Boyar in Barron’s: 6 Value Stocks for 2022 From the Forgotten 40

Excerpt from the article:

Looking at 2022, I think the money is going to be made outside of the major indexes or in stocks that aren’t well covered on Wall Street says Jonathan Boyar in a recent Barron’s interview.

Boyar’s Forgotten Forty portfolio has produced an average annual gain of 11.5% over the decade through the end of 2021, versus about 10%, on average, for the Russell 1000 Value index. The full Russell 1000, including growth components, has climbed about 14% a year during that period. In the interview, Jonathan Boyar highlights  half-dozen stock picks from his 2022 Forgotten Forty portfolio.

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This information is not a recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security, including an interest in any investment vehicle managed or advised by Boyar Asset Management (“Boyar”) or its affiliates. The results of the Forgotten Forty are not audited. This material is as of the date indicated, is not complete, and is subject to change without notice. Additional information is available upon request. No representation is made with respect to the accuracy, completeness or timeliness of information and Boyar assumes no obligation to update or revise such information. Nothing in this interview should be construed as investment advice of any kind. Consult your financial adviser before making any investment decisions. Any opinions expressed herein represent current opinions only and no representation is made with respect to the accuracy, completeness or timeliness of information, and Boyar Asset Management and its affiliates assumes no obligation to update or revise such information. You should not assume that any investment discussed herein will be profitable or that any investment decisions in the future will be profitable. Past performance does not guarantee future results. Certain information has been provided by and/or is based on third party sources and, although believed to be reliable, has not been independently verified and Boyar Asset Management or any of its affiliates is not responsible for third-party errors. Any information that may be considered advice concerning a federal tax issue is not intended to be used, and cannot be used, for the purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter discussed herein. Boyar Asset Management, its employees or affiliates may own shares in any of the companies referenced in this article.

Any results mentioned, do not necessarily represent the results of any of the accounts managed by Boyar Asset Management Inc., and the results of Boyar Asset Management Inc. accounts could and do differ materially from any of the results presented. While the results presented show profits, there was the real possibility of a permanent loss of capital. This information is for illustration and discussion purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Boyar Asset Management Inc. is an investment adviser registered with the Securities and Exchange Commission. Registration of an Investment Advisor does not imply any level of skill or training. A copy of current Form ADV Part 2A is available upon request or at https://adviserinfo.sec.gov Please contact Boyar Asset Management Inc. at (212) 995-8300 with any questions.

Boyar Asset Management or its affiliates, its employees and/or shareholders own shares in Bank of America, Walt Disney, Uber Technologies, Scotts Miracle-Gro, Callaway Golf, and Hanesbrands. The presentation represents the  views of Boyar as of the date of this article and is subject to change at any time without notice.

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IAC CEO Joey Levin on why his company took a 12% stake in MGM, which companies within IAC he is most excited about, lessons learned from working with Barry Diller, and how he approaches capital allocation.

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The Interview Discusses: 

  • Lessons learned from working with media mogul Barry Diller.
  • Why they decided to take a 12% stake in casino giant MGM.
  • Which businesses within the IAC portfolio he is most excited about.
  • How he approaches capital allocation at IAC.
  • Which stage he believes Angi is at in their fixed priced transformation.
  • Why he believes Angi’s “take rate” will increase with time.
  • IAC’s major competitive advantage.
  • Why he believes Care.com is a major opportunity for IAC.

About Joey Levin:

As CEO of IAC, Mr. Levin is responsible for the strategic leadership of IAC and its operating businesses and also serves on IAC’s Board of Directors. Prior to his appointment to CEO of IAC in 2015, Mr. Levin was CEO of IAC’s Search & Applications segment, where he oversaw strategy across IAC’s mobile and desktop software and media businesses. Prior to this, Mr. Levin served as Chief Executive Officer of Mindspark, an IAC subsidiary. Mr. Levin has also served as IAC’s Senior Vice President, M&A and Finance. Prior to IAC, Mr. Levin worked in the Technology M&A group for Credit Suisse First Boston (now Credit Suisse).

Mr. Levin is Chairman of the boards of Match Group, Inc. and Angi Inc. and also serves on the Board of Directors of Turo and MGM Resorts International. He graduated from the Jerome Fisher Program in Management & Technology from the University of Pennsylvania, with a BS in Economics from the Wharton School and a BAS in Engineering from the School of Engineering and Applied Sciences.

 

Click Here to Read the Interview Transcript

Transcript of the Interview With Joey Levin:

[00:00:00]
[silence]

Jonathan: Welcome to The World According to Boyar where we bring top investors, best-selling authors, and business leaders to show you the smartest ways to uncover value in the stock market. I’m your host, Jonathan Boyar. Today’s special guest is Joey Levin. Since 2015 Joey has been CEO of IAC, which owns a collection of largely online businesses such as Angi, Vimeo, online publisher Dotdash, Care.com, as well as the host of other smaller, faster-growing businesses. Joey is also executive chairman of Match Group, which until recently was controlled by IAC, is on the board of casino giant, MGM, where in August of 2020, IAC opportunistically invested $1 billion to acquire a 12% stake in the company.

Over the past five years under Joey’s leadership, IAC shares, if you include spin-outs, have compounded at an annual rate of 60% versus 17% for the S&P 500. Full disclosure, clients of Boyar Asset Management, as well as myself, own shares in IAC, as well as IAC controlled Angi Homeservices. Joey, welcome to the show.

Joey: Thank you. Thanks for having me.

Jonathan: Really excited about the interview. I guess I’ll just delve right in. IAC has a market cap of a little over $20 billion, Match’s market cap is a little below 40 billion. You’re CEO of IAC and executive chair of Match. You’ve accomplished this, and you’re only in your early 40s. How do you achieve this level of success at a relatively young age?

Joey: One step at a time, [00:02:00] I guess. I’ve been very fortunate to be a part of IAC, which is a dynamic business with a dynamic chairman and a philosophy that generally– There’s a lot of components, but probably one of the most central elements is to do things differently, try and create new ground or try and go against whatever is the status quo. Things like specific experience or age are less relevant at IAC than they might be at another place. The thing that matters at IAC is people being passionate about something that they’re working on, working really hard on it, and wanting to get a chance to succeed at it, which is something that we give people.

Jonathan: You mentioned an executive chairman. That’s obviously Barry Diller. What are some of the important things that he’s taught you along the way?

Joey: Always think bigger is probably a big one. You think you’re thinking big at something. You say, “Look at this little business that’s doing a few million dollars of revenue. We can imagine one day if we work a lot of things out, we could do a $100 million in revenue.” Most people would say, “Wow. Well, that would be quite an accomplishment for a little business.” We could say that to Barry, and he’d say, “Well, why bother then? Because there’s a much bigger opportunity. If you’re not going for a bigger opportunity than that, then why bother?” That boundaryless thinking has been really important to creating value at IAC and really important to consistently setting the bar and the ambitions higher.

If you start with small ambitions, [00:04:00] the best you do is achieve those. We’re trying to look bigger, go after bigger markets, bigger opportunities with bigger wins that could work out for IAC. That’s been a pretty important one. Also, the willingness to allow yourself to be challenged, to challenge others, and to be comfortable in that state of constantly challenging and being challenged. I don’t ever have any problem disagreeing with our chairman on anything we want to disagree on, nor certainly does he with me. That gets us along with all of our colleagues.

That I think gets us to better answers because if you just start with one and everyone agrees or doesn’t challenge it, then you don’t explore the nooks and crannies of it in a way that allow you to prepare better for the future or better for thinking about what could go wrong or things like that. That challenging culture is really at the essence of getting to better answers I think. Those are some of the important ones, but there’s a lot.

Jonathan: Speaking of thinking big, in August of 2020, you announced a billion-dollar stake in MGM. It’s now May 2021 and that investment, using share prices, increased by about 128%. You get shown deals every day and you obviously pass on most. I’d love to hear how you sourced the idea and what gave you the confidence to give it the green light.

Joey: MGM in particular was a period where we were hair on fire looking at opportunities [00:06:00] knowing that we had a very short fuse because this was March and April of 2020, no one knew what the future looked like, everyone was scared and our businesses were in fine shape. Some businesses declined meaningfully for a short period, but we knew we had a very strong balance sheet. We knew we had the ability to get to the other sideway. As we do always believe that, ultimately, things come back to normal relative to challenging situations.

We said, “We have a very short window to deploy capital here. Let’s make sure we don’t miss this window.” We were looking at ideas round the clock in that period to try and figure out where to go. One thing we realized early was that buying an entire company in that window was probably impossible. Boards of directors weren’t meeting in that window to say, “How do we sell the company?” The only ones that were, were ones who were truly out of money, truly bankrupt, or at a significant risk of near-term bankruptcy. We looked at some of those but didn’t see ones that fit.

We realized that if we were going to put a lot of capital to work in that window, it would have to be likely through public companies and minority investment public companies. In that context, we looked at ones that didn’t have a control shareholder where we could be a meaningful shareholder and where we thought we could add value in the company. Also, ones that were clear leaders in their category with very clear asset value and enough capital to get to the other side, whether their own capital or capital we could contribute. That actually narrowed the field pretty quickly.

Among those, MGM was an idea that I think originated with somebody from our board, Alex von Fürstenberg, who had been talking to somebody else [00:08:00] about the idea. I think we had talked about it a few times in passing, but that one was something that we started to get excited about. I think he was, if not the catalyst, certainly a meaningful catalyst in it. We were looking at that in the context of all the other things we were looking at and as we do with every idea, we went through this process I was referring, which is taking apart the idea and figuring out all the reasons why it wouldn’t work.

Could they run out of money? Would the world change in some meaningful irreversible way? All these things you go through and then get what they were doing strategically. At each step, we didn’t find a blocker. In fact, we found more exciting opportunities, which was the sum of the parts thing, which was something that we’re familiar with. They had, basically still do, three different public companies under the same umbrella. They also had this really interesting theme that’s been relevant for us, which is an offline to online migration through a joint venture they have called Bet MGM, where they are one of the top three players in the US for digital gaming which is a business that’s a multi-billion dollar market today probably be 10x bigger 5 years from now, somewhere in that neighborhood.

You’ve got a market, you’ve got a leader in a very established category with great cash flow, which is I think some downside protection, then you’ve got a digital upside opportunity which is just a huge growing category with tailwind and a leadership or a potential leadership position there. The combination of those two things, which was the cash flow and downside protection plus the upside optionality, was really all we needed to proceed. You add to that a seasoned, solid, strong management team, they just had a new CEO, but a [00:10:00] person who had been in the business for an eternity and who knew it backwards, forwards, upside down, and sideways.

That was a winning formula for us. That has, so far, worked out very well, very quickly. Probably we’ve joked internally, I’ve joked a little bit dangerously, which is generally to create a billion and a half dollars of value, we’ve had to work for years and years, decades, making mistakes harrowing moments, all the things that you do to get there, which are very rare. This one happened in a few months. We didn’t have to do much work at all. The management team on their own did all of that. We were just, sitting back observing.

Jonathan: How did you come up with $1 billion? I think you had about $4 billion of cash on the balance sheet around that time, roughly. Did it just sound like a nice round number or was there just a capital allocation decision there?

Joey: It was two factors. One, it was a little bit of nice round number of us saying, this is about in the neighborhood of what we’re comfortable with, but the other big factor was we were buying in the public markets. We could buy up to 4.9% quietly and then our goal after that was to buy as much as we possibly could before we had to disclose. I think it ended up being a little bit more than a billion, but a billion and change we put in and that got us to 12%. I think they had 10 days to buy– I can’t remember how it works. You have 5 or 10 days to buy, and we bought as much as we possibly could in that time, which got us to the 12%, which ended up being somewhere in the neighborhood of a billion.

Jonathan: You think MGM is more of an attractive opportunity, even though the valuation has gone up now that you have certainty over COVID vaccines or as much certainty as you can, as it was when you bought it, obviously at a much lower price, [00:12:00] but you had that visibility that the world’s not going to end?

Joey: Yes, absolutely. MGM, I think they said last quarter, they had bought back some of their own stock. That’s, I think, a testament to the answer to your question. Yes is the answer. Two things have worked out probably better than we thought. Number one, the pace of the recovery. We always believed it would recover and we always believed they have enough capital to do that, but the pace of the recovery has been faster. Two, the pace of acceleration at BetMGM in capturing share. Now, there’s still a lot of unknown at BetMGM.

Most significantly, all the businesses in this category are losing an enormous amount of money and continuing to lose an enormous amount of money because it’s very competitive, it’s hard to acquire customers, it’s expensive to acquire customers. I think MGM has some unique advantages that they’ve been successfully leaning into. Nonetheless, it’s expensive. There’s still a lot of unknown as it relates to what happens when all of this spending shakes out or settles down. For now, taking real share in what is a huge and growing category.

Our thesis was that the offline and the online work together, that they both enhance each other. In some categories, online destroys offline. In this category, I think online enhances offline. One of the best examples of that was the state of Michigan, it’s the state where MGM has the best property in the state in Detroit. The MGM was at the beginning, other [00:14:00] states we’ve been late joining, this one was at the beginning. The combination of being there from the get-go with a physical property, and the success that we’ve seen there demonstrated how this whole ecosystem can work together in MGM’s favor.

I think that was really, really compelling. That a little bit validated the thesis, probably more than a little bit validated the thesis and that’s been a positive too. When we look at it overall, I think we feel stronger now than we did going in.

Jonathan: In your letter, right after the stake was announced discussing the deal, you left it pretty open-ended on how you would assist MGM. What have you been doing to help? I know obviously, you’re on the board as well — You obviously have great expertise on internet-related businesses. Are you actively engaging with them?

Joey: Very much. I had a call with them last night. Wherever they need us is the answers to specific examples, we’ve trying to help with talent. We’ve helped with sourcing or recruiting some folks. With some of the technology questions that MGM needs to answer for itself and also through the joint venture where and I see employee has joined the board of the BetMGM joint venture. With ideas and direction and helping with the storytelling, all that we’re trying to be helpful with, but we’re not doing anything really ourselves.

We’re passengers here with a team that’s very capable and doing well, doing it all on their own. It’s just us, we’re here to help when they need us and whenever they call, which they do sometimes, we [00:16:00] chip in.

Jonathan: You’re about to spin off Vimeo I think this week or so. Right now the most valuable piece of IAC after the spin-out will be your stake in Angi, your cash, Dotdash and obviously your MGM stake as well. You have a lot of lesser-known companies under the umbrella. Which are the ones that you’re most excited about that investors really should be paying more attention to?

Joey: I really am excited about all of them. If I want to pick out some that you haven’t mentioned that are fun right now, you take one called Turo. Turo we’re the largest minority shareholder, but own a meaningful stake in the business. I’m on the board along with my colleague Mark Stein. The businesses in a fantastic macro situation right now, which is, they’re in the business of peer-to-peer car sharing. If you think about Airbnb as it relates to hotels or vacation homes. Turo does similar for cars.

As a owner of a car, you can generate income from your car and as somebody who needs a car, you can get the most unique set of car inventory anywhere from Turo, generally at a pretty attractive price too relative to the rest of the market. What’s happening macro is two things that are really helping the business, besides the general situation which is Turo’s a much more engaging experience, much better experience. Once you use Turo instead of a traditional rental car, you really don’t ever want to go back to a traditional rental car. [00:18:00] What’s leading to a lot of discovery right now is, number one, there’s a lot of more, it’s called local mobility.

People are less getting on planes. Airplanes are starting to recover, but still even domestic travel on airplanes is still down, so people are taking cars, they’re taking cars for trips and sometimes they use fun cars for trips. That’s really helping Turo. By the way, even in that context, the rental car companies are based in airports. When there’s less people in airports, we don’t need the airports to operate our cars, they are spread out all over the place. The airports also all want to take a tax on the consumer to use cars in airports. We, fortunately, avoid some of that infrastructure by being a different kind of company.

Long-winded, the two macro things that are happening, one is the local mobility, the second one is that because during this crisis, a lot of the car companies sold off their fleets, and now with the chip shortages, the OEMs can’t make new cars, they can’t replace those fleets. You see these stories about the rental car companies charging insane prices for access to cars because the supply and demand aren’t lining up. We have supply and we can grow our supply. We don’t need to go to the OEMs and buy 1,000 of the same car at a time. We’re finding this all the time. Somebody whose operation is working picks up a second car.

Sometimes they buy a second car, sometimes they get a second car from their sibling or their brother-in-law, or father-in-law, or somebody who’s not using a car or who only use the car part-time. They realize that this is a yielding asset and that all these things are unused and they can do it. The business is seeing fantastic growth right now, which is a lot of fun. I think the way it’s transforming [00:20:00] the categories, something that’s going to be very– It is already and will continue to be something that is very beneficial for consumers. That’s a fun one, but we’re, again, minorities there.

We’re also in this category that I think is fascinating, which is matching temp labor with employers. This category lately has gotten a lot of tangential noise because of what’s happening with stimulus and what’s happening with unemployment benefits, and whether people are going to work or not in these light industrial jobs. What this platform does is it matches workers with employers. That traditionally happened, really still today, almost entirely offline. There were resumes, there were interviews, there were phone calls, there were literally physically going to pick workers up at a certain location and move them to another location.

Now in a small way, because it is still very small, but I think if you fast-forward a few years, then we’ll all be down with software, it’s just a better way of doing it. Knowing whether somebody is available to work, knowing whether somebody is proximate to a work location, knowing whether somebody is commute could be half-hour shorter, knowing whether their commute could be a few dollars cheaper. All these data points, knowing their propensity to show up on time, their ability to operate a certain kind of machine. Most of those things are actually relatively binary.

There’s not a huge amount that’s accomplished in an interview in jobs like that. You’re qualified for the work, you’ve done the work and you’ve either demonstrated or not an ability to show up and show up on time for that work. Software is going to be better at judging that than people are at judging that. That’s the idea with this platform is to match the workers with the work and really help the workers [00:22:00] in that context get better jobs, better-paying jobs that are closer to their home, that are more convenient for whatever they need to accomplish and getting rid of a lot of the hassle that really adds no value in that ecosystem.

We’ve got one business doing that in the light industrial space and we’ve got another business doing components of that, not in the same way, in the healthcare space. I think that it’s a pretty interesting category for us. That’s a fun one.

Jonathan: IAC is known for taking businesses, as you mentioned just now, that are primarily currently conducting most of their business offline and transitioning them to online. You’re doing with those businesses that you just referenced. You did it with Ticketmaster, Expedia, Match Group, Angi. Are there really any major categories left for IAC to enter that haven’t meaningfully transitioned from offline to online?

Joey: I thought for sure we’d be out of gas on this strategy by now or five years ago and there’s still a lot more. There’s the one we were just talking about temp labor. It’s almost entirely offline right now. Even Angi is probably still 10%-ish online, definitely less than 20% online. Healthcare is another huge one. We’re basically nowhere in healthcare other than a bit through this employment business. Healthcare is still significantly offline. Food has only in the last few years moved online. The pandemic was a big catalyst for that, but food just probably over the last three years moved massively online. It was otherwise offline.

Offline to online is a little bit– We still talk about it and it’s still, I think, a great way to look at it, but it’s a little bit old news in the [00:24:00] sense of what does offline to online mean anymore? There are different evolutions of online. Another big theme for us has been in a few of our businesses that we’re in that we’ve considered entering is the first amazing moment in going online, you might remember, but most people probably don’t, is this thing of there’s a list of all the available information online. That was transformative when you could find all the information, whether that was in travel or whether that was in ticketing or whether that was just in search, with Google offering you 10 billion results on any query.

Now, what’s happening is, just having the information is not– that’s obviously table stakes. In fact, that can get annoying. What you really want is the curation. You really want to go down to one answer or a couple answers and that curation is a whole other evolution in these businesses where you see disruption from the person providing the lists or the entity providing the list, the entity providing the match and, ultimately, the entity providing the transaction. In all of our businesses, probably Angi most pronounced is, we’re trying to enable that transaction online. That’s another evolution.

Jonathan: As I mentioned earlier and as well-known, you’re about to spin off a Vimeo. You have about $3 billion in cash. Do you have a preference of how you’re going to use it? Do you anticipate any of your current businesses needing a lot of cash, or you think it’s going to be spent on acquisitions? How do you see your use of capital going forward?

Joey: It’s probably not likely a huge amount of capital in just P&L losses. I do think one thing we have been doing with Angi and probably will continue to do is reinvest profits in Angi, but probably not. [00:26:00] Not likely going below zero in those businesses to reinvest, at least not a significant amount of cash into those businesses. We’ll invest into businesses and reinvest P&L, but I wouldn’t say materially more that way. That really leaves acquisitions or new acquisitions, acquisitions in our existing categories, or acquisitions of our own business, which is another word for share repurchases.

We’ve gone through periods where there was after the 2008 spinoffs where we span off four businesses in that period. I think we bought back over a few years basically half our shares. That’s one option. Another option is getting into new businesses and buying more businesses. I think both are possibilities and both are something that we analyze pretty regularly and we’ll continue to analyze regularly.

Jonathan: I guess when Anjali, who is currently leading Vimeo, came to you when it was a much smaller company with a new vision for it, you ended up plowing a lot of money into growing it to where it is today. What gave you the confidence to aggressively invest in that business?

Joey: The big thing that Anjali did was, she convinced us that it was– she really made the case for it being a much larger market than we originally thought. With the tools business, the services business, software as a service business had been Vimeo’s business for a very long time. We thought it was a small cottage business and we needed a really a big ambitious business. That’s what led us into the entertainment business, building our own streaming service. We knew that it was a big market, there were some big players in that market, eventually [00:28:00] ended up being basically every player in that market, but there were some big opportunities there.

What Anjali showed was that, actually, the market for people that needed those services were not just the software as a service video software as a service, were not only the most highly talented filmmakers, which was the bulk of Vimeo’s paying user base at one point, it was really anyone who could use video in their business. When we realized that, it became worthy of significantly more investment and significantly more acceleration. That’s what led to certainly the next $300 million of capital going into that business under her leadership.

Jonathan: For every Vimeo grand slam success, I imagine there has to be a lot of failures. How do you know when it’s right to walk away from an investment? You walked away from the streaming part of it and with the benefit of hindsight that was a great move because you have some deep-pocketed players. How do you know when to walk away?

Joey: The streaming business never really made it out of the crib or the womb or something if we keep going with the analogy. That was relatively easy. We’re investing in things constantly. When you see some sign of traction, you keep going, and when you see no traction, you pull back. You have to think about it differently. The way we think about it is, it certainly ties to the scale of the business. We have a big business, take Ask.com for example. We bought Ask Jeeves at some point. We bought that business for a billion and nine and at that time it was doing about 75 million EBITDA. [00:30:00] There was no question that we lost the search battle.

We lost that probably not that far after we bought the business, we lost to Google. Google was certainly winning when we bought it. Google was probably winning to a greater degree than we even realized when we bought it. We lost that. Instead of pulling out of Ask because there’s not really an easy way for us to do that as the owner of the asset, there weren’t a lot of people interested in buying it at that point and there wasn’t really a viable path to selling it. For us, it was, “Well, we have to make this business work in a different way, so we have to reinvent.”

