An interview with Bob Morris - Part 2
Our CEO founder Ken Marlin was recently interviewed by Bob Morris about how best to build a winning investment bank while at the same time improving performance and culture on Wall Street, as well as in corporate board rooms, and perhaps in our political caucuses. Please see part 2 of his interview, below, and part 1 here.
Ken Marlin is Managing Partner and Founder of Marlin & Associates. For more than 30 years, he has advised scores of U.S. and international middle-market technology enabled firms on the best ways to buy, sell, grow, and thrive.
Between 1970 and 1981, Ken rose from the enlisted ranks to become a Marine captain and infantry commander. He deployed twice to the Far East. Since then, he’s been an entrepreneur, a tech company CEO, a senior corporate executive and, for the past twenty-plus years, an investment banker on Wall Street. Throughout all these endeavors, he has applied Marine Corps principles to leading successful businesses. Today as the founder and managing partner of the award-winning investment bank Marlin & Associates, he is a member of the Market Data Hall of Fame, twice named one of Institutional Investor’s “Tech 50,” and has appeared in publications ranging from BusinessWeek, Fortune and Forbes to The Wall Street Journal, The New York Times, The New York Post, The Los Angeles Times, The Chicago Sun-Times, and the Associated Press. He has appeared on CNBC, CBS MarketWatch, Yahoo TV, The Street.com TV, and Fox Business Channel.
His book, The Marine Corps Way to Win on Wall Street: 11 Key Principles from Battlefield to Boardroom, was published by St. Martin’s Press (April 2016). One reviewer called it a book that “…lays out a compelling vision to improve Wall Street and Main Street by returning to solid core values like taking the long view, behaving with honor, delivering excellence, and working for a cause greater than money…” As Ken says, he’s no socialist and has no issue with making money or helping others to do so – as long as it is done with honor.
Ken earned a BA from the University of California (Irvine), an MBA from UCLA, and a post-MBA Advanced Professional Certificate in Corporate Strategy from New York University. He lives in Manhattan.
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Morris: For those who have not as yet read The Marine Corps Way to Win on Wall Street, hopefully your responses to these questions will stimulate their interest and, better yet, encourage them to purchase a copy and read the book ASAP.
First, when and why did you decided to write it?
Marlin: The book was born out of frustration – if that’s the right word – and sometimes embarrassment. For years, I have been seeing bankers, CEOs, politicians and others engage in acts that I considered to be just dumb. The recent fiasco at Wells Fargo Wells Fargo offers a case in point. More than 5,000 employees were fired after it was discovered that they were involved with opening millions of accounts on behalf of clients who never requested them – and knew nothing about them.
A different sort of recent example is Microsoft buying LinkedIn. There was nothing morally or ethically wrong with that deal. But it was dumb. Both are great companies but I fail to see how acquiring LinkedIn advances Microsoft toward any clearly defined, long-term strategic goal. It doesn’t. And that’s the first principle in my book.
Microsoft execs will disagree with me. But I’ll point out that this isn’t the first time. They have written off most of the $6 billion they paid for aQuantive and most of the $8 billion they paid for Nokia’s hand set business. I predict that they will write off most of the $26 billion they just paid for LinkedIn. There are many other examples of acts that don’t make sense or that take advantage of the unwary, unsophisticated or the weak — such as some investment bankers convincing unsophisticated county officials in Alabama to enter into a series of risky securities trades that would eventually bankrupt the county. Or GM selling cars with faulty ignition switches.
For years, I would say to friends: “Why can’t corporate leaders, bankers, and politicians live by the same principles that I learned in the Marine Corps?” They would make just as much money, stay out of the newspapers, pay fewer fines, and their wives, children and mothers would be less embarrassed. In some cases they would avoid harming innocent people. My friends said: “Why don’t you write a book about it?”…and so I did.
Morris: Were there any head-snapping revelations while writing it?
Marlin: I knew from the outset what the 11 principles that I wanted to write about are. The revelation was the number of real world vignettes that I had in my head – most of which I had experienced – that illustrate my points. Some of them were in the deep recesses and I had to go back to old emails to recover the details. But most were ready to be shared.
Morris: You discuss principles that you consider to be directly relevant to both the battlefield and the boardroom. Which of them seems to be the most difficult for most people to follow, no matter what? Why?
