KSW Claws Back

Long time readers may recall that we noted that shares of KSW Mechanical Services (Nasdaq: KSW), Inc. plummeted last December when two projects comprising about 40% of its backlog were put on hold in the same week. On Monday, KSW announced that the larger of those two projects has been resumed.

Readers may also recall this post from March, where we noted that KSW's corporate counsel Jim Oliviero mentioned the company was competing for a World Trade Center project. Yesterday, the company announced it had been awarded this contract. The company predicted in its press release that its backlog would total $129 million as of the end of this quarter. Before the drop last December, the company's backlog totaled $139 million.

A Critique of Pointless Blogging

This blog is, I realize, a glass house in some respects¹, but I'm going to ignore the old admonition in this post and throw a couple of polished stones from my blog's proverbial front porch. Today's target is the Oracle of NY, one of the blogs written by Joshua Persky, the subject of a recent post ("Infinite Corridor") and a man who was kind enough to correspond with me last week. After our correspondence, I checked out Persky's last few blog posts. I have critical comments about two of them, one of which I already noted on Persky's site, but I'll reproduce it here.

The first of the two posts I'll mention is this one, "President Obama on the American Graduation Initiative", which consists simply of three paragraphs excerpted from a recent speech by the President, without any context or commentary by Persky. This was the comment I left on Persky's site:

What is the "American Graduation Initiative"? You haven't explained what it is here, it's not mentioned in the three paragraphs you excerpted, and you didn't provide a link to the full text of Obama's speech. You also haven't provided your opinion of the American Graduation Initiative (whatever it is) here. What was the point of this post?

I hate to be critical, but through your moxie and hard work, you've gotten a lot of national attention, and I don't think posts like this one are anyway to retain that attention. This one seems like you just wanted to post something for the sake of posting something.

The second post is this one, "Valuation Services and Consulting", and here's the text of it:

Steps for producing a valuation for a bank loan to a private company:

1. Gather and review financial and legal documentation.


2. Note key loan parameters such as: interest rate, maturity date, type of loan (bullet or amortizing), first or second lien, financial covenants, up-front and other fees, pre-payment penalty.


3. Note key financial performance parameters: EBITDA, income, margins, cash flow, balance sheet (historic, current and projected).


4. Analyze key financial ratios: leverage, interest coverage, loan to value.


5. Perform DCF analysis.


6. Compare company to similar publicly traded companies.


7. Compare loan to publicly traded similar debt instruments.


8. If the company is distressed, determine the value of its assets.


9. If the company is in bankruptcy, determine the probability and timing of recoveries.

For competitively priced hedge fund portfolio valuations, business development corporation and private equity valuation services and consulting, please contact:

Joshua Persky
tel: 917 650 8700
email: joshua.persky@sloan.mit.edu

Here's my thought on that post: Wouldn't any potential customer of Persky's valuation services already know about these steps? If so, how does enumerating this list in a blog post demonstrate one's talent for valuation? A better tack might be to offer as an example a case study where you can demonstrate your mastery of some tricky aspect of valuation. Persky could use a historical case where he has access to all the necessary data, or he could speculate a little and attempt a valuation (or comment on the reported valuation) of a well-known, privately held company. A way to get some attention as a valuation expert while demonstrating that you are familiar with current technology might be to attempt a valuation for a business such as Twitter.

Another thought: is it best to lead with price by offering "competitively priced" valuations? First, it's probably implicit that your valuations will be "competitively priced", given your current situation and the state of the labor market, and second, is price the most important factor to a hedge fund or other firm seeking a valuation? If it is, they can probably find an even cheaper valuation by outsourcing the job to India, but my guess is that they have more pressing concerns than price, such as, for example, accuracy, and protection from liability. This sounds like a difficult market to compete in as a sole proprietor. I wish I had some positive suggestion to offer here, but I always try to picture myself on the other side of the deal: if you were running a hedge fund and you were concerned about litigation from your investors, wouldn't you feel more comfortable having your valuations done by an established accounting firm?

