Going Private

Financial Journalism for the Mathematically Challanged

The Five ForcesCircles of Hell

I make it a practice not to spend a lot of time in these pages on my personal interests and pursuits.  More than occasionally, something related to the general brief covered by Going Private will overlap with my overly broad spectrum of interests, but I don't spend a lot of time on such things in the abstract.  Be this as it may, occasionally, I can't help myself.

All of this is a round about way of saying that I have finally grown to understand one of my guilty pleasures: Apple.  In doing so, I have managed to focus some attention on some structural issues that have been, at least subconsciously, bothering me for some time.

I admit, grudgingly, to owing an iPhone.  I bought it in time (that is to say foolish-early enough) to have Mr. Jobs give me one of those $100 "Sorry I screwed you on the price" rebates.  I also have to admit to owning a top of the line 15"  MacBook Pro (I bought after the latest upgrades- watching a colleague run Excel on a Windows XP instance isolated from the rest of his system and displayed in a window on his OS X desktop was the last straw).  Before that, I had two white, Intel MacBooks.  This is unusual, because three and a half years ago, I never would have bought Apple.  This last, that new Apple owners almost find themselves surprised to own an Apple, seems a common trait among the, admittedly small, sample of Apple owners I have encountered.  I've watched four or five people who swore they would never own an iPhone give in, buy them and proclaim, in such similar tones one wonders if The Amazing Alexander works for Apple now ("I loved it.  It's much better than PC.  I am going to buy it again, and again and again..."), that it is the best phone they have ever owned.  And this is where I began to wonder, why the near epiphany in reaction?  Now I think I know.

Why this reluctantly amazed reaction among iPhone buyers?

Because the definition of "phone" created by hardware and network providers today is so limited.

Why have so many Macintosh buyers had the same reaction?

Because the conventional definition of "laptop" or "operating system" or "computer" created by hardware and software providers today is so limited.

Because these companies hate consumers, hate their desires, hate their needs and, consequently, make sure that the conventional definition of, e.g., "laptop," or "phone" is very limited.

Why is this?  I blame Michael Eugene Porter.  Not that Porter is a dipstick, (well not only that) but because the majority of his modern adherents certainly are.

IP Litigation Arbitrage Tactics

"Human Capital" is a term that has seen quite a bit of use.  Personally, I would far prefer it if the term would depart forever from the already hopelessly twisted lexicon of buyouts (and any other field in which I will eventually play some part).  I tend to like people in the Human Resources of Sub Rosa's various daughter companies, that is to say the junior people in Human Resources of Sub Rosa's various daughter companies.  The senior people have a far more inflated sense of their importance within the organization and the world at large.  Often it is only their vice-like grip on critical compliance information (and the veil of secrecy in which their offices are cloaked, this facilitated by any number of state and federal privacy statutes), as opposed to some semblance of merit, that enables the perpetuation of their brutal rule.

Because Human Resources is the first line of defense for the company against its employees, the tendency (and I don't suggest for a minute that this is absolute) is for Human Resources professionals to have few qualms with respect to mercurial and duplicitous behavior.  One day they are the most helpful people on earth to the new employee.  Then, an allegation, and they are leading the charge for your ouster and digging up your file for dirt.

If you compound these elements with the fact that qualitative factors, like competitive advantage, the "moat" of a barrier to entry, and non-compete protection for key personnel, the importance of Human Resources elevates even more, and their close ties with the general counsel (or outside counsel) are, necessarily, numerous.  These sorts of things can have a very direct impact on valuation.  Tell that to a seller and see how quickly they start asking to review every employment file the company has ever touched.

As one might imagine, firms with primary interests in fields where "Human Capital" play an important role (consulting, finance, banking) take such matters quite seriously.  And here begins the disconnect.  Most courts hate enforcing non-competes.  A professional has to be able to ply his or her trade, no?  It is quite difficult, therefore, to lock in top talent, or to prevent them from flying to competitors with state secrets.  Or whatever.  Ah, but watch now, here come the hedge funds.

God of Truth and Prophecy

I have to admit to having a bit of a soft spot for Apollo.  At the very least, they seem to have a grip on the cyclic nature of economies, and how a private equity firm can, and should, use the ups and downs that naturally accompany such shifts to make money.  They also seem to have been one of the few firms to hold on to the notion that private equity is a contrarian sport.  But there are a few new features among large LBO firms that, I suppose, they couldn't resist adopting.  For example:

On April 20, 2007, Apollo Management Holdings, L.P., one of the entities in the Apollo Operating Group, entered into the AMH credit facility, under which AMH borrowed a $1.0 billion variable-rate term loan. We used these borrowings to make a $986.6 million distribution to our managing partners and to pay related fees and expenses. The Apollo Management Holdings, L.P. credit facility is guaranteed by Apollo Management, L.P.; Apollo Capital Management, L.P.; Apollo International Management, L.P.; Apollo Principal Holdings II, L.P.; Apollo Principal Holdings IV, L.P.; and AAA Holdings, L.P. and matures on April 20, 2014. The pro forma adjustment in the column labeled Borrowing Under AMH Credit Facility gives effect to the increase in interest expense, without consideration of any hedging, resulting from our entering into the AMH credit facility, as if the transaction occurred on January 1, 2007.

Well, who can blame them really.  And they got, well, a pretty decent deal.  Elsewhere we find:

Our April 20, 2007, $1.0 billion borrowing under the AMH credit facility bears interest at three-month LIBOR, plus 1.50%

Private equity loves 3-Month LIBOR.  Quarterly payments on their bonus advances, you know.

On July 31, 2007, certain management companies within Apollo Management Holdings, L.P. transferred their indirect interests in a corporate aircraft, a G-IV, to a group of Apollo Non-Controlling Interest holders, which was treated as a distribution to such Non-Controlling Interest holders. Simultaneously with the transfer, such management companies were released from their obligations as guarantors of the loan used to finance the purchase of the G-IV. The transfer of the indirect interests and release as guarantors resulted in deconsolidation of the trust that owns the corporate aircraft. The pro forma adjustments in the column labeled Reorganization and Other Adjustments include the deconsolidation of Wilmington Trust, which holds the G-IV Aircraft.

I know, but now, really, who can begrudge them their airplane?  It is not even a VI, so cool it.  I suppose one could say that the name "Wilmington Trust" is an awfully boring moniker for an aircraft holding company, but then, the subtlety is somewhat crafty, no?  "Trump Aircraft Holdings," does sound just as crude as "Trump," after all, so perhaps Apollo gets points here too.

Cranky as that may make you, there is, however, really a wonderful chart of their cyclic investment strategy worth taking a look at.

And, why is it, exactly, that private equity firms always make the best orgcharts?

Posting will be slow through April as I am on "vacation," and also acting as Guest Editor over on DealBreaker.com.

(Art credit: Lycia Apollo.  Musée du Louvre, Paris, France, seized during the French Revolution).