Public vs. Private

First of all, I'd like to apologize for not posting in quite awhile. It's been a hectic couple of weeks trying to get the semester finished up. As soon as all of the finals were done, I found myself smack dab in the middle of the holidays. While the posts have been few and far between over the last couple of weeks, I'll try to catch up quickly. I haven't been writing much, but, as always, I've been thinking about good topics and trying to educate myself (a never ending practice) on what is going on in the business world. I'm also excited about the comment left by the anonymous commenter. I'm planning a response soon, so keep an eye out...

Today's post deals with an interesting topic that I read about in Fortune a couple of weeks ago. There was a good article in the magazine that talked about CEO's and the different ways in which they manage private companies as opposed to public ones. The gist of the article was that CEO's that manage privately held companies operate differently because they can make decisions that a CEO of a public company might not have the latitude to make (i.e. investing in the company which may show a short term loss in favor of a long term gain). These private CEO's say that they can focus on running their companies more because they do not have to deal with distractions (i.e. dealing with shareholders, etc...). Since the ultimate goal of a privately held company is to go public with an IPO in a set amount of time, private CEO's also argue that by having a set timeline, it is easier to set goals for the organization. They contend that since timelines can be nebulous for public companies (i.e. "create value for shareholders" as opposed to "take company public in 5 years") it is harder to create goals and benchmark performance.

On the surface, these arguments seem valid. These private CEO's have a point. They are able to make decisions that a public CEO might not be able to make. After all, we can all guess that a public CEO making an investment in the company that may show a short term loss will probably hurt the stock. However, isn't it the responsibility of the CEO to articulate his strategy? He (or She) should be telling the stockholders why he is doing what he is doing. Also, would decisions like these really hurt that much? A good CEO should point to a well followed strategy as well as an increase in the company's book value if he wishes to spend money on something like a new facility. While book value might not be as sexy as beating analyst estimates for a certain quarter, no one is going to turn their back on a company that is in growth mode.

I can agree that private CEO's don't have to deal with shareholders. This is probably beneficial because companies that are usually acquired by private equity companies usually have some issues and are in need of some sort of turnaround or liquidation or some other modification to the business model. A private CEO's time is probably better spent on these things, but I highly doubt that there is much difference in allocation of time between a public and private CEO.

I saved my biggest gripe about this article for last. Private CEO's love to say that they enjoy managing a privately held company and would rather not manage a publicly held company. But isn't the goal of a privately held company to go public at some point? I mean an IPO is how the big money private equity guys cash out. So, once this privately held company goes public, you now have a CEO who specializes in running privately held companies in charge of a publicly traded organization. You've effectively placed a specialist in a position for which he is neither needed nor qualified, nor wants to be in. Now I'm not saying that these guys can't manage a public company. Some of these people are the best managers in the world, but you have someone suddenly playing by different rules; rules by which they have somewhat shunned in the first place. Just like "turnaround" CEO's leave after the job is done, does a "private" CEO move on after the company goes public? What would that do to the stock? I mean if you have a company float an IPO and then the CEO resigns 6 months into the deal, what is that going to do to the price of the stock? We all know that a CEO resignation isn't a good thing and will probably kill the stock price. However, since the private equity guys have long since cashed out, they probably don't care. Is this akin to screwing the little guy shareholder? Who knows? I'm starting to sound like an activist shareholder now... Anyways, this little trend should be interesting to watch play out. An interesting guy to keep an eye on would be David Calhoun. He was in line for the GE CEO spot (but lost to Immelt) and has now since gone on to a private equity firm (of which he owns a share). I'm sure that Mr. Calhoun will end up as the CEO of a private company sometime in the near future. Let's see how this plays out...

Location, Location, Location...

