer—which was at the the future of the business, just the lender of last resort for
center of that scrutiny—has modest ones. people who want to buy cars
lost a lot of market share in but are having real difficulty
the browser market not DP: The easiest way to figure with their credit. So a lot of
because Microsoft was forced out if something is really good the loans are going to be made
to change its practices but and really works is whether its on the buy-here-pay-here type
because, I think, competitors competitors can copy it. We of car lots—where the car
just came up with a better owned an industrial distributor dealer is also the financier—
version of that product. called Fastenal for 17 years— and not a typical dealership.
people tried to copy it and The customer has a credit
G&D: In that vein, how do couldn’t. I think Google has problem, and is buying a
you think about competition $6,000 or $8,000 car that they
from, say, Facebook or “I also dislike the idea need to get to work, and they
Amazon? Eric Schmidt has said can’t otherwise get a loan.
that, after Google, Amazon is that there’s a
the next biggest search engine Credit Acceptance has a
U.S. consumers use. fundamental program where it will advance
the dealer a portion of the
JH: Amazon is already there. It
distinction between sales price of the car—but not
is a huge advertising and value investing [and] the whole—and then the
product discovery platform, dealer and CACC are both on
and it wasn’t started yesterday. growth investing…. the hook. So it’s a model based
Facebook is already a gigantic on alignment with the dealer.
advertising medium that Every business is worth Both the dealer and CACC are
attracts eyeballs for huge very incentivized to collect the
periods of time every day. And something. And ideally full balance of the loan, and to
they weren’t created sell the car at the proper price
yesterday. Google is already
you’d like to buy for where you have a chance to
living with this competition and some discount to collect the loan instead of
still growing at remarkable exploiting a customer who is
rates. intrinsic value.” poor.

Also, by no means is our similarly proven itself in the Meanwhile, consumers who
position predicated on the idea marketplace, precisely because couldn’t get a loan anywhere
that Google is going to there have been other search else get a chance to rebuild
continue growing 20% a year engines that haven’t stuck. their credit record if they’re
for the next five years. I able to pay the loan off, even if
certainly would not want to The Google search engine they’re paying rich terms to
take the over on that bet. Our works better. It’s better for access that credit. Around 60%
guess is that the business is the consumer. And at this of people end up paying the
going to grow in the future, point, it’s so powerful and so loan off. I think it is a benefit to
but the point is that we didn’t widely used globally, it would the consumer. And for the
want to be forced to have an be very, very hard for 40% or so that ultimately end
opinion about the rate of up defaulting on the loan,
(Continued on page 18)
Page 18

Ruane, Cunniff & Goldfarb

Credit Acceptance is very of capital flooding into the challenged circumstances is
effective at repossessing the space. And it will do better in even harder.
car and then reselling it. the next couple of years if
money exits subprime and And collecting money from
It’s a niche product that you more people struggle to find CACC’s borrowers is very
need for a particular credit. hard, because car loans are not
consumer. On a buy-here-pay- really a secured lending
here car lot, Credit Thanks to some of these business. There is collateral
Acceptance will account for misunderstandings, CACC was there, but repossession is not
5% to 10% of the loans. And very cheap. We bought it at 10 a major feature of the business
because CACC doesn’t times earnings, with a model.
advance the full price of the management team that’s very
car, it doesn’t have the same good and very aligned with the So CACC is a collections
leverage as a typical subprime shareholders. It feels like a business. Collections
lender who is advancing the full great investment to us. businesses are tough. The
price of the car, and it doesn't more history and the more
have the same risk profile. G&D: Can you explain why data you have on the
Over time, the returns on the other five competitors borrower, the better. Lending
capital have been very high who tried to replicate CACC’s against this office building is a
compared to any other model weren’t able to? It relatively easy lending business.
subprime lenders, because the seems all you have to do is You’re lending to people who
capital at risk is lower. make sure the dealer has some in a lot of cases don’t need the
skin in the game. money, and you have a
It’s a terrific model. Four or fantastic piece of collateral
five other reputable, smart DP: How much you advance that’s readily saleable.
companies have tried to copy to the dealer is important.
it over time and haven’t been One thing that’s really neat And it’s easy to get your hands
able to do it. On top of that, I about Credit Acceptance is on this building. It’s not on
still think Credit Acceptance they have a ton of discipline. If wheels.
has got a relatively low market they can’t get the right terms
share, even among the they’ll do only two loans to the G&D: Why are dealers willing
subprime or sub-subprime dealer a year. They will walk to work with CACC? They’d
customer base. away from business. Credit ideally prefer no skin in the
Acceptance over time has game, and be advanced the full
We also like that the been very disciplined about loan, no?
management team is heavily what it will pay and about
invested in the company and adhering to its economic DP: Because the dealer can
owns a chunk of the stock. model. In contrast, I think then service a broader
The CEO has been in place for everybody else who gets into customer base and do more
16 years and is only 51 years the business runs into business. So instead of turning
old. And the founder still owns problems. To get market a sub-subprime customer
a lot of the stock. share, they advance too much down, he can sell another car
against the car, they take on with the help of CACC. And
CACC gets lumped in with the more risk. dealers are in the business of
stocks of other subprime selling more cars. And if the
lenders, which have been Secondly, Credit Acceptance is dealer does it right, he can
beaten up recently for good very good at repossessing the make more money.
reason as the value of used car to get the collateral back.
cars decline and as those And other people haven’t been And as John just said it
lenders’ experience with loans as good at that either. perfectly, CACC has a tough
worsens. But Credit business. You have to do
Acceptance is actually a little JH: Loaning money is hard. things sometimes that are
bit counter-cyclical to the rest Loaning money in a leveraged adversarial with customers.
of the subprime industry. It way is harder. Loaning money Yet one of the things that was
does poorly when there’s a lot to people in economically so impressive to me is that this
(Continued on page 19)
Page 19

Ruane, Cunniff & Goldfarb

company has been on the 100 G&D: Is there still a sizeable DP: He has sold down his
best places to work list for addressable market of new stake. The founder owns a
years. It has a good culture. It dealers they can be involved large percentage of the
has a good employee with, and hence grow? company and sold some stock
environment. last year, interestingly not at a
DP: There are parts of the great price. He sold a big
It’s easy to be in one of the country, such as suburban chunk last year, and that’s
100 best places to work in Detroit and generally the around the time we bought
America when you’re Google, Midwest, where they’ve got CACC actually.
and you’ve got an amazing very good penetration. But
business with smart people and there are other parts of the The founder selling gave us a
a tremendous model. It’s not country where they’re not little bit of pause, because we
as easy to be one of the 100 nearly as big as they could have great respect for him. But
best places to work in America be—California, some of the he had an overwhelming
when you’re dealing with Sun Belt states. I think there’s portion of his net worth in the
people who are in distressed a lot of opportunity to grow. business, had owned it for
situations. I think they’ve built many years, and is no longer
a really good culture in a really involved in the day-to-day
hard business. “Credit Acceptance management. He made the
decision to hold a little bit less.
G&D: A quick glance at the has a program where
financials shows that CACC The CEO who is there now is
now makes 30% ROE, but it will advance the in his early 50s, also owns a lot
before the Great Recession of stock, and I think has an
dealer a portion of the
they were usually making 20% incentive plan that rewards
ROE. Is it possible they’ve over sales price of the him based on stock
-earned the last few years performance over 10 years,
because of the Fed’s easy car...and then the which is the kind of thing that
money, which has kept down aligns with us very well. So I
their cost of capital and also dealer and CACC are still feel that we’ve got heavy
boosted their loan volume? ownership by the management.
both on the hook. So The board of directors also
DP: That’s a good owns a lot of stock. There are
it’s a model based on
observation. I think after the a couple of good investors on
Great Recession, a lot of alignment with the the board.
lenders fell out of subprime,
and there was a period of dealer.” G&D: What about the politics
probably two or three years of subprime auto lending? The
where they had much less JH: More generally, I don’t Obama administration was
competition. So their returns think we wanted to have a particularly aggressive against
boomed. point of view on what exactly such lenders.
the sustainable ROE of this
Now, over the last couple of business is. We felt that the DP: There is regulatory risk
years, a lot of money has price we paid for it assumed there, and we’ve thought
flooded back into subprime. So that the business never grew about it a lot. Government
CACC has actually cut back on again. does tend to look at high
the amount of loans they do interest-rate loans and the way
per dealer—because there’s DP: At 10 times earnings, subprime consumers are
much more capital available for certainly. It’s not as if we paid treated. The good news is
these dealers—and they’ve a stretch multiple. CACC has a very serious
tried to grow instead by being compliance culture—and as I
involved with more dealers. So G&D: Hasn’t the chairman- mentioned, it is often listed as
I’m not sure we’re in an founder sold down his stake? one of the 100 best places to
artificially inflated environment work.
at this point.
(Continued on page 20)
Page 20

Ruane, Cunniff & Goldfarb

Keep in mind that this thanks. Do you have any advice comes, hire people who are
consumer would not have for MBA students looking at a smarter and better than you. If
access to an automobile if not career in investment you do that, your life is going
for a business like CACC. management? to be so much more
They perform a role in society. successful.
If they weren’t there, think of JH: This is a learning business.
the number of consumers who Try to work with people who And if you’re trying to break
wouldn’t be able to drive a car. are good teachers in an into stock-picking, the other
environment where you can cliché that’s true is the stock
G&D: You assume that learn a lot. The fanciest name market can stay irrational
government will be rational. on the door is not always the longer than you can stay
right answer to that question. solvent. So you’ve got to be
DP: Yes. You assume the humble. It’s not an easy
government will be rational It’s the same in your career as business. You can be right at
and realize that this is a high- it is with college. I talk to everything you do, and the
risk customer, therefore you young people and they seem to stock can still go 20% the
need to have a high ROE constantly think that if they other way. Humility takes you
model to serve that customer. don’t go to any one of these a long way.
And if CACC is not there, five colleges, life is over. That
who would be there? In the they must get this credential G&D: Thank you for your
case of Credit Acceptance, you or all the doors will be closed time.
could make an argument that to them. The truth is that’s just
60% or so of the consumers not how the world works. You
do pay off the loans and have the motor inside of you
rebuild their credit record. So that you’ve got. It’s up to you
there’s a benefit to a person to put the fuel into it and get
who wouldn’t otherwise be the most out of it.
able to drive a car.
Where you go to college, the
G&D: What’s the interest rate name of the first firm you
on these loans? work at is not going to
determine where you end up.
DP: I’m sure that they’re You determine it. You
pushing whatever state limits determine how much you get
are on the interest rate. out of whatever God gave
Perhaps 20% to 24%. you—and the way to get the
most out of it is to work really
G&D: You’re referring to the hard and do what you love,
usury limits states set. Though because it’s hard to work
couldn’t a lender always get really hard if you don’t do
around the usury limits by what you love. And then work
inflating the price of the car? with really good people in an
environment where you can
DP: Again, I think they have a learn, that will help you get the
compliance-conscious culture. most out of what you’ve got.
Part of the deal that they make
with the dealers is that the DP: The best advice I think
dealer needs to have some I’ve ever heard anybody give is
alignment and some incentive Charlie Munger’s bit about
to do the right thing. I think aligning yourself with people
they do a good job obeying the who are better than you are.
law and caring about Marry someone who’s better
compliance. than you are. Work for
somebody who you really
G&D: That was fascinating, respect and admire. If the day
Page 21