We don’t usually have the option. For example, as a passive investor, you could buy something under a thesis, the thesis doesn’t work out, you sell it the next day. That’s not available for us. We may buy something, own something, we were trying and it’s not working, well, then we try something else and then we try something else and then we try something else until we find something that works. We did that with About.com, we did that with Ask Jeeves, we did that with basically every single one of our businesses. We’ve disrupted ourselves and tried something new rather than pulling out completely.

We don’t usually have the option available to pull out completely. We can pull out of a strategy completely and we could do that frequently, and we can pull out of something small, but if it exists as a business and it had a reason to exist as a business, then we ought to be able to pivot it and change and adapt and explore new alternatives until we find the thing that’s working. That’s on us to do that. We don’t really give up or cut things loose in that context.

Jonathan: Just want to focus a little bit on Angi, where you own roughly 85% of the company, [00:32:00] You’re making a big bet on fixed price services. It’s really complicated trying to figure out how to charge for jobs, sight unseen across different markets. How close are you to getting this right in terms of execution? How much further do you need to go? It’s really hard.

Joey: It is really hard. I think we’re close in the sense that we’ve proven it in certain parts of the market and far in the sense that we haven’t proven it in other parts of the market yet. You always learn more things good and bad as you scale further. You have certain assumptions on your ability to automate things. Sometimes you find you can do more things that you didn’t realize you could automate, and sometimes you find you can do less things that you were counting on to automate. We’ll go through those realizations over time, but if you focus just on the homeowner and the homeowner experience.

We’ve determined with certainty that for the vast majority of homeowners, when they get the full experience, they’re going to be happier. Full experience means you go online, you find the service you want, you pay for the service you want, that service is completed, and you’re done. You skipped the step where you have to negotiate, you skipped the step where you have to evaluate different providers for the service, and you skipped the step where you have to chase the person down to show up or finish the job or all that stuff. That is really a magical experience.

When you know you can deliver a magical experience relative to the incumbent, then everything else from there is just engineering to optimize that magical experience. Once you’ve seen the magical experience and delivered the magical experience, then you know the direction you’re headed with very high confidence, and you know there’s [00:34:00] no turning back from that direction. All you have to do at that point, I say all you have to do like it’s easy, it’s very hard, but all you have to do at that point is optimize. That is the phase that we’re in right now.

We talked about this how we change frequency. If you’re coming in and doing a fixed price job, what we call now Angi Services, if your first experience is an Angi Services job that gets fulfilled, your frequency, with a couple of other things built into there, change your frequency by 4x. That is transformational. I allegorize that to a bunch of other experience that we’ve admired, like Amazon Prime. When I first signed up for Amazon Prime many years ago, I remember saying, “Well, we get a package every now and then, and we like Amazon. I feel like I know that it’s $10 to ship something, so if I ship a few things, maybe one thing a month, it’s going to work out that we’ll be close enough with this two-day shipping.”

What happened is, we went from that to, we have a package from Amazon at our house four times a week, probably at least. The transformation was that you could rely on it. Once you can rely on something, then your behavior changes meaningfully. I believe that that same opportunity is available within home services. Right now, the average person does six to eight jobs and we get a little under two of them. I think the right number of jobs could be a multiple of that. Our portion of those could be also a multiple of what it is right now00:35:48]. That’s the behavior that we’re looking for.

We’re starting to see some of the early signs of that. That leaves me pretty optimistic about it. That’s why we’re putting in the [00:36:00] level of capital that we’re putting. I think that the faster we go, the better. Meaning a lot of these gains, a lot of these marketplaces are about building up liquidity on both sides of the marketplace. You got to keep the service professionals engaged and happy, and you got to keep the homeowners engaged and happy. The best way to do that is to keep more volume moving through the system. That’s what we’re trying to do right now.

Jonathan: Right now for Angi, your take rate or the amount Angi receives from a job, I think it’s a little less than 10% for the fixed price services. If you look at a company like Uber, they get roughly 20% or so. Is achieving a higher take rate over time realistic?

Joey: I’m not sure you’re right on your estimated take rate on the fixed price services. It’s going to be higher than that. The answer on take rate overall is yes, I do think it goes up over time because I do think we add incremental value over time to the service professional. We can actually start to make their operation more efficient and save them real costs and share in the savings with the service profession. You may not need a receptionist or a calendar person to be making or booking the calls, or a salesperson to be going out and doing the sales.

You could be more efficient with just people doing the work, and by the way, people doing the work in a finite geographic space, which saves on travel time and things like that, optimizing the schedule, optimizing the payments, not having to do invoice and collections, and things like that. You take a lot of those nuisances out of the equation for the service professional, you can start to justify a higher take rate because everyone’s doing better. The loss there [00:38:00] is the inefficiency and the unpleasant part for both sides. That added happiness is generally going to be added opportunity to share in the economics.

Jonathan: IAC is famous for not holding things forever. You let them go and break free. I’ve always thought that a major home improvement company like Lowe’s, which you do have a partnership with Angi, should own part of. I think it makes sense for both sides. In your mind, does it make sense for Angi to be a standalone, or would it be better to partner with a larger organization, or you’re just trying to achieve what you’re trying to achieve?

Joey: I always default to we’re on our own. We’re always open to things. If somebody calls and says something that makes sense, we certainly listen, but our mentality always is and always has to be we’re on our own forever. You’re right that we’ve spun off a lot of businesses and plan to spin off a lot more businesses. Our philosophy, when we get into something is we own it forever. Spinning it off doesn’t mean we don’t own it anymore. It just means our shareholders own it directly. Same owners before the spin as the owners after the spin.

Now, in reality, of course, some people trade in and some people trade out, so it’s not going to be all the same owners. Our thought is, when we buy something, we buy something to own it forever, we buy something for our shareholders to be able to own it forever, and we do that really efficiently. That forever mindset has been a massive competitive advantage for us, in that, very few other people operate with that mentality. [00:40:00]

Jonathan: No, absolutely. Short-termism is rampant. I know we’re running out of time. I just wanted to touch briefly on Care.com. You bought it not too long ago. Before you bought it, the site had some major safety issues which was profiled in a Wall Street Journal story, which I guess gave you the opportunity to purchase the company. They had a lot of hard problems that they needed to address. What gave you the confidence that you could right that ship?

Joey: A similar situation, in that, we looked at the Care’s market position, which they were, I don’t know, 30x the next competitor on audience. They were the default brand in the category, based on the genericness of their name, but also the brand equity that they had built in that area. Is a very large category, which we felt and we’ve been at least right on this part is that the category has a natural tailwind to it, not just offline to online migration, but also more of society feeling a responsibility to help in care, childcare, and senior care.

We’re seeing this on the enterprise side with the growth in the enterprise business at care, and we’re seeing this in government in the discussion in some of the infrastructure bills that are coming out around care. We’re seeing the necessity of this in what’s happened to the workforce, the makeup of the workforce over the course of the pandemic, and particularly women in the workforce. Now, they’ve borne much more of the brunt of childcare than men in the workforce. People are realizing, enterprises are realizing, government’s realizing this is a problem that we have to solve.

We looked [00:42:00] at that combination of things and said, “This is a really attractive place to be.” Generally, our view is that mistakes are fixable, the company made some mistakes in the past, those could be fixed. I don’t think that they fundamentally undermined the principle of what could be accomplished in that category. I think they just made some mistakes and we had the ability to work on fixing some of those. I think we made progress on– It’s impossible to be perfect, but I think we’ve made progress on a lot of those. We’re seeing that come through in the numbers a bit.

Jonathan: Has the pandemic changed the company’s prospects in your opinion?

Joey: Yes, it has. In a business like Vimeo, that came through in real-time where growth rates tripled, or whatever, overnight. In care, it’s perhaps an even bigger impact, but slower because it awakened the world to our responsibilities in helping with care. Now people are seeing that that needs to now translate into the business and people engaging with the right product to solve these problems. The spotlight on carrying the responsibilities around care is there in a way that would not have otherwise come. That’s going to, I think, be really important to the growth of that business.

Jonathan: Joey, you’ve been more than generous with your time. I want to thank you for being on the show and telling us more about your fascinating career as well as your vision for IAC and Angi in the future. We look forward to watching IAC’s and Angi’s progress. Again, thanks for being on.

Joey: Well, it’s my pleasure. I’m looking forward to all that too. I hope to see you again.

 

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Michael Santoli, Senior Markets commentator at CNBC on how he has used his experience covering 9/11 and has applied that to Covid-19. He also discusses the importance of Twitter in journalism.

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The Interview Discusses:

  • Michael’s fascinating career from being a columnist and feature writer at renowned financial publication Barron’s to becoming a Senior Markets Commentator on CNBC.
  • The importance of Twitter as a tool for journalists.
  • Michael’s famous source, ‘the mystery broker’.
  • How Michael has used his experience covering 9/11 and has applied that to Covid-19.
  • His thoughts on the possible rotation from growth to  value in the equity markets.

About Michael Santoli:

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network’s Global Headquarters in Englewood Cliffs, N.J.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Santoli has covered the Wall Street beat for more than 20 years. Prior to joining Yahoo in 2012, he spent 15 years as a columnist and feature writer for Barron’s magazine. From 1993 to 1997, Santoli was a reporter at Dow Jones Newswires, covering the securities industry, and was awarded two Dow Jones Newswire Awards for distinguished real time journalism.

 

Click Here to Read the Interview Transcript

Transcript of the Interview With Michael Santoli:

[music]

[00:00:11] Jonathan Boyar: Welcome to The World According to Boyar, where we bring top investors, bestselling authors, and business leaders to show you the smartest ways to uncover value in the stock market. I’m your host, Jonathan Boyar. Today’s very special guest Michael Santoli is well known to regular watchers of CNBC. Michael serves as a senior market’s commentator for the network.

Prior to that, he was a senior columnist at Yahoo Finance. Before joining Yahoo, he spent 15 years as a columnist and feature writer for Barron’s where I was a regular reader of his column, Streetwise. Michael, welcome to the show.

[00:00:47] Michael Santoli: Great to be with you, Jon. I appreciate it.

[00:00:51] Jonathan: Thanks for coming on. I’d love to hear a little bit about your career. You graduated from Wesleyan with a degree in history. How did you end up in a career in journalism?

[00:01:02] Michael: Well, the journalism part was, to the extent that I had a plan in school, it probably involved journalism, even though I didn’t study it. The financial journalism piece of it was somewhat more accidental. Wesleyan, of course, is just a purely liberal arts school, it was not really going to have something like a journalism degree, which was fine with me.

I felt like majoring in history was choosing a major without having to choose because everything is included in history and I was writing a lot and all that. I did work on the college paper pretty extensively. In fact, a couple of years, there was pretty much what I did at school, and at the paper at some point.

I did think that it would be maybe my first choice or something to do afterward, I didn’t do the greatest job in laying the groundwork for a career search necessarily before I got out of school. I had a few leads, but what I ended up hooking on was at a financial trade publisher. I actually got the job through a New York Times Help Wanted ad. There’s not many people who can say that or a lot younger than me at this point. This is the IDD, it was called Investment Dealers Digest, still exists in some form.

The business model was very high price weekly newsletters for very narrow financial subjects, only for professionals and they would hire young people just teach them in a hurry, the language and the ropes and the content to some degree and work them as hard as they could. Then they inevitably went off somewhere else within a couple of years.

I was covering the syndicated loan market, I was covering IPOs and really had no firm background in this stuff. It was really just learn the beat, learn the language, try to work the phones, it was a great experience in the sense of being on a steep learning curve. From there, though, I went to Dow Jones Newswires where I covered the securities industry, and that was a great training ground just to be able to write quickly and clearly, figuring out what the story is, learning a wide range of financial topics.

All this time, one of the reasons that financial journalism ended up being a place I stayed is because it was expanding, and it was becoming more mainstream throughout the ’90s. It seemed like it was interesting and the markets were getting interesting. I went to Barron’s from there, a pretty common route to go from Dow Jones Newswires to Barron’s owned by the same company.

Barron’s very market-oriented, but a lot more column centric, and a little more deliberative in terms of what you want to cover and where you feel like you have an edge and trying to be a little bit contrarian and trying to bring fresh info. That was the bulk of my career, I guess. All along the way, just to knit it up, I had done some video and TV.

Dow Jones had to deal with CNBC in the ’90s, and I was a contributor, and I was a point person to do television. That grew to be a bigger part of what I did through Yahoo and, of course, now at CNBC, where it’s pretty much the main gig.

[00:03:59] Jonathan: Barron’s has a great history of weeding out frauds. They were the first ones or one of the first people at least publicly to question Madoff’s returns. I don’t know if you were working or around that story, but it’s amazing that the regulators didn’t run with it then, it would have saved people tons of money.

[00:04:20] Michael: Well, it’s funny you say that because I thought you were going to say Charles Ponzi because Clarence Barron, one of his claims to fame was having partially exposed Charles Ponzi as well. No, I was not directly a participant in that Madoff story, a colleague of mine at the time, Erin Arvedlund was writing about it and interestingly had coming at it from the options trading side of things where it was just like this suspiciously regular returns, as you know, and it’s tough to put a real fine point on those stories because you don’t really have subpoena power. You don’t really know everything necessarily, but you can raise the question. No, I really love that about Barron’s and still certainly respect it. I would say it was great. For me leaving it was much more about exploring different parts of media and how media was developing from there, in terms of Yahoo, the opportunity to be over the top free Bloomberg with video and just to get an idea of how things were flowing in free internet, so to speak. Then, of course, CNBC I’ve been in the orbit of CNBC for over 20 years and it just made sense to settle in here at some point.

[00:05:28] Jonathan: You’re basically on CNBC throughout the day. How do you prepare for the show, when does your day start, and what are you reading? You have to be able to react to almost anything.

[00:05:43] Michael: It’s a constant process that isn’t so much a defined menu of stuff that I consume but I start on the early side. Even if I don’t have an on air booking in the morning, I’m usually up and moving and looking at the news. I’m a lifelong Newswire headline watcher in real-time and Twitter has absolutely replaced that at this point, for the most part.

If you curate it well enough, you pretty much get a sense of the stories of the day and what seems to be relevant for markets. I will do that scan, I definitely have access to a lot of sell side research, and the research boutiques and all that stuff, as you can imagine. I’ve had to chop it down into stuff I find very relevant in real time and try to figure out my touchpoints. I start scanning all that stuff.

On the early side, I’m usually preparing for an 8:15 editorial meeting we have here with at least some take on the markets in terms of what’s going to matter or what’s not going to matter, where we are in terms of field position in the markets, what some of the main bullet points that I think are relevant. From there, I could have a lot going on in the morning, I could have nothing.

I’ll review to a degree what guests we’re going to have and mostly, I’m watching the tape. I watch the tape in conjunction with a lot of color commentary that I’m reading about it, whether it’s on Twitter or just back and forth messaging with people. I always do write a midday memo, it’s just series of notes on the markets. I’ve done it internally here for a while mostly just to prep people for the show and prep the anchors and now we run that out on CNBC PRO subscription service in the afternoon.

To me, it’s jus like my desk notes but I just think as a snapshot of what’s happening in the market, I like to have that. Again, its like you’re right to figure out what’s important. Then I could just be called on to comment on almost anything. The thing about TV is I’ve, a little bit of an adjustment is that the main story is usually the story. What I mean by that is, it’s not like when I was at Barron’s where it was, “Oh, we’ll let the news get out there and people can talk about it and we’re going to find out the unexplored angle. We’re going to find out what it means.”

I have to fixate on the main event of what’s happening. My ultimate goal is to place it in context, whether its historical context, whether its in context of what a particular company’s done before, or whether it’s a response to a competition, or whether this particular type of market move is strictly technical, or whether it’s some major style, shift or theme that’s washing through the markets.

All that stuff gets thrown into the mix. I have to say, I wish I could feel as if it were more orderly than it is as a process, it’s much more just consume as much as possible, and try to eliminate what’s not relevant.

[00:08:44] Jonathan: It’s interesting, you mentioned Twitter, two or three times so far in the interview, it’s full disclosure, Boyar Asset Management own shares of Twitter, and we wrote about it and when it was about $29 a share earlier this year, the company has a market cap of $34 billion, which when you compare it to Facebook or some of these others is really quite small. Are you surprised based on utility of the service, that they’re not much bigger than they are?

[00:09:18] Michael: Yes, I think on a top-down basis, I’m surprised given its importance in the information ecosystem, the engagement of the people who actually are on there. I’m just less surprised given the fact that it suffers I think a little bit from the comparison to Facebook, where the monetization on Facebook seems just automatic.

There are quarters where Facebook, it seems like they’re trying to hold it back and try not to seem like that they’re this magical growth machine. $34 billion now to your point in today’s market, is not a big number for a company that has carved out that kind of place. I don’t know exactly what to do with that, in terms of I wouldn’t have a prescription for how Twitter should operate differently to try to change that.

There’s no doubt in terms of how crucial it is to people who do– I think the knock on it to some degree is, people in the news business and people obsessed with things like politics and sports are completely saturating Twitter. For other people, it’s easy enough to ignore, but that might be changing as well. It seems like it’s becoming much more central.

[00:10:33] Jonathan: To me, when we were doing our initial work, it just amazes me. At that time, it was in the $20 billion and it was roughly where it was in the 2012 IPO. We started seeing somewhat of a no-brainer. You had Jack Dorsey who runs it. He’s a brilliant guy, but he’s also running Square and he has other outside interests. I wasn’t doing it in terms of how to jack up the stock price.

To me, it was just amazing that a professional like you, and I’m sure you’re not the only one who relies on it for news, it’s just so comparatively small. It’s always amazement of that. I follow you, or my firm @BoyarValue follows you on Twitter. You talk about how you did it in Barron’s, about this mystery broker. It’s a really interesting story. I’m certainly not asking you, would you reveal your source? Do you mind telling everyone how that came to be?

[00:11:34] Michael: Oh, sure. It’s fascinating to me that it became the phenomenon to the degree that it has. It’s a weird lesson too, and I think there’s a behavioral aspect to it, which I’ll get to after, as to why people so flocked to it. It’s just this mystique of secrecy that I think amplifies people’s sense of somebody’s importance perhaps.

The way it all started was, it was really during the global financial crisis. I was writing my column at Barron’s, and this guy, and what I’ve said about him is just that he’s a guy, he is a broker, he’s a financial advisor, but of the old school. Got into the business in the ’80s. He seems to have discretionary accounts and things like that, so that there’s an element of where he’s actually doing his own research and trading to some degree, in addition to just acting as a financial advisor.

However, he emailed me with certain thoughts about my columns. His basic thrust, and this was very, very close to the 2009 law was. He had sent me– By the way, there’s something he wrote in 2007 before he was in touch with me, and I verify the date when he more or less called the top ’07 of the market. Anyway, he sends me this lengthy email with his thesis.

Every time I pushed back on it, he said, “Because the financial crisis is over.” This is April of ’09. Literally, nobody thought the financial crisis was over. What they thought was, “Oh, maybe we’ve seen the worst,” whatever the rationale. I was just impressed with just how he was able to boil things down to what seemed to be discounted already, whether we pass the inflection point, both technical and fundamental inputs that he used.

In a column, and I used to write short columns, a few 100, 600, 800 words, whatever it was, I just detailed this guy’s view in pretty significant detail. I introduced it in a way I was like, “There’s this guy who emails me.” Basically, trying to characterize exactly how I came upon him and people went nuts. The reception– I think part of, it was a very tightly wound moment in the markets.

If you were saying the bottom was in April of ‘09, a few weeks after it was, you’re really going out on a limb. Then later in that year, he basically says, “This is not a bear market rally. This will be a multi-year thing. We’re probably going to have pullback,” et cetera. He’s very tactical along the way, but it just gained this following

I never really intended to make him a regular feature of what I did, but people would ask all the time, and they would also criticize me for amplifying this guy’s views without giving his name. There was no real accountability and all the rest of it. It carried on from there, he just stayed in touch. I’ve literally never met him in person.

I know who he is, I’ve checked out the background and all that, and he’s never telling me anything that would be insider-ish. It’s just his observations and his analysis of what’s happening. What’s fascinating is, Twitter is like a little bit of an ideal way for this thing, this stuff to propagate and I would put stuff out there and I think even when I was at Yahoo, I created the hashtag because people would constantly ask me what he said before, it’s sort of all in one place and I just think it’s– First of all, he’s not always been right but he’s been more right than not typically, he comes from a particular discipline.

I think I would characterize him as being kind of in the Marty’s Zweig, very focused on some like monetary and fun flow and rate of change type stuff but it’s certainly pick individual stocks, and he’ll do work on individual stocks as well. It’s just amazing to me where it’s come to. Also, he’s been an influence on how I think about the markets to some degree.

I try to actually make sure that I’m not bending my thought, my view in a direction, because I either want him to be proven right or wrong, I try to disassociate my current thoughts with like, what he’s– For example, just recently, he basically saying like, the rotation into value, it’s got years to run, here’s why and he’s playing it. I don’t disagree with that but I wouldn’t be so bold as to actually assert that myself.

Again, the lesson in how people view and treat what seems like kind of secret backroom information from an unnamed source is really an interesting lesson because I truly believe if people knew his name and what he did day to day, he would just be another guy, and he would be another voice. Maybe he would be one that people respected a lot like David Tepper, where he doesn’t say much all the time but when he says something, people think that it carries weight or maybe he would just be like one of the many voices that we have on the air all the time, who because of their familiarity, people don’t put on a pedestal. It’s really kind of an unintended phenomenon and kind of an interesting one.

[00:16:53] Jonathan: He’s like your reoccurring deep throat essentially.

[00:16:57] Michael: Right, exactly.

[00:17:01] Jonathan: Years after his death, hopefully many years from now, you’ll reveal him as the way they did with Mark Felt.

[00:17:09] Michael: Wasn’t that a good example of that though? I feel like when Mark Felt was shown to be Deep Throat, people were like, okay. It wasn’t like some bombshell because he kind of knew what was going on but it wasn’t so scandalous that he was one of the top guys or whatever but no, that’s exactly right. In fact, I’ve asked him if he be interested in a reveal and he’s just not. I just think temperamentally, he just doesn’t really want the attention, but clearly, he loves to be right and he likes– he just interestingly, seems to like having that limited amount of publicity.

[music]

[00:17:47] Jonathan: I hope you’ve been enjoying the latest interview with Michael Santoli. To be sure to never miss another World According to Boyar episode, please follow us on Twitter, @BoyarValue. Now, back to the show.

You were at Barron’s covering September 11th and I know you and I kind of talked about it a little bit off air. What did you take from your experience covering September 11th, from a financial journalism perspective that you currently applying to the COVID?

[00:18:20] Michael: Sure. I think one of the first things is a recognition of how markets will turn before it feels like it makes any sense to turn. The overshoot reaction on the downside and then before you really think the coast is clear, the markets will respond most likely, especially when there’s some kind of an overwhelming policy response as there was then.

Now clearly, it was a bear market before September 11th. It kind of gave way to a further bear market months later but the week after September 11th and when I was at Barron’s, we were in the World Financial Center across the street. I’ve had no crazy drama about the day, but of course, we were displaced, and the industry was completely hollowed out. It was obviously all the reasons we know pretty rough time.

We put out the paper that we’re going to publish remember the markets remained closed through that week. It was much more about trying to speculate on economic impact and what’s going to change and everything. Then the markets reopen the following week, I think the Dow opened up down seven, ends up being a pretty nasty little correction.