Perhaps Persky would be better off taking his talents in a different direction. Presumably, if he is talented in valuing private businesses, he'd have some talent for investing in them as well. There are always business owners looking to sell their privately-owned businesses, and affluent individuals and companies looking to buy them. Persky might, for example, offer service where he'd help affluent individuals diversify their assets by buying privately-held firms. He might also scout out businesses currently for sale, do his own valuations on them, and then offer to help sell those businesses. Last year I approached a business broker about a situation and he was happy to offer me remuneration contingent on finding a buyer for his client. I imagine most business brokers would be amenable to this.



¹Namely (for starters), in its lack of focus, its name, its use of a generic blogger template. I plan to address some of this in the near future.

Sonic Discord in Northern New Jersey

In a post a few months ago, I mentioned that one business that seemed to be bucking the recession locally was Food Network chef Bobby Flay's, burger place, Bobby's Burger Palace. A few weeks ago, the first Sonic drive-in opened in Northern New Jersey, on Rt. 17, one of the two main commercial highways cutting through densely populated Bergen County¹. Since then, the place has been jammed. There have been traffic cops on foot directing traffic into the lot, and waiving off cars when the lot is full. We have a lot of people in NJ who love to eat, but we also have, arguably, the most aggressive and most dangerous drivers in the country². Last night, that combination led to one of the traffic cops getting sandwiched between two cars. From the Record:

Several teenagers in their cars at the drive-in heard the crash and ran to the scene, on Route 17 north. They saw a Honda Civic with its front end smashed, facing north, and up against an Acura SUV facing south, both vehicles pinned against the center median in the northbound lane.

They said they saw the officer pinned between the two cars. “The officer wasn’t moving … his eyes were closed,” said Ryan Conlon, 17, of Allendale.

“We heard, like, a screech, and then a loud thud … it sounded like somebody hit something heavy,” said Conlon, who was at the drive-in with two friends, Brandon Neuburger, 18, of Allendale, and Nicole Piazza, 18, of Ho-Ho-Kus³.

[...]

One customer, P.J. Montevirgen, 29, of Hackensack said he had to circle up and down the highway to try and get a spot, and saw an Acura SUV trying to get a spot and a police officer telling the driver the lot was full. The Acura driver suddenly floored his vehicle in front of the officer, jerked to the left, and disappeared behind some car. Moments later, Montevirgen said, he heard a crash.

“It’s a real popular spot. … I’ve been hearing about it [the drive-in],” said a 50-year-old Ramsey resident who declined to give her name. She said she had circled on the highway five times before she pulled into the drive-in. “People jockey to get position in the right lane to get in.”

As she pulled in, she spotted two police officers directing traffic and blurted to herself about the position of one of them, “That cop is going to get killed.” Five minutes later, she said, she saw all the commotion.

I dedicate the footnotes below to the memory of David Foster Wallace.

¹According to Wikipedia, there are about 900,000 of us tucked into the little corner of Northeastern NJ comprised by Bergen County. In contrast, Sussex County, which is situated in the Northwestern corner of NJ and covers twice the land area of Bergen County, has only about 150,000 residents. My mother owns a small horse farm in Sussex County, and when we drive there Cheryl and I pass the "Welcome to Sussex County" sign, which features that county's slogan, "People and Nature Together". We've joked that the slogan for Bergen County ought to be "People at each other's throats".

²I say this based my experience driving in a number of different parts of this country. Los Angeles, for example, has lots of traffic, but when I've driven there, I've never seen the kind of nonsense I see here. I don't see it driving in Manhattan, for that matter either (with the possible exception of the taxi drivers).

³As densely populated as Bergen County is, the northern end of it includes some scenic, rural parts. Ho-Ho-Kus is up in that area. One bit of trivia: Ho-Ho-Kus was mentioned in an episode of Sex and the City ("Sex and the Country"), when Carrie Bradshaw drives into NJ from her boyfriend's cabin in New York state to get a burger. According to IMDB, this scene was actually shot somewhere in Long Island though.

