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insight FINANCE

What is Your
Financial Signature?
Have you ever seen a talented employ- MBA a mile up the river from MIT, we referred
ee flounder because their strengths were not to the Sloan crowd as the “numbers jocks,”
properly matched to the job requirements? but surprisingly the article does not contain
It happens all the time — a great salesperson any quantitative data to support his theory.
is promoted to sales manager and turns out However, what Prince says makes sense. He
About the Author: Michael Jacobs is presi- to be a lousy manager of people, for exam- concludes that CEOs typically have a “finan-
dent of Jacobs Capital, an M&A and busi-
ple. When it comes to the CEO, the risks of a cial signature” that indicates their capacity to
ness valuation advisory firm based in
Atlanta. He served as director of corporate mismatch between individual skills and cor- create shareholder value in two dimensions:
finance policy at the U.S. Treasury porate needs are much greater, so it is Adding value to products or services
Department from 1989 to 1991, and he is imperative to pair the strengths of the indi- (characterized by high gross margins) and
the author of Short-Term America and
Break The Wall Street Rule. He can be vidual with the challenges facing the com- Utilizing resources efficiently (charac-
reached at mjacobs@jacobscapital.net. pany given the competitive dynamics of its terized by low expense ratios).
industry and the stage of its life cycle. Based on the results of a series of tests,
Ted Prince, founder of the Perth Leader- Prince categorizes CEOs as high, medium or
ship Institute in Gainesville, Fla., has just low on the above two dimensions. The four
released a new evaluation methodology that extremes are assigned monikers that char-
purports to be able to evaluate the financial acterize their behavior patterns.
wiring of CEOs and determine if their The “Venture Capitalist” pursues high
approaches to creating value are suited for margins with high investment. This is a high
the companies they run. Prince published his risk/high return approach to running a busi-
findings in the spring issue of the MIT Sloan ness. When the strategy succeeds, the pay-
Management Review. When I was getting my off is huge. However, in more cases than not,
CEOs typically have a “financial signature” that indicates
their capacity to create shareholder value.
this approach results in a washout. This is Discounters, on the other hand, cut costs to makes money off of commodity burgers
the CEO signature that a company seeking the bone. They recognize that the price for and wings by differentiating its sales force.
a breakthrough product, service or tech- their wares is essentially fixed, and the only The final category, the “Buccaneers,”
nology would want. way to make more money than their com- is comprised of CEOs who target very high
Price cites Steve Jobs as a classic petitors is to keep costs as low as possible. returns by providing high-margin products
Venture Capitalist. Jobs, who founded Certainly the prototypical “Discounter” or services with minimal expenses. To
Apple Computers, is also a founder of NeXT would be Sam Walton, whom Prince fails to accomplish this difficult feat, Buccaneers
Software and Pixar Animation. These start- mention in the article. Instead, he cites search for innovative approaches or busi-
ups were bold attempts to revolutionize Reginald Lewis, who acquired TLC Beatrice ness models. To quote Prince, “They want
their respective markets. Pixar has become and McCall Patterns through LBOs. By tak- spectacular earnings, and they want them
the leader in film animation despite mas- ing on significant debt, these companies quickly.” The Buccaneers do not tend to
sive losses early on. NeXT also spent were forced to trim fat to remain viable. The create new technologies; rather, they
aggressively but has failed to produce the debt imposed a disciplined culture in which exploit existing technologies to pioneer a
breakthrough in computing that Jobs was executives were forced to preserve their new approach in an existing business.
after. Often found in technology compa- jobs by squeezing greater cash flows out of Prince’s example of a Buccaneer is the
nies, Venture Capitalists are typically no-growth or declining businesses. When founder of eBay. There is nothing revolu-
visionary, patient individuals with a high the debt was paid down, huge equity value tionary about eBay’s technology. Rather,
tolerance for risk. My father was an engi- had been created, and Lewis became one of the company built a business model using
neer who is so risk-averse that he and my the wealthiest individuals in the U.S. with- available technology to accomplish what
mother are featured in the ads for their out ever creating or running a company. classified ads never could.
retirement community because they are the The “Mercantilist” can effectively run a Without taking any of Prince’s tests, I
youngest people to ever buy there, so I low-margin business with high fixed costs. know this is the category that I would fit
could never fit into this category. Two sectors cited by Prince as fitting this into. My firm uses unique marketing
The opposite extreme is the “Dis- mold are consumer electronics and person- alliances and available technology in a
counters,” who try to make hay with low- al computers. The products or services way none of our competitors do to effi-
margin businesses by meticulously manag- themselves are somewhat commoditized, ciently accomplish routine tasks, so we are
ing expenses. They don’t attempt to add but a company can be highly successful by able to make more money than our com-
value to their product or service, but focus building a superior distribution system petition. Creativity and frugality rarely
on how to deliver that product or service (Dell); a trendier brand (Apple); more come in the same package. While being
with the least amount of resources. appealing or convenient physical locations tight comes naturally to me, it took years
Discounters thrived in the 1980s era of (Bank of America) or a more professional of observing innovative clients to learn
leverage buyouts (LBOs), when takeover sales or service staff (I would like to cite an how to reinvent business processes.
artists raided companies with commodity airline here, but none comes to mind). The Regardless of your personal profile,
products and high overheads. The leaders of above examples are mine, as Prince fails to you can succeed in creating shareholder
commodity businesses are often in denial cite a single successful illustration of this value as long as your “financial signature”
that their product truly is a commodity, and model in his article. My local nominee for a is matched to the needs of the company or
they maintain unnecessary overhead. prototypical Mercantilist is Hooters, which business unit you are running. c

Reprinted with permission from Catalyst magazine, July 2005.