Going into the next weekend, the others thought, they wanted me to write a market piece and make a call on what happens next. I was completely nervous about it. I really didn’t know if we could be confident in the terms even under which we were trying to make this estimation and we ended up basically going with a cover story that said time to buy stocks now. That would have been, let’s see, 17, like September, the issue of September 24. We kind of got lucky timing-wise on it, and market went up 20% from there over the next few months before it did roll over again. That was a lesson to both of why you’re always going to be nervous when you’re deciding that the markets have already handicapped, or discounted awful events.

Also why you should never be surprised that how violently they react. The other thing that I think I’m carrying over here into COVID and did from the beginning is to be skeptical of that reflects strain of analysis that says, after this crisis, everything will change.

After this crisis, our behavior will fundamentally be different. Now, some of it, of course, will, but I just think back to 9/11, and nobody thought we were getting back on planes as fast as we did. Nobody thought that there would be international travel, and of course, we were worried about the war, and what would it do to the economy and everything else? I just feel as if I’m just reserving judgment, a lot of those things.

Right now, it’s all about like, are people really going to stay away from the office? Are people never going to be comfortable on planes again? Obviously, it’s unique in the sense that we have to find medical signposts for all this stuff when it might get back to normal. Those two things more than anything, I think, inform how I’m trying to go about covering things this phase.

[00:21:35] Jonathan: Yes, I am always skeptical when people say that the world is going to change. We had David Rubenstein on the last podcast, and he had similar views. To me, what’s amazing was, if you would just look at the headlines, starting in, I guess, early March, and you look, you had the chance to look at the headlines through today of what has occurred. You saw that over the past six months, the S&P is up 27%, up 14% year-to-date. The NASDAQ has advanced about 32%. Was there anyone emailing you or telling you that this is what is going to occur that this is actually like the mystery broker said in April of 2009, this is the time to buy stocks?

[00:22:27] Michael: I don’t think anybody said that it would happen that quickly. I think that it goes in these little increments. I think anytime that S&P is down almost 35% in five weeks. That’s usually a close your eyes and buy just for a bounce type of thing. I think it’s gone and it goes in these phases of, okay, fine, you can play for the bounce for mega oversold, maybe the most ever. We’ve already discounted a wipeout of earnings or something for earnings growth for this year, and then all the rest of it. No, I don’t think anybody really thought that it would round trip as quickly as it did.

Now, what’s been fascinating is the way it did it, of course, and I do think that all you would have had to say is that like, Oh, well, mega-cap growth stocks are going to be considered to be bond proxies and the safety trade and they’re going to expand their valuation up to 35 times forward. That gets you a long way toward the S&P getting back to the old highs but no, I think what’s been interesting this time around is that you had such disagreement going in as to how much of an economic event this was even going to be?

I’ll be perfectly candid that through February, I was in that camp that said, “Look, we’ve heard about these. We’ve had these pandemic scares before they’ve been localized. We’ve gotten lucky. If never, if you look back, you never felt like it was smart to sell on the Ebola scare, the SARS crisis, or anything like that.” I was definitely not one from an early stage that was saying, this is going to be big.

I didn’t feel equipped to make the call on the other end of it very well and not that I make calls even, but I do think that one of the main tasks I found myself, well, assigning myself here at CNBC, and it’s gone on everywhere, is trying not to pretend that every step of the way and every day, the market had it wrong.

It was very easy to say what the hell is wrong with the stock market, they don’t get what’s happening with 20% unemployment and shut down economies and mass business failure, you go down the list and I think it comes down to what the stock market does and does not capitalized in the given moment and what stock market we’re discussing. As I said, the NASDAQ 100 is perfectly positioned to be a net beneficiary of that type of environment and it showed through.

I mean, the other piece of it, though, is and this might be the most enduring impact of this period, in terms of economics and fiscal policy and things like that is basically short circuit in the recession with massive proactive response, $3 trillion from Congress, $7 trillion, whatever, another $3 trillion or $4 trillion from the Fed incrementally, whatever it’s been. It completely washed over the economy and did buffer things in a way that you wonder down the road if it’s going to just be considered to be like, “Well, why aren’t we doing this?”

Are you going to essentially just overwhelming force to try to prevent recessions because you haven’t yet gotten any of the bad side effects of that necessarily, so far. It’s been surprising to me but I think once we got into the summer, and the market felt as if it was just handicapping a process that it could monitor day-to-day, whether it be on vaccine development, or whether it be on re-openings.

There’s a sense that we got to created all these new metrics. They’ve been plugged into the machines, and the market was happy to just discount them day-to-day, with every incremental data point. At that point, it didn’t become, all that surprising to me. Also, the earnings floor was I think higher than most people thought would be, for a lot of companies. They just suspended guidance, raised a ton of debt, created a vast liquidity plan for the worst and then maybe the worst didn’t really last more than a couple of months.

[00:26:31] Jonathan: Something near and dear to my heart and you had mentioned that the mystery broker had said to you or I talked about you, do you think we’re really in the midst of a rotation from growth to value? How do you think it’s going to unfold? I’ve seen plenty of false starts for the last three or four years. I’m trying not to get too excited on any of these moves but it does feel like there might be something there.

[00:26:58] Michael: Yes, I’m on board with the idea. I think of it a little more as just a more inclusive market of broadening out. On a relative basis, stuff that’s more cyclical, tied to better nominal growth and just cheaper is it does seem as if there’s certainly a window for that to work better. Where I’ve struggled is the idea that with the major indexes at all-time highs, that somehow in a wholesale way, people are going to retreat from the best business models in the world with the highest profit margins, and reallocate in a major way into laggards and value.

In other words, my point is, I don’t think it’s a zero-sum game. It doesn’t seem as if growth stocks have to fall apart. They probably get derated a little bit. Just have earnings growth, that it’s not matched by stock price performance. I find a little more satisfaction in talking about cyclical as opposed to value because I think you’d get a little bit bound up in some of the weird statistical value measures that maybe don’t tell you much.

One of the issues is, obviously, in many sectors, if you’re buying cheap, you’re buying the disrupted. I just don’t know to what degree that’s fully been discounted. I think, to a large degree, it has been discounted, that that disruption cycle, these companies been living with it for a long time or they’ve been such, they’re now such small parts of the index that doesn’t really matter and the rest of valuable will take over.

I see the opening for it but it’s tough for me to think that it happens as a easy pass the baton at all-time highs from one style to the other, as opposed to in the mass of a correction or even a bear market. Although maybe the last several months collectively, was that hashing out process. I’m not really sure because you obviously remember in 2000, index did terribly, growth fell apart, and value didn’t have a bear market.

[00:29:02] Jonathan: [laughs] I love those days. Our view is this is not 2000 that those leaders are actually really solid good businesses. I just think the rest will play catch up but does an Apple deserve to trade at 30 some odd times earnings should be treated more like a consumer staple, that type of thing might happen. Amazon’s in its own orbit, how that plays out with regulations. It will be interesting to see. That’s what makes it really interesting.

One of the things I see you utilize, we don’t use it just because it’s just not part of our style. I’m not saying that there’s not a reason for and I think a lot of people do it very well is technical analysis. How do you think investors should be thinking about technicals when making their buy and sell decision? What should they really be paying attention to?

[00:30:02] Michael: It’s interesting because, first of all, I am a complete amateur practitioner. I don’t really consider myself a technician either by belief or practice, but I do highlight a lot of technical metrics. I do view the world to some degree through those frames. The reason I do it, to be honest with you is, I’m always looking for context. I’m always looking to place what’s happening today in terms of what came before. I want to get a sense of trend, I want to know if this is just a continuation of what’s been going on or if it’s been some kind of an aberration, and whatever.

I don’t really focus as much on levels and absolute price signals and targets as much as saying, you have to have a really good reason to fight an entrenched trend. If the price hasn’t got diverge massively and decided to get very overbought or oversold, the trend is something you should probably– It’s like path of least resistance.

I follow people who make very persuasive arguments that like, “If you see a stock that falls out of bed, it gets oversold, but it’s in an uptrend, there’s your opportunity.” Those are the types of dips that you want to buy and vice versa. If some oil and gas stock is in this disgusting looking downtrend, and it just pops 20%, don’t think that’s a trend reversal, you need some more confirmation.

To me, it’s about listening to the market, as much as telling the market what it ought to be doing. I’m not one of those people who says the only truth is price and fundamental analysis is useless. For me, it’s more of a convenience to how I should portray what’s happening in the market, graphically and narratively, than it is believing that technicals are magic in terms of trading or investing.

I’d make that distinction to some degree, but I’m a huge baseball fan. It’s like, I believe all this high powered statistical stuff that people have come up with, it’s an amazing way to decide what matters in a game and what types of players might be more or less valuable, but it doesn’t really entirely replace having a sense of who performs well in better situations and trying to project out how a team might perform or something like that.

I also like to see the game unfold, let’s be honest. What I’m mostly doing is color commentary on the action. Not predicting the next move, we’re just trying to give some perspective on how it’s been going. I think the technicals at least helped me do that.

[00:32:52] Jonathan: Michael, you’ve been more than generous with your time and you’ve gone 15 minutes over than what I told you it would be and I know you probably have some stories you need to cover. I want to thank you for appearing on The World According to Boyar and I really appreciate your time and insights. To be sure to never miss another World According to Boyar, please follow us on Twitter @BoyarValue. Michael, again, thanks for being on the show.

[00:33:19] Michael: It was great. It was great to talk to you.

[music]

[00:33:40] [END OF AUDIO]

 

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David M. Rubenstein, Co-Founder & Co-Executive Chairman of The Carlyle Group, on how private equity deals are evolving and his recent book “How To Lead”.

 

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The interview discusses:

  • How Zoom and other technologies will change how we conduct business going forward.
  • David’s views on how the pandemic has impacted the global economy.
  • How the private equity world is changing in terms of the types of deals they are doing.
  • Key skills needed to be an effective fundraiser.
  • How The Carlyle Group almost went out of business early in the firm’s existence.
  • The reasons behind writing his latest book: How to Lead: Wisdom from The World Greatest CEOs, Founders And Game Changers.
  • Key qualities of effective leadership from interviews with many of the world’s most accomplished leaders including: Justice Ruth Bader Ginsburg, Dr. Anthony Fauci, Jamie Dimon,  President Bill Clinton, President George W. Bush and more.
  • Which historical figure he would most like to have as a guest on his show and what would he ask.
  • And much more…

 

About David M. Rubenstein:

David M. Rubenstein is a Co-Founder and Co-Executive Chairman of The Carlyle Group, one of the world’s largest and most successful private investment firms. Mr. Rubenstein co-founded the firm in 1987. Since then, Carlyle has grown into a firm managing $221 billion from 31 offices around the world.

Mr. Rubenstein is Chairman of the Boards of Trustees of the John F. Kennedy Center for the Performing Arts and the Council on Foreign Relations; a Fellow of the Harvard Corporation; a Regent of the Smithsonian Institution; a Trustee of the National Gallery of Art, the University of Chicago, Memorial Sloan-Kettering Cancer Center, Johns Hopkins Medicine, the Institute for Advanced Study, the National Constitution Center, the Brookings Institution, and the World Economic Forum; a Director of the Lincoln Center for the Performing Arts and the American Academy of Arts and Sciences; and President of the Economic Club of Washington.

Mr. Rubenstein is a member of the American Philosophical Society, Business Council, Harvard Global Advisory Council (Chairman), Madison Council of the Library of Congress (Chairman), Board of Dean’s Advisors of the Business School at Harvard, Advisory Board of the School of Economics and Management at Tsinghua University (former Chairman), and Board of the World Economic Forum Global Shapers Community.

Mr. Rubenstein is an original signer of The Giving Pledge, a significant donor to all of the above-mentioned non-profit organizations, and a recipient of the Carnegie Medal of Philanthropy, and the MoMA’s David Rockefeller Award, among other philanthropic awards.

Mr. Rubenstein has been a leader in the area of Patriotic Philanthropy, having made transformative gifts for the restoration or repair of the Washington Monument, Monticello, Montpelier, Mount Vernon, Arlington House, Iwo Jima Memorial, the Kennedy Center, the Smithsonian, the National Archives, the National Zoo, the Library of Congress, and the National Museum of African American History and Culture. Mr. Rubenstein has also provided to the U.S. government long-term loans of his rare copies of the Magna Carta, the Declaration of Independence, the U.S. Constitution, the Bill of Rights, the Emancipation Proclamation, the 13th Amendment, the first map of the U.S. (Abel Buell map), and the first book printed in the U.S. (Bay Psalm Book).

Mr. Rubenstein is the host of The David Rubenstein Show: Peer-to-Peer Conversations on Bloomberg TV and PBS, and Leadership Live with David Rubenstein by Bloomberg Media; and the author of The American Story: Conversations with Master Historians, a book published by Simon & Schuster in October 2019, and How to Lead: Wisdom from the World’s Greatest CEOs, Founders, and Game Changers, a book published by Simon & Schuster in September 2020.

 

Click Here to Read the Interview Transcript

Transcript of  the Interview With David M. Rubenstein:

[00:00:00] Jonathan Boyar:  Welcome to The World According to Boyar, where we bring top investors, bestselling authors, and business leaders to show you the smartest ways to uncover value in the stock market. I’m your host, Jonathan Boyar. Today’s guest is David Rubenstein, co-founder of the Carlyle Group, a private equity firm that now manages well in excess of $200 billion.

David started his career as an attorney at Paul Weiss but quickly decided the legal world was not for him. He was able to get a job on the Carter campaign. When President Carter took office, David, at the age of 27, became Deputy Assistant to the President for Domestic Policy. After Reagan won, David went back to practice civil law briefly before co-founding the Carlyle Group. David has been quite generous with his success and is an original signer of The Giving Pledge.

David has made significant donations to organizations too numerous to name. He’s best known for being a leader in the area of Patriotic Philanthropy and has made transformative gifts for the restoration of the Washington Monument, Monticello, Mount Vernon, and the Kennedy Center among others. David has also provided, to the US government, long-term loans that his copies of the Magna Carta, the Declaration of Independence, the US Constitution, the Bill of Rights, and the Emancipation Proclamation.

David has recently published a fantastic book called How to Lead: Wisdom From the World’s Greatest CEOs, Founders, and Game Changers. On a more personal note. David has a show that airs Bloomberg, which was a major inspiration for starting The World According to Boyar. David, welcome to the program.

[00:01:53] David Rubenstein: Thank you very much for having me.

[00:01:54] Jonathan: I certainly want to talk about your latest book, How to Lead, but first I wanted to discuss your career as well and hear your thoughts on the current business climate. You’re a self-described workaholic. I heard you mentioned in a speech that in a normal year, you’re on the road about 240 days out of the year. During COVID, I imagine like most people, you’ve been spending a lot of time at home. What has that experience been like for you? Have you realized you like your house? Are you itching to get back on the road?

[00:02:22] David: Well, it’s an eyeopening kind of situation because I was spending 240 days a year on the road for such a long time. Now I’m not doing that. I’m wondering whether I wasted 30 years traveling that much or whether I could’ve done everything just the way I’m doing it now by Zoom. Now, of course, Zoom wasn’t quite invented 30 years ago, but it has given me a chance to actually do more than before because now I can do four or five, six Zooms a day in parts of the world that I otherwise could not be in, in one place.

In many ways it’s different. On the other hand, human contact, civilization has shown over many millenniums, is a plus. Having human contact would probably be better than just doing this forever on Zoom. I’m happy to have rested a little bit, happy to learn the Zoom technology, but I would like to go back on the road a bit, maybe not 240 days a year but maybe a lot more than I’m doing now, which is 0.

[00:03:16] Jonathan: You led right into my next question is, will things change forever as a result of the pandemic and with the Zoom technology? How much do you think, I know you said you were going to probably travel less, but the typical person in your organization, are they going to be traveling as much as they did pre-pandemic or you think a lot will be accomplished via Zoom?

[00:03:38] David: It’s always dangerous to say because something happened in the last month, two months, three months, one year, that the world will change because of that because, often, the world reverts to the mean and goes back to what it’s been doing for a long time. On the other hand, I do think, in this case, this is a transformative way that people will conduct themselves for at least 5 or 10 years, which is to say, I don’t think people will travel quite as much.

I don’t think that people will go out to eat quite as much. I don’t think they will go to movies quite as much. It will take time for people to ease back into what they did before. I do think that we will change the way we work, which is to say a lot more people will work remotely. A lot more people will feel that they don’t need to go into the office more than maybe one or two days a week. Things will change.

The interesting thing about this is that when you think about how the world changed through the industrial revolution, it took about a hundred years where the industrial revolution had its impact on the way people conducted their lives. The internet probably took about 20 years or so before people really changed the way they live and act and transact business. This has taken about a year or less. Think about it. Last January, we were doing business the way we always have been doing it. When this came along, we, all of a sudden, learned Zoom technology. We, all of a sudden, learned the value of working at home and the way you can do it. People, I think have found it’s a lot easier in many ways. I think we will change the way we live and work for the future. I can’t say 20, 30 years from now, something won’t change it back, but on this, at least the next 4 or 5 years or so, I do think things are going to change.

[00:05:16] Jonathan: Do you think if this happened five years ago, the economic ramifications would have been much more severe because we didn’t have this technology?

[00:05:25] David: Absolutely. Well, let’s say 20 years ago, there was no internet to speak of. It would have been much more disastrous then. Five years ago, there was internet, not quite Zoom technology, but you probably could have done some things orally. There was a lot of teleconferencing, just not video teleconferencing. Video teleconferencing, which is, in fact, what Zoom is, makes things a lot better.

I just think about it 20 years ago if we’d had this or 30 years ago, I do not think we had teleconferencing that worked all that well, so it would have been  much more difficult thing to survive. The result would have been one of two things: people would have gone back to work sooner and maybe been injured more because of the virus, or the economy would have gone down even more than it went down this time because people would not have been able to conduct business the way they’re able to do so now.

Right now, people in your business and my business, which is the financial business, are basically operating as if this wasn’t really happening all that much because everything is done online. Everything can be done through phone conferences, video conferences. The financial world hasn’t been so adversely impacted, honestly, it’s the other parts of our economy that have been adversely impacted, people in the restaurant business, the entertainment business, the cruise shippers, the hotel business. Those have been dramatically impacted and will take many, many years to recover.

[00:06:42] Jonathan: You have an interesting perspective on that because Carlyle owns over 250 companies in a variety of industries, and through those companies you employ, I guess, roughly a million people. You have a real insight into the state of global business. The US stock market is close to all-time highs. That’s really reflective of how a small number of technology stocks are doing. In your opinion, how is the real economy holding up?

[00:07:06] David: You’re correct in pointing out that the stock market has done well, in part because the gigantic tech companies have done so well, they’ve dragged everything up in effect, or at least the industries, I should say. The real economy is in a much more difficult shape. Let’s suppose you own or work at a food truck, let’s suppose you own or work at a 10-person restaurant, let’s suppose you own or work at a small car delivery service or something like that, transporting people around like Uber’s, all those businesses been adversely affected and dramatically so.

Let’s suppose you work at a hotel or you work at a sports and entertainment venue. Those businesses have really been hurt and hurt to the point that we haven’t quite recognized it fully. Let me explain what I mean, we’ve had $3 trillion come from the federal government to support the economy. The fed has put in somewhere between $1 and $6 trillion. We don’t really know yet exactly how much they put in, but let’s say $1 or $2 trillion, for sure.

Congress recognizes that this money is beginning to wear off. If Congress doesn’t pass another trillion or $2-trillion package at some point in the near future, you’re going to see the economy going back to where it would be without all the support. As a result, I think we are probably going to have to do something, probably after the election. After the election when the politics are a bit out of it, I think Congress will pass something. Without that and until there’s a vaccine that makes people feel safe, this economy, it has to be propped up a fair bit. I don’t think there’s any way around it.

[00:08:38] Jonathan: How is Carlyle evaluating acquisition activities during COVID? Are there industries you would historically invest in that now you are taking a wait-and-see approach? How do you value companies amid all this uncertainty, not just COVID, what’s happening with China and all the other geopolitical uncertainties? It’s really difficult.

[00:08:59] David: The deals process works the way it did before in the sense that we have young people who do all the due diligence after getting some direction from more senior people, they come up with the analysis, we have more senior people provide their experience. We look at the deals, and we are looking at things that we think will do better in the post-COVID environment then than things that won’t, but you can’t know for certain.

Of course, there’s always the thought that you can buy something that’s been hurt by COVID and will come back in time and if you get a big enough discount on the price, you might buy it. On the whole, we’ve been investing pretty steadily, prices have not come down all that much in the buyout world. The growth capital world is even more expensive. The venture capital world, in certain areas, is even more expensive than that. You either have to say, “Look, I’m going to pay double-digit EBITDA multiples, or I’m just not going to be in the business of investing in private equity or venture capital or growth capital because the prices are not cheap.”

[00:09:54] Jonathan: Even in the non-technology world, you’re not seeing multiples go down or sellers have unrealistic expectations or–

[00:10:01] David: Well, as a general rule of thumb, sellers always have expectations that are unrealistic, except when we’re the seller, then we have realistic ones and then, unfortunately, sometimes people don’t meet them. I would say that as a general rule of thumb, people in the financial services world are saying, “Well, wait a second, why should we discount prices right now?

“The economy has gone through what presumably is the worst of it, the vaccine is not too far down the road, we buy these companies for four and five years horizons, so in four, five years, things will be back to normal.” Financing is so cheap that if you’re doing a buyout and you’re using some borrowed capital, you can basically get it for very, very modest amounts of money. I don’t really see that prices are coming down all that much. Sure, there’s something that’s in extremis and falling apart, yes, you might be able to buy it, but it’s not really that much of a discount, but it’s not going to be that much different because of COVID or not.

[00:10:54] Jonathan: You said in an interview if you look at the Forbes 400, the people who made it on their own acumen. Virtually, no one is on that list because they bought things at a discount in an area they did not know about in the recession. They generally shore up what they already had or make investments in areas they know a lot about. Is Carlyle following your advice now, or are you doubling up in areas that you have great expertise in?

[00:11:17] David: As a general rule of thumb, people in our firm and elsewhere tend to be buying things in areas they know well. Occasionally, you might take a flyer or somebody might– Carlyle doesn’t tend to do this in areas we don’t know much about, but the price is just so low. My point in the quote that you are referring to is that you always hear about a dumb luck story where somebody bought something out of bankruptcy, didn’t know anything about it, and it just turned around because of good management, but that’s rare.

As a general rule of thumb, if you look at the people in the Forbes 400, they got there by having an expertise in one area and pursuing it, pursuing it, and pursuing it, not by stumbling into something they didn’t know anything about. Now, there’s luck, of course, involved, and a lot of people in the Forbes 400 got lucky, including me, but generally, it’s a result of spending a lot of time on something and not just having something pop along that you didn’t know anything about and you bought at a discount, all of a sudden, the world went in your favor.

[00:12:11] Jonathan: Thus far, there’s $1.6, I believe, trillion of PE capital on the sidelines, financing is unbelievably cheap, there really haven’t been PE, it really hasn’t been that active. What do you think it’s going to take for private equity to really get back in the ballgame?

[00:12:29] David: Well, private equity is in the ballgame, it’s just doing it somewhat differently. For example, it used to be thought that private equity was synonymous with buyouts and that venture capital and growth capital were minority-stake transactions, but if you lump it all as private equity or private investments, you’re seeing an enormous amount of private investment activity, but sometimes, the big buyouts are not getting done as much as they used to, but you’re seeing a lot of mid-sized buyouts with a lot of growth capital.