Built to Last

My first exposure to the business guru Jim Collins came during a conference call in the late 1990s. I was sitting in a conference room in Northern New Jersey with several colleagues while our division head was on the speaker phone from his office in Southern California. The division head had announced two challenging new goals for us and one of my colleagues had apparently asked him which one should demand more of our attention. I wasn't listening too closely at that point. The division head's response caught my attention though, when I thought I heard him extol the "genius of the ant". "The genius of the ant," I thought, "what the hell is he talking about?". After another sentence or two it was clear that he was referring to one of the "myths" Jim Collins (pictured above, rock climbing) debunked on p.10 of his book, Built to Last: Successful Habits of Visionary Companies:

Visionary companies do not brutalize themselves with the "Tyranny of the Or" -- the purely rational view that says you can have either A or B, but not both.

[...]

Instead, they embrace the "Genius of the And" -- the paradoxical view that allows them to pursue both A and B at the same time.

At the time, I thought: another management guru serves his purpose, by letting a manager parrot him to rationalize why he set an unrealistic goal. I was scheduled to be interviewed by that division head for a promotion in a couple of weeks, so I decided to read the book before the interview. The book was better and more substantive than I had expected. In it, Collins compared companies he considered great with companies in the same industries he considered also-rans, and tried to explain what made the great ones great. One of the invidious comparisons in the book, Merck (great) v. Pfizer (also-ran) seemed questionable by the late 1990s, when Pfizer was raking in money from Viagra, but I was reminded of it a couple of weeks ago when Pfizer announced that it would start giving away Viagra, Lipitor, and a number of other drugs to current patients who lost their jobs during this recession.

In "Built to Last", Collins had written that one of the things that made Merck great was the company's idealism, and as an example he cited the company's decision to give away Mectizan, the cure it had developed for River Blindness, when it couldn't find a third party to pay for the drug. Collins also quoted then-Merck CEO Roy Vagelos on the decision:

Asked why Merck made the Mectizan decision, Vagelos pointed out that the failure to go forward with the project would have demoralized Merck scientists -- scientists working for a company that viewed itself as "in the business of preserving and improving human life." He also commented:

When I first went to Japan fifteen years ago, I was told by Japanese business people that it was Merck that brought streptomycin to Japan after World War II, to eliminate tuberculosis which was eating up their society. We did that. We didn't make any money. But it's no accident that Merck is the largest American pharmaceutical company in Japan today. The long-term consequences of [such actions] are not always clear, but somehow I think they always pay off.

Perhaps Pfizer CEO Jeffrey Kindler has read "Built to Last"? That thought went through my mind when I heard the Pfizer announcement a couple of weeks ago, but I didn't get around to blogging about it. I was reminded of it by the cover article on Jim Collins in this past Sunday's New York Times business section, "For this Guru, No Question is Too Big". The photo above, by Kevin Moloney, accompanied that article.

Lessons from Brooklyn's New Economy

This week, the New York Times published an interesting article on the burgeoning culinary movement in Brooklyn, one similar to the movement led by Alice Waters¹ and others in Berkeley, California, in the 1970s ("Brooklyn's New Culinary Movement"). There are some broader political and economic issues related to this story that the article doesn't touch on, which I try to touch on below.

The article described how a number of Brooklynites were building viable businesses and creating livelihoods for themselves. Conspicuously absent was the role of formal education in most of this. The butcher learned his trade from an apprenticeship of sorts; the ricotta cheese makers learned that craft on a trip to Italy; the chocolate-making brothers were mainly self-taught, etc. Since education is one of President Obama's three main policy foci, it would be good if he or his aides took note of this, but I doubt they will, for a couple of reasons. The first is because of the extent to which the Democratic focus on education is about feeding the educational industry, and the second is because I doubt many of Obama's aids (or outside advisers) have ever done the sort of thing these Brooklynites are doing: building businesses from scratch. That lack of hands-on experience leads to blind spots among our elites, both in the public sector and in the corporate sector.

