Variant Perceptions

Category: growth

Growth math

The most powerful force in the universe is compound interest – Anonymous, wrongly attributed to Albert Einstein and Mark Twain

The greatest shortcoming of the human race is our inability to understand the exponential function – Albert Bartlett, Professor of Physics

This lecture  tackles  the mathematics of compound interest, inflation, health care costs, finite resources, peak oil, ethanol, global warming all at once. The rest of the lecture is here with parts 4 to 6 being particularly interesting. The rule of 70 is a great shortcut and YouTube  a great time sinkhole.

Vodpod videos no longer available.
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Turnaround Cases: Premier Exhibitions Part 3 ($PRXI)

Walshgb, a reader of this blog, was right on the mark when he made this point on management in turnarounds

If you don’t have control, this means you should only focus on turnarounds that already have the right leadership team in place (although, they presumably wouldn’t be in that situation if they were the right team in the first place)?

This Gordian Knot gets cut with the rule number one for successful turnaround investing

RULE #1: FIRST, CHANGE MANAGEMENT

And I am not talking about the hippie projects that IT consultants try to sell nowadays with what used to be just accounting software and now called ERPs. No, it is literally waiting for a change of management before considering investing in a turnaround. And the reason is that most successful turnarounds involve an overhaul of management practices where former leadership is usually the source of the problems.

One Man Rule

Type of Turnaround

And that change should specifically include the founder if he is still in place. He already hinted a lack of organizational building skills, or they would not have deep problems in the first place, and will probably be stubborn , a character trait of all successful entrepreneurs. Therefore, any investment margin of safety could be in danger.

There are several types of transition during a corporation life cycle. But my favorite for investing is the transition from creating a business to building an organization. The skills required are so different that VCs usually transition start-up founders and hire professional managers. One particular reason is that entrepreneurs are usually addicted to one-man-rule that can work pretty well in small organizations, but when you get to revenues $50 million plus and growing 20% plus the risks increase. A survey of successful turnarounds gives some evidence that an excessively centralized organization could be at the root of the problems.

Organization

And consider that turnaround beginnings usually involve a centralization of power to discipline and focus the organization. However, after the bleeding has been stopped the most appropriate structure for a fast growing company is usually decentralized because it focuses growth where the market signals. This is something that some entrepreneurs do not like or do not get. There are some exceptions though: Bill Gates that was able to grow a great business out of products that were not necessarily the best.

One of the problems of this autocratic structure is that businesses lack processes and financial controls to direct the limited human and financial resources where they are most needed. Entrepreneurs usually do not like processes and controls. Most of them became entrepreneurs in the first place because they did not like processes and controls.

Well there is substantial anecdotal evidence that Premier was internal chaos and a candidate for the fall from grace that we saw in part two. As my wife remarked after reading this post, it seems as an Arrested Development episode