Staples 8.5 2025 (CUSIP: 03939PAA2) - Long

1st Place - 2017 NYU Credit Pitch Competition
A.J. Denham, CPA Kevin Brenes Gili Bergman

We are long Staples 8.5 2025 Senior
Unsecured notes which are trading at
91.7 with a YTM of 10.3%. The mar-
ket has overreacted to the announce-
ment of Amazon Business Prime on
October 24th, dropping the newly
A.J. Denham, CPA ’19
issued bonds from 96 to a low of 85
A.J. is a first-year MBA student in a two week period. We believe the bonds offer a compelling investment due to 1) extremely stable cash
at CBS. Previously, A.J. worked
in private equity at the Florida flows with 70% of revenue on 3-5 years contract basis with 92-97% customer retention rates, 2) strong barri-
Mezzanine Fund then as a ers to entry against Amazon, and 3) market overreaction to Amazon Business Prime.
Manager in Strategic Planning at
Verizon in the U.S. Business Description
Staples is a B2B distributor of office products. The company is the 5th largest e-commerce merchant in the
U.S. Staples was acquired by private equity firm Sycamore Partners on September 12, 2017, and issued $1.0bn
in 8.5% Sr. Unsecured Notes maturing 2025 to finance the transaction alongside a Sr. Secured $2.9bn Term
Loan and $1.6bn in new Equity. The issuer is Staples North American Delivery (NAD), a B2B office supply
distributor. Staples NAD operates three business segments: Staples Business Advantage, which targets enter-
prise customers on a 3-5 year contract basis (70% of revenue),, and, which targets small
businesses and individuals (collectively 30% of revenue). Sycamore spun off the retail store operations into a
separate entity with its own separately financed capital structure with no cross obligations.
Investment Thesis
1) Sticky customer base with extremely stable cash flows
Staples has extremely stable cash flows with a high fixed charge coverage ratio. 3-year customer retention
rates are 97% for enterprise customers and 92% for middle market customers. These customers comprise
70% of sales, creating strong revenue protection for the entire company.
Kevin Brenes ’19
Kevin is a first-year MBA Staples Business Advantage revenues are extremely sticky. We have modeled a downside scenario with as-
student at CBS. Previously, sumptions of contracts renewing every 3 years and retention rates declining by 3% per year for the next 5
Kevin worked at Banco Gen-
eral as an analyst in Panama
years. These inputs only produce a ~2% revenue decline per year. Because of its stable revenue and approxi-
City, Panama. He covered Latin mately 10% projected EBITDA margins, Staples generates strong free cash flow that covers its fixed charges by
American corporate bonds and over 2.0x. Bringing the FCCR to parity would require assumptions of 50% customer retention rates, a 5%
Panamanian equities. gross margin contraction, and a 17% revenue decline – unrealistic given Staples’ history and barriers to entry
in the industry.

Gili Bergman ’19

Gili is a first-year MBA student
at CBS. Previously, Gili worked
at Harel Insurance & Finance as
a buy-side analyst in Tel Aviv,
2) Strong barriers to entry and protection against Amazon
Israel. He covered both equity
and fixed income global mar-
The B2B office supply business has strong barriers to entry, protecting it from new entrants like Amazon. The
kets. market is used to thinking of Amazon as a nimble competitor disrupting old industries. However, in this case
Amazon is the company faced with legacy issues prohibiting it from adapting quickly. In the legal opinion from
the antitrust proceedings blocking the merger of Staples and Office Depot in May 2016, the Federal Trade
Commission provides 8 reasons as to why Amazon is not a viable B2B office supply competitor. Customer
calls with corporate sourcing personnel confirm the FTC’s story. We highlight what we believe are the major
Page 22

Staples 8.5 2025 (CUSIP: 03939PAA2) - Long (Continued from previous page)
• Desktop Delivery: Staples has a dedicated sales team and delivery fleet that work with office managers on delivery times and place-
ment. Staples consolidates orders, delivers, stocks, and installs merchandise at specific times in specific locations within a building –
for example, directly walking into a customer’s office and installing ink in the printer. By contrast, Amazon sends separate packages
for each order (85% of Amazon Business deliveries are not consolidated by address) and delivers only to customer’s door or mail
room. Corporate clients confirmed the high demand Staples’ approach to enhanced customer service without which it becomes
much more difficult to win request for proposals (RFP).
• Customer Service: Staples assigns each enterprise customer a dedicated sales representative to provide support for personalized
orders and logistics. Staples currently employs 3,500 sales representatives and is planning to add 1,000 more. Amazon does not have
a dedicated office supply sales force and has no experience with the RFP process. This is a critical support factor; individual corporate
sourcing agents have little to no experience planning corporate-wide office supply needs.
• Fixed Pricing: Enterprise customers require fixed pricing on a contract basis. Amazon is unable to provide fixed pricing because
over 50% of its office supplies are sourced from third-party vendors over which Amazon has no control. Amazon’s existing business
model conflicts with current business practices in the B2B office supply industry, and it will be tough for Amazon to change this core
• Switching Costs: Switching costs such as process integration and retraining personnel are a real consideration for corporate cus-
tomers. Office supplies are also such a small part of the overall corporate cost structure that there isn’t as much pressure to cut
costs, and any gains are unlikely to outweigh the pain from switching vendors. Corporate inertia will delay any effort Amazon makes
to enter the enterprise market.

3) Market overreaction to introduction of Prime membership for Amazon Business customers

On October 24, 2017, Amazon Business introduced Prime membership for its customers. Staples Sr. Unsecured notes fell 5% on the an-
nouncement. The announcement of Prime membership should not be confused with Amazon entering the marketplace. Amazon has been
competing in the office supply industry for 15 years and has yet to make significant inroads into the B2B office supply business. The only
new benefit of Prime membership is free two-day delivery. However, Staples already offers free next-day delivery covering 95% of the
U.S., with 85% of orders already delivered next-day. Additionally, the FTC noted that Staples , inclusive of corporate discounts, actually
has lower prices than Amazon. The market has overreacted to a non-event and has created a compelling opportunity.

Capital Structure
Staples debt consists of two issuances: a $2.7B Senior Secured Term Loan at L + 400bps due in 2024, and this $1B 8.5% 2025 Senior Un-
secured. There are no near-term maturities and the Term Loan amortizes at 4% a year, reducing total debt over time. Staples also has
access to a $1.2B undrawn revolver at L + 150bps for liquidity support if necessary. While rated B-, 3.6x EBITDA/fixed charge coverage
and under 3.7x total leverage resemble a B+/BB- profile and will support a rating upgrade with continued strong financial performance.

Key Risks and Mitigants

1) Amazon acquires Office Depot/OfficeMax: The most effective way for Amazon to enter the B2B office supply market is to ac-
quire Office Depot and run it as a separate business unit, which could increase price competition. However, even in the event of an acqui-
sition, it’s unlikely Amazon would drive prices too low or sell below cost for fear of antitrust action.

2) Sycamore sells assets and/or distributes cash: Sycamore has a poor reputation among creditors due to harmful actions in prior
deals. In our model, we assume Sycamore will distribute any of the company’s excess cash and liquid assets in order to enhance its re-
turns, which requires accepting the risk of further assets sales which might erode credit support. This risk is mitigated, however, by the
over 2.0x fixed charge coverage ratio, stable cash flows, and $1.2 billion revolver. You are not buying these bonds for the balance sheet,
you are buying them for the coverage.
Page 23

FleetCor Technologies (NYSE: FLT) - Long

1st Place - 2017 Women In Investing (WIN) Conference
Aditi Bhatia Lisa Chen Victoria Gu Aleksandrina Ivanova

We recommend a long on
FleetCor Technologies
Aditi Bhatia ’19
(FLT) with an end of 2019
Aditi is a first-year MBA stu-
dent at CBS. Previously, she
price target of $279.46,
worked as a Senior Associate offering 80% upside from
at Temasek Holdings and as an September 2017’s price of
Investment Banking Analyst at $155.00 and an IRR of 34%
Credit Suisse.
over a two-year holding
period. We believe that FleetCor has 1) an attractive business model with strong network effects yielding an
industry-leading ROIC, 2) the ability to grow revenue ~15% per annum over the next 5 years by capturing
opportunities domestically and abroad, and 3) an attractive buy-in opportunity due to misplaced market pessi-
Business Description
FleetCor is headquartered in Norcross, Georgia, and its products are used in 53 countries around the world,
with its primary geographies in the US, Brazil and the UK. FLT provides workplace productivity enhancement
products primarily related to fuel, lodging, and employee benefit payments, telematics services, and fleet
maintenance management. Fleet card solutions (>60% of revenues) allow fleet owners to control employee
Lisa Chen ’19 spending, generate fuel savings and improve free cash flow. Further, by joining a fuel card network, gas stations
Lisa is a first-year MBA student benefit from increased vehicle traffic. The company’s core products are primarily sold to businesses, retailers,
at CBS. Previously, she worked major oil companies and marketers and government entities.
in Strategy and Business Devel-
opment at BlackRock in New
Investment Thesis
1) Attractive business model with strong network effects yields leading ROIC
The industry is characterized by high barriers to entry because the two interdependent factors for success
include scale and network acceptance, which is challenging for a new entrant to build. The business model is
characterized by highly recurring and diversified revenues with high customer retention, resulting from a
strong value proposition to customers. FLT and its closest competitor operate in a duopoly market following
significant consolidation, and there are no near-term threats from smaller players in the market. Between the
two players, FLT has consistently had a higher ROIC, cleaner balance sheet, and a great execution track rec-