In Carlyle’s case, we bought a lot of companies, let’s say in China, it’s very hard to do a control buyout deal in China. A lot of our investments in China and India are minority-stake transactions. We’ve bought a lot of stakes in large companies that we own a minority stake even though we put in a fair amount of money. I would say private equity people are putting out a fair amount of money, they are, they’re just maybe doing it not in control buyouts that are very large.

[00:13:20] Jonathan: In 1987, you co-founded Carlyle. Initially, as you said, in How to Lead, your latest book, which we’ll get to very shortly, you said your main focus was essentially to fundraise. How did you master that skill?

[00:13:34] David: It’s an interesting phenomenon when you think about it, many people spend a large part of their life being asked for money or asking people for money, either political contributions, philanthropic contributions, or business investments. When I make this speech to people, I often ask people, how many people have asked people for money in one of those categories or been asked over the last month or so?

Of course, almost everybody raises their hand, but interestingly, there are very few courses in college or graduate school in fundraising, it’s just considered something you learn, you don’t take a course in it. I did what everybody else does, I learned by doing it on the job, I didn’t even know a course in it and I did use my personality, such that it was, to get in to see people and try to make it interesting and try to make it a polite meeting with people

The trick in fundraising is knowing what you’re talking about, having something reasonably good to sell, following up, being polite, being attentive, listening what people say, and of course, if you have good performance, it makes it easier the next time around.

[00:14:34] Jonathan: You mentioned the word “polite,” how do you learn to balance the line between persistence, which is extremely important, and you mentioned that in your book, and polite follow-up?

[00:14:42] David: Yes, it’s a complicated thing because I’m often, now, the recipient of many requests, and still, I’m heading a lot of capital campaigns myself, so it’s a tough balance. If somebody says no to you at the outset, and they say no way in the world, I think probably persisting is probably not a good idea. If somebody says, “Well, let me think about it,” or “Send me something,” that means maybe they might be interested and then you can follow up at an appropriate time. Eventually, you have to read the tea leaves, and you have to figure out whether it’s a waste of your time and you, ultimately, will get nothing. I have been reasonably persistent in times, and our biggest individual investor for a long time was somebody who turned me down nine times.

Every time I went back to see him in this European city, I would stop in and see him and gently suggest he might look at something we’re doing. Finally, he got worn down and said, “Okay, I’ll try it” and then he ultimately liked what we were doing. It’s a difference between being impolite and being polite, and just like anything in life, if you are too persistent or too arrogant about it, you’re not going to get very far.

[00:15:44] Jonathan: When you started your firm, interest rates, as measured by the 10-year– roughly 11% down from 15% in ’81, and they have gone down significantly since then. Do you think PE would have had the returns that it did had borrowing costs stayed high?

[00:16:00] David: Remember when interest rates were high, inflation was also high, and therefore, it inflated the value of certain things too. No doubt, with interest rates low and borrowing costs low, it’s made it easier to finance things, and it’s also made it easier to get good rates of return. I suspect if interest rates had stayed high and inflation was normal, probably the returns would not have been as good.

On the other hand, in the early days of private equity, the business was largely one of leverage and basically quickly taking advantage of buying something at a reasonably cheap price. People, the sellers were selling things more cheaply then. You used a lot of leverage, you quickly fixed some costs, got rid of some costs, I should say and then you exited the deal. Today, you have a lot of management teams and management experts who work at these private equity firms.

They really go in and really help the company. It’s not just a leverage game. In the old days, think about this. The RJR deal, in 1989, was 5% equity and 95% debt. That was not considered unusual. Today, a buyout might be 40% or 50% equity. The deals are much better structured. The returns have stayed reasonably good although they’ve come down. In part, the returns are good because you have much more expertise in building these companies, the private equity firms are much more knowledgeable about what they do, and also, the interest rate charges are so much lower that the cost of leverage is just relatively de minimis.

[00:17:21] Jonathan: You referenced the KKR deal. You were an innovator. KKR at the time, they just had funds, not to belittle the business. It was an unbelievable business at the time, but you were the first person to make private equity into a real business, basically, the Fidelity of the PE world. How’d you get that idea?

[00:17:39] David: Well, I don’t really know that there was one moment where I was in bed, and all of a sudden, a light bulb went off. After we raised our second buyout fund, which was about a billion dollars, our first one was holding $100 million, and then we co-invested $600 million. I was saying, we raised, we invested $700, and we were able to get a billion for the second fund, but then it dawned on me that why couldn’t we do like that in another area?

We were doing buyouts, why not do a growth capital fund, why not do a real estate fund, or why not do a Europe fund or Asia fund? Since I was not the investor per se, I had the time to think of new products, and I could go recruit people and raise the money. I had the luxury of doing that. It seems in hindsight that it was an obvious idea, but to be honest, while some people have done it better than we have done it, nobody else had yet gone out and said, “Okay, I’m going to build a Fidelity of private equity.” We went in that direction. We made some mistakes, some things I wish we had done better, but we pursued that approach. I think there are now four or five firms around the world that are now doing that.

[00:18:42] Jonathan: I hope you’ve been enjoying the interview with David Rubinstein. To be sure to never miss another World According to Boyar episode, please follow us on Twitter @BoyarValue. Now back to the show. Now let’s talk about your latest book, How to Lead, a book I personally enjoyed and would highly recommend. In typical Rubinstein fashion, all proceeds from the sale of the book are going to John Hopkins.

How to Lead is a compilation and commentary of the interviews you’ve done with leaders in their respective fields conducted as President of the Economic Club of Washington and through your Bloomberg television show. The book interviews, a wide range of people from Oprah to Jeff Bezos, to Warren Buffett, Jamie Dimon, Phil Knight. You certainly have a lot on your plate. Why write this book?

[00:19:29] David: Well, one, I’d already done the interviews, so it wasn’t that hard to take the interviews I had and then edit them down. Two, it kept me out of trouble. I spent a couple of hours working on it a week and didn’t get in trouble doing anything as a result. Three, I do think I would like people to read the interviews and hopefully, the younger people, particularly, already might be inspired because I realized my TV show, even when it goes on social media, isn’t watched by that many people relative to 60 minutes or something. A book can last for a long time. I guess as I’ve gotten older, I keep saying, “What is my legacy going to be?” I’d like to have something that I could leave behind, and leaving behind a couple of books is something I’d like to do. I say to myself though, “What was I doing in my 20s, 30s, 40s, and 50s, and 60s? Why wasn’t I writing books?” I’m now trying to do one a year, why couldn’t do that when I was younger? Life is that way, so I’m glad I had the life I had, but I would like to do a couple of books.

I think people like the interview format, which is to say, it’s easier to pick up and read it because you don’t have to read the whole thing start to finish to get the point, you can read one interview at a time and put it down and go back and go and read another interview, and they’re not necessarily related. I think people seem to like it.

[00:20:39] Jonathan: In the book, you discuss the common attributes of successful leaders, and there are many, but the one that seemed to be the most common are luck, desire to succeed, hard work, long hours, focus, and experiencing failure. You wrote, in your book, your failure was losing the status and upward career trajectory after Carter lost and Reagan took over. Well, that might have stung. I don’t think his loss was directly attributable to you. Can you give an example of failures you had when trying to get Carlyle off the ground, or was it really smooth sailing?

[00:21:10] David: Sure. When we first started our first buyout deal, we finally got a company, we bought a company. About two or three days after we bought it, we realized we dramatically overpaid, it was a publicly-traded company. We didn’t have the opportunity to do as much due diligence as you would have as a private company. We realized pretty quickly, we grossly overpaid, and it took us years to get our money back. That was complicated.

Then, we had some other deals early on that we didn’t do that well on, relatively speaking. We always had some stumbles. Everybody has some stumbles, I suppose, but generally, it’s worked out okay. If I could do it all over again, as I may have said in the book, I would have held on to the stock we had an Amazon, and I would have pursued my initial opportunity to invest with Facebook, but I blew both of those.

[00:21:58] Jonathan: Was there ever a point when you were at Carlyle that you didn’t think you were going to make it?

[00:22:02] David: Yes, absolutely. We were pursuing a deal in bankruptcy court to buy an aerospace company out of bankruptcy or part of an aerospace company. We basically spent all our money trying to get this company, and we had no cash reserves, and at the time, I don’t believe we even had a fund. We had a tiny fund. We had no cash left, and all of a sudden, we lost the deal. We were outbid in bankruptcy court. I woke up one night and said, “You know what, we don’t have any cash, and I don’t know what we’re going to do now.” Ultimately, something happened, and we won the deal, so hopefully, things turned out. I did think for a while we weren’t going to make it.

[00:22:37] Jonathan: One of the people you’ve interviewed in the book, who’s truly an American hero, is Dr. Fauci. He’s certainly the definition of a leader. How did you come to know him? I think you tried to hire him at one point, right?

[00:22:51] David: Yes, I hired somebody to head up our Venture Capital Group. His name is Bob Grady. His sister is married to Dr. Fauci. Through Bob Grady, I got to know Dr. Fauci many years ago. When he turned 70, I went out to see him and said, “Look, you’ve done a great job for the country, but I assume at 70, you’re going to retire, why don’t you take your healthcare expertise and become an advisor to a private equity firm? What could be better for you than that, and you can make some money, you’ve never had any money?”

He thought about it for a brief period of time. He said, “David, I don’t really care about money. I borrowed money to send my kids to college, I paid for that. I’m just not interested in making a lot of money. I care about infectious disease and saving lives.” What are you supposed to say to somebody who says that? He’s obviously a man under enormous pressure these days.

I think he will stand the test of time as being a great American. I suspect a year from now and hopefully so behind us, he will win every award you can possibly win for his insights, his courage, and his convictions. He’s the kind of person everybody should want their child to be: dedicated, hardworking, admired by virtually everybody, and focused on the right things: saving lives, not making money.

[00:23:56] Jonathan: You had the opportunity to interview President Bush and President Clinton at the same time. Does it take a special kind of leadership to become president?

[00:24:05] David: Well, being president of the United States, it’s hard to predict who is going to get that job because if you go back and look at these people when they were young, very rarely would somebody have said this young person is going to be president. Now, Bill Clinton was thought to be a potential president when he was very young, but generally, you don’t see that. People get to the presidency by different routes.

Rarely did it seem likely that Jimmy Carter, a peanut farmer, would become president; or Gerald Ford, a lifetime House Member, would become president; or Ronald Reagan, an actor, would become president. You just can’t predict how these things come out. Who would have thought Donald Trump would be elected president, never been in government before? These things are hard to predict. Being president of the United States is a great job.

I’ve often thought a better job is being a former president because everybody tells you how great you were and still are. Nobody is mad at you as much anymore, and you can take life a little bit easier. When I interviewed those two presidents together, they said that actually, they did miss being president because when you are president, you can really help people and change lives. That’s what they missed the most.

[00:25:04] Jonathan: Both, in some ways, are exceptions to some of the characteristics you outlined that most successful leaders share. One of the things you say and one of your arguments you make, and I agree with it, that most people who grew up in privileged circumstances generally don’t achieve the super degree of success that most of the people in your book have. President Bush came from a very well-to-do family, certainly had above-average family connections. What was it about him that you think propelled him to be president? What was the exception?

[00:25:35] David: In George W. Bush’s case, his family was prominent. They weren’t extremely wealthy, but they were prominent. What happened to him is he had a life of not all that much accomplishment, he would certainly say, and then he had a drinking problem, he would admit. Then at 40, he said, “I’m not drinking anymore,” decided to turn his life around, became involved in buying a baseball team that made some money, and he decided to run for governor, largely on the name George Bush.

It worked out. His first campaign, he was extremely underestimated. It worked out quite well. It was something that nobody would’ve predicted. Even his family, his father, his mother never thought he would be elected governor, let alone president of the United States, but sometimes these things happen.

[00:26:15] Jonathan: President Clinton’s also an outlier for many reasons. One of the things you do in the book is divide people’s lives in thirds, the first thirds of a person’s life are when they’re young and in school and learning. You found that people who are successful early in life, the Rhodes scholars, the student body presidents of the world generally don’t achieve fantastic degrees of success later on in life. What made President Clinton different?

[00:26:40] David: Well, it was said for a while before he was elected president, he was a rare person who was a rising star in three different decades, a rising star in the ’70s, ’80s, and ’90s, and people thought maybe the time had passed him by. He was always a rising star but wasn’t actually going to get there, and he actually wasn’t likely to get there either because the person who was thought to be the most likely nominee in the Democratic Party that year, 1992, was a man named Mario Cuomo.

At the last minute, he decided not to run. Because people thought Cuomo was going to run, a lot of the really good candidates also did not run, so Bill Clinton had a relatively modest field, I think he would admit, that he had to compete against, and he pulled it off, even though he had some challenges during the campaign, but had he not pull it off that time, I don’t think he could’ve run again, for a number of reasons.

He got lucky in some respects, he would admit. He also was aided by the fact that George Herbert Walker Bush had a Ross Perot helping to knock George Herbert Walker Bush down. Had Perot not entered the race, I think that George Herbert Walker Bush might have a pretty good chance of getting reelected.

[00:27:41] Jonathan: Another person you interview is the late great Ruth Bader Ginsburg. You typically don’t think of Supreme Court Justices as leaders. What made her different? What made her special?

[00:27:52] David: Well, she’s special because, in recent years, she became known as The Notorious RBG, in part, because she was seen as having come back from four bouts of cancer. She’s got a workout expert. She’s exercising every day, a diminutive woman, probably weighed 100 pounds, though, 98 of that were her brain, and she just was a person who was seen as having changed the world a fair bit but as an advocate and as a consistent fighter for women’s rights and somebody who was very articulate and easy to get along with.

People liked her, but I think it was her coming back from so many challenges in her life, physical challenges, and also having done so many things early in her life that changed the law that I think made her the only rock star we probably have ever had as Supreme Court Justice.

[00:28:36] Jonathan: Another person in the book, Coach K. You were Chairman of the Board of Trustees at Duke. I’m assuming one of the perks of the job is getting to go to some basketball games. How would you describe Coach K’s leadership style? Why has he been so successful over multiple decades?

[00:28:51] David: Think about it. He was the coach in the Army for a number of years, had a losing record. The first three or four years at Duke, he had a losing record, so he was fortunate that people gave him a chance at Duke, and then when he was at Duke, they didn’t fire him, as he was afraid was going to happen, and people were afraid that he just didn’t have what it took to be a major basketball coach, but in the end, he turned out to be a very good recruiter, which helps.

He also turned out to be somebody who really wanted to work with these young men, and even if they didn’t become pro basketball players, and most of the people he coaches do not become pro baseball players, they felt that he had given them leadership, he had become like a father figure to them, and he made them stronger individuals. Before the one-and-done phenomenon, he insisted that everybody have to graduate from Duke University before they would put a banner or pin it up on the rafters of Cameron.

That’s changed now because of all the ones-and-dones. He still tries to get these individuals to get their college degree if at all possible. He’s just a remarkable person, a great team leader, somebody that the coaches around the country I think really, really admire. I hate to be his successor.

[00:29:54] Jonathan: Yes, absolutely. You picture a lot of coaches being yellers to try and motivate their squads, the team. is Coach K a yeller?

[00:30:05] David: I am told by some players that he does, from time to time, use some words that you wouldn’t use on this podcast, but that’s how you motivate athletes from time to time and showing your emotions. John Wooden, by contrast, who was the greatest coach before Coach K was seen to be somebody that wasn’t a bit of a yeller, and then he was much more soft-spoken, but Coach K knows what it takes to motivate people, and it seems to have worked out, five national championships and three Olympic championships.

[00:30:34] Jonathan: Coach Krzyzewski certainly has made a very good living at Duke. He also has the shoe contracts, et cetera, but it’s not NBA-type money. Why don’t you think he ever made that transition to become a pro basketball coach?

[00:30:47] David: Well, I think he likes molding young men into professional players or into good, young citizens. He liked the university a lot. They were very nice to him. They stayed with him when his record wasn’t so great in the early years, I think pro basketball coaches don’t have the tenure that college basketball coaches often have, you can lose your job relatively quickly.

I think he didn’t want to– I think the closest he came was going to LA when Kobe Bryant was trying to recruit him, but in the end, Duke did some things that made it more attractive for him to stay. We built the practice arena for him and some other things. I think he’s pretty happy.

[00:31:24] Jonathan: Jamie Dimon, who also is in the book How to Lead, arguably the best bank CEO of all time, I think you refer to him as a once-in-a-generation phenomenon, was famously fired by Sandy Weill. Do you think he would have had the success he had without that happening?

[00:31:41] David: I would say that that was a transformative moment for him in his life. I did talk to him then and tried to recruit him to Carlyle, but I think he wanted to stay in the banking world, which he knew pretty well. Jeff Bezos was trying to recruit them as well. Jamie is as good a banker as has ever existed, just so smart, he knows all the details, motivates people.

I just really admire what he’s done in the banking world. He would be somebody that would like to be president of the United States, as he said publicly, but he recognizes that Democrats are not probably going to nominate the CEO of JP Morgan as their candidate, but Jamie has a lot of great skills. He’d be a good leader in government if he someday he wants to go in the government as, maybe, Secretary of Treasury or Head of the World Bank or something, he’d be great.

[00:32:25] Jonathan: You’re a student of history. If you could get any historical figure as a guest, who would it be, and what would you ask them?

[00:32:31] David: There’s no doubt that in my mind, the greatest American of all time would be Abraham Lincoln, he held the country together when there was a great temptation not to do, obviously, led the way to free slaves, and so forth. I would like to ask them, among other things, was he surprised that he, in the end, freed the slaves with the Emancipation Proclamation and had he done earlier, does he think the war would have ended much sooner because he did it, in part, to help with the war effort?

That was one of the reasons, but had he done earlier, would the war have ended much sooner? It’s an interesting question that you raise, and let me explain that what we’re doing now is what you would call an interview. What I’ve been doing is interviews, the interview format that we are now engaged him is relatively new in the history of mankind. There are no interviews that I’m aware of Plato, or Socrates, or Julius Caesar, Cleopatra, Charlemagne, so forth, and so on.

For whatever reason, this format developed, I would say, maybe in the early ’50s when The Tonight Show had Steve Allen on it and then Jack Parr, and they would bring guests on the interview. It was seen to be not just informative but entertaining and then ultimately, television shows did more and more interview formats, and then it became radio interviews, and podcast interviews, and now books and so forth.

I wish we could go back and interview William Shakespeare and say, “Did you really write these plays?” or ask King Henry VIII, “Why didn’t you just have a prenup instead of chopping the heads off of all these women that you didn’t want to stay with?” or Cleopatra, who was a better lover, or Mark Antony, or Julius Caesar. These are the things people want to know, but we’re not going to know the answers to these things, I think.

[00:34:14] Jonathan: I think it’s hard to respond after that one. You’re a student of history, your knowledge on a breadth of subjects is amazing. Buffett and Charlie Munger spend a lot of their time each day reading and reflecting. How much of the day would you say you spend just reading and thinking?

[00:34:29] David: Always not enough but I am a big believer in reading because, as a young boy, I didn’t come from a well-educated family or wealthy family, we didn’t have a lot of books at home. I’d go to the library and get as many books as I could and really fell in love with the new worlds that I was exposed to. Today, I’m very involved with reading efforts, literacy efforts, and so forth at the Library of Congress and the National Book Festival and so forth.

I try to read as many books as I can, at least one a week if not more. I have a trick, which is I’m often interviewing the authors. If you’re going to interview the author, you got to read the book. I, typically, am reading books on subjects I know something about, so it’s not that complicated for me. If I had to read a physics textbook, I wouldn’t probably get through it, but I do think that it’s a sad situation in this country that 40% of the adults are functionally illiterate, can’t read past the fourth-grade level. If you can’t read, you’re not likely to have a very enjoyable life compared to what you would have if you could read. We need to do much more about that.

[00:35:25] Jonathan: David Rubenstein, thank you so much for being a guest in The World According to Boyar, I loved hearing your insights and learning more about your latest book, How to Lead, thanks again for being on the show.

[00:35:36] David: My pleasure. Thank you for having me.

[00:35:41] Jonathan: I hope you enjoyed the interview with David Rubenstein. To be sure to never miss another World According to Boyar episode, please follow us on Twitter @BoyarValue. Until next time.

 

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Sir Martin E. Franklin, Founder & CEO of Mariposa Capital/ Founder of Jarden Corporation, on SPACs, Capital Allocation, Acquisition Strategy and Business Success.

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The interview discusses:

  • The differences between the current business climate and the one at the start of his career in the 1980s.
  • His views on when share buybacks are appropriate.
  • Why capital allocation was so critical for shareholder returns at Jarden.
  • Executives he believes are good capital allocators.
  • How he managed to gain control of the company that eventually turned into Jarden.
  • The acquisition strategy he employed while running Jarden (that he still employs today).
  • How he evaluated brand equity when making acquisitions of consumer products companies.
  • Why he believes he would have had the same success today even with the growing popularity of private label brands from Amazon and Costco.
  • His current views on Newell.
  • His latest SPAC (which he is partnering with Viking Global on) and what his acquisition strategy will be.
  • And much more…

About Sir Martin E. Franklin:

Sir Martin E. Franklin is the Founder and CEO of Mariposa Capital, a Miami based family investment firm focused on long term value creation across various industries. Mr. Franklin serves as Founder and Executive Chairman of Element Solutions Inc., Co-Founder and Co-Chairman of Nomad Foods Limited, Co-Founder and Co-Chairman of APi Group Corporation and Chairman and controlling shareholder of Royal Oak Enterprises, LLC. He is a principal and executive officer of several other private investment entities.

Prior to founding Mariposa Capital, Mr. Franklin founded Jarden Corporation in 2001. Under his leadership, Jarden grew from approximately $300 million in revenues to more than $10 billion, comprised of over 120 global brands and 35,000 employees before it was acquired by Newell Brands in April 2016. He served as Executive Chairman of Bollé, Inc. from 1997 to 2000 and Chairman and Chief Executive Officer of Benson Eyecare Corporation from 1992 to its sale in 1996. Jarden and Benson generated over 5,000% and 1,800% stock returns to their investors respectively.

Mr. Franklin received a BA from the University of Pennsylvania. A father of four, he resides in Miami, FL with his wife Julie. He is an avid endurance sports enthusiast and an active supporter of a number of charities including the Challenged Athletes Foundation and Wounded Warriors Project.

 

Click Here to Read the Interview Transcript

Transcript Of The Interview With Sir Martin E. Franklin:

[00:00:11] Jonathan Boyar: Welcome to The World According to Boyar, where we bring top investors, best-selling authors, and business leaders to show you the smartest ways to uncover value in the stock market. I’m your host, Jonathan Boyar. Today’s very special guest is Sir Martin Franklin, whose business career dates back to the 1980s, where at the age of 24, Martin and his father took control of DRG, where he became CEO of a company with over 13,000 employees and was tasked with the job of breaking up the conglomerate.