Marlin: A lot of business failures derive from a failure to understand and follow the first principle in the book, “Take the long view.” This is a simple maxim that all corporate tactics – including actions such as hiring a person, opening an office, buying another company etc. — should be taken only if that action clearly furthers the organization toward achieving some clearly defined, measurable, long-term strategic objective. Killing more bad guys does not count as such, nor does achieving 20% profit margins or “making America great again.” It seems a straightforward maxim – yet it is amazing to me how often I see people taking actions that don’t meet the criteria. I mentioned the recent Microsoft acquisition of LinkedIn – which in my view fails this test. Compare that to Verizon’s acquisition of Yahoo! which makes total strategic sense to me in light of their earlier purchase of AOL and a clearly defined strategy to become the leader in online entertainment, sports, and news.
Morris: With all due respect to the folks on Wall Street, I think your book can be of incalculable value to anyone who has the determination to achieve personal growth and professional development.
Here’s my question: In your opinion, which of the eleven principles can be of greatest value to owner/CEOs of small-to-midsize companies? Why?
Marlin: The first one for sure, as I mentioned a minute ago – Take the Long View. But I believe strongly that each of the other 11 principles is also important because they combine to form an ethos that can help any business leader be more successful. I have been working on Wall Street for the better part of the past 20 years. That has prepared me well to write about it – but I have also advised scores of CEOs every year and before I was a banker I spent nearly 20 years as CEO of two tech companies and as a senior executive at two large multinational corporations. My publisher (St. Martin Press) felt that the title we chose would resonate with many. But I do believe that all 11 principles in the book are fully applicable to those who lead a wide range of organizations. Politicians should pay attention too.
Morris: For those who have not as yet read the book, you make a number of affirmations throughout your lively and eloquent narrative. Please explain why each of these is so important.
First, “Strengths only confer strategic value if they help you win battles.”
Marlin: Can there be any doubt that in Vietnam our military was stronger than that of the North Vietnamese? And yet we lost that war. That’s because military strength was only one component in that battle. The North had others ranging from political will to popular support, and, in their view, the moral high ground. They won. We lost. It hurt. Strengths only confer strategic value if they help you win battles
Morris: Next, why is it important to “Take a Stand” – the title of one of your chapters?
Marlin: Some people think that “Taking a Stand” is about being “decisive” and it is a Marine leadership trait. But what I write about in my book is more about the need for all leaders – not only those on Wall Street and in boardrooms — to be true to their own moral compass. Sometimes it’s about being willing to speak truth to power.
If some executives at General Motors had taken a stand about selling cars with faulty ignition switches, 51 people might not be dead and GM would not now be paying millions in damages and fines – not to mention the fact that they could have avoided damage to their reputation and future auto sales.
The same can be said about the executives at Volkswagen who failed to take a stand about emissions cheating. The same can be said about people who saw eBay buying Skype, or Yahoo paying $5.7 billion for Broadcast.com or bankers and executives at Time Warner who saw shareholders giving up half the value of their company to merge with AOL. Or people at Wells Fargo….
Wall Street bankers need to take a stand when advising clients. They should not just be “executors” of bad deals – much less promote bad deals. There are many stories similar to the one I mentioned earlier about the bankers who convinced unsophisticated county officials in Alabama to engage in risky securities transactions that wound up bankrupting the county. In my view, Wall Street bankers ought to have a culture in which their first obligation is to do their best to help the client achieve their goals. Unlike the Wells Fargo situation they should take a stand against an inappropriate (if not illegal) practice such as opening accounts people don’t need or entering into transaction that aren’t appropriate – even though it will generate fees. If a client insists on going forward anyway – and that sometimes happens, that’s the client’s right so long as they or fully informed as well as educated and knowledgeable enough to understand the risks that they are taking. If not, the banker should take a stand and decline to help them commit suicide – even if that means walking away from a big fee.
Some people will tell me that this is never likely to happen because bankers are taught to maximize revenue. I agree that they should maximize revenue. But they need to “take the long view.” If they become a trusted advisor to clients they can build long-term relationships with them that can generate more fees over time. Conversely, if they talk the client into inappropriate deals – or even go along with inappropriate deals, they may find themselves involved in lawsuits or at least the object of public chastisement.
If the client is educated and sophisticated and understands the risk they are taking and insists on taking an action against the advice of the banker, then I understand a banker helping – as long as the proposed transaction is not illegal, immoral, or unethical. In that case, the banker should do their best to protect the client.