That's a thought I had considered writing a post on a few months ago, but I'll make the point here instead. There's been speculation in recent months about how some of the catastrophes that combined into the financial crisis could have happened on the watch of some of America's best and brightest, in big business and government. In a recent New York Times column, Ben Stein, drawing on his experience in the Nixon White House, speculated that most of the best and brightest weren't that bright. He wrote that most of the men he worked with in Washington were B+ types, with the exceptions of two he considered to be geniuses, Henry Kissinger and Paul O'Neil. Others in recent months, including Atlantic blogger and Harvard alumnus Ross Douthat, have blamed the arrogance of Harvard-educated elites. I suspect the lack of hands on experience in closer-to-the ground businesses is partly to blame. Relatively few alumni of Harvard or other elite schools go into these sorts of businesses, as they tend to have lower-risk, lucrative job opportunities in big business, consulting, etc.

Attitudes toward debt and leverage are one example. Most small businessmen I've known are inherently cautious about both². The New York Times article doesn't give much detail on how these culinary-related businesses are financed, but what details it does give suggest an aversion to getting over-extended with debt (e.g., the chocolate-makers paying the designer of their packages in chocolate bars and deciding to let their business "evolve" rather than trying to grow it more quickly). The academic perspective on leverage (at least for public companies), up until recently, was different³, and of course there was no shortage of elite university grads at highly-levered Wall Street firms.

The image above, from the article, gives you an idea of the sort of ethnic diversity you can find in many gentrifying New York City neighborhoods.

¹In doing some research before writing this post, I came across this related essay (which I don't entirely buy) by John Schwenkler: Eat Republican: How an organic movement born in Berkeley exemplifies conservative values.

²In lending businesses, some amount of leverage is necessary, but the owner of a local non-traditional lender for whom I've done some work explained to me that his business is usually levered less than 3-to-1: far less than most commercial banks, let alone investment banks. He also takes a more hands-on approach to asset-backed lending than some of his counterparts in big Wall Street firms, e.g., driving out to a retail property backing a note and watching its foot traffic, etc.

³The academic perspective on this always struck me as counter-intuitive. In an NY Institute of Finance class a couple of years ago, for example, the instructor, a veteran CPA and CFA, lectured that it was a bad thing for a company to have a lot of cash on its balance sheet (because that dragged down returns on equity). He said that a company flush with cash it couldn't put to use ought to use it to buy back its stock, and then lever up and buy back some more stock. Of course, companies that followed that sort of advice in the last couple of years haven't been well served by it, while companies holding net cash may now have some attractive opportunities to put it to use in a depressed market.

New York Restaurants Adapt to Recession

Restaurant critic Frank Bruni of the New York Times writes that high-end local restaurants have added deals and started acting more solicitously toward diners as their business slackens due to the recession and financial crisis (hat tip to Cheryl): "Restaurants Stop Playing Hard to Get". Excerpt:

Battered hard already by the recession and petrified of what’s to come, restaurants are talking sweet and reaching out in ways they didn’t six or even three months ago. They’re cutting special deals, adding little perks, relaxing demands and making an extra effort to be accessible.

They’ve seldom wanted you so bad, so they’ve rarely treated you so good. If you can still afford to dine out, you’re likely finding yourself enfolded in what the restaurateur Stephen Hanson— who recently closed two Manhattan restaurants, including Fiamma — describes as a big, tight embrace.

The photo above, of the chef Mario Batali (wearing Crocs), Sirio Maccioni (of Le Cirque), and Jean-Georges Vongerichten (mostly cropped out by Blogger) comes from the New York Times article. Vongerichten's flagship restaurant in New York, Jean-Georges, is one of only three restaurants in the city that has earned Michelin's highest, 3-star rating.