We all know that location is vital in real estate, but it is also important in business. In some areas, location is everything. I say this because I believe that in the Central Valley, location is absolutely vital to the success of a business. Perhaps I should clarify a bit... When I say location, I don't mean figuring out which street corner to put your store on. I'm talking a bit more about the business environment. I sincerely believe that here, in Visalia (and the surrounding area), knowing your environment is essential. Let me preface my thoughts by saying that I believe that the Central Valley has some of the most business savvy entrepreneurs that you'll find anywhere, bar none. The simple fact is these businesspeople absolutely must be good at analyzing the business environment in this area.
Case in point... I visited a bar/nightclub in downtown Visalia a few months ago and I had a pretty good time. It was a large wine bar that frequently hosted live music from outside the area. Just recently, said bar closed down due to lack of business. I immediately started wondering why the bar closed down, and I began to think of all of the things that could doom an establishment that has been succesful elsewhere (I have been in wine bars in other places that were extremely profitable). First of all, the actual bar was huge. There were plenty of tables and booths in the bar, but there was also a lot of open space. I'm going to guess that a building of that size commands quite a high amount of rent when compared to the hole in the wall down the street. This big bar immediately means that you're starting out with a high rent expense. Secondly, having a wide selection of wines means that you're going to have lots of expensive inventory sitting on a shelf waiting for someone to buy it. After all, how many people are going to buy a bottle of Opus One to share with friends. Even though not many people are going to pay that kind of money for a wine, you still have to have it on hand in case someone wants a bottle. This was an observation made by my Brother-In-Law Will, and I thought it was pretty sharp. Lastly, this place charged a cover charge every single time I went in. Sometimes the cover charge was $5, sometimes it was $20. While you might be able to get away with a $20 cover charge in San Francisco, it's not going to fly. People are going to walk. Less customers coupled with high expenses is a recipe for disaster.
While I applaud the entrepreneurial spirit of the owners, I think the business environment was bad for this sort of business. I think the population in this area is a huge factor. There are businesses in the big city that make their owners an excellent profit that would never ever be successful here. Could you imagine trying to open something like an oxygen bar here in Visalia? You would lose your shirt!
Its also my opinion that if you have a successful business in this area, you have to be even more diligent. With the lower numbers of population in this area, I think saturation is a huge worry to a successful business owner. If you own a business that is running well, you can't just open up a second location right across the street like you can in a big city (i.e. two starbucks stores across the street from each other in places like New York).
Also, whenever I hear of someone starting a business in this area, my first question is; "Who is your competition?" In the Central Valley, you and your competitors are fighting over a lower number of customers.
I'd love to start a business of some kind in the valley someday. I'm always looking for a good idea, but I always temper with my enthusiasm with the knowledge that if and when I do start a business, I'm going to have to be very good at analyzing the business environment that I am in.

FYI, I read an interesting article in Fortune about management strategies in a publicly traded company versus a company owned by private equity firms. Sounds like a good topic for tomorrow...

The very first post...

Well, I have finally broken down and jumped into the "blogosphere". I'm starting to see a lot more blogs on the internet written by some interesting people in the business world (i.e. Mark Cuban and Jonathan Schwartz). In some cases (as is the case with Jonathan Schwartz at Sun Microsystems), these people are using blogs as a very effective tool to publish their ideas on their organizations. In the case of Sun, Mr. Schwartz also uses other blogs published by Sun employees to gauge exactly what they are thinking about at any given time. It's becoming apparent that blogs are a good way for the leadership of an organization to quickly communicate thoughts and ideas as well as gain information on what their people are excited about. In short, blogs are a great business tool that will only get more popular. Having noticed this, I can no longer ignore blogs. In fact, I'm looking forward to being able to put my thoughts out there for all to read and comment on. Here we go...

I suppose I should start with a little bit of information about me. I am a 28 year old guy living in the Central Valley of Calfornia. Specifically, I live in Visalia with my wife, Marjean. Marjean and I have been married for 7 1/2 months, and it has been quite literally the best 7 1/2 months of my life.
I have also had quite an active professional life. I have been a Network Adminisrator at various companies, both large and small, for 7 years. Two years ago I went to work for a large, privately held agricultural company as a Network Admin. In March 2006, I made the leap from a technology role within the company to one that had more of a bearing on the division P&L. I became involved with agricultural commodities and the financial aspects that come with them. I also got involved in some production processes. In August of 2006, the company went through a restructuring and I was asked to leave. At the time, I was working on my MBA at Fresno State. Since then, I have decided to work full time on my MBA. I have 3 semesters left (including this summer), so the countdown is on!

I think I'm really going to enjoy this blog. I'm excited about the whole idea and I'm looking forward to having a journal that lets others read what I am thinking about. Expect this blog to be very business oriented. You'll get a glimpse of me and my life, but I'm hoping this is also a forum where a dialogue on the business world will occur. I believe that I have an interesting perspective on business, given where I live and what I have experienced (I already have tomorrow's post floating around in my head). Nonetheless, it should be an interesting ride...