Morris: You have an unusual approach to valuation in your chapter about Knowing What the objective is Worth Before You Engage in Battle. How does that work?
Marlin: Bankers like to talk about the value of some company or stock or bond based on what someone else was willing to pay for something similar not long ago. It’s a common approach. Sometimes it makes sense. Many times it simply reinforces the herd mentality. When prices are rising people using this approach pay more and more; and when prices are falling people pay less and less. MBAs, economists, and academics use something called Discounted Cash Flow analysis. But it is flawed in a different way in that it assumes that you can accurately project future top-line growth, expenses, investments, profit rates, and a wide range of risks. The future is not so easy to predict.
Other than waiting for years to see actual results, how can you tell in advance whether not Facebook was smart or dumb to pay $1 billion for Instagram when it had thirteen employees, no revenue and no profit? The $1 billion Facebook paid consisted of $300 million in cash and about 23 million shares of Facebook stock, valued then at $30 per share? At today’s price, those 23 million shares alone are now worth almost $3 billion.
When we assess the likely value of a company, we often use the traditional methodologies and criteria. But on top of them we layer on an approach that I learned while in the Marine Corps.
No Marine would say that because we paid for Guadalcanal with seventy-one hundred American lives (and seventy-eight hundred casualties) plus twenty-nine ships lost, that this price can somehow be applied to the “value” (lives, casualties, ships) World War II leaders should have paid to take Iwo Jima — another heavily fortified Japanese-held island in the Pacific that was about twice the size of Guadalcanal (eight square miles) with three Japanese airfields versus the one on Guadalcanal. These naïve approaches to valuation are how Yahoo! wound up paying $5.7 billion for Broadcast.com (and $3.6 billion for Geocities), and, why Time Warner agreed to a $165 billion deal with AOL.
Marines have a different way to evaluate what a piece of ground is worth. We look at four criteria:
First, how important is winning this battle (transaction) strategically? Does it advance the parties toward their respective long-term strategic future goals? (It’s all about the future.) The more it does so, the more it drives interest in winning —and as the economists will tell you, interest leads to “demand,” which is one of the key drivers of price. Does the other side have to transact? If the transaction isn’t strategically important to either side, it is probably not going to happen – and certainly not at a very high price. But if winning is critical for one side, that’s different. To some extent, this correlates to a simplistic version of supply-and-demand which, after all, should be the ultimate driver of value. But, even supply-and-demand needs context.
Second, Is the timing right for this battle? The US is a master at island hopping – picking the battles they will and will not fight. If the timing isn’t right for both sides, the deal probably isn’t going to happen – unless a highly motivated buyer is willing to pay a huge premium, or a highly motivated seller is willing to sell at a discount.
Third, Is the cost of the contemplated battle both affordable and reasonable? It’s the intersection of affordability and price reasonableness that is important. The US could spend 25,000 American lives to capture Syria – but should we? Google could spend a billion dollars to buy your company – but should it? Google could afford to sell YouTube for a dollar – but should they?
And finally, Is the risk acceptable? The risk of entering into the battle as well as the risk of not entering into it. “Value” can be impacted by a seller’s concerns about their own future, the future value of promises made by the buyer, and
many other factors. It also can be affected by a buyer’s concerns about issues such as customer concentration; weak management; competition; technology; or dependency on key people. But if the object is to achieve the long term strategic mission, there may be times when there is greater risk in not entering into a transaction.
When we differentiate the Marine Corps approach from traditional approaches, we can conclude that the $1 billion that Facebook spent to buy Instagram made total sense. That deal was strategic for both sides; the timing – immediately before Facebook’s IPO (and after Instagram had been approached by others) — could not have been better; the price was both affordable and reasonable for both firms; and, for Facebook, the risks of not acquiring Instagram at that time were significantly higher than the risks of buying the company and later having it fail.
Morris: How about this one: You can’t negotiate if the other side perceives that you are unwilling to walk from the table. Do you have an example?
Marlin: I have many. For example, a few years ago, we had a VC-controlled client that had been negotiating the sale of their company for months with a very qualified buyer before they came to us for help. The offer was all-cash at a fair price by any measure. At the same time, it was clear that the buyer would merge the organizations and fire at least half of my client’s personnel. The VCs were mostly interested in the money, but they were sympathetic to the CEO’s desire to protect his people. The CEO had tried to negotiate, but the buyer said that their offer was “best and final” and would expire in three weeks. Further, the buyer said that if there were any solicitation of other bidders, they would walk from the table. The buyer was using their leverage better than my client. They assumed that the VCs would not risk losing a high all-cash offer.