2) FLT can grow revenue ~15% per annum over the next 5 years by capturing opportunities do-
mestically and abroad
Victoria Gu ’19 We identify attractive market growth opportunities in its two key markets: fuel card market estimated to
grow at 19% CAGR over the next 5 years driven by increasing market penetration, and corporate payments
Victoria is a first-year MBA market estimated to grow at 8% p.a. Using a blended market growth rate across different business segments,
student at CBS. Previously, she
worked as an Investment we believe FLT can achieve a ~15% growth rate p.a. over the next 5 years.
Banking Analyst and Associate
at J.P. Morgan in the US and
Europe covering the TMT

Aleksandrina Ivanova ’19 3) Market pessimism is misplaced, creating a cheap and attractive buy-in opportunity
Citron published a short interest report in April 2017 accusing FLT of unsustainable fee practices from late
Aleksandrina is a first-year fees and predatory billing practices that were driving away customers and large accounts (Chevron). The re-
MBA student at CBS. Previous-
ly, she worked as an Equity
port was timed with FLT’s ComData IT conversion issue that caused billing inaccuracies and delayed customer
Research Associate at Survey- service to 30K accounts, leading to a significant uptick in customer attrition and precluded new sales. Since
or Capital. Before that, she then, the issue has been resolved and attrition has stabilized. Noise around billing practices has also quieted,
spent 3 years working as a
High Yield Associate at Fidelity.
with stock prices recovering since 2Q17. Upon inspection of FLT business practices, we see consistent above
Page 24

FleetCor Technologies (FLT) - Long (Continued from previous page)

90% retention rates, lower than WEX revenue contribution from late fees, and historically low complaints, with the exception of a spike
due to the IT conversion issue. We anticipate the NTM multiple to re-rate to historical levels after FLT proves consistent new customer
wins and unaffected retention rates for the next few quarters.

We are valuing the company assuming a two-year holding period. In our base case, we assume the multiple would re-rate to competitor
WEX’s current level. In our bull case, we assume the multiple would re-rate to FLT’s level prior to the publishing of the Citron report and
IT conversion issues. In our bear case, we assume the multiple would not re-rate. Taking into consideration all potential outcomes, we
arrive at a FY19 target price of $279.46, which implies a 34% IRR. We also used a DCF as a sanity check to our valuation methods. Based
on current market conditions and comparable beta to WEX, our DCF analysis yields similar price ranges to a multiple-based approach.

Implied Return: Breakdown of price appreciation:

NTM P/E multiple evolution: FLT is currently trading at a discount to WEX and its own 5-year avg. NTM P/E

Key Risks and Mitigants

1) Electric vehicle adoption in the truck industry: New vehicles have a long runway to prove economic viability. Furthermore,
charging and production infrastructure needs to be improved.
2) Exposure to gas prices: FLT’s pricing model incorporates a natural hedge against a drop in fuel prices. Through actual diversification,
the company only has 10% exposure to absolute fuel and 11% exposure to fuel spreads.
3) Shifts in fuel card outsourcing trends toward in-house solutions: ~60% of US gas stations are independently owned, making in-
house solutions difficult. Furthermore, FLT’s consistent 90%+ retention rate proves strong value proposition to customers that will help
continue increasing win rates.
4) Improved fuel efficiency: Economic growth along with a rise in the number of vehicles will offset the impact of improving fuel effi-
ciency or new regulations.
5) Threat of consolidation of fleets and small gas stations: This would act as a tailwind, as the value proposition is stronger for
larger-sized gas stations and fleets.

1) Analyst day in 2018 and a new Head of Investor Relations should provide for better management disclosure and correct the market’s
2) Proven strong customer retention in the coming quarters to counteract Citron’s allegations.

CBS first-year students Jade Hu ’19 ( and Ashley Allen ’19 ( also participated in the presenta-
tion of the FLT idea at the WIN conference in November 2017.
Page 25

First Data Corporation (NYSE: FDC) - Long

3rd Place - 2017 CSIMA Stock Pitch Challenge
Ishaan Bhatia Ryan Darrohn Victoria Gu

We recommend a long Capitalization Other
on First Data Corpora- Share price ($) $17.1 Short Interest 6.80%
tion (FDC) with an end DSO (mm) 923.5 52-week low/high $13.01/$19.23
of 2020 price target of Market Cap ($mm) $15,819
$39, implying a 128% Less: Cash ($mm) (502) EV/EBITDA FY18E 11.3x
absolute return and 30% Plus: Debt ($mm) 18,649 EV/EBITDA FY19E 11.9x
Ishaan Bhatia ’19 IRR. We believe: 1) Plus: Minority Interest ($mm) 2,938 P/E FY18E 10.9x
Ishaan is a first-year MBA
FDC is a winner in an Enterprise Value ($mm) $36,904 P/E FY19E 9.9x
student at CBS. Previously, he oligopolistic market with Leverage 6.3x FCF yield 8%
worked as a Private Equity industry leading margins
Analyst with Samara Capital in and cash flow, 2) short-term fears are overblown and FDC can grow revenue at 6-8% due to secular recovery,
India and as an Investment
Banking analyst at J.P. Morgan and 3) strong FCF generation will lead to rapid deleveraging and a multiple re-rating to P/E.
in India and the UK.
Business Description
First Data Corporation is the largest merchant acquirer, merchant processor, issuer processor, and network
services provider in the world, with a global footprint on four continents. FDC was taken private by KKR in
2007 and recently went public in 2015. It has three segments: 1) Global Business Solutions (GBS) - POS mer-
chant acquiring and processing, 2) Global Financial Solutions (GFS) - credit/private label processing, and 3)
Network & Security Solutions (NSS) - EFT network solution (STAR), stored value network solutions, and
debit card processing. 79% of FDC’s revenues are from North America, 14% are from EMEA, and the remain-
der is split between Latin America and Asia.
Investment Thesis
1) Winner in an oligopolistic market with industry leading margins and cash flow
FDC’s scale and distribution network are protected by high barriers to entry. Its large network allows FDC to
continuously reinvest cash flow into expansion, driving customer stickiness and cross-selling opportunities. At
1.5x the scale of the closest competitor in merchant processing volume, FDC enjoys the highest EBITDA mar-
Ryan Darrohn ’19
gins (37%) and FCF conversion percentages (92%) in the industry.
Ryan is a first-year MBA stu-
dent at CBS. Previously, he was
an acquisitions officer and
Captain in the U.S. Air Force.
He graduated from the U.S. Air
Force Academy with a degree
in Business Administration.

2) Secular recovery and tailwinds spark growth

Cash-to-card conversion, which is forecasted to grow at a CAGR of 6% for debit cards and 9% for credit
cards through 2020, will continue to drive FDC’s top line and represents a tremendous white space oppor-
tunity in key international markets where purchase penetration is low. Crucially for the GBS North America
segment, lead flows suggest recovery in Joint Ventures while SMB attrition has started recovering, which will
drive FDC’s recovery to continue to grow at 8-12% CAGR, while signature and PIN-less will grow-in line with
wider industry GBS. Meanwhile, VisionPLUS will continue to grow GFS at a projected 8-12% CAGR.

Victoria Gu ’19
Victoria is a first-year MBA
student at CBS. Previously, she
worked as an Investment
Banking Analyst and Associate
at J.P. Morgan in the US and
Europe covering the TMT
Page 26

First Data Corporation (FDC) - Long (Continued from previous page)

3) Strong FCF generation leads to rapid de-leveraging and multiple re-rating
We project FDC to have over $6B of cumulative FCF generation in the next four years (FY2019-FY2021), which will drive a Net Debt/
EBITDA reduction to less than 4x by FY2020. As debt repayments are accelerated, FDC will be looked at on a P/E multiple, rather than an
EV/EBITDA multiple, by the exit horizon.

Our base case price target of $72 offers ~31% upside. In the base case, we assume:
• Base Case: one-year forward P/E multiple of 18.5x, driving non-GAAP EPS of $2.25/share in FY2021.
• Bear Case: one-year forward P/E multiple of 13x, driving non-GAAP EPS of $1.26/share in FY2021.
• Bull Case: one-year forward P/E multiple of 22.1x, driving non-GAAP EPS of $2.57/share in FY 2021.
Using weights of 50% for the base and 25% for the bull and bear, our implied share price in FY2020 is $39.10, representing upside of 128%
and an IRR of 30%.

Key Risks and Mitigants

1) Disintermediation: International and domestic scale and network are critical to becoming the leading merchant acquirer and proces-
sor. For First Data, near to medium term disintermediation risk is extremely low. 2) Pricing pressure: High switching costs and a
lengthy onboarding process should favor FDC’s scale. 3) Leverage: Superior FCF generation through top-line growth, margin improve-
ment, and low CAPEX profile allows significant deleveraging. 4) KKR controlling ownership: KKR provides operational improvement
opportunities such as business development through its portfolio.
Page 27