In the early ’90s, he pivoted to an investment style where he wanted to build companies and purchased a small chain of eyecare stores that was merged into a company called Benson, where he completed the successful roll-up of the optical industry, earning his initial investors more than a 23 fold return on their investment when he sold the company in 1996. Martin is probably best known for his success at Jarden Corp, where through a series of successful M&A transactions, he built an empire he sold to Newell in 2016. For the 15 years, Martin was Chairman of Jarden, his investors earned a compounded annual return of well over 30%. Martin, welcome to the show.

[00:01:22] Martin Franklin: Thank you for having me, Jonathan.

[00:01:24] Jonathan: Before we discuss your truly remarkable career, I just wanted to briefly talk about your love of extreme sports. You completed the Badwater Ultramarathon in 41 hours and 29 minutes, five hours ahead of your goal time. The race I believe, covers 135 miles starting in Death Valley in July. I mean this in the most respectful way possible. What were you thinking?

[00:01:48] Martin: To get to the stage of wanting to do Badwater was a progression, a journey of going on to do more and more extreme things and then I met an individual fellow Vito Bialla who owned a brand called Zoot Sports, which I ended up partnering with him on, who said, “I could take you to a place where very few people have ever been in terms of taking athletics to the extreme.” I was intrigued.

Then he explained to me what this race was, and I said, “You’ve got to be crazy. No one does that.” He said, “No, no, there are 90 people a year who do it or at least who try to do it.” I just decided that’s what I wanted to do. It was instinctive and I just liked the idea that you could do something that was almost a spiritual journey. It’s beyond athletic because it’s all about mental discipline and that really appealed to me. That’s why I decided to take it on.

[00:02:42] Jonathan: Do you think any of the qualities especially the mental discipline that makes someone able to do these super endurance challenges translates to business success?

[00:02:51] Martin: Yes, I do. I think mental discipline is fundamental in business, and I think that the journey– I could tell you from, personal experience, this journey, it was a spiritual as it was athletic. Given one time to think and learning that you really can push to another level. I think that’s some relevance there to one’s business life. I do think it’s quirky, I will be the first to admit that I always think that a lot of the ultra-people that I know are slightly strange. I don’t think of myself as slightly strange. Then again, who knows, probably other people perceive me a different way.

[00:03:35] Jonathan: I read an article and I think it’s great. Your son, Robbie, followed you into the love of extreme sports and the two of you completed the St. Croix Half Ironman Triathlon together. Robbie was 16 at the time. As a father, what was that like?

[00:03:51] Martin: I think of all the races I’ve done that the two most enjoyable races I had were the two Half Ironman’s I did with two of my, I have three sons and a daughter but two of my sons did these races each at 16. Robbie did St. Croix and my son Mikey did one in Show Low called the Show Low Arizona Half Ironman. Yes, those were the two most enjoyable races I could have had.

They are good athletes, great athletes. They didn’t choose to pursue what I pursued. The truth is I picked up doing extreme sports in my 30s. I played soccer till I was about 32. They may yet decide to do that. That was something that grabbed me later on in life. It’s really not for the young, they prefer to play, go skiing, play tennis and play basketball.

[00:04:39] Jonathan: Let’s shift gears to your career and interestingly, you started at Rothschild where you were the youngest Vice President in the firm’s history. Then you started working for your father, who was the former partner of James Goldsmith. What was it like working with your dad?

[00:04:56] Martin: I loved working with my dad. I was probably one of those few sons that regretted my father retiring. I was the youngest of six. For me, it was a bit of a catch-up opportunity to spend a lot of time with my father. I got to see another side of him as I partnered with him and it was a great experience, one I’ll never forget.

My father was 94. I’m very thankful for those years that I had to be under him. He taught me a lot, particularly how to treat people and what priorities were and never to take oneself too seriously or never to believe that just because he had some success that you were any better than anybody else. Those were things I learned from him.

[00:05:36] Jonathan: He had an interesting style, and I think it was a style of the time of breaking up companies, and it worked quite well in the ’80s. It seemed like a perfect time to execute such a strategy, especially after all the excessive conglomerate building in the ’60s that made corporations bloated and inefficient. Do you think if he was working in the ’90s or today, he would have done things differently?

[00:05:59] Martin: I think the reality is my father was a banker. That was his real background. He got to know Jimmy Goldsmith because he was his banker at the time. I think that what they did was, as you said, important for the time and I think these things do go in cycles and based on economic need. Because of the inefficiencies that were created by the conglomerations that were made in the 1950s and ’60s and early ’70s, having some catalysts like my father and Jimmy was essential for industry.

They served an important role, but it became irrelevant at some point because the efficiencies have been found and the market had adjusted. That was really when they retired. I think that today, people are doing similar catalytic things, but they’re doing them in a very different way, but much more appropriate for the times today. You always have to have some engine there in order to drive towards efficiency and making sure that inefficiencies don’t exist for very long in any place in the capitalist system.

[00:07:09] Jonathan: What are some of the catalytic trends that you think are worth exploring today?

[00:07:15] Martin: Well, I think that you have to look at the things that have been happening. First of all, you go back to the activists so that you like the takeover artists and think conglomerators of yesteryear are the activist investors of today. They’re trying to push companies to find initiatives within themselves, rather than making takeover attempts and ask them to bust them up. Some of that’s because of the laws have changed. Some of it is because it’s really a better way to go because, in a way, you’re bringing all those benefits to all shareholders as opposed to just the buyer.

I think the second if you like, trend today and I’ve been a part of that is towards bringing companies back to the public markets. You see all of these SPACs. They are, if you like, the LBOs of today’s environment. They’ve become quite a trend. People go into market using equity for doing transactions, but in some other scenarios might have been private equity deals. That’s just, I guess, a couple of examples of things that are going on, but I think it keeps on shifting over time. I’m sure that in 10 years’ time, there’ll be something else.

[00:08:23] Jonathan: One of the things in the activist playbook is, lever up the balance sheet buy back a lot of shares. It’s great for a short-term potential pop in the stock. Its appropriate today’s the day that Sumner Redstone passed away. Viacom is a perfect example of, yes, you could spend a ton of money buying back stock or CBS Viacom, but if you don’t invest in content, or whatever you’re building, you’re not going to have a good long-term results. Do you have any views on share buybacks?

[00:08:55] Martin: Yes, I’m a believer in share buybacks when it’s appropriate. I think the mistake that a lot of companies have made is they’re not very good at them. You take a company like Teledyne over the years, maybe in the book Outliers, you’ll see a number of examples. The great thing about being a public company is if you’re a good capital allocator, you know when it’s a good time to issue shares, you know when it’s a good time to buy them back.

When you go back and look at Jarden’s history, we bought companies and there were periods of time when we bought shares back, and we had periods of time when we issued shares. The reason we had a 34% compound return for investors over 15 years was because, with the benefit of hindsight, of course, we timed those things correctly. I think just when activists come in and their only playbook is, I think you should lever up buy and bunch of shares back no matter what the price, I completely agree that that’s not a good thing to do and particularly if it sacrifices necessary investments in the future of the company.

Again, a management team that leveraged up the company to the sacrifice of investments they need to make isn’t doing their job. I’m in the middle of a buyback for Nomad Foods today, a company which I’m a founder and Co-Chairman. It’s the largest frozen food company in Europe and we’re returning capital to investors for specific reasons, but not to the detriment of any acquisition opportunities, we have assessments that are going to be made in our own business, from a marketing support or anything else, for the future of the business.

There are times to do it. I think to say that buybacks should never be done is a big mistake. In fact, it surprises me sometimes with the politicians starting to talk about things like that. What people should do is make the right decisions for their companies. It’s not a question of whether it’s black and white, whether one thing is a good idea or a bad idea.

[00:10:46] Jonathan: To be clear, I think in certain instances buybacks are quite appropriate. For our asset management clients and for our research service, we do a lot of the John Malone companies and he’s a big believer in them and does a fairly good job of it. He was in the Outsider book as well, I believe. Are there any other executives that you think have done a good job with this?

[00:11:12] Martin: Yes, I think the Rales brothers who built Danaher, I think they would be a poster child example of good capital allocators and understanding how to build a business.

[00:11:21] Jonathan: Yes, and they’re doing it a second time, I believe with Colfax.

[00:11:25] Martin: That’s correct. We’re people who understand how to do these things, the skillset is transportable to any industry. Okay, not to toot my own horn, but I’ve had success in multiple different sectors, but I’m following the same playbook and the same disciplines because they are agnostic to what particular industry you’re in.

[00:11:46] Jonathan: Your first big success was actually in the optical business. It was in the early ’90s and you started rolling them up. You had all the areas you could have invested in. What attracted you to the eyes?

[00:12:00] Martin: I have to confess, I’d be lying if I told you it was because I did some huge industry analysis at the time, I was looking to do something when my father had retired and somebody came along and offered me 11 optical shops, and a company that looked to me when I looked at the numbers that it was going to go bankrupt. I saw an opportunity to buy a very small business, get an opportunity to get my foot in the door, and have hopefully the opportunity to buy the rest of it when into financial difficulty.

Like so many things, the old saying 80% of success is showing up. I put myself in an industry where I suddenly realized that my thesis was probably a poor one but I liked the business I was in. I’d called in all the suppliers to my stores and what I learned when I really sat down to talked to them is the people that made frames just made frames, the guys that made lenses, made lenses, the guys that made distributed contacts, and it was a very, pardon the pun, but a very myopic business.

People were focused on very narrow things. That gave me the idea of creating another integrated eyecare products company. The problem I had at the beginning was I was pretty poor so I didn’t have a lot of money and I had to figure out how to go from buying distressed businesses to buying healthier ones that will go in the platform and I didn’t know that at the time but that’s really what I was doing.

I went quite quickly, actually, from being a retailer to being a distributor or manufacturer of optical product. Each acquisition got progressively better in terms of quality of business. Until we’d built the largest lab system in the United States and Essilor, the largest lens maker in the world, figured we’d built a big enough infrastructure to offer a very generous price to buy it, which is when we sold it.

[00:13:53] Jonathan: You accomplished this in your late 20’s, early 30’s. Correct?

[00:13:57] Martin: Yes, I think I started when I was about 26, 27, and I sold it when I was about 30 or 31.

[00:14:06] Jonathan: Not bad for the early 30’s. It’s funny, growing up, my father started the business and one of his big earlier successes was a company called US Shoe, not because he liked the business, but they own lens crafters.

[00:14:20] Martin: I remember it well.

[00:14:22] Jonathan: Yes, he says it’s probably one of the worst run public companies ever.

[00:14:25] Martin: If I remember, that was also a company, the Rales brothers in their early days went after to try to buy.

[00:14:30] Jonathan: Yes, a lot of people did and they finally sold to Luxottica, took a lot of patience.

[00:14:39] Martin: Yes, I remember.

[00:14:41] Jonathan: As I mentioned earlier, you’re probably best known for Jarden, when you compounded it at over 30% per year for 15 years and you did it by basically forcing your way onto the board of a former of ball court spin out, which was a horribly run company. How did you manage to get yourself on the board?

[00:14:59] Martin: If I ever write a book, that’s going to be my favorite chapter because it’s a crazy story. The craziest story is how I became CEO, but I’ll tell it to you, I got on the board because I bought 9.9% of the company and they refused to really listen to any of my suggestions we looked to try to take it private. Then I made a public offer for the company. They rejected that.

Because it was an Indianapolis domicile company, it was very difficult to, if you like, force them to do anything but in the end, they decided to run a sale process. I was the only bidder. Then when they decided they didn’t want to sell to me, they’d rather make peace, they offered me two seats on the board and Ian Ashken, who’s been my longtime colleague and partner went on the board with me and that’s how I joined the board.

I went to my first board meeting in, I think, June of 2001. I’ve been buying shares from the beginning of 2000. Then the first meeting was an extraordinary meeting. I’d promised that I would be just a listener and observer in the first meeting. Ian went to a cricket match so he left me to the wolves on my own. I’ve sat in this meeting and one of the businesses they owned was called Triangle Plastics. It was a terrible acquisition that they had made and EBITDA was supposed to be $14 million. I had done due diligence on the company when we were looking at buying it. I knew for a fact that it was not probably going to be lucky to make two million of EBITDA, which means we’d have a big P&L loss.

The company was already in financial difficulty. This would have put them in covenant default. When I went to the first board meeting, the outside director, the lead director who had never met the president of this division, I told him, I thought it was a breach of their fiduciary duties they had never met the manager. It just so happened that my first meeting, that manager was there. He gives a presentation and he tells the board that he’s going to make 12 to 14 million of EBITDA that year. Now, remember this is June of this year. Already half the year is already done.

I already knew what the numbers were so everybody listened. I didn’t say a word and then they were going to move on to the next subject. Then I put my hand up. I said, “Look, I’m sorry, but I have to ask a question.” He said okay. Then I started asking questions. I said, “What’s your EBITDA year-to-date?” His answer was a billion dollars. I said, “Okay, what’s your expected EBITDA? Two billion dollars. What’s your expected EBITDA for this month?” He said, “I’m going to lose a million dollars.”

I said, “Okay. You’re telling the board, you’re going to make 12 to 14 million dollars. You’re going to do it in the back half, the slowest quarter in this industry because this is the fourth quarter. I know for a fact you have no chance of making these numbers. Why are you telling the board numbers you all know aren’t true? Who would ask you to tell you to stand up in front of this board and effectively lie to them?” He points with his finger to the CEO and he says, “He did.”

[laughter]

I know it’s a long story, but it’s worthy of telling. The CEO was going to be removed from that day forward and it took them 90 days to basically agree to give me the keys. It was one of those stories where the board did the right thing. I joined the board, the stock split adjusted was like $1.20 and we sold the company on an apples-to-apples basis of about $60. That’s really the job of the story.

[00:18:21] Jonathan: That’s an amazing story that a CEO would tell a subordinate basically to lie to a board.

[00:18:29] Martin: It was unbelievably– It was shocking and it played right into everything that I’ve been trying to explain to this board for a long time, which is that they had the wrong people running it and the underlying businesses were good businesses that had opportunity and we exploited that.

[00:18:46] Jonathan: You certainly did and primarily through an M&A strategy and you purchase brands like Coleman, Mr. Coffee, Playing Cards, Rawlings. What was your acquisition strategy?

[00:18:59] Martin: I will tell you that I don’t think our success was just M&A, I think M&A was a good piece of it. Our success was really because we ran the businesses well and we built a great culture and we really managed to attract the best talent in each of the businesses we were in to those businesses. Our criteria was very consistent across all of our acquisitions. We looked for market leaders in the respective consumer markets. I mean, obviously all consumers. We wanted businesses that were defendable, had defensible moats around them.

It’s really the same strategy I pursue today. We look for businesses that had good management teams and had generated a lot of free cash flow that we could buy for a reasonable multiple of those cash flows. That was the strategy. For the 25 or 26 acquisitions we made, there were probably 500 that nobody ever saw that we passed on, whether it be for price, culture, strategic battle, or whatever. We were very careful to make sure that the chemistry inside the company was never, if you like, tainted because I think one bad apple can ruin everything, so we were very cautious.

Did you take the Buffett handsoff approach with these businesses, or did you end up taking an active role?

[00:20:34] Martin: I think people who think that Buffett is inactive probably don’t get close enough to what he does. I think the reality is, we have a very similar view. You hire the very best people and then you give them the latitude to perform, and the incentives to perform. That we did, but what we did that I think was more important is, we gave them tools to be better than they would’ve ever been able to be on their own. For example, if we were doing shipping containers from Asia, all of our shipments were under the same umbrella agreement.

We could take a company who was doing a great job, and it saved them a significant amount of money just by them being under the tent. We did the same thing with insurance, with buying raw materials such as aluminum, and various resins, and all those kinds of things. Everything that was in the back of the house, we had the economies of scale, but we gave them the entrepreneurial freedom to build their businesses as they saw fit within the parameters of, if you like, budgets and forecasts that they would present to us on a forward basis.

[00:21:45] Jonathan: You’re a big believer in brands and that was a big part of your acquisition strategy. How did you figure if a brand was good enough to fit into your portfolio? Is it gut feeling, did you do consumer surveys, did you just simply look at cash flow and say, “Hey, if I can buy this at five times and it’s a decent enough brand, let’s put it in.” How did that work?

[00:22:06] Martin: The answer is, depends, okay. To give you some examples, I didn’t need to do a survey to know that United States’ Playing Card, that owned 94% of the playing club space in the United States had brand equity. That didn’t require a survey. When I bought Food Saver, which was the machine that made a oxygen barrier bag, I did a very full consulting study because it was a very narrow market and I wanted to understand was it a fad, or was it something that’s going to be around for a very long time?

By the way, we bought that business because everybody else thought it was a fad, and that business has produced every year substantial profits without, at least in the years I owned it, it went from 25 to over 45 million of EBITDA through the period without missing a beat. Our thesis was right, and we bought it very cheap because other people were very skeptical that it would have legs. We did the research, the consumer surveys, and everything else because we didn’t have that– It wasn’t obvious.

When it’s obvious, we don’t do work for the sake of doing work, we use our common sense. There are some things that were obvious, and some things that required more study, but when it required more study, we never cut corners though. I guess that was one of the things that I think we did well. We never had surprises after we bought things because we were thorough in our diligence.

[00:23:32] Jonathan: Would it be fair to say that one of the secrets to your success was making a lot less mistakes than everyone else?

[00:23:40] Martin: Yes, right. My dad said to me many years ago, he said, “You make more money on the deals you don’t do, than the deals you do.” That’s why I would be the first to tell you, I would be a great venture capitalist because I don’t think I could sleep at night knowing if I was doing 10 deals, two are home runs, they pay for everything else, and four of them go bust then the other ones are mediocre, I just couldn’t live with that because, for me, I’d be having sleepless nights about the four that were going bust, and what we’re going to do with the people? It’s just not my way of thinking. I have very little appetite for living with failures and moving on from them. This approach has always been better for me.

[00:24:21] Jonathan: How important were stores like Walmart to the success of Jarden. It seems like having good relationships with them was critical, I don’t know what percentage of sales of your products were at Walmart, but having such a concentrated–

[00:24:36] Martin: It started off as 5% and went to 15%. Amazon went from 1% and was probably 10% by the time we sold the business, and today would probably be 25%. What I always told people is, my job is to make our job, and the company’s job is to make great products, get them to wherever we want them to go on time in the most efficient way possible and to price them fairly, that’s our job.

I’m agnostic as to whether or not they’re sold in a retail store and an e-commerce platform or any other way. It’s not, to us, our job. I didn’t care if I was selling to Walmart or selling to a different kind of retailer, but our job was to make sure that we were the most efficient in doing it. They were important, but I think if it wasn’t Walmart, it had been somebody else because at the end of the day, they’re simply conduits to consumer purchasing. Our job was to make things that appeal to the consumers, and that would drive the demand.

I remember sitting with the president of Bed Bath & Beyond, who had asked me to give him help with his e-commerce strategy. What are you going to do to help me? I buy a lot of product from you, what are you going to do to help me with this? I had to explain to him, I said, “As much as I want to be helpful to you, that’s not my job. My job is to give you products that your consumers want to buy. How you figure out how you will deliver to your consumer is really your responsibility. I don’t know what to tell you.” Obviously, the ones that adapted to online strategies, and saw this coming where the successful companies.

I always reminded by management and this is the difference between Blockbuster and Netflix, was always staying sharp and adapting. That’s one of the things that Jarden did really well. We never got complacent. We never rested on our laurels. We always adapted. We tried to be the Netflix of our space, not the Blockbuster

[00:26:36] Jonathan: You had mentioned earlier that Amazon was becoming increasingly important as a few years ago, as a percentage of sales. A lot of your portfolio is branded consumables in today’s digital age where Amazon and Costco have such strong private label brands. Would it have been harder to have the success you had today?

[00:26:55] Martin: No. Private label is something that if you can’t compete with private label, you’re not doing your job because private label by definition doesn’t evolve because Walmart is not spending the same amount of time as a consumer-driven, consumer products producer to innovate. They’ll take somebody else’s product and they’ll figure out a way to make it either the same price or cheaper, but if you continue to innovate and value engineer your products, you should always be able to stay one step ahead of private label. I competed with private label all the time. One of the things, for example, at Coleman.

Coleman competed at Walmart. It was a very much a Walmart brand, but Ozark Trails was the house brand of Walmart. Walmart would be the first to admit that they needed Coleman to be successful, to drive revenue at Ozark Trails because people would come in to buy a tent. They’d see the Coleman product at one price point, and maybe they’d gone by the Ozark Trails product and the lower-price points. That was fine by Walmart because of how they sold their margins. If I wasn’t innovating and driving interest in the space, it wasn’t going to help them.

We always had an earned a place on the shelf because of the products that we produce, the innovations that we made, we drove traffic. Sometimes that’s the right strategy, and sometimes that’s the wrong one. One of the dividing lines for me with Newell after Jarden was sold to them. When they put Yankee Candle in Walmart. The flagship product, to me that unwound 50 years of goodwill and capital planning in one cynical move to try to boost revenue for the short-term, just because management wasn’t doing a good job. That’s how you kill a brand.

[00:28:45] Jonathan: That was a perfect lead into my next question. I know you’re no longer involved in Newell today. After spending so many years building up Jarden, clearly you follow the company and you’ve been very vocal that they cant M&A their way out of the problem. Do you currently think their problems are fixable?

[00:29:01] Martin: I have to be honest, I don’t know the new management team, and I don’t keep that close to tabs on it at this point because I’m a busy person. I don’t spend much time worrying about. I always tell my kids, “If you look over your shoulder, all you will get is a stiff neck?” I didn’t spend too much time worrying about what they’ve been doing in the last couple of years, but some of the things that were done were hard to unwind.

The Yankee Candle example is a good one in the sense that I just think that once you put your flagship product on the same shelf as something that used to sell it $39.99, and it’s now selling at $19.99 bogged down, and it’s sitting next to a product that looks very similar at $5.99, that’s hard to get over. They’ve got a lot of work to do. There are a lot of good brands in there still. Some of the best ones got sold.

All things could be better. That’s the sort of, I don’t know if they’ll be is as good as they were. I honestly don’t know. What I do know is that I had a very talented group of people on the Jarden side and most of them left and that’s never a good thing when you lose your talent, because at the end of the day businesses are just people.

[00:30:14] Jonathan: Absolutely and you said you always look forward and I guess currently to talk about what you’re doing now is you’ve been very involved in SPACs and you’re one of the most successful SPAC investors around. Briefly, do you mind explaining to the audience who might not know what a SPAC is and why yours is different?

[00:00:34] Martin: Sure. These are Special Purpose Acquisition Companies. I wish what I did wasn’t called a SPAC, but I started pretty early in this. I used it as a way to diversify my own investments. I partnered up with a guy called Nicholas Berggruen and we invested in three vehicles early on and what we decided to do that was different from anybody at the time was we put a lot of our own money to work in these things rather than just being promoters.

We did them on a scale that people like City Group would underwrite  them. We made them more institutional and what these vehicles do they’re very simply pools of cash that accumulated under one entity for the purposes of buying one company and taking it public and using that cash to, if you like, fund the equity offerings. Think of it like a pre-funded equity offering. The first iteration that I did, first three actually, were like the US model is today, which is you raised a bunch of money, you get 20% of the company for free, which is remarkable when you think about it.

Then you go and try and find a company and you have to have a shareholder vote and the investors have the right to either ask for their money back or vote in favor of the deal. If they vote in favor of the deal and they leave their money and you get the transaction done, and the sweetener for the investors is they get a package of warrants, usually a third of the company in warrants.