  • Disorganized Site Selection: The Bodies explosion to more than 17 exhibits without an organization to manage it was a major disaster. Months of no new exhibits and openings in suburban locations like Branson, Durham, Columbus and Farmingham. The pressures to use the new exhibits lead to some international fiascoes like Russia where new partners did not execute as expected. The bad results compounded by increasing marketing expenditures to turn around these locations. These site selection problems were running the risk of becoming endemic after Arnie Geller fired on his return the sales and marketing department and took personal control of site selection, even though the number of exhibits was much larger than a year ago. As a consequence of Arnie Geller’s unwillingness to delegate, Chris Davino, the new CEO, had to face large programming holes in Q2 and Q3 2009.
  • Delays on Permanent Exhibitions: Several delays in getting Bodies Vegas out of the Tropicana and into the Luxor got into everybody’s nerves. The delays were repeated with the Vegas launch of Titanic and Sports Immortals (that was finally canceled). Besides, $12 million in capital expenditures for the exhibition center? That was not pocket change for a small company. The story repeated itself with the permanent exhibition in New York. It took years for the selection of the site in Times Square. However, the Davino’s team has been able to inaugurate it in less than six months.
  • Lack of Financial Leadership: There was no real full time CFO in Atlanta until 2008 and earnings surprises were the usual state of affairs. Premier did not even have budgets before the arrival of Bruce Eskowitz. The reason for all this was that Arnie Geller had brought in Stephen Couture in 2006, a young CFO whose only qualification was that his family had inherited a large Premier stake since his father was the former CFO. This resulted in a suspicious incident of a pumped up 68 cents guidance, reiterated in subsequent conference call, that Couture used to sell most of his position. On the next call the guidance was reduced by over 50%.
  • Excessively Promotional: Timothy Sykes was right on this point, management was overly promotional. For example, Arnie Geller commented in a conference call that the share price would be $30 in a couple of years and, adding to the guidance incident, he was in several publications sharing overly optimistic revenue projections that were more that twice peak levels. His phrase “Should have looked right and left” has become part of the company folklore.
  • Secondary Accounting Firm: The use for several years of Kempisty and Co., a little known accounting firm, while resisting the pressure to change it was at least highly suspect. Premier finally engaged Cherry, Bekaert & Holland, L.L.P, a large regional firm, as a result of Marc Sellers’ activist pressure. Why Kempitsky in the first place? We will probably never know.
  • Second Class Event Marketing: several exhibits were promoted only a couple of weeks in advance. The excuse was that their competitor could jump in if they promote it too soon. Given the related evidence, it seems that the real reason was last minute decisions on site selection. The consequence was under promotion of exhibits and the lack of access to some museums that needed advanced scheduling. Also merchandising and sponsorship revenue was almost negligible and Premier’s internet site was a laughing stock. They did not remove closed exhibits and did not add exhibits close to openings.
  • Nepotism: Judy Geller, the wife of Arnie Geller, was a consultant to Premier and received payments of approximately $100K during 2007. In addition, she also received royalty payments on the sale of the exhibition catalogs of approximately $197K. How can someone justify this? One of the directors was also Arnie Geller’s nephew while he received many times the normal director compensation while failing to disclose he was a relative. If these incidents were not enough, Arnie Geller was still getting paid a$675K CEO and President salary after Bruce Erkowitz was hired adding to the SG&A expense issues. And the clique was back when Arnie came back, hiring several family members.
  • Geller’s Inability to Delegate: Bruce Erkowitz was fired but most senior management decided to leave promptly after Geller’s comeback. CFO Bud Ingalls even made the unusual step of saying publicly that Arnie Geller was the reason for his resignation. The CFO, VP exhibits, VP Sales/Marketing, VP Strategy, VP Sponsorships were all gone by late 2008. That had also an impact in running costs; the company had to pay some of them for another year after their decision.
  • Titanic Trial the long time to reach a conclusion was endangered with a company statement on ownership of the Titanic property when they only had rights to salvour-in-possession. Why risk a district court response when you are still negotiating the covenants and conditions for a sale?
  • Botched Dialog in the Dark launch: Premier did virtually nothing to promote it and the selection of Kansas City for a liberal exhibit certainly was head scratching. Reviews have been very good and the creator was even invited to TED. However, word of mouth most certainly takes time and Premier’s divided attention did not help.

And this is just a summary of the problems of the lack of control and procedures in this autocratic organization. Is Arnie Geller incompetent? No need to make judgment. As investors -not as judges, lawmakers or journalists- the important thing is that there is a pattern, the one man rule story, that has provided and will provide opportunities. So it does not matter if the reason is incompetence, bad luck, entrepreneurial psychology, or an organizational cycle. One big advantage of turnaround investing, for example compared with growth investing, is that we do not have the difficult task of picking ex ante the next Bill Gates. We can instead wait for the fall and the following arrival of professional management. Also, if a company had good years with such a chaotic organization imagine what it can do with a well functioning one. So it is time to hear Premier’s new management turnaround plan.

Long PRXI

Turnaround Cases: Premier Exhibitions Part 2 ($PRXI)

OK, what is the deal with Premier Exhibitions. How a company that caught the imagination of some value investors can fall from grace so swiftly. This is not only out of curiosity: understanding the history helps to understand the turnaround complications. We can never be completely sure, but let’s try our best to play Sherlock Holmes and build our case.