Vulcan Value Partners

(Continued from page 1)

categories. Prior to majored in finance and of fun, but the main reason I
founding Vulcan Value minored in English. As my went back to school was to
Partners, C.T. worked as a coursework evolved and as I transition my career. In 1990,
principal and portfolio had exposure to more things, I I started with Southeastern
manager at Southeastern discovered that I was Asset Management in
Asset Management. passionate about investing. Memphis, also known as
During his 17-year tenure, Longleaf Partners. I was very
the team at Southeastern While I was in school in the fortunate there had been some
Asset Management early 1980s, coursework changes in the senior
achieved double digit emphasized efficient markets, management of that company.
C.T. returns well ahead of CAPM, and all those things. It left a hole, allowing some
Fitzpatrick, CFA inflation and was ranked in Conceptually, a lot of it made younger guys, including myself,
top 5% of money managers sense but some of it didn’t. It to take on a lot of
over five, ten, and twenty was counter to how my dad responsibility quickly. I became
year periods according to actually did things in the real a partner in the company
Callan and Associates. world. I started challenging my pretty early on.
professors and I got pushback.
C.T. earned his MBA in It just didn’t feel right. Of I started as a generalist. We
Finance from the Owen course, you want to were finding things in the real
Graduate School of regurgitate it for the test, but estate area that were really
Management at Vanderbilt then do you really agree with cheap and interesting. We
University. He also has a it? increasingly gravitated to it
BS in Corporate Finance simply because there was
from the University of I read Graham and Dodd’s more opportunity there. Long
Alabama. Security Analysis just to try to story short, we started a real
understand, “Okay, what’s the estate effort, and I was very
Graham & Doddsville other side of this?” It really fortunate to be tapped to lead
(G&D): Could you tell us appealed to me and struck a that effort. I went from being a
about how you got started in nerve. By the time I graduated, generalist to a real estate
the industry? I wanted to be a value expert. Then, in the early
investor. It was the mid-80s 2000s, we shut that program
C.T. Fitzpatrick (CTF): I and Wall Street was booming. I down because basically we
was a weird kid. I was reading had some opportunities on the rode cap rates down from 12%
the Wall Street Journal when I money management side, but I to 8% and thought the bargains
was 14 years old. My father also had an opportunity to had dried up. Obviously we got
was my mentor. He was an work here in New York in out too early. I became a
entrepreneur and I was just investment banking. generalist again. At that point,
curious about what he was we had moved into
doing. It became an intellectual G&D: What was that job? international and global. That
curiosity. My dad was a value was really fun.
investor but he didn’t know it. CTF: I worked at Merrill
He didn’t call himself a value Lynch capital markets. I met Then, in early 2007, I decided
investor. He did a lot of things my wife. She was a trader at it was time for me to move on.
in real estate and he would try what now is Credit Suisse First I’d been there for 17 years. I
to buy properties at a discount Boston, which was First think anyone who’s passionate
to replacement value. He’d be Boston at the time. It was a about what they do, and
looking for things that had fat great experience but I was only strives to continuously
cap rates, things like that. on the edge of what I wanted improve, will keep their core
to do. I was an agent, not a principles but continue to
Since I knew I wanted to go principal. refine them over time. I began
into business, I did not have to feel very strongly about
the patience to pursue liberal I went back to graduate school some things that I wanted to
arts, so I went straight into at Vanderbilt’s Owen School of do in my own personal
corporate finance at the Management and had a great evolution.
University of Alabama. I experience there. It was a lot
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Vulcan Value Partners

I left Southeastern to start assets, and the asset values value. They all became
Vulcan Value Partners in order dropped just a little bit, the discounted, but we bought the
to put these principles into equity value could evaporate companies that had inherently
practice. I had a wonderful because of the financial stable values.
experience there and I’ll be leverage on the balance sheet.
forever grateful for being part You could buy J.P. Morgan at a My evolution as an investor
of Southeastern. I wouldn’t be discount to tangible book and was that it's not enough to buy
here today if I had not been believe you had a margin of a company that is statistically
there first. safety, but the margin of safety cheap at a point in time. It has
would be ephemeral because to have what we call at Vulcan
G&D: Is there a particular the company’s value is Value Partners a sustainable
philosophy or framework that inherently unstable. margin of safety.
they use?
That is an example of a G&D: In addition to
CTF: When I was there my company that, in fact, the old sustainable margin of safety,
initial emphasis was just on C.T. would have said, “Oh, my what other things are critical
valuation. The cheaper, the gosh! I can buy J.P. Morgan at parts of your investment
better. There were other parts half of tangible book. You philosophy?
to the analysis, of course, but
the energy went to finding “My evolution as an CTF: Time horizon is really
discounted companies. The important. It can be a huge
bigger the discount, the more investor was that it's competitive advantage if you’re
interesting, and that’s the work able and willing to use it. Our
you focused on.
not enough to buy a minimum time horizon is five
company that is years. Assume the equity
As I evolved, I began to feel markets are shut down or
that it was even more statistically cheap at a think about it like a private
important to focus on business equity investor. If we would
quality, specifically value point in time. It has to not be willing to have capital
stability. This concept gets tied up for five years, it doesn’t
back to what attracted me to have what we call at qualify for investment.
value investing in the first
place: the idea that you could
Vulcan Value Partners a With that rule, we discard
take on less risk and earn sustainable margin of probably 90% of the companies
excess returns. That absolutely that are publicly traded. A lot
turns the Efficient Markets safety.” of them get cheap from time
Hypothesis and CAPM on its to time but we have no
head, but it is what Graham know, this is great!” or, interest in them because they
and Dodd were talking about, “Maybe we should buy Bear don’t meet that test. If we’re
and what Warren Buffett and Stearns too or maybe we going to have a five-year time
Charlie Munger continue to should buy Lehman Brothers. horizon and base our
talk about. We can buy them at a discount investment decisions on that
to book.” But, we didn’t do time horizon, we have to
For example, look at J.P. any of that at Vulcan. invest in companies whose
Morgan during the financial value is stable over that time
crisis. It was a really well- Instead, we were buying horizon. Very few companies
managed company but its companies like MasterCard fit that criteria, but the ones
balance sheet was so leveraged that were caught up in the that do, again, provide what
that it was impossible to figure taint of being a financial we call sustainable margin of
out what its equity was worth services-oriented company but safety.
with any accuracy. The it had net cash on its balance
company’s assets are opaque sheet. Unlike all the others When I started, I was discount
and difficult to value with that I mentioned, it generated first and then the rest later.
precision. Even if you were a huge free cash flow coupon Today, at Vulcan, we are value
able to accurately value the and had an inherently stable stability first. We don’t care if
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Vulcan Value Partners

it’s discounted or not. Of that aren’t cheap yet? high are your returns on
course, we want to buy capital? How stable are your
companies at a discount, but CTF: That’s a great question. margins? How strong is your
when we start, we don’t look It gets to how we’re wired. balance sheet? We look at all
for cheap stocks. We look for I’ve heard Mr. Buffett speak of it, free cash flow being the
companies with inherently very eloquently about this. most important.
stable values. Those companies There are different types and
we follow. Most of them are different stripes of value We spend a lot of time
overvalued most of the time investors. When he wrote the qualitatively trying to
but when they become essay The Superinvestors of understand what’s driving the
discounted, we’ve already Graham-and-Doddsville, he numbers and the qualitative
done the work. We’re up to mentioned there are different aspects of the business. Is the
speed on them. We follow people who do it in different business getting better or
them just like we own them. ways. There’s not, I think, one worse? Our analysis is
correct way to do it but quantitative but I think our real
Often there is an event: it there’s probably one way value add is on the qualitative
could be a macro event, it that’s correct for each of us to side. We spend an awful lot of
could be something specific to do it. It gets back to staying time debating those qualitative
the industry, or it could just be within our circle of issues.
volatility. We haven’t had competence.
much of that lately but it does G&D: In the past you’ve
happen every now and then G&D: You mentioned your mentioned energy companies
and you have a chance to buy shift towards value stability. and commodity risk. Are there
these businesses at a discount. Were there some investments any other sectors that you’re
that pushed you in that saying, just by the dynamics of
You have a history of your direction? that business model and that
values. You’ve updated them. sector, we're not playing in
When you watch that over and CTF: On average, our returns that area?
over again, it gives you a lot of were really good but it
confidence to buy a company. bothered me more to lose CTF: Anybody who doesn’t
You might not have owned it money than I enjoyed making control their own destiny,
for 10 years, but you might money. What attracted me to which is most people. You
have been following it for 10 value investing in the first place mentioned energy. There are
years and its value has is a margin of safety, taking on less than a half a handful of
compounded steadily. It gives less risk. companies in that area that
you a lot of confidence provide value-added services
because you’re not scrambling Using a baseball analogy, you that we like, but we don’t like
to get up to speed. If you’re don’t improve your average by most of the industry.
trying to get up to speed at the just hitting more home runs. If
last minute, the seller is going you can eliminate your There are some really well-
to know a lot more than you strikeouts, you can really managed industrial companies.
are as the buyer, but we’ve improve your results. It’s not One we’ve owned for a long
been following these so much about what you do; time that’s been really
companies forever. it’s what you don’t do. successful for us is Parker
Hannifin. They’re a leader in
We make mistakes but I think G&D: When you’re thinking motion control products and
our dual emphasis on quality about the value stability, you they have a substantial
and discount is what really seem to focus on free cash aerospace business as well,
differentiates Vulcan. That is flow. Is that correct? where they are in programs
what we do differently than a like the 787 which have a very
lot of practitioners in the CTF: Yes. From a quantitative long life. We like companies
industry. point of view, free cash flow is where the equity duration is
really important to value long and the cash flow is very
G&D: How do you motivate stability. That’s a quantitative stable.
your analysts to look at things metric. There are others: How
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Vulcan Value Partners

Then there are other industrial G&D: You have a couple thoughtfully and create a
companies that are just making hundred names on that list, foundation that can propel you
commoditized products. right? forward, that is a one-time
They’re typically price takers asset but it’s depleted over
and they are heavily leveraged. CTF: We have roughly 500. time. It’s gone. You only get it
They’re in a very weak Our analysts are rewarded for once. We spent a lot of time
position. Anybody can do what finding new names to add to when we were setting up the
they do. Those are just cigar the MVP list, but they’re company to make sure that we
butts. They get cheap, but we doubly rewarded for taking set up a culture and a
Professor Tano Santos don’t care. We don't want to names off. No one is rewarded compensation system that
speaks with Mario Gabelli waste our time with them, for how many names they reinforces the execution of
’67 at the 27th Annual even if they are cheap, because follow in the portfolio. You our investment philosophy.
Graham & Dodd Breakfast they do not have inherently just happen to be the person
stable values. who is following the name at G&D: How do you look for
the moment it became these new MVP companies?
G&D: Could you buy one of discounted. These names on
those cigar butts at such a the MVP list have been CTF: We read a lot. We get a
discount that you are updated by numerous analysts lot of ideas from following the
effectively agnostic to the companies we own. We spend
commodity price risk? “We don’t screen. a lot of time talking to the
companies we own. I can’t give
CTF: Absolutely. You could, We’re looking for great you all the secret sauce, but
and I used to do things like we’ve spent a lot of time
that but don’t do them businesses….A lot of talking to very accomplished
anymore. You have to be people. We never ask about
disciplined. We still like the businesses that we own earnings. We talk about long-
discount. But liking a discount currently, I have owned term issues impacting the
didn’t make it go away. business. We talk about what’s
three or four times over going on currently. We talk
There are things we look at, about the things that really
we go, “Oh, my gosh. You the course of my career. matter. The companies we talk
know, this is just so tempting,” to really appreciate that.
but don’t do it. We don’t. That makes up what we
G&D: You’ve owned Oracle
G&D: You mentioned call our MVP list: for a while, and it’s your
spending some time on the companies we follow largest holding. Why?
quantitative but a lot of time
on the qualitative. How do you that we would buy if CTF: We became believers in
go about valuing those the shift from on-premise
qualitative metrics for they become computing to cloud computing
companies and kicking the tires a long time ago. Go back a
before you invest? discounted.” few years before the cloud
grew rapidly. Oracle and SAP
CTF: We don’t screen. We’re over many years. Nobody even dominate the on-premise
looking for great businesses. remembers whose idea it was. software markets, specifically
There’s a lot of accumulated It’s great because we’re now the enterprise computing
knowledge. A lot of businesses working objectively with a software market. SAP is
that we own currently, I have culture that reinforces our stronger in applications and
owned three or four times investment process. We’re not ERP and Oracle are stronger in
over the course of my career. at odds with each other. databases, but Oracle has
That makes up what we call plenty of ERP products and
our MVP list: companies we Most new businesses fail. You SAP has its own database. SAP
follow that we would buy if have a lot of things going licenses the Oracle database
they become discounted. against you but when you can for most of their stuff.
set up initial conditions
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Vulcan Value Partners

