Comments on: Centralize the Acquisition of Capital and its Allocation to Business Units http://bearonbusiness.com/separating-telecom-businesses-into-stand-alone-business So much has happened in telecom over the last decade, both good and bad. With BearonBusiness.com, I strive to dissect what’s happened before as well as what’s going on in the here and now. I try to capture stories from the boom, the bust, and, now, the resurgence. We are fortunate to work in a great industry (communications) at a great time (the dawn of the Internet)–let’s reminisce, reflect, and celebrate. Thu, 11 Mar 2010 01:07:16 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: my blog http://bearonbusiness.com/separating-telecom-businesses-into-stand-alone-business/comment-page-1#comment-2465 my blog Thu, 02 Jul 2009 12:49:06 +0000 http://bearonbusiness.com/separating-telecom-businesses-into-stand-alone-business#comment-2465 <strong>check this out...</strong> this is mine... check this out…

this is mine…

]]> By: Savvis Realigns Business Units http://bearonbusiness.com/separating-telecom-businesses-into-stand-alone-business/comment-page-1#comment-492 Savvis Realigns Business Units Thu, 28 Aug 2008 09:10:07 +0000 http://bearonbusiness.com/separating-telecom-businesses-into-stand-alone-business#comment-492 [...] Voice Services, they really separated them.  Separate NOCs, sales, service, separate everything - except capital allocation, there is a great discussion at the bottom of that post also that is worth reading.  The idea [...] [...] Voice Services, they really separated them.  Separate NOCs, sales, service, separate everything – except capital allocation, there is a great discussion at the bottom of that post also that is worth reading.  The idea [...]

]]> By: Kevin B http://bearonbusiness.com/separating-telecom-businesses-into-stand-alone-business/comment-page-1#comment-422 Kevin B Fri, 22 Aug 2008 20:11:51 +0000 http://bearonbusiness.com/separating-telecom-businesses-into-stand-alone-business#comment-422 These are great discussions/debates and my guess is we are not that far apart in our views. I think there is great value to really understanding these types of principles, though principles alone won't make a company successful. I remember reading a quote by the infamous Fischer Black from your stomping grounds (Univ of Chicago). When asked about the application of Black-Scholes he said it was a lot like shooting pool. In a pool match if you have the chance to take a Ph D. in math who knows every principle around the angles of incidence and refraction or Lenny the pool shark who dropped out of high school... you got to take Lenny every time. These are great discussions/debates and my guess is we are not that far apart in our views. I think there is great value to really understanding these types of principles, though principles alone won’t make a company successful. I remember reading a quote by the infamous Fischer Black from your stomping grounds (Univ of Chicago). When asked about the application of Black-Scholes he said it was a lot like shooting pool. In a pool match if you have the chance to take a Ph D. in math who knows every principle around the angles of incidence and refraction or Lenny the pool shark who dropped out of high school… you got to take Lenny every time.

]]> By: Dan Caruso http://bearonbusiness.com/separating-telecom-businesses-into-stand-alone-business/comment-page-1#comment-419 Dan Caruso Fri, 22 Aug 2008 17:23:32 +0000 http://bearonbusiness.com/separating-telecom-businesses-into-stand-alone-business#comment-419 Here is what I say, and this I have huge conviction about. If a business units isn't responsible for its balance sheet, it isn't a business unit. Nor is it a P&L. Nor does it have any real abilty to know whether or not it is creating value or not. I have a whole series of posts in my head to write on this topic. One snipit: at Zayo, each of our business units has a balance sheet and checking account. Moreover, our bonus incentive scheme is migrating to cash balance, which will emphasize that each business unit better understand its working capital, capital leases, etc. AND then manage each of these accounts. Use other people's money to fund your business and less cash is consumed/more is delivered--and bonuses will be higher. I love when people declare they run a P&L. "How does your balance sheet look?", I ask. They don't even understand the question. Here is what I say, and this I have huge conviction about. If a business units isn’t responsible for its balance sheet, it isn’t a business unit. Nor is it a P&L. Nor does it have any real abilty to know whether or not it is creating value or not.

I have a whole series of posts in my head to write on this topic. One snipit: at Zayo, each of our business units has a balance sheet and checking account. Moreover, our bonus incentive scheme is migrating to cash balance, which will emphasize that each business unit better understand its working capital, capital leases, etc. AND then manage each of these accounts. Use other people’s money to fund your business and less cash is consumed/more is delivered–and bonuses will be higher.

I love when people declare they run a P&L. “How does your balance sheet look?”, I ask. They don’t even understand the question.