I told my client that they could not negotiate if the other side perceived that they were unwilling to walk from the table. Otherwise they would just be begging. We knew that if we solicited other bids we might lose the first buyer, but that was a risk we had to take to improve the terms. My client agreed to take the risk. Once we had other bids coming in and the first buyer saw that they might lose the deal, they materially improved the cash portion of their offer. But they put even more emphasis on cost reductions. Fortunately, we had identified another interested bidder, and we were able to use our leverage – including the possibility of sale to the original buyer – to obtain an offer for more money and protections for the employees. That was win-win.
About a year ago we had a similar experience internally, as the lease on our office space was expiring. We were the sole occupant of the top floor of a prestigious New York office tower. It had terraces, great light and views, and it was built to our specifications. We were willing to stay. But the landlord asked for a rent increase that was clearly above market. He may have assumed that we would not walk away. We pushed back. We showed him that rent for comparable spaces was lower but logic did not work. He declined to offer more than a pittance. So we went out and found another great space and used the specter of staying in the original space as leverage to negotiate great terms with managers of the new building. When the first landlord saw that we were willing to walk from the table, he finally got reasonable. But it was too late. We moved to the new space. We love it.
Morris: “Tell The Truth” is one of your nine rules for negotiating. Don’t many bankers lie all the time?
Marlin: We don’t. I’m not saying that you can’t lie to an enemy who is trying to kill you or your friends. This is about negotiating in normal business environments – or in Marine environments when you are negotiating with so-called “friendlies” (such as local villagers). In this context, the Marine definition of lying goes beyond the standard definition of asserting something as fact that you know to be otherwise. It includes making statements – or failing to make statements – with an intent to deceive. It’s an extension of the concept that my word is my bond – with a focus on being honest with those who expect that of you. Reputations are built over time and will outlast the negotiations at hand. A reputation as a liar will eventually catch up to you.
Morris: In your opinion, which of all the material you provide in The Marine Corps Way on Wall Street will be most valuable to those now preparing for a business career or who have only recently embarked on one? Please explain.
Marlin: Many of the principles in the book are aimed at business leaders. For those starting out I would encourage them to be true to their own moral compasses. To live by the maxim of doing the right things, for the right reasons, every time – no excuses. I would tell them to be willing to Take a Stand and not allow themselves to be pushed into taking advantage of the unwary, unsophisticated or weak — and to Take the Long View, especially when making decisions that could have long-term impact. Life is long; and, the rewards for taking the Marine Corps Way will eventually materialize.
Morris: To C-level executives? Please explain.
Marlin: Marlin: “C” level executives set the culture of an organization – it all starts at the top. There is no way that 5,000 junior people at Wells Fargo independently decided to open millions of unauthorized accounts in the names of unsuspecting clients. Culture can encourage – or discourage people who take advantage of the unwary, unsophisticated or the weak. It can reward those who do or it can slam the door hard on such behaviors. Culture comes from the top and it determines whether a firm is totally focused on maximizing short-term profit or tolerates some short-term pain for the longer term good. The people at the top set the tone they determine through their actions if it is tolerable for junior people to speak truth to power – to take a stand. Culture is what allows people in the midst of an organization to negotiate from the high ground – or not. I encourage leaders of all organizations — large and small — to be very mindful of how their actions much more than their words establish the firm’s culture. Their compensation schemes send loud messages and are a critical component – but not the only one. People see who gets promoted or otherwise rewarded – and who doesn’t. They see what happens when someone takes a stand on an ethical matter that costs the firm short-term gain. They see what happens when someone is caught taking advantage of a client’s trust. I encourage “C” level executives to embrace all 11 principles in my book; to encourage teams over individuals, to resist valuing people solely based on their profit contribution or their net worth; to focus first and foremost on meeting the long term goals of clients rather than on maximizing short term profits, and to ensure that their actions are in alignment with these concepts.
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Here is a direct link to Part 1.
Ken invites you to check out the resources at these websites:
Slide show about the book link
Amazon reviews link
Forbes review link
Link to Ken’s perspectives in an article in the New York Times
Link to Maria Bartiromo’s interview of Ken on Fox
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This article originally appeared on the Bobmorris.biz on October 18th, 2016 and was written by Bob Morris.
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