It’s like Coke and Pepsi. might be using one of the margins. Earnings growing well
Neither one of them is going products in the cloud and one over 100% in that part of the
to knock the other out. They of the products on-premise. business.
fiercely compete with each You’ll never know. That’s
other, but they respect each really easy to say and The on-premise business is
other. They bad mouth each incredibly hard to do. basically going from growing at
other but at the end of the a mid-single-digit rate to
day, neither one of them is SAP kept focusing on on- basically growing at zero. The
going away. It’s very logical. premise. They’re more of a cloud business is now at a $6
Both companies have pricing European company and more billion run rate. With that kind
power and their products are of their clients are based in of run rate, it’s now growing
really sticky. Renewal rates are Europe. The Europeans are around 40-50% instead of 70%
north of 90%. They’re in a generally more skeptical about or 80% on that much bigger
sweet spot if you look at cloud than the Americans. The base. You couldn’t see it in the
where the economy is adoption’s been a lot faster in GAAP numbers but we saw it
growing. the U.S. There are some in all of the new bookings.
business reasons for it, too, Growth was in line with the
There’s more and more but Oracle is in a much strategy that they explained to
demand for their products. stronger competitive position us. We weren’t the only ones
Everybody talks about the than they have ever been who heard it, but you could
explosion of data, and that because of their investment in see it in the figures that
drives demand for their the cloud. ultimately drive the GAAP
products. They both have had numbers.
a wonderful business for a It cost them in terms of
really long time. They’re both earnings. They’ve been You can go read old sell-side
MVP companies. converting their client base to reports that were negative on
cloud. It has impacted their Oracle because its earnings
Roughly five years ago, Oracle revenue growth because growth had stalled. Now their
made an announcement that you’ve had decelerating growth earnings are beginning to
they were moving toward the in on-premise. They have had accelerate and the reports are
cloud. SAP at the time said heavy R&D investments and getting more favorable.
they were staying with on- costs going up faster than Oracle’s stock price is
premise and not really revenues. Their earnings after beginning to go up but the
investing much in the cloud. growing steadily for decades growth was there two years
Oracle spent a ton of money starting dipping. ago if you looked at what’s
to make all of their on-premise under the hood and not at the
products fully compatible in G&D: When was that? When GAAP numbers. The GAAP
the cloud and integrated with did they start dipping? numbers are a lagging indicator
the on-premise offerings. to what’s actually happening in
CTF: They started dipping the business.
When you say you’re in the about two years ago, sort of
cloud, what does that mean? flatlining about two years ago Oracle’s growing at double
Oracle is in the cloud in a and then just a slight decline. digit rates again. We think
much more integrated way Part of it was FX, but I’m they’re going to grow at
than SAP is. Oracle invested talking about down mid-single double-digit rates for a really
aggressively to be able to offer digits. Not a big deal at all. long time. Ultimately, is it
the cloud across their entire going to be a 10-year transition
product suite, a complete At the same time, while the on or a 20-year transition? If it’s
solution. With Oracle, you can -premise is slowing down, the 10 years, they’ll grow faster
be 100% in the cloud, you can cloud business is exploding. I’m sooner, but if it’s 20 years,
remain 100% on-premise, or a value investor. We have a you’ll just have longer
you can be hybrid and never really hard time modeling duration. They’ll grow slower
know the difference. When growth rates like this but this but it’ll last longer. They will
you’re sitting at your desk and was 70-80% annual revenue settle back down to a mid-
you pull up the database, you growth with expanding single digit kind of revenue
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growth again but in the mean investment phase. Now we’re opportunity when others were
time they’re going to grow at on the other side of it. As five- focused more on near-term
an accelerated rate. SAP trades year investors, we’re happy to EPS?
at a significant premium to wait. Other investors are not.
Oracle because they have They want to see near-term CTF: It does happen from
continued to enjoy their earnings acceleration. time to time. It’s really ironic
earnings growth over the because it’s what many say
shorter term. They haven’t G&D: Can you talk a little bit they want companies to do,
made these investments, but about barriers for entering the but then the companies get in
that’s going to catch up with cloud? Can’t others enter as trouble for it. United
them. well? Technologies is doing it right
now with Pratt & Whitney.
Again, at the right price, we’d CTF: Oracle has made Honeywell did it a few years
own SAP. SAP’s strategy is not extensive investments not only ago. FedEx did it a long time
flawed. It’s just a different to rewrite all of their code so ago when they started building
strategy, but in terms of what’s that it can be deployed in the their international operations.
going to happen, SAP’s growth cloud, on-premise, or hybrid, Quaker Oats did it when they
is going to slow relative to but also in the infrastructure were investing heavily in Latin
Oracle’s and it trades at a needed to deliver such America. It can create great
premium. I think Oracle is an services. We do recognize that opportunities for long-term
example of us exploiting our investors.
five-year time horizon. We “We give Oracle’s
look at that and say, “Okay, G&D: How do you evaluate
we’ve got two years of flat-ish management team management? Is that just going
earnings.” Meanwhile, they’re back and checking the track
generating $13 billion of free points because they record of how they’ve
cash flow, 80% of which has performed as stewards of
been put into share re- do what everybody capital in the past or is it more
purchases because they know by talking with them about the
says you’re supposed
their stock is cheap. landscape they’re facing?
to do. They’re willing
While we’re waiting for this CTF: You have to do both. I
transition to occur and to sacrifice short-term think that studying somebody’s
earnings growth to accelerate history is really, really
again, our value is stable results to strengthen important. We made an
because of the robust free cash investment in Time Warner
flow and stable margins. They the company over the seven years ago. That was a
quit growing for a while but company that was not on our
long term.”
we’re still getting a free cash MVP list because of mis-
flow coupon, and they are cloud-only competitors exist in management exemplified by
using that to repurchase shares the application layer, such as the AOL-Time Warner
at a discount. Workday and Salesforce, and merger. Because of that, there
there are infrastructure-only was finally a shakeup on the
Our view is that we were paid competitors, such as AWS. board. People that we didn’t
to wait while this transition However, no one competes like started to leave the board,
occurred. We give Oracle’s effectively throughout the and people we did like started
management team points stack with Oracle in both on- to join the board. Jeffrey
because they do what premise and in the cloud. Bewkes became CEO, and we
everybody says you’re were paying attention.
supposed to do. They’re willing G&D: Are there any other
to sacrifice short-term results examples where your The company was not on the
to strengthen the company institutional knowledge from MVP list because of this big,
over the long term. Now having followed these black mark on management
we’re in the payoff phase but companies on the MVP list but it could be a potential add.
we had to ride through the helped you spot a multi-year When Bewkes became CEO
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Vulcan Value Partners

and we saw this change in the look like?” During the financial CTF: We’re not always right.
board composition, we started crisis, we had large Sometimes we sell something
watching more closely what he investments in DirecTV and and the company remains
was doing. He started Comcast, and we ended up competitively entrenched.
reversing all the crazy stuff owning Time Warner Cable Frankly, with the distributors,
they’d done. They started when it was spun out. Those it’s come back full circle. The
doing a lot of shareholder- businesses were great video business is not that
friendly things like spinning out businesses when we owned important to them anymore
Time Warner Cable and them and their bottom-line compared to what it used to
started buying back the stock financial results still looked be, but every time you’re
when it was cheap. fantastic when we sold them. streaming Netflix or Amazon
But from a qualitative point of Prime, it’s going through their
We kept listening to view, we had started to worry pipes. They win anyway. They
conference calls, and we kept about cord cutting. have really become ISPs more
watching, and we finally put it so than video providers.
back on the MVP list. Luckily We started talking to the
for us this happened right younger analysts that we had I’m not saying that they qualify
before the 2011 U.S. debt- hired. All of a sudden, I’m again, but who knows? Five
ceiling debacle. First, we hiring people and they’re years from now, we might own
decided it met our quality saying, “I’ve never paid for Comcast again. I don't know,
criteria, including management. cable or satellite in my life and but things evolve and they
You can have a great business I’m never going to.” The more change. We don't always know
like Time Warner, but if you work we did qualitatively, we about the timing and how fast
don’t have good management, said, “You know what? Power it’s going to happen.
it doesn’t work. That was the is shifting from the content
missing piece. It then became distributors to the content As value investors, we don’t
discounted, and we bought it. owners.” About the time we have to play. It’s all about
We just recently exited the bought Time Warner, we were managing risk. We might be
position. getting out of DirecTV, wrong, but if we're wrong and
Comcast and Time Warner things continue to go well,
G&D: You mentioned the Cable because we believed we’ll just allocate capital
quality criteria for Time that the content owners were somewhere else where we
Warner. Can you define it? getting a stronger hand. We think things are also going to
believed the distributors’ go well. We don't have to take
CTF: Our definition of quality competitive position was those risks.
is value stability. How stable is beginning to erode, but you
your value? Things that lend couldn’t see it in the numbers G&D: Taking a long-term
themselves to value stability yet. approach as opposed to more
are production of free cash of an activist approach, I would
flow, stable margins, and Now, look at today. Cord imagine you definitely need buy
strong balance sheets. cutting's rampant. We saw that in from your clients on this
You could argue that most of six years ago from a qualitative type of strategy. How do you
our companies have very point of view. The qualitative communicate the type of
inefficient balance sheets. analysis is even more investor you’re looking for and
Because of their free cash flow important than the quantitative how do you best have that
production, they could have a analysis because quantitative is conversation?
lot more financial leverage than always a lagging indicator. By
they do. Most of our the time you see it in the CTF: That’s a great question.
companies have net cash and numbers, it's often too late. We truly view our clients as
their balance sheets can be partners. We chose the word
used as a weapon. G&D: So you recognize the partners and put that in our
qualitative thing that triggers name very deliberately. We
You then go and say, “Okay, you to think, “Okay, there’s a view the companies that we
that’s great but that’s the past. shift here that hasn’t turned up invest in as partners. We want
What’s the future going to in the numbers yet.” them to treat us as partners. If
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Vulcan Value Partners