]]> By: Kevin B http://bearonbusiness.com/separating-telecom-businesses-into-stand-alone-business/comment-page-1#comment-418 Kevin B Fri, 22 Aug 2008 16:56:39 +0000 http://bearonbusiness.com/separating-telecom-businesses-into-stand-alone-business#comment-418 Dan - I think both of us focused on BH, in whom we both have great respect. However bringing it back to the original question I was more focused on generally unique subsidiries of an operating company (for Zayo - bandwidth, voice services and managed services; Level 3 - content vs. network; Comcast - newtork/cable versus content/programming/espn.) The original reason I asked the question was your view (which I agree with) that many key decisisons should be made by those closest to the business. I recently met with a former fortune ~50 CFO who has long since retired to summit county. He told me he is astounded that in many CFO orgnaizations today means looking in the rear view mirror (heavy accounting/controller experience). While Sar-box is the primary driver of this it has lead to a degredation of focus on managing a balance sheet create to value as opposed to the view that only the P&L creates value. His view is that the optimal alignment of assets and liabilities (effectively how you capitalize an entity) can increase enterprise value in the 10-20% - in some cases it may be de-risking which lowers overall cost of capital - again increasing value. A good example I think is the very old article I sent you on Disney whereby the sold of the revenue streams from Tokyo Disneyland - which gave them immediate access to low cost capital and hedged all currency risk. So my question to you, if you don't feel business units should be individually capitalized to optimize assets and libialites - do you feel you are leaving value on the table? Dan – I think both of us focused on BH, in whom we both have great respect. However bringing it back to the original question I was more focused on generally unique subsidiries of an operating company (for Zayo – bandwidth, voice services and managed services; Level 3 – content vs. network; Comcast – newtork/cable versus content/programming/espn.) The original reason I asked the question was your view (which I agree with) that many key decisisons should be made by those closest to the business. I recently met with a former fortune ~50 CFO who has long since retired to summit county. He told me he is astounded that in many CFO orgnaizations today means looking in the rear view mirror (heavy accounting/controller experience). While Sar-box is the primary driver of this it has lead to a degredation of focus on managing a balance sheet create to value as opposed to the view that only the P&L creates value. His view is that the optimal alignment of assets and liabilities (effectively how you capitalize an entity) can increase enterprise value in the 10-20% – in some cases it may be de-risking which lowers overall cost of capital – again increasing value. A good example I think is the very old article I sent you on Disney whereby the sold of the revenue streams from Tokyo Disneyland – which gave them immediate access to low cost capital and hedged all currency risk.

So my question to you, if you don’t feel business units should be individually capitalized to optimize assets and libialites – do you feel you are leaving value on the table?

]]> By: Dan Caruso http://bearonbusiness.com/separating-telecom-businesses-into-stand-alone-business/comment-page-1#comment-412 Dan Caruso Thu, 21 Aug 2008 21:39:03 +0000 http://bearonbusiness.com/separating-telecom-businesses-into-stand-alone-business#comment-412 great response...it is forcing me to think through this a bit more... As I understand it: first, the capital allocation that Buffett does is simply an agreement with the management of business units as to the extent that they should deliver cash back to corporate or whether they should invest excess cash back into their busienss. In some cases, corporate provides them additional cash, for example to fund acquisitions. Individual busienss units do not raise their own equity, other than through the parent. However, I think you are right. The business units do (presumably) manage certain aspects of their debt structure. They probably have bank lines-of-credit, equipment financing, capital leases, postive working capital (which is huge source of cash in many of Buffett's companies). In this regard, the business units to varying degrees to manage aspects of their capitalization. I don't think Buffett would gain efficiencies by having an army of corporate folks managing HR, legal, etc. for his dozens of companies. He would make each entity less accountable and more bureaucratic, and he and Charlie would have long since hung up the spikes for needing to be involved in the execution of all their businesses. None of this is black and white of course, and taking decentralization too far is always a risk. Telecom companies, in my opinion, tend to be way to centralized and have little visibility on where they are creating or destroying value. great response…it is forcing me to think through this a bit more…

As I understand it:

first, the capital allocation that Buffett does is simply an agreement with the management of business units as to the extent that they should deliver cash back to corporate or whether they should invest excess cash back into their busienss. In some cases, corporate provides them additional cash, for example to fund acquisitions.

Individual busienss units do not raise their own equity, other than through the parent.

However, I think you are right. The business units do (presumably) manage certain aspects of their debt structure. They probably have bank lines-of-credit, equipment financing, capital leases, postive working capital (which is huge source of cash in many of Buffett’s companies). In this regard, the business units to varying degrees to manage aspects of their capitalization.

I don’t think Buffett would gain efficiencies by having an army of corporate folks managing HR, legal, etc. for his dozens of companies. He would make each entity less accountable and more bureaucratic, and he and Charlie would have long since hung up the spikes for needing to be involved in the execution of all their businesses.

None of this is black and white of course, and taking decentralization too far is always a risk. Telecom companies, in my opinion, tend to be way to centralized and have little visibility on where they are creating or destroying value.

]]> By: Kevin B http://bearonbusiness.com/separating-telecom-businesses-into-stand-alone-business/comment-page-1#comment-411 Kevin B Thu, 21 Aug 2008 21:25:25 +0000 http://bearonbusiness.com/separating-telecom-businesses-into-stand-alone-business#comment-411 Dan - I am a bit confused - and of course anxious to take the contrarian view. Berkshire absolutely capitalizes its companies with debt - in fact I bet there is debt at both the entity BH owns and debt at subsidiaries in order to write the interest off for state income tax purposes. Buffet's comments relate to who makes the decision how to capitalize a company - which he is saying he does. Therefore, I take it that yes, different businesses are capitalized differently - just not by the management team. But the intersting thing I took away is that you're view is that nearly all functions down to the bank accounts should be at the subsidiary level. yet you are saying just the opposite for capital efficiencies. If someone is smart enough at the corporate level with regards to capital, why wouldn't legal, HR, accounting, finance, etc have that some level of knowledge at the corporate level? Why wouldn't the premiere cash management person at a company manage cash for all the subs just as Buffet is the premier allocator of capital? Dan – I am a bit confused – and of course anxious to take the contrarian view. Berkshire absolutely capitalizes its companies with debt – in fact I bet there is debt at both the entity BH owns and debt at subsidiaries in order to write the interest off for state income tax purposes. Buffet’s comments relate to who makes the decision how to capitalize a company – which he is saying he does. Therefore, I take it that yes, different businesses are capitalized differently – just not by the management team. But the intersting thing I took away is that you’re view is that nearly all functions down to the bank accounts should be at the subsidiary level. yet you are saying just the opposite for capital efficiencies. If someone is smart enough at the corporate level with regards to capital, why wouldn’t legal, HR, accounting, finance, etc have that some level of knowledge at the corporate level? Why wouldn’t the premiere cash management person at a company manage cash for all the subs just as Buffet is the premier allocator of capital?

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