They have optionality on the upside. What I did when we bought Burger King, which was Justice, which is the fourth vehicle I raised, and now all the subsequent ones, we moved it offshore to the UK so we had a neutral tax jurisdiction. We raised it in the UK because the raising of the money cost half, as much as it costs in the US. Untold secrets about Europe versus the US, is it costs you between 5% and 7% gross spread to raise money in the US then it costs you between 1% and 2% to do exactly the same thing in exactly the same way but in the UK-

[00:02:43] Jonathan: Is there any reason for that?

[00:02:45] Martin: Yes, greedy bankers.

[laughter]

I don’t have a better answer for you. Probably litigation and all those other things, but the truth is the convention is a higher gross spread in America. That’s the truth. Then the second part of it is we don’t get any free shares. I’ve never wanted to make money unless my shareholders made money. We get a carry, we’re both similar to what a hedge fund that’s paid in shares on the upside but the quid pro quo is we give no vote to investors, it’s a board meeting.

These are true committed vehicles, they’re much more certain for the target companies that they’ll get a transaction completed. We are much more competitive with, let’s say, a private equity firm or a big corporate on the transaction and also we’re probably the most efficient way somebody can go public. There’s less frictional costs because there’s no upfront founder equity, and at the same time, we could deliver absolute certainty to the target. My view is, and it’s played out this way that you could do superior– If you want to buy quality companies, profitable companies that have long histories and are established and have choices as to what they’re going to do, this is a very viable, competitive structure.

US SPAC structure tends to do more speculative transactions because the non-speculative targets won’t deal with US SPACs. From my perspective, I think you can create better long-term outcomes because you buy better quality companies, that doesn’t mean that US SPAC can’t make shareholders money. All you have to do is look at a company like Nicola, which is almost a publicly listed venture investment that’s flying because there’s no PE to market against or revenue, by the way.

That’s not a knock on it. It could be one of the great companies of the future, but this is a publicly listed venture capital effort. That’s what that is and that’s not what I do. I do a very different thing, I buy very fundamental companies that make a lot of money today, made a lot of money for many, many years before and hopefully, will make even more money in the future. It’s a hunting license to do publicly-listed acquisitions without having a foundation company prior to that.

[00:35:06] Jonathan: As you mentioned, you had Justice Holdings which ended up taking Burger King public and it was obviously a fantastic success. Bloomberg reported in June, you’re thinking of starting another SPAC to invest in consumer business. Are you able to comment on that?

[00:35:22] Martin: Yes, I actually talked about it this morning on CNBC. I did disclose it. I’m going to create a vehicle called “Harvester” with Viking Global, the hedge fund. We’re putting up $200 million between us, then we’re going to raise probably about $750 million to a billion dollars in a new vehicle. It’ll be structured with very much the same as J2 which was the vehicle we used to buy API Group which is now symbols APG is now a public company that’s performing very well. The business is doing very well. We have very happy shareholders.

My goal, personally, is to have a portfolio have a portfolio of five large nine-figure investments in great companies whose capital allocation decisions I have a say in, not a dictatorship. It’s a collaborative process but I can influence those outcomes. If I really feel strongly that the wrong decision is being made in something, I have the power to stop it. From my perspective, that’s the way I’ve wanted to invest my capital for my family over the very long-term and I have no ambition to trade those investments. I don’t trade them in and out of them. This is truly long-term stuff.

[00:36:36] Jonathan: The new vehicle that you’re starting with Viking, is there a specific mandate you’re looking at or to certain type of companies?

[00:36:43] Martin: No. I have a carte blanche to go any jurisdiction, any type of business. The truth is, I will continue to do exactly what I’ve done for the last 25 years. I stick to the same formula because it’s worked in terms of the type of profile of company as we’ve talked about. I tend to hunt more in the consumer and industrial space as I think you will know but that doesn’t preclude looking at new things. I can tell you that Viking Global, one of the reasons for me to partner with them, apart from the fact that I just like to be from an intellectual standpoint, surrounded with intelligent people whose company I enjoy. I do it because I enjoy it at this point of my life.

I think they have a set of relationships and have made investments in sectors frankly I’ve never been in. If we find things that are in sectors that fit my criteria, in other words, these highly profitable businesses that have defensible moats, good management and history of cash flows, with those two places overlap, I may do something in a totally different space from where I’ve been before which is exciting to me.

[00:37:49] Jonathan: Martin, you’ve been extremely generous with your time. I want to thank you for being on the World According to Boyar Podcast. I enjoyed learning about your fascinating career and I’m excited to hear about your latest venture. I’m sure it’ll be as big of a success as the Justice Holdings one was.

[00:38:07] Martin: Thank you.

[00:38:07] Jonathan: To be sure, you never miss another World According to Boyar episode, please follow us on Twitter @BoyarValue.

 

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Brandon Ridenour, CEO of ANGI discusses how ANGI is disrupting the home services industry.

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The interview discusses:

  • Brandon’s views on running a public company (especially during times of stock price volatility).
  • Why ANGI took the rare step for a public company and stopped providing quarterly guidance.
  • How ANGI is trying to transform the way consumers purchase home services and why he believes home services is one of the last major categories without a significant online presence.
  • How ANGI is helping to reduce the lack of price transparency in the home services business.
  • How he believes ANGI will be able to compete against Facebook and Google in the home services category.
  • Brandon’s views on potential anti-competitive behavior by companies like Google and whether the government should be exploring antitrust action.
  • The opportunity ANGI sees in fixed priced services and how they are building a similar model to that of Uber or Doordash.
  • ANGI’s partnerships with both Realogy and Loews.
  • How COVID has impacted ANGI’s business and which categories are doing well and which are struggling.
  • Why millennials are an incredible tailwind for their business.
  • Why he believes ANGI will do well regardless of economic conditions
  • And much more…

About Brandon Ridenour:

William B. (Brandon) Ridenour is CEO of ANGI Homeservices (ANGI) and also serves on the Board of Directors. Prior to assuming the role of CEO of ANGI Homeservices, Mr. Ridenour served as the Chief Product Officer of ANGI Homeservices and as the Chief Product Officer and Chief Technology Officer of HomeAdvisor for six years leading up to the acquisition of Angie’s List in 2017. In this role, Mr. Ridenour managed web and mobile product strategy, product design and development, as well as the operations of HomeAdvisor’s North American subsidiaries, HomeStars, mHelpDesk and CraftJack.

Earlier in his career, Mr. Ridenour served as the Senior Vice President of eCommerce at Nutrisystem, Inc. where he managed e-commerce organization and supported multiple large scale e-commerce platforms. He also previously served as the Director of eBusiness Solutions at Scholastic.

Mr. Ridenour currently serves on the board of Builder Homesite, Inc., a company whose mission is to bring home building leaders together to develop world-class technology solutions. He is also on the board of Axial, the largest online marketplace connecting private companies to capital.

 

Click Here to Read the Interview Transcript

Transcript Of Interview With Brandon Ridenour:

[00:00:00]

Jonathan Boyar: Welcome to The World According to Boyar, where we bring top investors, bestselling authors and business leaders, to show you the smartest ways to uncover value in the stock market. I’m your host, Jonathan Boyar. Today’s guest is Brandon Ridenour CEO of publicly-traded ANGI Homeservices, the global leader in home improvement. Through their collection of brands, such as Angie’s List, HomeAdvisor, and Handy among many others, they’re creating the world’s largest digital marketplace for home services. Brandon, welcome to the show.

Brandon Ridenour: Jonathan, thanks for having me.

Jonathan: Well, before we start, full disclosure. Both IAC and ANGI have been written extensively about in our research service and clients of Boyar Asset Management own shares in both. Before we get to some of the exciting things that are happening at ANGI, I just wanted to briefly discuss your career path. Prior to ANGI, you worked for both Scholastic and Nutrisystem, two companies obviously not in the home improvement area. How did you end up working for ANGI?

Brandon: I’ve definitely followed an unusual path to where I am today. I started my career at Accenture back when was Andersen Consulting. Really was a technologist and a software engineer. Probably around 2000 I left and went into- this was during the middle of the dotcom boom, I went to a small startup. This is in 2000, so it didn’t last long.

Over the ensuing probably 15 years or so, I really worked in consumer e-commerce. While the businesses might not seem like they have a lot of relevancy to home services specifically, they were all unusual bespoke services to consumers. A lot of them were continuity or subscription-based so I have a lot of experience in dealing with consumers and thinking about things over life cycles and lifetime value.

I came to [00:02:00] what was ServiceMagic in 2011 as chief technology officer and chief product officer, again, a combined role and spent about seven years redefining ServiceMagic or rebranding it to HomeAdvisor and then embarking on this effort to redefine how home services works and how people take care of their homes. A couple of years ago, my friend and former CEO here where I worked with at Nutrisystem retired, and I was fortunate to be able to take over as CEO.

Jonathan: I love asking CEOs of public companies what is it like running a public company? Do you enjoy it? If you had your druthers, would you rather be private?

Brandon: That’s a great question. I’ve been doing this since late 2017 and it has been incredibly interesting and very challenging experience and certainly one that propels a lot of personal growth. I think adding a pandemic onto that experience has made it especially both interesting and challenging.

The way I think about this is there’s work I might prefer to do. I love building products. I love focusing on the day-to-day of figuring out how to build great products and obviously I do very little of that now. If you’re trying to do something incredibly ambitious, which is certainly what we’re trying to do, there is no better position or role in which to have an incredible influence over the outcome. I think less about the sort of day-to-day, hour-to-hour view of what I’m doing and how much it’s my preference and more about what we’re trying to accomplish and the incredible leverage I have in trying to propel us forward.

Jonathan: That’s a great answer. One of the things I know that is difficult about running a public company is obviously your mark to market every day. At the Boyar Value Group we’re long-term patient investors, we try not to look at the day to day fluctuations of stocks, easy to say, very difficult to do. Like many stocks, yours has been particularly volatile this year ranging from $4.10 to $17.10, and that’s something that’s completely out of your control. How do you get your employees and yourself from not focusing on too much of the daily moves of the stock price? It’s obviously a significant [00:04:00] part of compensation and your total net worth.

Brandon: Yes, that’s a wonderful question. I don’t love the volatility and I don’t think anybody possibly can. Certainly, we try to follow the precedent I think that was set at Amazon where we one, don’t spend a lot of time talking about it. To the degree we do, when we’re at the lows, we talk about the fact that the external market doesn’t really know what we’re doing and can’t always appreciate it.

When we’re at the highs, we say the same thing, that really it’s relevant to what we’re trying to accomplish and how we measure ourselves and how we mark ourselves against our performance. It’s not a perfect strategy by any stretch of the imagination, but I think one of the benefits we’ve had is we’ve had some serious highs and some serious lows and back and forth, and I think people have to some degree now gotten used to it because it has become a pattern. I hope it’s not one that necessarily persists into the future.

I also talked to our team about the fact that every successful company, the most successful companies, have had that same pattern in their history, whether it’s Amazon, Netflix or anybody with a name. They’ve all had that pattern of volatility. I think that’s a little bit calming to know that that is realistically the path with any incredibly ambitious company follows that goes on to become future successful.

The last thing I’m at is we do benefit I think by having IAC as a control shareholder. IAC and the management there, definitely take a very long-term view of this and a very long-term view of the opportunity. Having their support and that structure definitely puts us in a safe position to swing big and really pursue this with a long-term view and not necessarily get caught up in a quarter-to-quarter grind. If we were traditional public company, that certainly might be more difficult.

Jonathan: The IAC, which owns roughly about 85% of your stock, they recently announced they’re no longer going to be giving quarterly guidance. Is ANGI following suit?

Brandon: We are. I personally think it is a very smart move. I’ve now lived that experience for directly [00:06:00] as a CEO for eight quarters, and then for a few quarters before that in very close proximity. I think with regard to what we’re doing and what we’re trying to accomplish, quarter to quarter variations volatility is frankly pretty irrelevant. It really doesn’t end up being irrelevant to the market, but it is irrelevant to what we’re trying to accomplish and whether or not we’re on the path to doing so.

We’re still going to publish our quarterly results and people are still going to care a great deal, but I think trying to publish a number a year round or whatever the case maybe, and then try to live up to it, which of course, it’s fundamental to issuing guidance is I don’t want to say waste of people’s time, but certainly not the most efficient use of the time and resources of some very important people whose mindshare is better spent elsewhere.

Jonathan: I really wanted to dig in to ANGI. I’m really excited about the company. We have a pretty diverse audience on the world according to Boyar. Can you just briefly explain what ANGI is?

Brandon: Sure. Well, we’re definitely a collection of brands, all whom are focusing on the exact same thing, which is we’re really trying to transform the way people get home services. I think more broadly speaking, we’re trying to reinvent the way people care for their home.

The status quo in how people care for their home is a very subpar experience, I think would be a nice way to put it. It’s pretty antiquated, and the vast majority of that activity happens offline or happens in a very analog way. It’s certainly, I guess odd, that home services is probably the bigger laggard category when you think about all the consumers verticals in terms of moving from offline to online. Nearly every other category has been reinvented or disrupted in some significant way by online services. Now, home services has really lagged.

Our view on that is driven by two different things. One is that just fundamentally, in terms of demographics, home owners skew quite a bit older on average than perhaps most categories. The average age of our customer is around 53 or so. These are folks that just aren’t digital natives. They didn’t grow up [00:08:00] doing everything digitally. The internet mostly came, if you look at that population, came after college or after their education. There’s a behavior aspect of having done things one way for a very long time that is stubborn to change. That’s point one.

Then point two is you also have to deliver an experience and services as they say, 10 times better than the status quo in order to disrupt and influence that behavior in a new direction. I think both of those, one, the demographic aspect, has been an inhibitor. Then two, I don’t think the service that’s 10x better has existed quite yet.

There’s certainly services. They’re better, and they’ve augmented the classic way of doing things with EPC and consumer reviews and that sort of thing. We haven’t seen the truly innovative types of services that you’ve seen in other categories. That’s obviously what we’re aspiring to and what we believe we’re building, delivering for homeowners.

We have a few brands in the US. I think the HomeAdvisor really has done the growth engine of the company over the last many years. Then Handy is a very innovative service we acquired a couple of years ago that really delivers what we think is the next generation’s style of experience, what we call fixed-price services. You can really think of it as on-demand services, greater than an experience. It’s very similar to those which you get in other categories.

We also have the leaders in several of the Western European countries, but those businesses are earlier staged and quite a bit smaller.

Jonathan: Is the market opportunity– I’ve seen numbers all over the place, somewhat about 400 billion and about 10% right now is online. Is that roughly correct?

Brandon: That’s roughly correct. We redid the numbers recently in terms of the TAM and we have it at about 500 billion, so it’s grown a bit. The 400 billion number was from probably close to a decade ago now. Then in terms of the online penetration, we still have it below 10%, but it’s a little squishy in terms of getting it exactly, but that’s definitely in the ballpark.

Jonathan: This is obviously a huge opportunity. You are well-funded obviously with IAC’s backing after they just

[00:10:00] spun out MATCH, they have a lot of cash. How are you able to compete against giants like Facebook and Google who are also trying to get into this market?

Brandon: I think that is one of the most interesting questions because it’s certainly a question that weighs on most investors’ minds. There are two different ways to look at competition. First, there is competition for advertising dollars among small businesses. As a small business, any small business has a myriad of ways to advertise and small businesses in the home services space have advertised historically on TV and the directories and the yellow pages. Then obviously, with the  the internet, they can have a bunch of additional options, including a paid search in Google and advertisements on Facebook and the like.

I think one on that front, we compete very favorably with any service that exists because I believe we have the best offering for service providers. I can go into some detail on why that is, but we offer a platform that offers a level of targeting and a granularity in terms of control and ROI tracking that’s never existed.

If you think about the way it would work, historically, you put an ad in the yellow pages or maybe on the top of an online directory. It’s very difficult to know what response you’re getting exactly what– You’re typically paying a fixed price every month and you don’t necessarily know which phone calls come from the ad. In our platform, in our ecosystem, you know exactly what you got and you know exactly what your ROI is. You can be very specific about not just that you’re a plumber in Denver, but in fact, you’re only interested in doing tankless water heater installations and you’re only interested in doing them in three zip codes. It’s a level of control and power that has just never really existed.

However, I think that that is really not the long term way to think about competition. The way I think about our ambition is that we’re trying to create a transformational consumer service that reinvents the way people care for their home. When you think about that as an ambition and a mission, very focused on home services, we don’t really feel that we have anybody competing to provide or accomplish that same goal.

In the end, most of this activity is offline. Our challenge is to create that transformational service and [00:12:00] move that activity that’s happening offline to online. When I think about Facebook or Google or any of the large platforms where you can advertise, the odds of them creating a truly transformational deep service that is explicitly focused on the home is pretty unlikely. We have literally thousands of people that get up and come to the office every day with this one because one goal in mind.

Home services is complicated that there’s enough nuance and complexity and specificity to the category that I think trying to be a Jack of all trades across a bunch of different categories and come up with a really great solution is pretty unlikely.

Jonathan: It’s really your level of focus compared to the behemoths is what’s going to make you guys win?

Brandon: That’s right. I’m sure we’ll talk about fixed price a bit, but we are moving from being, I think what was historically a lighter marketplace where we connected people. I would think of that as more of a traditional advertising model to a much deeper vertically integrated fulfillment platform and suffice to say that gets more and more difficult. The deeper you go in, the more ownership you take over delivering actual services, it gets complicated.

I think those types of services, when you look at them in today’s world across categories, whether it’s something like Uber or whether it is a DoorDash or Grubhub or any of the services that really have true vertical integration and manage the fulfillment, you don’t see the big mega platforms competing as much in those areas where I think you see them competing more are in lighter, simpler information discovery areas. Certainly, you’re seeing that in flights and travel and perhaps in hotels, because you’re an aggregator and you’re really just connecting the platforms that are readily available.

If you want to actually start delivering services, it’s really an entirely different level of complexity. I think the level of focus and the investment required in terms of humans and operations and logistics is pretty difficult to take on. [00:14:00]

Jonathan: Today is July 29th so we’re talking about competition and it’s particularly timely because the leaders of Facebook, Apple, Amazon or I don’t know if they’re on Capitol Hill or they’re doing it via Zoom or whatnot, but they’re talking about competition and  monopolistic behavior. Do you have any views on that? Google is probably one of your biggest sources of traffic, but it’s also in some ways your competition, as we just discussed. Do you have anything you can elaborate on that?

Brandon: Sure. First as just a consumer, a person living in the United States, I look at the last 20-25 years of incredible innovation driven by the internet and all the amazing companies that we as consumers benefit from and that certainly the economy as a whole has benefited from. I think if we want to see that for the next 15 or 20 years, the ability to discover these companies, these businesses, these innovative services is crucially important. Obviously, with the dominance Google has in terms of offering search and discovery services, I think it’s a completely reasonable thing for the government to take a look at. It’s just so important. I do believe if you take a longer view of this, we all certainly want to see innovation flourish and we want to see these amazing new services developed by entrepreneurial folks come into being and be able to thrive. I don’t have enough expertise to know whether there’s a there there, but I do think it’s a reasonable thing for people to take a look at.

When I think about ANGI Homeservices, of course, we think about these platforms, we think about Google in particular, they’re a huge partner for us, an incredibly important source of finding customers and I expect that they always will be. In fact, there’s no question that they’re the best way for us to find customers. That’s where people search. We value the relationship. We value the channel, if you will, from a marketing perspective as an incredibly important part of our business.

When I think about our strategy, and when I think about competition, I honestly believe we are either going to execute and be successful [00:16:00] by developing a truly customized service that goes deep within home services and really attracts a very large audience of homeowners in a sticky fashion and become a direct destination brand, or we won’t because we didn’t execute successfully. I don’t believe that Google– If they’re going to have an advertising business, they’re going to have home services, businesses that advertise there because they have an audience and that’s completely reasonable. I don’t think we’re really competing to accomplish the same thing.

Jonathan: Understood but you have been, I don’t want to say a victim, but when Google changed their algorithm, I don’t know if it was a year or two years ago, your costs went up, I think 30% and it’s no coincidence that they are competing in the same category. It’s something the government probably should take a look at.

Brandon: Google’s a large source of customer acquisition for us, and certainly when they make changes, we are affected. We have been affected positively in the past but I think if you look at the course in the last 10 years, I think it’s reasonably clear that Google’s own proprietary products have incrementally taken up more space on the search result page, which just makes it a little bit more difficult or perhaps a lot more difficult for consumers to find those organic results and those services like ourselves.

This is to each person’s own eye but I do feel like they do occupy most of the most premium real estate on the page. It’s pretty extensive. I feel from a personal standpoint, as a company I feel pretty comfortable with the risk profile and our ability to continue to operate within Google at the level we are currently.

[background music]

Jonathan: I hope you’ve been enjoying the interview with Brandon. Be sure you never miss another World According To Boyar episode. Please follow us on Twitter @BoyarValue. Now back to the show.

One of the ways that I guess you’re planning on combating Google is to have more direct relationship [00:18:00] with the customer. You’re doing this with fixed price services. Can you just describe that opportunity?

Brandon: Absolutely. We’ve been in business for more than 20 years. It’s an incredibly complex problem in terms of solving home services and it’s complex for two reasons. One is almost a math challenge and the other one is really about human behavior.

From a math standpoint, we serve all of America, we serve every single zip code and there’s well more than 500 different types of projects that we do. They’re about 42,000 zip codes in America. If you combine the zip codes and the 500 plus services, you almost have what you can think of as 20 million micro markets where you have to have humans available to deliver services and you have to balance supply and demand. It’s an enormous problem from a scale standpoint.

On the human side of it, unlike, let’s say a service like Uber where you can pretty much go out and find and mint new drivers really easily because almost everybody knows how to drive. In home services, these are oftentimes craftsmen, people that not only have but need to have many years of experience.

For many of these types of projects you think about things like wood floor refinishing, or remodeling or you name it, lots of complicated types of projects. You can’t just go create these businesses so you have to work with the economy as it exists. The combination of those two things makes this, I think in order of magnitude or perhaps a couple of orders of magnitude more difficult than perhaps like the idea of creating a service like Uber.

We have been working to standardize over the last seven or eight years, the experience for consumers and digitized more of the experience. We have offered services like online booking, which enable people to book an appointment directly with the provider. What we have found over time is that it’s very challenging to get hundreds of thousands of small businesses to operate in a consistent manner, I would say of their own accord.

We essentially pivoted three or four years ago [00:20:00] to begin a completely new approach to this problem. We really believe fundamentally that we need to provide a very consistent experience to homeowners that solves several different pain points.

First of all, there’s no price transparency whatsoever in home services. Nobody knows really what anything should cost. If you go out and get estimates, you’re often going to get estimates that are all over the board or they’re not close to each other. First of all, we think solving price transparency and helping people understand the price as fast and easily as we can is important.

Then digitizing the remainder of the experience and taking out a lot of the friction. People don’t want to talk on the phone anymore. Nobody wants to obviously leave a voicemail. People want to effectively– Everybody’s time-starved. People would love to when it comes to home services, generally, once they get the momentum to actually do a home service, they want to get it done as quickly as possible.