they don’t feel that way about great. Most of our clients are think about careers in this
us, that's a big red flag. We institutional. They invest in industry long term?
look for the intersection, if you multiple asset classes, partner
will, of a partnership between with multiple managers around CTF: I’m going to quote the
the management teams with the world, and have lots of interview you did in your Fall
whom we invest, ourselves, options. We tell them to issue with Howard Marks. I
and our clients. One of the reduce their exposure to us thought his advice was
things I’m really proud about at and put their capital outstanding. Do what you love.
Vulcan is everyone at Vulcan is somewhere else where there I’m the happiest guy in the
required to invest in public world. Every day, I do what I
equities exclusively through “With the [content] love. I’m more blessed than I
Vulcan. You can’t work at deserve to be. I have been
Vulcan and invest anywhere distributors, it’s come happily married for many,
else. many years. I have healthy kids,
back full circle. The everything’s great. But during
I think that really aligns our my working hours, I don’t
interests with our clients. It video business is not think, “Okay, got to go and get
doesn’t make us smarter than that important to through work so I can start
anyone else, but it does keep enjoying my life.” I look
everybody focused and it them anymore com- forward to going to work. I get
weighs heavily when someone bored on vacations pretty
in a research meeting feels pared to what it used quickly. It’s such a blessing to
strongly about something. I enjoy my work that much. My
know that their net worth is to be, but every time advice to everyone is to find
riding on it. something that you love. You’ll
you’re streaming Net- become so much more
Our clients share our time flix or Amazon Prime, successful at something if you
horizon. They share our ability love doing it.
to differentiate between value it’s going through their
and price. We have fantastic I’m sure you have all heard of
clients. We tell them that pipes. They win any- Malcom Gladwell’s book
investing with us can be very Outliers, and maybe you have
uncomfortable. There are way.” read it. It discusses the
going to be periods of time principle that if you do
when we’re doing things that are better risk adjusted something you enjoy doing,
are very uncomfortable in the returns. We want the kind of you’re going to do more of it,
short run. If you are not willing client where we can have that and the repetition makes you
or able to go through that dialogue. Then, there'll be a better. That’s my biggest
discomfort, don’t hire us. day when we'll say, “Now, the advice. In terms of value
You’ll be unhappy with us. We opportunity set is rich. I fully investing or anything else, you
want client partners that can expect to get that money back must be passionate.
provide stable capital for us. and a whole lot more.” 2008
was a great example of that G&D: Thank you, C.T. Thank
There’ll be a time when we're happening. you for sharing your thoughts
going to say, “Give us money. and time with us.
The opportunity set is rich.” I One of our competitive
really think they will because advantages is our group of
we’ve told them it's not a great clients. We closed to outside
opportunity set right now. If investors in 2015. Our clients
you have better places to provide us with very stable
allocate your capital, we capital, and that is a huge
encourage you to do that. If advantage for us.
you have another manager
who’s got some great things G&D: What advice would you
for another asset class, that’s have to students just as we
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(Continued from page 1)

