It's Not Luck - Eliyahu M. Goldratt [41]
Brandon says, “Shall we discuss the real asset of the company? Its market share? We have about 23 percent of the North American market and our share is very stable.”
The snake turns to me, “How difficult is it to penetrate into this market?”
“Very.” I give him my sincere evaluation. “The market is dominated by four companies, all about the same size, all in this business for over forty years.”
“I see.” He chews on his pencil. I hate it when people chew their pencils. “Why is it so?” he asks.
“Several reasons,” I calmly answer. “There is customer loyalty. This business is actually a spare parts business. You sell the basic equipment to the client and he is locked into buying additions and spare parts from you.”
“That will do it,” he agrees.
“And,” I continue, “it’s not so simple to build this equipment. Every order is different; you have to tailor everything to the client’s specific needs. It’s more craftsmanship than anything. It takes a long time to grow the expertise.” I barely control myself from adding, “The real assets of the company are its people.”
“Is there a lot of excess capacity in this industry?” he asks.
Where is this question coming from? Then I understand. “Yes, there is,” I answer. “All the pressure steam companies took advantage of CNC and CAD technology, so it’s no wonder that a lot of excess capacity exists. But everyone is very careful not to start a price war. Extremely careful. As I said, they are all in the business for many years, they are all in it for the long run. I don’t see any danger of a price war.”
“Good,” he says. Turning to Brandon and Jim he asks, “How much?”
To my surprise they answer, “One hundred million dollars.”
This is a very high number. Unbelievably higher than the real value of Stacey’s company. Maybe this slick person is not as shrewd as I thought, because his only response is, “Let me check around. I’ll get back to you next month.”
No, this inflated number is just a starting position. I’d better remember that the market of buying and selling companies has a remarkable resemblance to an eastern bazaar.
On the way down we don’t talk. I don’t like this type of meeting. I don’t like this person. I’m disgusted with the whole situation. Analyzing the value of companies as if they are just a collection of machines, inventory, land and market share. It’s so wrong. It’s so distorted.
And the cherished balance sheet, what a joke! Until now I hadn’t realized to what extent it’s useless. The real assets, like people’s expertise, market share, reputation, etc., don’t appear at all. And the numbers that do appear—the value of machines, inventory and land—have only a remote resemblance to their real value.
I want to leave this artificial number world. I want to go back home.
14
This day didn’t start well, and as it stands now, it’s going to end up even worse. Two meetings were scheduled to negotiate the sale of Bob’s cosmetics company. My problem was that I hadn’t yet decided what to do about Bob’s new distribution system. His system represents a remarkable improvement in service and inventory levels, but the reduction in inventory leads to a short-term loss of about ten million dollars.
The financial reports that we sent to the prospects are from last quarter, so the impact of the new system doesn’t appear in them. Can I afford not to mention it? What’s the best way to reveal it?
On the way to our first meeting I consulted with Brandon Trumann and Jim Doughty. I can tell you, they were not too happy with the new surprise I landed in their laps.
“A new distribution system? Inventory down by seventeen million dollars? The expected loss is ten million dollars larger than is currently presented? Alex, we should be used to you by now. But, next time, give us a little bit more warning.”
Thank God that it was a relatively short taxi ride. Otherwise I suspect that they would have elaborated more about how much they like facing such