Premier Exhibitions basically created the business of running museum quality exhibitions. There have been some other local exhibits and one hit wonders, but nothing similar in number exhibits or geographical scope. And not only that, it was very successful.

Historic Financials

The pressure to grab the opportunity without an organizational role model might have lead to ad-hoc decisions. Here is a list of some of the growth initiatives the company was seeking in 2008 just before the downfall:

  • Increase Bodies Exhibits: From 6 in 2006, to 8 in 2007 to more than 17 in 2008. Arnie Geller decided to bet the future of Premier on one concept. It is clear that there was demand but he was risking to kill the golden goose by overexposure.
  • Permanent Exhibits in New York and Vegas: In 2008 closed a lease for 36,141 square feet of space within the Luxor Vegas and they were looking for years for a venue in New York City (Times Square). This Luxor lease was for a five year period with an annual rent close to $3.6 million (!)
  • Self-run Exhibits: after several issues with some of the promoters, JAM in particular, they decided to take the promotion of several exhibits in-house. The economics of running exhibits should be favorable for Premier, but were the additional organizational needs and complexity, not just the costs, taken into account?
  • Three New Concepts: According to management they were working on nine exhibition concepts, and they announced and launched three of them in 2008: Dialog in the Dark, Sports Immortals and Star Trek. It is clear that Premier’s privileged position, with access to museums and promoters worldwide, was a center of attention for entrepreneurs with interesting concepts.
  • Internationalization: Premier added several exhibits running around the world. The complexity of moving and controlling exhibitions internationally can not be over estimated. At the beginning most of them were with partners that managed and promoted issues locally. After they run into problems with some of these partners Premier decided to run some of the shows itself with mixed results.
  • Merchandising and Corporate Sponsorships: Premier was and is doing a mediocre job in alternative sources of revenue. They finally decided to buy a merchandising firm for close to $1 million. This was the pet project of Bruce Eskowitz the CEO that replaced Arnie Geller at the end of 2007.

Besides the obvious organizational complexity, this plan included significant capital expenditures: $12 million for Luxor Vegas, $6 million for Dialog in the Dark, $6 million for Sports Immortals and $4 million for maintenance.

Arnie Geller’s big idea was to achieve all this by bringing new management. Brilliant man eh? The new CEO Bruce Eskowits lasted less than a year on the job. His package only matched his previous compensation in Live Nation, but it was a heavy burden for a small company. He had a $312 thousand salary but with awards and bonuses his total compensation was over $3 million. Just as a reference he received $1M cash bonuses in 2007 and 2008. He also brought in an expensive executive team that probably matched what he used to have in Live Nation.

But still with this, this is a really small company. We don’t have hundreds of employees. It’s a small head count, and we’re trying to be very focused on what we do. It’s just physically impossible to go from two products and 20 exhibitions to 40 without adding a few people who can support it. Unfortunately, we’ve got to get revenues to catch up to the G&A – Bruce Eskowitz July 9, 2008

Build it and they will come? Individually, all the growth initiatives seem not only plausible but attractive. I run some back-of-the-envelopes and, if well executed, all of them would probably be very profitable. However, if you have not been paying attention let me put it in black and white

  • New customers (tourists in Vegas and New York)
  • New products (not one but three new concepts: Sports Immortals, Star Trek, Dialog in the Dark)
  • New geographies (not one but two new continents: Europe, Latin America)
  • New channels (not only proprietary locations but also malls)
  • New capabilities (merchandising)
  • Forward integration (promotion)
  • New management

And all that at the same time! My background is in growth strategy and turnarounds (let’s leave out for the moment how I became a value investor) and never before I have seen such an ambitious plan, for lack of a better word.

This is the type of plan that can only be the result of irrational entrepreneurial will. The plan was to do everything that was in Arnie’s mind at the same time. No focus man.