Highbridge Capital to get coffee for the team—my these days. But, at the time,
Management, where he first opportunity to showcase there were more
managed the firm’s Asia my work was an FX arbitrage opportunities than there was
investment portfolio. Prior opportunity in Venezuela. It hedge fund capital in places like
to joining Highbridge in was an onshore-offshore arb Italy.
January 1995, Mr. Fischer of converting ADRs.
served in the Israel And then we got involved in
Defense Forces. Mr. Highbridge co-founder Henry the Japanese convertible bond
Fischer graduated from Swieca ’83 was extraordinarily market. That was then the
Yeshiva University, New generous towards me. I was largest CB market in the
York, in 1993 with a working with Alex Jackson ’91 world, because Japanese
Seth Fischer Bachelor of Arts in at the time—and he suggested companies were issuing so
Political Science. He is a I present the Venezuela idea to much CB paper. And this
Board Member of the Henry. I did, and Henry said, reflected a regulatory quirk of
Karen Leung Foundation, a “Great. Here’s half a million Japan. Insurance companies,
Board Member of Carmel dollars, why don’t you give it a who were among the biggest
School in Hong Kong, and try?” allocators of capital, had limits
Vice Chairman of the Ohel on how much equity in other
Leah Synagogue That was still a lot of money corporations they could own.
Management Committee back then, but we gave it a try So corporations would issue
in Hong Kong. and it worked. I stopped what are essentially surrogate
getting coffee and started bonds as equity–securities that
Oasis manages a looking for more stood in the eyes of the
combination of strategies opportunities. We then did regulators as bonds but that
that focus on investing, some cash extraction trades in offered equity-like
trading, and arbitrage Italy, where interest rates participation. And they issued
across global capital were really high. them cheap. There was just so
markets with an emphasis much supply of paper that it
on Asia, taking an G&D: What’s a cash was shockingly cheap.
opportunistic approach in extraction trade?
multiple strategies and Then I started getting involved
asset classes. It invests in SF: This may seem alien to with everything else. There
long and short current MBA students, but was a wide variety of arbitrage
opportunities across once upon a time the world opportunities in Malaysia,
markets and capital had both high interest rates Indonesia, and the Asian
structures, and and opportunities for pure Tigers. Soon, the 1997-98
investments are selected arbitrage. And cash extraction Asian crisis occurred, and I
for their optimal risk- is literally buying a warrant, learned about risk
adjusted return profiles. shorting the underlying stock management and how to deal
The firm’s investment and receiving interest on your with problems quickly.
approach combines short sale proceeds. At the
fundamental value analysis time, rates in Italy were about G&D: You started off in the
with sensitivity to changing 12%, so high that you could business finding arb
market environments. actually make money for free. opportunities, but Oasis is a
lot more than arbitrage today.
Graham & Doddsville G&D: And this would be very How would you characterize
(G&D): How did you get your hard to do in today’s near-zero Oasis’s strategies?
start in investing? environment?
SF: As I say to my traders,
Seth Fischer (SF): My first SF: Yes, this is impossible to and to my investors, “We’re
professional job in finance was do at zero. Plus, the world is trying to make a buck, and not
at Highbridge. Besides getting much more efficient and lose one.” And we have three
coffee for the traders on the there’s much more capital, so idea buckets: We are trying to
team —and, in fact, when I this opportunity would be do it faster than everyone else,
started out, I was running out arbitraged away in 30 seconds know it better than everyone
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else, or question the very They are different types of might work on something for
premise of the story. “Do It muscles. And you’re paid for a three or six months and you
Faster” is what we call our different ability. I think acting decide to kill it.
Tactical business and the faster in trading means you’re
others are part of our getting paid for mostly risk I’ve made mistakes killing ideas
Strategic business. tolerance, and to some extent that I shouldn’t have killed.
the ability to quickly source an And maybe we proceeded with
A lot of the ideas I described idea or a block of securities ideas that I should have killed
just now fall into the rubric of when an event occurs. It may along the way. But it’s much
“Do it Faster.” At other times, also mean you’ve thought nicer to make these decisions
we have done good research, about these events before—or when you aren’t immediately
and we just know what’s going have seen some version of this pressured to put risk on, and
on with a company or situation generate some profit in the
that others don’t. When I left short term. We can slow
“We are trying to do it
Highbridge and started Oasis, a down and do our Strategic
lot of our P&L came from faster than everyone work diligently.
continuing to do it faster or
knowing things better. else, know it better Plus, our Tactical business
gives us access to a lot of
Then we also started than everyone else, or pieces of information that we
questioning everything, in what would otherwise miss.
is now our third bucket. On question the very
the long side, we started G&D: What kind of
premise of the story.”
questioning Japanese gaming information?
company Nintendo many years story—and can act quickly this
ago. Why doesn’t Nintendo time around. SF: A lot of ideas in the
use its IP for mobile? This Strategic bucket come from
became a big case of G&D: Is there any benefit to observations made from the
shareholder activism for us, combining the Tactical with the Tactical side. For instance, why
where we kept nudging Strategic? Can one help the is a company continuously
Nintendo into this direction. other, for instance? issuing capital? We learn a lot
about a company or its
That’s an example where the SF: I like both businesses, promoter who is doing a lot of
future doesn’t necessarily maybe because on Day One, I deals or trading a lot of
reflect the past, and where we was the only guy doing all this securities. We also generally
have to think differently from stuff. For the first two years at know of incoming supply or
the herd. In our Strategic Highbridge, I worked by offerings in a market that may
business in general, the great myself. I developed both affect the price of a particular
returns come from being very muscles, and I am going to security, which does affect our
different. continue to use both muscles, timing for our investment.
even though I’m spending a lot
G&D: Is it possible for the more time on my slow-twitch Could we have figured that out
same analyst to both “do it muscles these days. without being in the Tactical
faster” and “know it better,” business? In some cases, yes.
possess both trading instincts The Tactical business is a But in other cases, we
and the fundamental-analysis consistent revenue stream. wouldn’t even be paying
chops? That’s helpful when the attention to that space if it
Strategic business has longer weren’t for our Tactical work.
SF: I think you’re right that holding periods, some of
they are generally different them—like our engagement Thanks to the Tactical bucket,
muscles. They are fast versus ideas—much longer. Strategic we end up making more
slow muscles. That’s why we sometimes involves long connections, meeting more
have four analysts in our engagements with companies, people. On any given day,
Tactical team, and about eight and some of it is work that there are three to seven
in our Strategic Team. doesn’t return anything. You companies coming through our
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office. There’s a lot more idea or validity of contracts is the forest, you’d see the inside was
sourcing. And we know more norm. In the West, we see cut out.
about the IPOs, secondary sophisticated accounting
offerings and private frauds, but not as many Sino-Forest ended up being a
placements in the region as a physical frauds. In China, there fraud from so many points of
result. are outright physical frauds— view. That business model
where the business just didn’t make any sense, because
We traded a stock recently doesn’t exist. Despite the fact it seemed the customers were
where we remembered that that you have all the financial paying the company’s suppliers,
somebody had been sitting on statements, and auditors and and the company could say it
a related convertible bond for lawyers have signed off, a was not touching any cash.
a very long period of time. The substantial part of the business That helped them manage the
underlying stock has gone up is just not there. That takes a accounting part of the fraud—
in value a lot, so all of the lot of on-the-ground work to the auditors couldn’t see any
sudden the CB looks cheap. So know better, but also a healthy cash going in or out. But tell
we said: Why don’t we just call degree of cynicism. me this: What business reports
this guy and see if we can EBITDA margins around 60%
source the stock block or buy G&D: Can you elaborate on and doesn’t touch cash?
the CB from him?
“In the West, we see That was a case where you
G&D: How would your could ask big existential
Tactical prowess work in sophisticated questions. You could work
markets that are getting faster down the chain, and cover
by the day and that rely accounting frauds, but every part of the business.
increasingly on algorithms? Who are the customers, who
Could no algorithm have gone
not as many physical are the suppliers, do these
through the CB holder list and frauds. In China, there people exist, where are these
convinced that guy to sell? assets, do they actually own
are outright physical the forest?
SF: No algorithm is yet making
automated phone calls to frauds—where the There is a similar, more recent
holders and convincing them case—another physical fraud in
to sell. There is still value to business just doesn’t this part of the world that
getting on the phone. As they involves sandalwood trees.
say in “Glengarry Glen Ross,”
exist.” There is misrepresentation on
you should always be closing a almost every single account.
sale. You have to convince the these physical frauds? It’s
fund manager who holds a intriguing that this is something If you are an alternative-asset
security that this is a good a sophisticated New York- manager or a family office who
time to sell. At least for based investor, used to has bought into the idea of
securities that aren’t that Western norms, may miss buying a forest or securities in
liquid, the business is still about when looking at Asia. companies linked to forest, be
relationships. very careful. Yes, on one hand,
SF: Perhaps the easiest it could be a great long-term,
G&D: As for your other example to talk about is Sino- uncorrelated investment—
business line, what does it Forest Corporation, the because yes, the world still
mean to you to know a Canada-listed Chinese timber needs wood.
business better than others in company where the trees
the market? were simply not there. They Yet the problem is that
didn’t own the trees. In the forestry is a 20-year or so
SF: In China, for instance, this one property that they took investment, and it matters how
may often mean being skeptical investors to see, if you drove the companies value these
from the get-go—and not around, you’d see a massive assets. In this case, the
being complacent enough to forest. But if you hired a company misrepresented how
think that Western rule of law helicopter to fly over the fast its trees grow, how much
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yield they get in sandalwood know to steer clear of such realize it’s really a long-term
oil out of it, the survivability physical frauds in Asia? relationship with you.
rate of the trees, the price that
they sell it at, the size of the SF: Uncovering physical frauds G&D: To get around this
demand from customers. requires real work, which principal-agent problem, does
means going to visit sites not Oasis do all that work itself?
David Greenspan ’00 speaks G&D: Ha, so what were they on a company-sponsored trip. Or do you rely on partners?
with attendees of the 27th not misrepresenting? There are countless stories of
Annual Graham & Dodd people going to factories in SF: Both. I have internal staff
Breakfast SF: The fact that they had China a day before the performing 80% of this
trees? The larger picture is roadshow and seeing a diligence. Yes, it’s labor-
that these trees are very hard different name on the door. intensive and time-consuming,
to grow. The company said When they show up on the and sometimes you are
that these trees had very high roadshow, on the other hand, working on a project for three
survivability—but we got the there’s a whole Potemkin months and you’re wrong. But
individual plantation numbers, village out there. the good news is that it’s not
and survivability was much physically difficult. You can
lower than their claims. They So first, go check it out. There send somebody who doesn’t
tried to claim that they cut the are no repercussions for going have a PhD. Most anyone
trees earlier and had a better to see the assets without diligent can stand outside of a
yield than ever before. All the telling the company you are factory, count cars, and click
claims were overstatements. going to see it. Second, visit pictures.
the customers, without being
Most importantly, customers, pre-announced. Third, visit the What you do need is that
who are often in China, were suppliers. Fourth, in China, pull healthy degree of cynicism.
either made up or had stopped up the local-government filings And it’s very helpful if you have
being customers—and the (that are separate from what is some business experience. If
company failed to disclose that. filed to the stock exchange) you’ve never gotten your
The price these customers and read the publicly disclosed hands dirty growing up, you
were paying has dropped by taxes. Do those numbers make might not know what a
50%. The company sold some sense? business looks like. And I don’t
plantations to the CEO, who mean knowing what a business
borrowed the money from the The point being, this stuff is looks like on an annual report.
company to buy those assets. hard if you are trying to look I mean having a sense of when
Now, the CEO has defaulted in at a hundred different money changes hands, when a
paying even the interest on the companies. So a lot of people company pays taxes.
loan. outsource the work. This is
harsh to say, but there are It’s important to also protect
The company has finally turned certain on-the-ground against our biases. For
around to sue him. A few investigation firms that have a instance, on the short side, I
months ago, this whole thing short time horizon and think don’t like our analysts meeting
blows up. He resigns, says he’s they are doing you a favor the management. While it’s
going to try to buy the because you are sitting in New very helpful sometimes to hear
company, and whispers rumors York or Chicago and need the company’s answer for what
that he’s going to do it with a their help. You are trying to you don’t know, it’s human
big private-equity firm. Which get to a “Yes” on your nature to believe people. Some
is unlikely, because that PE firm investment. But they are trying of these companies may be
owns another sandalwood oil to please you because you’re frauds but, not surprisingly,
plantation that they are trying the customer. So they’ll do half they have good salespeople.
to sell. And nothing has come or three-quarters of the work
of that “rumor.” and still give you an OK. Even our most cynical internal
analysts, when they meet
G&D: Wow. What does a So you either need to find management, end up believing
Western investor need to people who are going to go management. We can have
the extra mile, or people who other people ask the company
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questions but I don’t want the decades doesn’t have to shareholdings, and a focus on
primary analysts to meet the continue. We call that return on equity.
company in those situations. “protect”.
In the case of PanaHome
G&D: You mentioned your A campaign we have in that Corp., a listed subsidiary of
activist stance with Nintendo. bucket right now is Protect Panasonic, we had a company
Can you tell us more about Alpine with 89%+ of its market cap in
your activism? ( cash with zero leverage. Ex-
cash, the business was trading
SF: Our activism has a couple Japanese stock valuations are at one and a half times
of different buckets, too. It extraordinarily low. If you earnings. It was extraordinarily
could be a white-space cheap but possessed good long
opportunity—something the “In the one property -term revenue streams—and
company is just not engaged in not in tobacco or a heavily
that we think it should be. We that they took regulated industry with
call that “a better business.” systematic problems.
Nintendo is a phenomenal case
investors to see, if you
from this bucket. It was a drove around, you’d G&D: What does PanaHome
classic value investment, do?
trading at just a 20% premium see a massive forest.
to its cash when we got in. SF: It builds steel structured
That is, cash was roughly 80% But if you hired a houses in Japan. It has a fair bit
of its market value. of Southeast Asian expansion
helicopter to fly over potential, they have a land
Essentially, the pitch book bank that they can use, and
Nintendo puts out at IR
the forest, you’d see they have cash to use to buy
meetings today is the pitch the inside was cut additional land.
book I gave them in 2013. My
pitch was about going mobile out.” Now, they had never used that
and monetizing IP with new cash, because that cash
theme parks as well as media. think about valuations on EV/ happened to be parked with its
Today, cash is at 15% to 20% EBITDA as opposed to price/ parent Panasonic. Why? For
of market cap, and as the earnings, or if you think about cash-management purposes,
company has taken steps in them on a P/E ex-cash basis, they told us. Well, I’m also
this direction, the stock is up Japan is very cheap. And that’s holding my five-year-old’s
4x. because Japan has much lower lemonade money—literally.
leverage, lower ROEs and But he’s five. When they’re 13
A current campaign we have in lower profit margins. years of age, they want to hold
this bucket is called A Better their own money. This
Pasona Over the last 30 years or so, company has been listed as an
(, Japan Inc. has gone to excess entity for 40 years. I think it’s
where we’re involved with the cash with no leverage. That about time it grew up.
Japanese staffing firm Pasona. situation is changing as the
Bank of Japan’s monetary Why is its cash held by its
The second bucket is imagining stimulus tries to bring leverage parent? Because the parent
that the future could be back into the equation. It’s gets to pay out only five basis
different from the past. In prudent in a deflationary points and hold all its
Japan, I got encouraged on this environment to have no subsidiaries’ cash and use it. So
front by Prime Minister Shinzo leverage but if you are trying the market completely
Abe’s new corporate to have inflation, it’s actually discounts PanaHome’s cash
governance and stewardship prudent to be levered. On top because it thinks the company
codes about four years ago. of that, the government has is never going to get to see it.
This meant that the corporate pushed for shareholder You can read all the sell-side
abuse of minority shareholders payouts, independent directors reports and nobody uses the
that has gone on in Japan for on boards, unwinding cross- cash in their valuation.
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So I thought it was time to say metrics for the takeover. I letter to PanaHome back in
to PanaHome, “You should get thought this was ridiculous, 2011 when they had taken
your cash back. You should and I wasn’t going to stand for over two other listed
not only get your cash back, it. We bought more stock, and Panasonic subsidiaries and
you should use your cash for ended up owning 9.9% of the done the same exact thing.
growth. Invest with a positive company. I set up a website They had revised earnings six
IRR.” I went to them in March called months earlier, and the stocks
2016 and said so. They said, to went down 20%. Then they
“Great, we’ll think about it.” used the historical price
average, and on the day of the
They never got back to me, so “We are not coming announcement of the takeover,
six months later, I wrote them they revised back earnings to
to Japan saying, ‘This
a formal letter. Three weeks what they originally were.
after I sent them the letter, is the way it should be.
they set up a committee to I remember that we were
privatize the company— Let me tell you how to protesting at the time because
basically, to get rid of pesky we were shareholders of those
guys like me. do business.’ We are two listed subs. But I decided
not to really take the fight to
Then they go ahead and using the Japanese them at the time, because I
privatize at a very small didn’t think we would have
government’s own
premium to the current stock enough shareholder support.
price. And they bias every part initiatives. After all,
of the valuation process. The This time, it was different. The
comparable companies they list this is Abe’s third Japanese government was
for market multiples are not behind us, so we launched a
really their competitors. The arrow of structural full-scale battle. A few months
DCF suddenly has them using later, PanaHome announced a
all that cash in the next three reform.” revised tender offer, which
years. They show zero growth was 20% higher. I still think the
and negative cash flow in the spread the word—something price is too low. We have sued
DCF, so the imputed market that had been done before by for appraisal rights, a process
value ends up very low. activists in the U.S., but not in in Japanese law where a
Japan. shareholder can sell the shares
They revised down earnings on back to the company, if he
November 1, 2016, which The comparable companies objects to a transaction, at a
caused the stock to fall, then they used were not their only fair value that a court has to
announced the privatization on true nationwide competitors, determine.
December 20. And guess what Sekisui House and Daiwa
they used to calculate the House. Instead, they chose G&D: Activists have tried
historical average stock price small, money-losing and illiquid knocking on Japan Inc. doors
over which they would pay a companies as comps to further before. Is this time different
premium? They used the three depress the “fair” takeover entirely because of the
-month average, the 44-day price. Yet, we have tapes from government push?
average, and the 30-day more than 10 PanaHome sales
average—so they massively agents referring to only Sekisui SF: Yes, this time is different
weighted the exercise to the House and Daiwa House as because of the government.
44-day mark, right after the their main competitors. And press coverage is in our
time they revised their Naturally, Sekisui House and favor. During the PanaHome
earnings. Daiwa House trade at more debate, the Nikkei—Japan’s
than double the multiple of largest business paper—had a
Then in April they revised up PanaHome. cover story on justice for
earnings, leaving no doubt that PanaHome’s minority
they had revised down in We don’t have to take this shareholders.
November just to bias the anymore. I actually wrote a
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We are not coming to Japan management, but now couldn’t as his official successor still
saying, “This is the way it justify voting so. unofficially answers to him.
should be. Let me tell you how
to do business.” We are using Now, thanks to new One could say this is a cultural
the Japanese government’s developments in Japan’s matter, and reflects Japan’s
own initiatives. After all, this is corporate governance rules, respect for its elders. But the
Abe’s third arrow of structural companies in Japan have to problem is that the
reform. reveal how each individual shareholders, the company’s
shareholder voted. So there employees and even some of
There have been other is gradual progress. We’ll be the board members don’t
changes in Japan too. The back soon with the company. know about this guy. They
Tokyo Stock Exchange set up a And they know it. don’t know that he’s still
new JPX 400 index, where pulling the strings.
ROE is the key metric for G&D: If the driving force is
inclusion. And the political, what happens if Abe G&D: The proxy never
Government Pension loses an election? disclosed these advisors?
Investment Fund, which
manages $1.3 trillion—trillion SF: There is a risk. But we SF: No. But the good thing
with a “t”—now invests trying think Abe is stable and going to about Japan is its strong legal
to match the JPX 400. The continue in power. And the framework, so you have the
whole government, including two leading candidates of the power of the courts. We
the alphabet soup of regulators Liberal Democratic Party— would sue to get this
and associations, is massively Abe’s party, which has been in information and win eventually
behind this corporate- power for the overwhelming once we get the information,
governance initiative. majority of Japan’s postwar but that’s after six months to a
history—both embrace these year of fighting. Now,
In particular, cross- ideas. What’s more, most thankfully, it’s going to be a
shareholdings are getting people in Japan think the part of policy in Japan.
much, much weaker. This was corporate-governance train
the problem when fund has already left the station. The G&D: Oasis has recently
manager Warren Lichtenstein only question is about the taken an activist stake in
in the early 2000s was taking speed of acceleration. Chinese industrial gas maker
an activist approach in Japan: a Yingde Gases. Are China or
company’s web of cross- U.S. investors or international other parts of Asia new fronts
shareholdings ensured that the investors may get very excited for you?
management had enough about the recent corporate-
friends on the register to vote governance initiatives, SF: We are interested in the
in its favor. Now, minority expecting quick change, but activism space in general,
shareholders have real voting the reality of life is that such especially in line with
power. reform is slow. It’s slow improvements in corporate
everywhere. And Oasis is in it governance. It’s an increasing
We put forth a proxy in for the long haul. trend across Asia in general.
another company in March. Korea, for instance, is
We lost. But note that One of the most recent amazing—there was a whole
abstentions went up initiatives out there is that election in 2017 based on
dramatically during the proxy Japanese companies now have change in corporate
vote. The new trick for the to disclose their hidden governance after the vice
other shareholders was not to advisors. These are often ex- chairman of Samsung went to
vote against us but just to CEOs of Japan Inc.—a 75-year- jail on bribery allegations.
abstain. So management may old, say, who’s still hanging There are stewardship code
have beaten us in the vote, but around, who still goes to the changes coming to Hong Kong
the numbers were a lot tighter. office, still has a company car, and Singapore as well. And it is
The people who abstained and still gets paid 80% of his occurring in some ways in
were people who typically salary. The CEO he appointed mainland China, though China
would have voted for the is a different beast entirely.
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We’re also involved with crook. We are speaking in To make an Asian investor
Premier Foods in London. different languages. invest in the U.S., perhaps you
That’s another place where have to get rid of a lot of scar
cultural norms and In Japan, you want to appeal to tissue that you built up in Asia
shareholder activism are much what is right. The arguments of not trusting anything. Maybe
more conservative than in the one could make are that you waste too much time
U.S. abusing the process is wrong. because you just don’t want to
Child abuse, like Panasonic trust anything. Or maybe it
Premier Foods had a takeover abusing its subsidiary makes you a great investor
proposal rejected by the PanaHome, is wrong. Not because you so diligently check
board—and we thought it was making Japan as productive as everything.
poorly rejected. The stock it can be is a poor choice.
plunged and we established a Misleading shareholders is bad. G&D: Do you expect the
sizeable position. We own traits that allow Oasis to be
8.9% of the company today. “You have to learn successful today in Asia will be
We put a colleague of mine on materially different from
the board. And hopefully we’ll about the bad actions whatever is required to be
get a transaction done. successful there 15 years later?
of people. It’s
The U.K. is an example of a SF: Yes, remaining nimble and
important also to
place that has white-space changing our strategies as the
opportunity because of the understand where capital markets grow will
gentleman’s club way of doing continue to be a key to our
business. There has been some countries rule by law, success. The great news is that
activism, though not like the Asian markets are still
U.S., which has been picked rather than under the developing. I imagine Asia will
over and where activists have look a lot more like the West
been extraordinarily successful. law.” where there is a more
established rule of law.
G&D: What advice would you Thinking about how to have a
give U.S. investors about business that is taking risks and Japan will look more like the
approaching activism in Japan, growing in a well-mannered Western world if Shinzo Abe
compared to how they way, without being too is successful in 15-20 years’
approach it in the West? aggressive, is good. So this is all time. Companies’ balance
about what’s right and wrong. sheets will look more like the
SF: There is a very different It’s about adhering to the West, and that should be an
style. You have to remember Corporate Governance Code, upside for markets.
that you’re not just appealing or dismissing it.
to pure economics. Most prominently, there could
G&D: What lessons from Asia be a massive development of
There are great business- can investors apply when capital markets in China.
school studies on how looking at other parts of the There, we have to get out of
bargaining is different in world? the current gambling
different cultures. In some mentality—trading volumes in
cultures, it’s acceptable for bid- SF: There are physical frauds. mainland Chinese markets are
asks to be 50% wide. In other The ability to enforce unbelievably huge.
cultures, it’s only acceptable to contracts in important parts of
go 5-10% wide. It’s a big Asia is very hard, and it’s The key here is rule of law.
collision when two people of important to not take rule of Without legal enforcement,
different cultures bargain this law for granted. You have to trading is easy but value
way. One person asks for learn about the bad actions of investing is very hard.
$10,000 when the bid is people. It’s important also to
$1,000. But the other person understand where countries G&D: Any advice to MBA
thinks that asking for 20% rule by law, rather than under students who are interested in
more already means you are a the law. the world of investment
(Continued on page 43)
Page 43

