Saturday, November 10, 2007

Thoughtful Readers and “The Mother of all Bubbles"




Jeff,

With all due respect, I think you are a bit off the mark with your comments about ACCO's management.

So begins a well written, thoughtfully considered response to a NotMakingThisUp column by a reader identified as “Cadamyale.”

“Cadamyale” was responding to “An Inflationary Spiral Out of China,” in which we offered a back-handed slap at the management and business model of ACCO Brands—actually two such slaps—in the course of making a more pointed commentary about the inflation wave eminating from China.

China’s influence on the domestic inflationary scene, as readers will recall, was once downplayed by the current Fed Chairman, who, all evidence to the contrary, cast a skeptical eye on the importance of China’s role in keeping American consumer prices under control via the massive labor arbitrage of the 1990s and early 2000s—by which manufacturers such as ACCO substituted low-cost Chinese labor for high-cost US labor and regulatory constraints—as follows:

"There seems to be little basis for concluding that globalization overall has significantly reduced inflation in the U.S. in recent years; indeed, the opposite may be true," he [Bernanke] said.

—The Wall Street Journal.


Now, in our opinion, Bernanke’s comment was as astonishing as it was plainly wrong, and we said so (in Fed Big Flunks Eco 101, March 7, 2007):

If you quoted those words to my friend who runs a supplier of office products to Wal-Mart and other Big Box retailers, he'd probably spit out his coffee all over his Wal-Mart invoices.

Those invoices, at least on a per-unit basis, did done nothing but go down for the last decade, after Wal-Mart abandoned its “Made in America” campaign and began to enforce a constant price squeeze on its vendors, aided and abetted by the opening up of dirt-cheap manufacturing capacity in China

—JeffMatthewsIsNotMakingThisUp.

I not only stand by those remarks, but I make the following offer: I will provide Mr. Bernanke the telephone number of the office supplier in question, in case he ever wants to test his China Thesis.

I believe it would do our Fed Chairman good to brush up on his practical economics, for while he might know everything there is to know about “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression” (a 1983 Bernanke thesis available on Google Scholar), I think he is a bit out of touch when it comes to “The Mother of all Bubbles: How Communist China’s Deflationary Policy of Ravaging its Natural Resources, Enslaving its Farmers and Underpricing its Currency Allowed Alan Greenspan to Inflate the Heck Out of American Housing Prices” (a thesis I believe somebody, some day, will write).

Now, the office products supplier I am offering to hook up with Mr. Bernanke is not ACCO Brands.
.
It is, in fact, a small competitor that has been at the forefront of the production shift to China and, unlike ACCO, has seen its profitability rise while it has reduced costs to its customers, which include many of the same customers to which ACCO has been charging more and selling less.

The fact that it has been possible for at least one office products manufacturer to successfully transition its business model while ACCO has struggled to do the same tells me that the difference is not in the business itself, but in the management at the top, which is why I came down rather harshly on the ACCO folks in “An Inflationary Spiral Out of China.”

Nevertheless, we here at NotMakingThisUp encourage and admire informed opinion, and appreciate the fact that at least one reader—the aforementioned “Cadamyale”—was moved to offer not merely a negative reaction to our commentary, but an informed observation that adds some value to the issue at hand.

I quote from “Cadamyale” who clearly is not some inflamed Yahoo-message-board-stalking shareholder of ACCO Brands, but somebody with more than a rooting seat in the corporate stadium:

Without passing judgement on the merits of acquiring GBC (I think it is a bit early to determine whether or not this was a success), ACCO's management rightly chose to shed some unprofitable business and raise prices on some GBC products.

Prior to acquisition, and on the front end of the current inflation cycle, GBC guaranteed its customers' pricing for two years. ACCO raised prices this year. The resulting sales attrition has been more than expected, but buyers will come to see that ACCO offers a better product and value-added service than private label whiteboard suppliers and competing "laminating solutions"

The new product development cycle is coming. It includes a document finishing system that will allow the hapless assemblers of pitchbooks to change out pages without disassembling the entire book. It ain't sexy, but it is a better product.

GBC is a major restructuring and integration project that management has always targeted for completion in 2009. It took the same tack in assembling the legacy portfolio, which, while not the sharpest knife in the drawer, does generate 20%+ returns on tangible assets.

In my opinion, this is more a case of lack of investor/WSF patience than incompetent management.


While I appreciate these observations, I respectfully stand by our previous statements on ACCO. The company’s sub-1% return on assets—whether those assets are tangible or not—tells the story well enough, as does the following quote from the latest 10-Q, which makes it clear the company’s problems are not merely restricted to the woeful General Binding acquisition:

“The [sales] decrease was driven by the previously-planned divesture of non-strategic business…and volume decreases in all but the Commercial Laminating Solutions segment…partially offset by the positive impact of $16.3 million in currency translation as well as price increases implemented in North America and Europe in early 2007.”

Nevertheless, if the denizens of Yahoo message boards engaged in the kind of thoughtful and reasonable commentary as that of “Cadamyale,” we wouldn’t have readers like that to thank.
Informed opinion is always welcome.


Jeff Matthews
I Am Not Making This Up


© 2007 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

3 comments:

pondering said...

The day my customers become “hapless” is the day I go out of business. It only takes my “hapless” to find happiness in my competitor’s arms and quickly I go from company genius to hapless washout. My...how intoxicating this perch can be.

cadamyale said...

Thanks, Jeff. You author a fine blog.

Aaron said...

Jeff: Your post got me thinking about spinoffs. I'm not talking about those you see on TV (i.e., CSI:Miami from CSI) but, rather, this kind.

Spinoffs, generally, are a great way for companies to restructure their operations and reward existing shareholders in a tax-efficient manner.

Spinoffs are quite common and, more often than not, can be profitable when held over a long period of time (i.e., more than one year). Numerous examples come to mind, but two in particular include the "mother of all spin-offs", the break-up of ATT into the "baby bells" and, more recently, the spinoff of VMWare from EMC.

I only was thinking about this because ABD was a spinoff from FO. When one compares the share price of ABD at the time of the spinoff to its share price today, one could reasonably argue that little shareholder value is being created since the spinoff.

Spinoffs should, in theory, give managements in the newly formed company an incentive to maximize shareholder value by being accountable and responsible with the most efficient use of both intellectual and financial capital.

When that capital is squandered, via a poorly thought-out acquisition (a la, GBC) or an ill-timed pricing stategy, the share price of the spun-out company will suffer.

I wonder if insituitional investors are questioning whether ABD's management has efficiently maximized ABD's asset utilization?
I also wonder when the patience of Breeden Capital Management will "wear thin" with ABD's current management, and start clamoring for seats on ABD's Board of Directors to get the share price moving in the right direction?