We embarked on a new path, which is effectively us pricing and selling the service directly to the consumer. Based on whatever the project is, we’re determining, we show the price up front, and then a homeowner can quickly order that service. You put the credit card in, tell us what date and time they want the service. Then we find the professional to complete the service at the requested price or at the indicator price. We manage that fulfillment digitally, beginning to end and including processing the payment once the service has been completed.

It’s a closed loop system where the entire thing from a consumer or homeowner standpoint is managed through the app from seeing the price upfront all the way to watching the service technician arrive at your home in a digitally via the map and then obviously getting a receipt and seeing the payment process.

Jonathan: Basically, what you’re saying is the traditional–What you’re trying to do now is let’s say I wanted to have my gutters cleaned, I would go online, I would probably tell them how big my house is, whatnot. It would be a fixed price of what it would cost to clean the gutters and you would find a [00:22:00] qualified person to do it. I would not really have to communicate with that person at all. Is that what you’re saying?

Brandon: Well, that’s exactly right. I can simplify the whole thing I’m saying by just saying it’s very similar to the experience in ordering a car service from Uber or ordering food from DoorDash. I think the only difference really is that it’s typically not a same-day service. You’re scheduling oftentimes out a few days, but beyond that, the experience is very, very similar and you can communicate with the provider if you want to or need to. For the most part, no, there’s no reason to. You know the price, you know the date and time the provider’s going to show up and they show up and do the work. Then when it’s completed, we process the payment.

Along with this, of course, we guarantee the work, we guarantee the outcome and we call it our happiness guarantee. If something goes wrong, then we’ll either refund the money or preferably send somebody out to make it right. That’s a level of, I guess, confidence that you don’t typically get with how people have historically gotten home services.

Jonathan: You’ve compared this to some way to Uber, which seems like a pretty good comparison. Uber’s running into issues of these workers being classified either as employees, instead of independent contractors. Is that something you’re worrying about? Does that change the opportunity if all these service providers were classified as employees of ANGI?

Brandon: Well, we certainly watched the evolution in the regulatory environments, but generally speaking, we are in a very different position because the entities that we’re working with on the provider side are small businesses. Sometimes they may be sole proprietors or very small businesses and sometimes they’re much larger businesses, but they are generally speaking standalone businesses. We’re not bringing them into this industry. They are generally running this business and they’re taking consumers or customers from other sources.

I think that is pretty fundamentally different from where Uber sits and some of the challenges they face. [00:24:00] We’ll of course watch it. The home services industry has always been a small business-driven contract-oriented industry. Just the very nature of contractors and the fact that they use subcontractors to do remodeling projects or larger projects, it is the way the industry has always operated. We’re simply providing a digital medium on which you can interact in the same way that the industry has always interacted.

Perhaps the different thing we are doing is obviously we are offering price transparency which is sorely lacking in the industry. I think we’re pretty outside the scope of where the regulatory focuses and gig jobs and gig businesses at the moment.

Jonathan: In terms of the fixed price opportunity, how big can this be? Where is it now, relative to sales and where do you think it could be, 5-10 years from now?

Brandon: Well, that’s an interesting question because we do believe we use the term home services, but it’s incredibly heterogeneous. Obviously fixing a leaky pipe shares very little resemblance to remodeling a kitchen or building an addition to a home. Those are just two examples, but there’s many, many of those.

The question for us is this expression model is we believe fundamentally better value proposition for homeowners, for the reasons I already mentioned. It’s also a great deal for the service providers because rather than paying for advertising, they just receive when they get it, we pay them. They have a job and they don’t- they just receive compensation for it. We love the model and we think that is really strong for both sides of the marketplace, but the whole nature of pre-pricing a project gets more and more complex as you go up the scale in terms of project complexity and project cost.

We started by launching in about 130 different types of projects that are low prices, relatively simple. We did that last year and we have seen a lot of success with that, and that continues to grow quickly. This year, I should say that first segment that we tackled we think is about 50 billion [00:26:00] of the 500 billion total TAM and the home services market.

Relatively small slice from a TAM standpoint because these are low price services, but a very high volume part of that from a service request volume standpoint. We love tackling that first because we think, while it’s relatively small from a revenue standpoint given the whole market size, it makes up a big part of people’s experience.

Most of the projects that people do within a year are relatively low price. We’ve got our cleaning to lawnmowing handyman services and those types of things, that’s the most common thing that people do. We love delivering this experience and making that the core part of how people experience getting home services.

What we’ve done over the course of this year is we’ve moved into higher value and higher price services, which is where we’ve had some question mark about our ability to price it and about perhaps more importantly, whether homeowners would buy much more expensive services.

I would say in the first quarter of this year, we saw pretty quickly that when we offered services and these are typically call the average price is around $5,000, we saw very quickly that homeowners would engage. There was very high engagement, very high conversion rates to purchase these services. That was, I think the fundamental piece of information we needed to know there was a market there and something worth going after.

Obviously, if homeowners are just too reticent to buy those types of high-priced high-ticket types of projects, then it would have been difficult to overcome. We were able to prove out pretty quickly that there was interest and a willingness to buy those services.

What we spent the last few months doing or tackling is optimizing our sophistication around how to price those projects because they are much more complicated. Just to give an example, installing a wood privacy fence or installing a deck, these are the kinds of projects that cost a few thousand dollars and which each one of them requires a different approach to pricing it properly.

We almost have to go project by project and really figure out how to price that project, such that obviously we make a reasonable [00:28:00] margin and we can find providers to understand the clearing price in any locality that it requires to find providers to do the work that’s the price we offer.

We’re in the process of getting good at that. I think we’ll be in the process of getting good at that for the next, at least a year and a half because it’s effectively a project-by-project groundwork to figure that out, but we’re seeing it grow quickly. We know enough now to have confidence that this model is going to scale to probably a greater extent of projects than we might’ve originally believed. That’s where we’re at today.

Jonathan: Can you just out of curiosity, something like the wood privacy fence, like how do you use technology to price something like this? It seems something that would be very difficult to do because I might not be able to tell someone how big square foot of my property is, et cetera. How does that work?

Brandon: That’s a great question. There are really two components to knowing how to price a project. One is understanding the specifics of the project given its nature and what are the factors that determine pricing. With a wood fence, it’s going to be what’s the length of the fence, what material are we talking about, that sort of thing. Then the second aspect of that you need to know is really about the local market dynamics and what the going rate is to get a provider to do that kind of work.

On the ladder because of our scale, we’re building up expertise and sophistication quickly in terms of understanding local market dynamics. I think that’s a competitive advantage in a durable asset that we will possess that puts us in a strong position to do this effectively, where it will be difficult for others.

On the former, privacy wood fence installation is a great example of where we’re using technology to really accurately price these projects instantly. For privacy wood fencing we use satellite imagery to quickly allow the homeowner to identify the length of fence, the segment of fence that they want to install or replace. With that information along with a couple of questions around materials and that sort of thing, we can quite quickly and accurately price that project.

Obviously, not every project is [00:30:00] outside. You can’t use satellite imagery for everything, but that gives you a sense of how the actual solution might be a bit different for each and every individual project. I should have mentioned that the TAM, if the first 130 or so projects were around $50 billion in total TAM, this next segment we’re tackling is around $200 billion. By virtue of the success we’ve had, I think early this year, we believe that we’re going to unlock maybe not all of that TAM but certainly a significant portion of it via fixed price.

Jonathan: Right now, you went from a few hundred-dollar project to a $5,000 project, which I think you said about 150, $200 million of the Total Addressable Market. Do you ever see that going up? Is a remodel of the kitchen or some of these really high margin items ever– Do you ever see that being in a fixed price or quasi fixed-price model?

Brandon: Our fundamental goal is to make owning and caring for your home a really different experience and a much easier experience. The vast majority of what people do fall into these lower price projects. Most projects are several thousand dollars and then occasionally you might have one that is a little more expensive. That probably makes up nine out of 10 projects people do, maybe even more. What we want to do is build the brand that’s synonymous with this type of innovative and transformational experience and develop really loyal customers. I think fixed-price as applied to these most common projects are what will generate that loyalty.

To take it a step further, obviously, we ultimately believe that not only can we develop or deliver fixed-price projects, but we can begin to take ownership of all those repetitive projects that you do. If you have to clean your gutters twice a year, but we can offer that on a recurring basis and we can offer in a way that you really don’t have to think about it again. We just show up twice a year and let you know we’re coming and do the job and let you know it’s been done.

As you can imagine, there’s a pretty long list of these kinds of recurring [00:32:00] known projects that people have to do. Well, we think we can actually just take the load and the labor off people’s minds and deliver that in a more automated way.

It’s through this experience if you can imagine not only having a fixed-price experience, but having it via the app, and then perhaps engaging with these recurring services. It’s a pretty deep experience, we’ve got your credit card on file, it’s really seamless to order additional services. I think the general idea is every once in a while, when you decide to remodel your kitchen every 10 years, or when you have to replace your roof once every 10 or 20 years, or your furnace, we have the relationship at that point.

I don’t know that fixed-price, as stated will ever apply to something like a kitchen remodel. I think there may be some sort of simpler versions of it that possibly could but a $40,000 or $50,000 or $60,000 kitchen remodel’s probably always going to be handled differently. I think the point for us though, is we can win on the high-frequency projects, create this really deep and established relationship with the homeowner, and then we’re automatically top of mind when those higher-margin, higher-value projects come up.

Jonathan: One of the ways you’re creating this deeper relationship is you have partnerships, you have one with Realogy and one with Lowe’s. Lowe’s was announced earlier this week. Can you briefly touch on that?

Brandon: Sure. We started partnering with Realogy, I think it was middle of last year. The nature of that relationship is one that I really love because it’s good for us, it’s good for Realogy and it’s good for the homeowners that are selling their houses. Effectively, Realogy offers a program where a homeowner can improve their house, which improves their odds in price, they’re selling the home and the price at which they can sell it. Realogy essentially provides funding for that work and we provide the execution and management of the services.

This is simply put, a fixed-price service model and it is more in the middle-tier pricing; it’s more in the single-digit thousands of dollars type of area from a price standpoint and it tends to be heterogeneous. [00:34:00] It’s not usually just one project, but it’s a combination project; maybe I’m painting and reinstalling the floors or refinishing wood floors and so on.

One out of the programs because I think it’s the best of all worlds when it’s in everybody’s interest, everybody has a strong value proposition. It’s been a real proof point for us to essentially prove that we could manage and market these types of more complex services, particularly a heterogenous basket of services, and do so at really high levels of satisfaction.

We’ve been very happy with the program, I believe Realogy has been very happy with the program, and it’s been growing pretty consistently. Obviously, COVID threw a temporary curveball within the housing market but as we’ve all seen, demand has picked up very robustly and we’re pretty closely tied in terms of that partnership to transaction volume in the housing market.

That feeds in really nicely, which is what we’re trying to do overall, the learnings we’re getting and working with Realogy and working in the market on these types of complex projects feeds directly into serving our own customers directly on home advisor for the same kinds of projects on a fixed price basis so it’s been very synergistic in that sense.

The Lowe’s partnership, we couldn’t be more excited about. Obviously, it’s brand new. Lowe’s is a leader and selling products and materials related to the home, is somebody we’re extremely happy to partner with. We obviously bring a lot to the table in terms of enormous service demand from homeowners. I think there’s a natural synergy to partner with someone who is looking at this from a product and materials or leading with product and materials.

As they continue to strengthen their relationship with home pros, our ability to work within a partnership to deliver their pros, service demands, I think it’s naturally in our interest, in the natural and their interest. I’m excited about it. Obviously, we just kicked it off, but I think it’s pretty obvious that our position and scale, and being able to deliver service to their pros, and that then feeding potentially directly to product and material sales makes a ton of sense, conceptually,

Jonathan: In terms of how you’re running the business now, from March until [00:36:00] July, obviously, you’ve been dealing with COVID, how has that impacted your business in terms of what people are looking for? Is it now highly non-discretionary types of services people are looking at, or people are actually letting people in their homes for other types of discretionary work?

Brandon: Well, I think we’re obviously very thankful for the resiliency our business has shown throughout this. There were certainly a few weeks there in the early going that looked pretty grim, but the industry really bounced back with a vengeance and has performed really well I think given the context. That said, we are in the business of putting people inside of other people’s homes to deliver services, at least in some part. That is not going to go without some impact when you have a pandemic and the fear that is reasonably pervasive. What we’re seeing, I think in terms of the major impacts are on the demand side.

There are certain project types that are not growing or are flat to down maybe a little bit or are growing much more slowly than we would’ve expected. These are typically indoor discretionary projects and remodeling projects are a great example. They haven’t collapsed and I think they’ve been pretty resilient, all things considered. They’re definitely dragging growth a bit relative to where we thought we would be because they’re really important. Remodeling, while the frequency is low, the value of those jobs is enormous and it’s an important contributor to us financially. Those are growing more slowly and/or are flattish year over year. The reason is people are scared. There’s a level of fear.

I think maid service, cleaning services is another one where we’ve seen actually really soft demand. That’s one where people, they can do it themselves. They’re choosing to do that, to reduce exposure. Luckily for us, I think we said 65% or so of our business is non-discretionary. It’s just work that people have to get done, whether it’s inside or outside. Your AC breaks, you’re going to [00:38:00] get it fixed. It’s just the reality. Then beyond the 65%, that’s non-discretionary, a lot of work is also outside, even if it’s discretionary. As you can imagine people aren’t as worried about that.

Overall, I think we saw a huge bounce back in growth. We posted the highest service request growth rate in June in two years on a year-over-year basis. It was really a very strong recovery, but uneven. What I mean by uneven is some categories are up to 50 to 90%. In-ground swimming pool installation was up 90% year over year while other really important categories are flat to maybe a little bit down. When you have the type of supply and demand challenge that we do, trying to keep up with category growth that might be 50% or 60% or 70% out of the blue is definitely challenging. That’s a little bit of what we’re working through now.

On the provider side, providers are affected in a few different ways. A lot of them pulled back on employment and hiring during the early stages and perhaps, or either having difficulty hiring or have been cautious to do so. There are supply chain issues that are affecting a lot of categories. We’re seeing, I think it’s more than 50% of providers are reporting that they continue to be impacted by the pandemic and are effectively operating at a reduced capacity. Those two things are, I believe transient quite clearly but are definitely affects we’re seeing as the pandemic continues in its current form.

Jonathan: You had people on your platform trying to get in-ground swimming pools. That’s a major project. That’s a $50,000 plus project during the pandemic.

Brandon: Absolutely. One thing, we haven’t seen any consumer weakness. I think the consumer appears very strong. At least to this point, obviously, that was a concern and continues to be, I guess, a future concern as to whether that maintains but to this point, consumers have been, I think, very strong in terms of their willingness to do discretionary projects where there isn’t the risk of contagion.

[00:40:00] The impact is very specifically around concerns about having people in the home and having exposure.

Jonathan: Jamie Dimon, the CEO of JP Morgan said, savings are up, incomes are up, home prices are up. You’ll see the fact of this recession, you’re just not going to see it right away because of all the stimulus. Is ANGI preparing for future pain to come? Who knows what’s going to happen with the stimulus checks now that they’re running out and how there’ll be renewed? Is ANGI preparing for a deeper recession or how are you structuring your business?

Brandon: We really aren’t. We operate the company in a very lean fashion in any case, which is why when COVID originally hit and demand dropped so precipitously, we took a look at our operations and how we approach things. We certainly made some changes, but we were able to keep our workforce completely employed and quite frankly, focused on our longer-term goals.

We didn’t really miss a beat and I think more importantly, perhaps than that, just in terms of operating efficiently, we have an extremely resilient business model. That was on display during the initial we’ll call demand crash because we saw demand crash 40% plus and just a matter of days.

The way our business works is that if homeowner demand drops, first of all, we had a surplus of homeowner demand in the first place as we talked about, but if homeowner demand does drop, a couple of things happen, one is that service providers in general need our service much more. That’s broadly speaking to service providers who pay us. We generally see a much higher engagement level from service providers and those types of situations.

Secondly, the way our ecosystem works is that if providers allocate a budget and if consumer requests levels drop, then you just tend to see a higher revenue per request that gets processed. Perhaps this is at least partially driven by the fact that we do have such a big imbalance, that if we do see some drop in consumer demand, we’re just able to better match those SPs against the remaining consumer demand.

In the end, if you look at our performance, which we released, I think in April was our low point and our global revenue dropped by [00:42:00] 2% year over year. That was in the heart of a really an unimaginable collapse in demand, unlike anything we’ve seen, including the housing crisis in 2008.

We feel really confident that whichever way this turns out, we can stay focused that the business will perform well. Of course it can have some impact, some moderate impact on our growth rate and financials, but we’re going to be in a really strong position either way and in a position most importantly, to stay focused on what we’re trying to accomplish and then we think about a three or five-year horizon.

Jonathan: One of the effects people are predicting of COVID is mass shift of people to the suburbs. Whether that happens or not is certainly offered a debate. I would imagine that’d be pretty good for your business, correct?

Brandon: We believe so. I was looking at some data that just came out where home ownership amongst millennials just spiked in a pretty unprecedented way. That’s certainly incredibly positive for us. We believe millennials are going to be incredible tailwind to driving that behavioral change around moving this activity to online. These are digital natives. These are folks that already order most products and services digitally across every other category we have long anticipated and are certainly excited by what we think is probably a 10-year demographically driven wave, where a lot of this activity does come online.

Then just beyond that, home ownership is incredibly good for us. Home transactions, there’s a ton of work that happens before, during and after home transactions. That generally on a macro level creates more demand. It certainly some of the side effects of COVID with a focus on the home and people perhaps migrating out of dense urban cities and into less dense areas where they can own larger homes are positive for us. Obviously not worth the trade off in the world, but those are side effects that are currently tailwinds for our business.

Jonathan: Brandon, thank you so much for joining us on The World According To Boyar and sharing your vision for ANGI. I look forward to following your progress on this exciting story. [00:44:00]

Brandon: Thanks, Jonathan. I really appreciate the opportunity to be here. Thanks again.

Jonathan: Be sure to never miss another episode of The World According To Boyar. Please follow us on Twitter @BoyarValue. Until next time.

[00:44:24] [END OF AUDIO]

 

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David Alpert, Executive Producer of The Walking Dead, CEO of Skybound Entertainment on what he did that helped turn The Walking Dead into an international sensation.

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The interview discusses:

  • How David and Robert Kirkman took the Walking Dead comic book series and turned it into the most watched show in cable television history;
  • What it means to sell a television show to a network in terms of both economics and creative control;
  • The actual role of a television and film producer;
  • What David and Robert did (that had never been done before) that helped turn The Walking Dead into an international sensation;
  • What it means that Skybound signed a “First Look” deal with Amazon;
  • David’s view on whether the current level of spending on content by companies like Amazon and Netflix are sustainable (and whether he believes they make economic sense);
  • David’s thoughts on the competitive position of content providers like Disney;
  • What low-tech form of entertainment is making a huge comeback and how Skybound is profiting from it in a major way

About David Alpert

David Alpert is CEO of Skybound Entertainment, founded alongside longtime collaborator Robert Kirkman. Alpert is a prolific producer, with television credits including The Walking Dead and its companion series Fear The Walking Dead, Outcast, Robert Kirkman’s Secret History of Comics, and Dirk Gently’s Holistic Detective Agency.

 

Click Here to Read the Interview Transcript

Transcript Of The Interview With David Alpert:

Jonathan Boyar: (00:10):

Welcome to The World According to Boyar where we bring top investors, bestselling authors, and market news-makers to show you the smartest ways to uncover value in the stock market. I’m your host, Jonathan Boyar. Our guest today is David Alpert, Executive Producer of multiple television programs and films, including The Walking Dead, which has the highest total viewership of any series in cable television history. It airs in over 120 countries and in 33 different languages. He’s also the CEO of Skybound Entertainment, a multi-platform content company he founded with Robert Kirkman. David, welcome to the show.

David Alpert (00:50):

Jonathan, thanks so much for having me. It’s a pleasure to be here.

Jonathan Boyar (00:52):

No, thanks for being on the show. You’re best known as Executive Producer of The Walking Dead. However, one thing that most people don’t know about you is growing up, you were a highly competitive athlete. You were captain of the Harvard swimming team, and made it pretty darn close to being an Olympian. Did the discipline it took to achieve that level of success prepare you for business success?

David Alpert (01:15):

Well, first, I think I was definitely a good swimmer. I was pretty far from being an Olympian. I’d like think as I’ve gotten older in the stories that I’ve gotten closer to being an Olympian, I’m a legend, perhaps maybe in my own mind. But, I think absolutely the discipline of having to get up starting at eight years old, and having to go to practice in the morning at 5:00 and be in the water 5:00 AM, it definitely helped. In some ways I feel like I never worked harder than when I was eight years old or nine years old. I was definitely sort of putting in the hours.

David Alpert (01:44):

The truth is now, honestly, the things that I do, it doesn’t feel so much like work. I mean, because I make everything from comic books, video games, movies, TV shows, and now wine, it’s like if I have a busy weekend of work, I have to take my work home, it means I’m going to have to play a video game, read some comic books, and watch TV, feels pretty good. It feels pretty good. It’s a lot less stressful than it used to be.

Jonathan Boyar (02:08):

So, you’re making wine?

David Alpert (02:09):

Yeah, we partnered with a company called Treasury Wine, and we have actually one of the fastest growing wine brands in the United States right now. We started with The Walking Dead. we did a blood red blend and a Cabernet, and then we launched a shark name, Sauvignon Blanc, and we’ve been tearing things up. It’s been really kind of fun. We built an AR app for it, so basically you hold up your phone in front of a bottle, and the zombie will jump out and break the screen, and you hold up another one, and Rick will come out and sort of kill the zombie, so every time you get a new bottle, it adds a little something to the story.

Jonathan Boyar (02:40):

That’s awesome. That’s certainly the definition of a brand extension.

David Alpert (02:44):

Yeah. For me, everything I want to do at my job is something that I love. So, it’s always work. But, if come in and I have to have a hard day at the office drinking wine and reading comics, it makes my life feel a lot better.

Jonathan Boyar (02:57):

So, you graduated from Harvard, went to NYU Law School, not exactly the traditional path to a career in the entertainment business. How’d you end up breaking into Hollywood?

David Alpert (03:07):

In law school, I quickly realized I didn’t want to be a lawyer. I had done a summer at a law firm and really quickly realized, I was like, this is just not the life for me. I felt very much that I was on the wrong side of the table. So, I was very much looking to say, “Hey, how do I get out and be an operator as opposed to sort of a service provider?” A buddy of mine who I met at that firm, he and I started a internet company and that was also a big thing to do back then, I guess as it is today. But this was 1.0, and we started this internet company and we had a little success and a lot of failures, but the best part was, it was the best way to get, basically while in law school, to get an MBA, because I would go to classes in the morning and then I’d be running a 50 person organization operation in the afternoons and in the evening. So, that was quite an education.

David Alpert (03:54):

I got out of that business and then started basically my own management company. I saw that there was an opportunity in film and television. There’ve been a number of successful movies that had come from sort of unknown or unheralded comic books. So, Men In Black was based off of a little comic that had sold maybe a thousand copies. The Crow, even little indies like Ghost World had been based off of this sort of independent comic book. So, I said, “Oh.” I grew up reading comics, and loving comics, and sort of trading, collecting and selling comics. So, I said, “Huh, maybe I can go find some of those people that I know, and I can help them bridge the gap between the comic book world and Hollywood.”