Oasis Management Company


SF: First, don’t only sit behind

a desk. Second, just because
something is the way it is
doesn’t mean that’s the way it
has to be. If the way of the
future is simply the way of the
past, then a computer can do it
better than you. Think about
what your brain does that an
algorithm can’t.

G&D: That’s great advice.

Thank you.
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Contact Us: Graham & Doddsville Editors 2017-2018 Abheek Bhattacharya ’18

Abheek is a second-year MBA student and a member of the Heilbrunn Center’s

Value Investing Program. He spent part of this school year interning at Firefly
Value Partners, and worked for Davis Selected Advisers last summer. He’s done
stints previously with Indus Capital and Hound Partners. Prior to Columbia, he
wrote for the Wall Street Journal in Hong Kong, most recently for its flagship
Heard on the Street investment column. He studied philosophy at Yale Universi-
ty. He can be reached at

Matthew Mann, CFA ’18

Matthew is a second-year MBA student and a member of Columbia Business

School’s Private Equity Fellows Program. During the summer, he worked in the
Investment Banking Division at Goldman Sachs & Co. LLC. Prior to Columbia,
he was a Portfolio Manager at ClearArc Capital, Inc. focused on foreign currency
and emerging market debt. Matthew studied finance at Grand Valley State Uni-
versity. He is a CFA Charterholder and a 2018 McGowan Fellow. He can be
reached at

Adam Schloss, CFA ’18

Adam is a second-year MBA student and a member of the Heilbrunn Center’s

Value Investing Program. During the summer, he worked for the Intrinsic Value
Team at UBS. Prior to Columbia, he worked for T. Rowe Price and Lincoln In-
ternational. Adam graduated from the University of Illinois at Urbana-Champaign
with a BS in Finance. He is also a CFA Charterholder. He can be reached at