I am all for experimentation: new businesses have to try new things to find their edge, old businesses have to try new things to renew themselves. But resources are limited, organizations have constrains, markets are competitive, and cash flow is king so if you do not pay attention to these realities you have:

  • Contradictory goals
  • Wasted resources
  • Unfinished projects
  • Outsized organizations
  • Mediocre financial results

So from the get go, I am putting the burden of evidence on former CEO Arnie Geller. He was the entrepreneurial force behind all those initiatives and his was the plan even before Eskowitz arrival (than lasted for only 10 months). Besides he controlled the company through the Board of Directors.

SG&A

More expenses, fewer sales? The perfect recipe for a great business. Can you identify the entry of the new team, when it was fired and Arnie Geller’s second coming? I bet you can.

Cash

This little experiment burned $20 million in cash and left Premier at the brink of collapse. You need the discipline to shut down your best ideas, Arnie Geller and Bruce Eskowitz were not capable of doing that. Premier looks too much like the pattern of a one-man rule. Confirmatory evidence would be a disorganized culture and organization. That is what we are going to review next.

Long PRXI

Turnaround Cases: Premier Exhibitions Part 1 ($PRXI)

A great investment opportunity occurs when a marvellous business encounters a one-time, but solvable problem. You just need to know the business to recognize this – Warren Buffet

So after reviewing some situations where a turnaround was threatened by tough issues that were not completely on management’s control, we now move to situations where the core business is healthy but the performance has been compromised by solvable issues. This is usually the result of bad luck (it sometimes happens), internal issues brought upon themselves by incompetent leadership or by management’s inability to rise to a solvable new challenge.

What is the point of having a blog and end discussing examples with a strong consensus. Instead I am going to propose a controversial case: Premier Exhibitions (PRXI). You probably never heard that name before but you probably heard the names of its two exhibitions: Titanic and Bodies. Both are hit shows not only in the US but around the world and both continue to attract crowds. Bodies shows cadavers treated with a technical process that makes them viable for exhibition and Titanic shows pieces recovered from the wreckage. Someone appropriately used the adjective macabre to describe the situation however that is not necessarily bad. As Peter Lynch once wrote

Something that makes people shrug, or turn away in disgust is ideal – One Up on Wall Street

If you agree with that statement then Premier may be your kind of stock. This is a company well known for value investors since Mark Sellers, a respected hedge fund manager, is its majority shareholder. There are several articles on Premier’s good economics and the potential value of its Titanic assets so I am just going to make the introductions. Dear reader, here is Premier Exhibitions:

Most of these articles were written before Premier hit an earnings bump. That bump’s cause, consequence, solution and opportunity are going to be the topic of several posts, but as an appetizer let me show you the historic stock price:

Wow, that is what I call a rise and fall. You just have to go through Yahoo’s board to retrace the story and is really something. You can read how early adopters bought the story of the unrecognized Titanic assets, were joined later by growth investors that valued the successful new Bodies exhibition, how pricing got out of hand with momentum investors pumping pie-in-the-sky projections and the sudden collapse. Now it had gone full circle becoming a value stock again: I recommend you to check the Complete Growth Investor podcast on Premier and get their free report. This is indeed the story of an Icarus growth stock.

The collapse has wrongly been attributed to the 20/20’s attempt on character assassination of Bodies –that I still recommend to watch, also here is Premier’s response – and the settled investigation of the bodies’ origin. To the contrary, both were short term attendance boosts because as we know there is no such thing as bad publicity.

The reason for the collapse was simpler: an outsized and undisciplined organization built by an entrepreneurial one man rule seeking growth on too many fronts without the needed processes to manage that growth. This is a story repeated time and again that has been the subject of some best sellers like “Inside the Tornado” and “Build to Last”. I do not offer these books necessarily as testaments of good research but as witnesses of the topicality of the challenge.

All investing is risky and growth stocks have their particular set of challenges. Their stocks multiples can collapse fast when earnings or growth disappoints. And the probability of disappointing is higher than people think: these are some Bain and Co. estimates of success for growth initiatives

Growth

If this is not material for a good series, I do not know what is. It certainly has drama. In the next part we are going to address the story of Premier’s collapse and discuss if it is solvable.

Long PRXI