David Alpert (04:33):

So, that’s what I set out to do, honestly, knowing very few people and not doing much, I just started going to conventions and signing people up saying, “Hey, I’m going to take your products to Hollywood.” One of the people I met in that sort of first few months that I was doing it was Robert Kirkman, who went on to become the creator of The Walking Dead. So, very fortuitous, very lucky, but that was sort of the goal was finding great comic books that had film and television potential, and sort of being the conduit for them between their world and Hollywood.

Jonathan Boyar (05:02):

So, you met Robert Kirkman at a convention. At the time, obviously, his comic was well known in the comic book community.

David Alpert (05:10):

When I met him, he hadn’t done anything. The comic he was out there pushing was a comic called Battle Pope. It was this absolutely insane comic about a post apocalyptic New York where demons have sort of overrun the streets, and there’s a cigar chomping, whiskey swilling pope who’s living with his cockblocking roommate Jesus, and they’re out there trying to sort of save the doomed world, so pretty wacky, pretty out there, pretty indie. But, there was something both about the book, the writing was just really tight and taught, and there’s really something about Robert in the sense that I understood that he knew story, and he was charismatic, and he had sort of a certain charm to him that made me interested in knowing more about him and his work.

Jonathan Boyar (05:52):

How’d you go from that to landing at AMC? What were the steps that took you from that meeting to AMC, and eventually obviously getting it greenlit?

David Alpert (06:03):

It was a long way. So, the first is Battle Pope was actually the first thing we did together. We had made it into an animated web series at Spike.com, and we were the number one show on Spike.com. Robert and I found that we loved working together, that we had sort of a really good, creative collaboration, we had an opportunity to sort of really understand production together. It felt really good and we decided that we wanted to do more of it. Around that time is when he started working on The Walking Dead, and instantly we all knew that the comic was something different. It was unlike anything he had written previously. It was unlike anything that had ever really been in the market. Even though it was in a familiar genre, both the horror and zombie genre, it really treated it in a way that no one had looked at. That was something I was like, “Wow, if you could really innovate inside such a well explored genre, you’re really onto something.”

Jonathan Boyar (06:55):

So, then what happened after that?

David Alpert (06:57):

So, originally we had set up the show at NBC in 2005, and it didn’t go. Robert got very frustrated by that process. After the show got passed on NBC, everybody else wanted it. Robert said, “Listen, don’t come back until you production commitment, and somebody’s allowed us to retain the rights to market and merchandise based off my comic, not interested in anything else.” So, for four years we were out there shopping around, and got offers from most of the major networks in town, and a lot of the cablers offering to do the show. When I told them what we were looking for, they told me I was crazy. They told me that I’ll never work in this town again. Some people laughed. Some people hurled insults. Some people threatened me.

David Alpert (07:42):

Then finally in 2009, AMC stepped up to the table. They agreed to our terms and they committed to making the show. The book had been out at that point for six years in the market, and it had only gotten more and more successful. But four years in the wilderness between our failed attempts to get it off the ground at NBC, and sort of our successful attempt to get it off the ground at AMC. So, a really long time, and the patience that Robert exhibited in that moment, and the determination to say, “Hey, I don’t want to deal with Hollywood until this happens,” I thought it was both infuriating but also sort of empowering at the same time.

Jonathan Boyar (08:19):

So, for those of us who aren’t Hollywood insiders, what does it really mean to sell a show to a network?

David Alpert (08:25):

So, historically a network like a CBS or an NBC would develop, let’s say, 80 ideas in a season, a season being a course of a year. So, they develop 80 ideas. They would then, say of those 80, they’re going to shoot 10 pilots, and then they’d pick up somewhere between one and four of them given the year in their schedule and their needs. So, you had roughly somewhere between a two and five percent chance of having sold this idea to getting it made. So, it’s a lot of ideas get sold, not a lot of ideas get made, and of the ideas that get made, not many of them last. So, there’s a lot of half-lifes that go on there.

David Alpert (09:05):

So, that said, for every network, one of those networks was developing 80, they’d hear thousands, literally thousands of pitches, and then pick up that 80. So, the pyramid gets very, very tight at the top, but the bottom of the base was pretty huge. The economics have changed and the structure has changed a little bit now, but getting a guaranteed pickup back in the day was one, was really quite rare, but also sort of instantly pushed you through a lot of the clutter at the bottom of it.

Jonathan Boyar (09:33):

What do you give up when you sell a show to a network? Do you lose control? Do they tell you what you can write? How does that work?

David Alpert (09:41):

Yeah. In general, you lose control of pretty much everything. I mean, most of the ownership in a sort of original idea, so something that’s not based on source material, is instantly transferred and is governed by the WGA rules. So, there’s certain participations for the creator, but they’re very limited, and they sit behind the infamous Hollywood accounting. Whereas what you’re doing on source material, since the source material deal isn’t governed by the WGA, you have a little bit more freedom to sort of negotiate how ownership could work.

David Alpert (10:15):

So, sometimes they’ll allow you to keep, oh, you’re doing comics, so we’re going to let you also do comics and books, or, oh, you get to do a comic, but maybe you get to do some prints and merchandising based off it. But we basically were able to say, “Hey, we’re going to do everything we can based off of the comic other than competitive TV shows, of course.” But the thing for us is AMC was then also allowed to make stuff based off of the TV show. So, sometimes now we end up competing with AMC in the same category and sometimes fighting for the same shelf space.

Jonathan Boyar (10:48):

Are they making wine?

David Alpert (10:49):

They are. We are outselling them by an order of almost a hundred to one.

Jonathan Boyar (10:54):

Good for you.

Jonathan Boyar (10:57):

I hope you are enjoying The World According to Boyar. To ensure you never miss another podcast, as well as to hear the latest from the Boyar Value Group, please follow us on Twitter @BoyarValue. Now back to the show.

Jonathan Boyar (11:15):

So, something I always wanted to ask and could never really get a great answer to, what does a producer actually do?

David Alpert (11:22):

So, a producer is someone who puts something together. Producer can really be the CEO. So, every project is almost its own little venture company. So, the goal of a great entrepreneur is you’ve got to put together a great team. You’ve got to have your business thesis. You’ve got to have projected financials. You have to have sort of the market analysis. You have to know the right investors and institutions to sort of put it all together. I think that would be sort of, if you were to talk about in a venture community, that would be kind of the idea. It’s very similar here in Hollywood, a producer does the same thing. So you, you identify a space where you think there’s something interesting, say it’s action, thriller, horror or comedy, but you find that sort of that lane, you figure out what your thesis is, okay, people haven’t seen this recently or they haven’t seen this recently, or this was popular a long time ago, but no one’s doing it right now.

David Alpert (12:16):

Then you try to sort of analyze that and you build out your creative team. So, you’re assembling everything from the writers, the directors, the actors, and the money, and you’re trying to put the whole thing together and go. So, the day-to-day responsibility of a producer is incredibly varied and changes both on the day and the need. But in general, you’re sort of making sure that everything runs from inception all the way to delivery, and most times, all the way through marketing and consumption.

Jonathan Boyar (12:42):

So, going a little bit back to the success of The Walking Dead, one of the things that you said really launched it was when FOX bought the international rights to it. Why was that so important?

David Alpert (12:52):

We came on air in a very interesting inflection point in television history. So, a lot’s been said about sort of the change in television and it’s still happening. It’s still changing and it’s still very dynamic. But, we went from sort of a height of the network era to the point where now we’re having a lot of the basic cablers, in addition to some of the premium cablers, sort of really launching shows. AMC was launching successful shows. You had FX launching successful shows. The idea that there was some place besides the networks and HBO launching successful scripted shows was a relatively new phenomenon at the time.

David Alpert (13:29):

One of the things that’s a problem inside of the traditional television model, when you had a network show, they could cancel that almost at any time. So, if you remember when we were growing up, a show could be canceled after four episodes, or three episodes, sometimes shows would be infamously be canceled after one episode.

David Alpert (13:47):

So, the problem is if you went to then try to go sell that show overseas, a foreign broadcaster would often look at the success in the U.S. market as an indicator as to whether or not they should pick it up, because they knew that if the show was going to be a big hit in the United States, there was going to get a lot of press, there’d be a lot of tours, a lot of promotion. They also knew that there was going to be a steady supply of content. If the show had been on air for four or five years, you don’t have to worry that you’re going to invest a lot in marketing the show, then it’s going to be discontinued.

David Alpert (14:18):

So, one of the things that happened in the rise of the cable era, or the basic cable era, was people were getting picked up straight to series, and these cablers, because they had such smaller inventories compared to traditional broadcasters, a traditional broadcaster would be doing three to four hours of prime time television every night during the week, whereas a cabler might be doing two hours once a week, or maybe one hour once a week. So, the likelihood that that show would return, and it would be sort of carefully marketed to and sort crafted, was way, way higher.

David Alpert (14:53):

So, all of a sudden you have the opportunity to sell a show internationally day one, as opposed to having to wait two to three years. So, that was really a major sort of shift both in the business landscape of television. But in terms of why was it so significant to have FOX, again, the other thing is historically is a lot of the foreign marketplace had been fragmented. So, you literally had to hand sell the show country by country. Sometimes you had to sell it region by region, because even inside our country there were some times you’d sell it to a regional broadcaster and then you’d have to get picked up by other broadcasters.

David Alpert (15:28):

So, it was a very time consuming and tedious job. One of the great things about the FOX deal, is they had cobbled together FOX International Channels Group, which basically meant that with one deal we would be live in 60 or 70 countries essentially overnight. So, we did the first global day and date release for a television show. So, that had never been done before. So, the idea being that we aired Sunday night, 9:00 in the United States, and within 48 hours, we had been seen in 75 countries around the world, which now it’s commonplace, because now you have streamers, and you have Netflix, and you have all these different sorts of platforms, but back then that was groundbreaking revolutionary.

Jonathan Boyar (16:10):

It absolutely is. I’m definitely going to ask about the streamers in a second. You actually, I guess now it’s about an over a year ago, signed what they call a first look deal with Amazon. What does that actually mean?

David Alpert (16:21):

So, basically for these outlets, whether it’s a broadcaster, whether it’s a cabler, whether it’s a premium service or a streaming service, they’re all looking to sort of lock in suppliers. So, the relationship is we’re a supplier of content, so they will give us consideration capital in exchange for getting the opportunity to look at our projects first. So, the first look means basically, let’s say I have a new idea for the Jonathan Boyar show, and everyone’s really excited. Everyone thinks this is a great idea, but I’m like, the Jonathan Boyar show should really be an HBO show. But because I’m in a deal at Amazon, I have to show it to Amazon first, and if they want to buy it, they have a pre-negotiated deal with me where they can sort of buy the Jonathan Boyer show.

Jonathan Boyar (17:08):

I’m for sale.

David Alpert (17:09):

Well, we’ll talk about this after the podcast, we’ll make this happen. So, that was really sort of the goal. So, the good news is when you do these deals is that you have an invested buyer sort of on your behalf. I’m a seller of content provider of content. So, having a buyer allows me to sort of sharpen my focus in terms of I get to know their tastes a little bit better. They get to know sort of what I’m looking for. So, the goal is by being in one of these relationships, is that we’re able to sort of work with each other more closely, so that it’s more efficient and effective for me in the projects that I’m developing, and they don’t have to worry so much about supply. So, they’ll have dozens of deals with people like us, so that they basically know that they don’t necessarily have to compete on the open market for every project that comes up, even though they still do, but they know that they have sort of a good supply chain of product coming into the company.

Jonathan Boyar (18:02):

Not that you or Robert need credibility, but I imagine this helps when you speak to talent out there that you have an extremely deep pocketed person behind you.

David Alpert (18:12):

Of course, because anytime that you’re doing, you would want to know sort of what’s the path to market, what’s the route to market. So, some people, they’ll come like, “I have an idea I think is good for Amazon. What’s my route to get there?” They’re like, “Oh, that’s a good idea. It feels like a Skybound idea, or that feels like Jordan Peele, he has a deal there too.” So, they’re like, “Oh, Get Out was great. This is sort of more genre and race based, or comedy based. Let’s talk to him.” So, there’s a lot of different people that have different sort of vibes and opportunities there, so they might want to think about what’s the best way to access that buyer might be through one of the deals they’ve invested in?

Jonathan Boyar (18:49):

They’re spending like drunken sailors. I mean, is that current level of spending by them, Netflix, is that sustainable?

David Alpert (18:56):

The short answer is we don’t know. Historically, you’ve always had to justify your success of your show by viewership. That was because you were basically measuring audience against consumer products that you can sell for advertising. I can get more Ford commercials on my show because I was getting more ratings than my competitor. So, that was sort of the model. HBO was really the first place to be like, “You know what, we’re going to aggregate subscribers in exchange for our content.” But they were sort of very discriminating. They were a single competitor. There was nobody else out there doing what they were doing. So, it was a very different type of model.

David Alpert (19:37):

It’s really only now though that you have this sense of these guys are out there sort of not going through traditional cable networks. Netflix is something people are accessing all over the world in all different ways, and so they really pioneered a different model. But Amazon has completely different metrics. I’m not sure that I fully understand the economics behind Amazon’s desire to be in filmed entertainments, the idea being that it drives subscribers to Prime. Okay, I get that. But it is also one of those things where they have a completely different monetization tool than Netflix does, or Hulu does, or even HBO. Because those places, you’re the number of subscribers is the thing that generates the revenues, so you’re making content because that’s the thing, you’re exchanging subscriptions for content. Amazon, you’re getting all sorts of different things. My understanding is that more people are likely to be Prime subscribers because there’s the content there. So, they’re still sort of driven by getting many people to watch as possible.

David Alpert (20:39):

But ultimately I’m not 100% certain if it is sustainable or not. It might because maybe what you need is to get more and more market share. Maybe that’s the new world we’re living in. I’m guessing that there’s going to be periods of often peaks and valleys, but I feel with AT&T now coming in and watching their streaming service, and Disney buying FOX and launching their streaming service, and Apple coming online, I do feel like we are a little bit going to be in an arms race for a period of time. I don’t know that it’s sustainable forever for all of those companies to be doing it, but it certainly seems like the foreseeable future, there’s going to be a battle between some of these big behemoths.

Jonathan Boyar (21:19):

Well, speaking of Disney, it closed today with a market value of $168 billion. So, for $168 billion, you’re buying ESPN, ABC, one of the world’s greatest film studios with characters from Marvel properties, to Mickey Mouse, to Frozen, to Star Wars. Then you have Netflix, which while it’s growing and has some good original programming, but nowhere near the level of Disney, you can buy that today for $120 billion. As a guy who’s in the content business, does this make sense to you?

David Alpert (21:52):

I’m not going to be able to speak to valuation in quite the same way. I certainly think that Disney is a more valuable company than Netflix. If someone was like, “Hey, I’ll give you Netflix or I’ll give you Disney,” I would take Disney all day, just owning Marvel, Pixar, Lucas. I mean it’s pretty insane, and that’s not even touching sort of the core ESPN or the core Disney properties. So, I feel like those are some really amazing, amazing things. Probably Netflix now owns a lot of stuff too, but really what they seem to have is cultural mind share, and an opportunity to sort of really fight to take over people’s eyeballs as you’re trying to compete in that marketplace. Is that sustainable? Your guess is as good as mine. Over time though, I think that as people are able to flip between apps much easier than even having to switch between channels, and everything is sort of On Demand, I think that the best content is going to win out in the long run.

Jonathan Boyar (22:48):

Well, something that’s a lot easier are board games and I noticed that you sell them. Is that still a market?

David Alpert (22:54):

What’s interesting, what we’re finding as sort of a broad based social comment, is that as people spend more and more time in the digital worlds, people still want social experience. So, I think what is the thing that’s saving the music industry? Concerts. Concerts used to be marketing for album sales, or CD sales. But now they’re the big revenue drivers, that and streaming. But it’s the live event that’s coming up. We see in the comic book space, conventions are going crazy. There’s conventions for everything. There’s conventions for individual properties. We have Walker Stalker conventions for Walking Dead. There’s Star Wars conventions, Star Trek conventions, comic book conventions, board game conventions. Everybody wants it.

David Alpert (23:36):

What we’ve also seen is as the video game business has exploded, people want that social interaction directly. So, the board game business has really taken off. So, we’ve had a few hits in there. We started with this game called Superfight. That’s just been a huge, huge perennial hit for us. As we’ve gone from there, we’ve just seen that people just can’t get enough. So, we’ve seen everything from the rise of board game cafes, to board game conventions, and they’re all the same people that love digital entertainment. At the end of the day we’re animals and we need social interaction to feel happy, and so having people play board games is a great way to interact with people.

Jonathan Boyar (24:15):

Can you explain Superfight? It really is a great concept.

David Alpert (24:18):

So, Superfight sort of takes that classic thing, who would win, Hulk versus Superman?

Jonathan Boyar (24:24):

Hulk.

David Alpert (24:25):

I would agree. Hulk smash. That would be my argument. People have this conversation now, like who’s a better basketball player? LeBron versus Michael. What’d you say?

Jonathan Boyar (24:33):

Oh, Michael without question.

David Alpert (24:35):

See, I don’t know. I used to think that. Three years ago I would think that. Now, I’m like LeBron might be the GOAT. Not sure, but you could make an argument either way, and people do. So, this guy named Jack Dyer came up with this idea for Superfight. The notion was you pick cards and you essentially assemble your fighter. So, my fighter might be Bruce Lee made of peanut butter, and you could be Abraham Lincoln with a katana sword. So, then you and I would argue in a fight as to who would win. Our third friend would judge and say, “Oh, you know what, Jonathan wins.” Then we’d switch it up and play again. So, it’s a very simple game. It takes about 30 seconds to learn. Then we built out all these expansion decks. So, we’ve done everything from a Walking Dead deck, to an R-rated deck, to a G-rated deck. We’ve done 80s deck.

David Alpert (25:19):

So, we’ve basically been able to sort of build out this experience where you can really have good, silly fun engaging in ridiculous arguments about who would win in these crazy situations. It’s a rare game that can be a great drinking game for kids in college, but it’s also a game that I play with my kids and that they love, because for them it’s a visual storytelling tool where they’re thinking about these things, they’re imagining these things, and they get into these crazy arguments as to who would win in these crazy situations. But at the same time is, honestly, we played it last night at our holiday Christmas party, and people are doing shots and having a great time, and it’s a great sort of fun thing to do there, too. So, people of all ages can engage in that debate and conversation, and I think that’s why Superfight has gone on to become this perennial success story.

Jonathan Boyar (26:08):

You made this guy a millionaire from this.

David Alpert (26:10):

Oh many, many times over. When we met him, he’s this brilliant guy, but he was living with his ex-mother-in-law. He was having a lot of trouble making ends meet, but he had this game, and the game had been a huge success on Kickstarter, and all the big toy companies were coming after him saying, “Hey look, we want you to come with us. We’ll give you $1 million, $2 million.” He kept saying no. He approached us because he wants a license from us, The Walking Dead, and so I played the game. I played the game with him, and what I realized was as we were playing the game, everybody in the office started coming over and watching the game, and next thing I know there’s 20 people watching us play this card game. I was like, “Wow, if watching people play a random card game just instantly gets people to draw to you, I was like, “There’s something here. There’s something really sort of magical about this.”

David Alpert (26:59):

So, I said to him, I said, “Look, we want to buy the game.” He goes, “What are you talking about? I’ll give you a deck.” I’m like, “I’m not looking for a deck. I want to buy the game.” He goes, “I’ve turned down all of these offers. Why would I come with you? You’ve never even published a game.” I said, “Because I will give you complete creative control.” He goes, “What?” I go, “You’re not going to be sitting behind some crazy Hollywood accounting. You’re my partner and you’re going to have control over what goes into the deck.” He goes, “Really? Nobody’s offered me that.” I go, “Yeah, I’m not going to give you anything like what those people said up front, but in success, if this does what we think it is, you’ll make way, way more money, and you’ll have way more control, and way more sort of control over your destiny by working with us.” He said, “That sounds awesome. That sounds amazing.”

David Alpert (27:37):

So, he signed with us. He’s gone on. He’s made millions and millions of dollars. Honestly, one of my greatest pleasures is every quarter, I send the guy a giant check, and I know that I’m always sending that giant check because I’m in the same business. If I hadn’t made that deal with him in the first place, I wouldn’t be having those giant checks for me. So, that part has been really great, and now we’re in the process, we’re turning it into a movie, a TV series. We’ve made merchandise out of it. We’ve made a web series out of it. This thing has become its own little multimedia business just based off of a deck of cards.

Jonathan Boyar (28:10):

That is an amazing, amazing story. I’m assuming he’s not living with his ex-mother-in-law.

David Alpert (28:15):

No. No. He’s got a big beautiful house, and his kids come in, and they’re super happy, and the truth is it really is an American dream. I do think there’s a great sitcom though, and the story of a guy living with his ex-mother-in-law, Lord knows I couldn’t live with my current mother-in-law.

Jonathan Boyar (28:29):

Well, I’m sure financially you did great from The Walking Dead, but how cool is it that you were a key part in creating a show that over 17 million people tuned into regularly and was a pop culture phenomenon? I mean, lots of people can say they made lots of money. Very few can say they accomplished what you did.

David Alpert (28:48):

First of all, Jonathan, thank you. The truth is I love that. It makes me really happy. But the thing that really makes me happy, the thing that I enjoy the most, is that I work with a partner that I love. I get to come to the office with a group of people that I love to work with, and we get to do things that are both really cool, and really fun, and it’s still work but it doesn’t really feel like work. So, I don’t mind doing it all day.

Jonathan Boyar (29:10):

Well David, thank you so much for your time. Where can you get the wine and where can you get the board games?

David Alpert (29:15):

So, come check out skybound.com. We have a beautiful online store where we will do all your fulfillment for you, for the board games, and for the comic books, and our video games. The wine you can get pretty much at any one of your major local outlets, so at Ralph’s, Kroger’s, Costco, Bevmo, all those places. You can also check it thewalkingdeadwine.com if you want to check that as well.

Jonathan Boyar (29:33):

Well David, thank you so much. This was a lot of fun and hopefully you can come back and tell us about your next project.

David Alpert (29:40):

I’m looking forward to it. Thank you so much for having me on the show. Really appreciate it.

Jonathan Boyar (29:46):

I hope you enjoyed the show. To ensure you never miss another podcast as well as to hear the latest from the Boyar Value Group, please follow us on Twitter @BoyarValue. Until next time.

Disclaimer: This interview does not constitute a complete description of our investment services and is for informational purposes only. It is in no way a solicitation to buy or an offer to sell any securities or investment advisory services. Any statements regarding market or other financial information is obtained from sources which we believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Past performance is no guarantee of future results and there is no assurance that any targets or forward-looking statements will be attained. This interview represents the views of Boyar Asset Management as of December 13th 2018 and may change without notice. Boyar Asset Management may own shares in any of the companies discussed during the interview.

 

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Boyar Asset Management
We have been managing money since 1983 utilizing our proprietary in-house value-oriented equity strategies. We manage money for high net worth individuals and institutions via separately managed accounts. To find out how we can help you with your money management needs please click here 

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Since 1975 we have been producing independent research on intrinsically undervalued companies across the market capitalization spectrum and in a wide variety of industries using a business person’s approach to stock market investing. To find out how we can help you with your research needs please click here

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