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I’ve written previously about the private equity bubble/boom (depending on which side of the fence you are on) when discussing the IPO of the Blackstone Group (see coverage here and here). It has become a bigger discussion now that Blackstone has IPOed and is trading below the IPO price of $31 (even if it is up 2.3% today at time of writing). Well, look for that conversation to continue as Kohlberg Kravis Roberts, the granddaddy of Private Equity groups, has filed for an IPO.

KKR (as it is affectionately known) burst onto the scene in the 80s, most famously taking over RJR Nabisco in the largest leveraged buyout in history. It was so big that the record held firm until this private equity boom of the last couple of years. The takeover was documented in the book and HBO movie “Barbarians at the Gate” (I highly recommend at least watching the film). KKR is largely acknowledged as the company that perfected the leveraged buyout, where a purchaser forces the acquired to take on huge amounts of debt to finance the acquisition of itself.

That debt has been cheap during most of this decade as interest rates dropped to record lows after 9/11 and have been slow to rebound. However, the past few months have seen a marked rise in long term interest rates as the economy slows and the subprime market, which was also fueled by cheap and easy money, implodes.

Blackstone Group and another private equity firm, Fortress Group, went public to cash out for the founders of the companies who have enjoyed annualized returns over 20% for the past two decades. Those returns have caused everyone that can qualify to invest in private equity to throw as much money as the funds are willing to take in at the funds in hopes of replicating that return for the next two decades.

However, as anyone that has invested in previous hot mutual funds (such as Fidelity Magellan) knows, the more money these companies have to play with the lower returns will likely be. Essentially, this is because the low hanging fruit has been picked and the companies will have to accept lower returns in order to put the gigantic amounts of capital to productive use. While this would shield the funds from some of the blow from higher interest rates, the business plan for any private equity acquisition is to put in as little capital as possible and finance the rest with debt. Why? The business model is built on using debt, which is a cheaper source of capital as long as the interest rate is lower than the expected return on capital invested. As rates go up and the economy slows the cash flow from the acquired company will be able to cover less and less debt and the Private Equity groups will have to either put in more capital (at the higher cost) or cover the debt themselves (lowering returns).

Unlike the recent IPO of Blackstone, KKR will not be cashing out but rather putting the $1.25 billion from the IPO towards expanding the business.

I argued (and still do) that IPOs of Private Equity groups are a bad sign for the industry. These guys are pros at making money and knowing when to sell. Why don’t we believe they would do the same for themselves? Like I said with Blackstone, any time these guys are selling I don’t want to be on the other end. The more they sell, the more I’m convinced the end is nigh.

I’ve written before about Conde Nast’s Portfolio magazine, a high end glossy for business types, and I can’t say enough about the excellence of their blog coverage. An offbeat item posted today on the Tech Observer blog goes way beyond business and gets down to real life advice to tell students as they graduate from high school. While all of it is good advice, I’m particularly struck with #1, #3, and #4.

While I had excellent grades in high school and was National Honors Society and all that, once I hit college none of that really mattered anymore. I also got excellent grades in college, but once I got my first job it didn’t matter again. Grades are a way to open doors for college and the first job when the person doing the selecting has little else to go on. Once you get there, you have to prove yourself with your skills and your knowledge. Once I was looking for my second job they never asked what my grades were in college. They asked what I knew.

While I remember various items from Chemistry and a little bit of Calculus, I’ve never used either. I have used Algebra, but I can’t say I’ve ever seen a use for knowing the derivative of a function.

Oh, and I largely stopped finding new music after high school. Even with my iPod, I purchase about three albums per year (though one was Lily Allen, that I’m still listening to). You won’t be cool anymore kids, sorry.

Any other tips for graduating seniors?

Several months ago I detailed the issues that our local electric utility, Ameren, was having with keeping the lights on. In the article, I stated that the Missouri Public Services Commission was looking at a rate increase that Ameren was proposing in the neighborhood of $360 million. In it, I detailed how the PSC has traditionally let the companies they regulate run roughshod over them because the companies are free with the political donations and the PSC Governors are appointed by the Governor.

I was shocked when the PSC staff (the non-appointees) actually said that Ameren should have its rates cut because they were overcharging customers on the Missouri side of the river. While it’s nothing like how our Illinois friends are getting gouged by Ameren, the PSC felt that rates were too high and that Ameren should lower its rates. At the time, I said “[i]t will be interesting to see if the PSC makes a big public display and then quietly approves the rate increases”. Well, guess what?

Well, you probably don’t need to guess. While the PSC staffers pointedly criticized Ameren for three major power outages and a hilltop reservoir that came crashing down on an unsuspecting state park, they approved a rate increase for Ameren. It wasn’t what Ameren was wanting, but it was still an increase. Missouri’s crusading Attorney General (who announced he was running for Governor in 2008 in 2005) has demanded that the PSC follow the recommendation of the non-political staff. Even the Governor (who is also running for Governor if he isn’t taken by Mitt Romney) has blasted the decision telling the PSC not to raise rates until Ameren can keep the lights on.

While I think that the Governor’s objections are more political pandering than anything else, I won’t expect the rate increase to be reversed anytime soon. A 3% increase isn’t the end of the world when the rates have been steady for 20 years, but it’s the principle of the matter. An electric company that can’t keep the lights shouldn’t get rewarded.

Senator Herb Kohl (D-WI) has asked the Federal Communications Commission to block the merger of XM and Sirius (see my previous merger coverage here, here, here, here, and here). Senator Kohl may have some sway with the decision because he is the Chairman of the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights and would have the oversight of this merger and others.  

Senator Kohl immediately convened hearings on the merger, where Mel Karmazin attempted his song and dance that less competition actually meant more competition. In his letter, Senator Kohl was unconvinced that satellite radio should be compared to all forms of music distribution, including terrestrial radio and iPods. He was also not convinced that any of the emerging technologies, such as wirelessly distributed internet radio, would be online in the 2 year lookout period allowed under anti-trust law.

He also rejected calls for price caps and other regulations of the industry because he does not want the Federal government to be in the business of regulating the satellite radio industry intensively for years to come (don’t they already?).

The arguments that Senator Kohl makes will be tough to beat. He cites the Clayton Act, which strictly forbids combinations that substantially lower competition or create monopolies. Because the merger of the two companies would create a monopoly in satellite radio, the entire argument for XM-Sirius is that satellite radio should be put into the larger world of radio and iPods. Senator Kohl, a Democrat, isn’t buying it which does not bode well at the 5 person FCC. The FCC appears to be split on the issue and a little nudging from Congress could be all that they need to deny the deal.

This letter hasn’t gotten a whole lot of press, but it could be the first nail in the coffin of this deal.

In the April 30th issue, BusinessWeek ran a cover story on Wal-Mart’s midlife crisis. The story pointed out that Wal-Mart’s same store sales were only up 1.9% in 2006, not only the worst in its history but also less than half of competitors like Target and Costco. The main problem is that the once uber-confident company wants to be like Target and is going through an identity crisis.

Emblematic is the well documented bust that Wal-Mart has endured with getting into “cheap-chic” clothing, the type you would typically see at Target. This new market has befuddled the company that is used to simply putting the lowest cost on something and waiting for the market to come to them. While this is largely seen as the problem for Wal-Mart, I think it’s actually just the symptom.

For full disclosure, I don’t shop at Wal-Mart. I abhor their labor practices and find that the stores are more madness than I want to deal with (more on this below). We did shop at Sam’s Club when the baby was born (have you seen formula prices?!?!!?) but switched to Costco as soon as one opened up.

I think the real problem is Wal-Mart’s crisis of confidence and its move upscale. For the first 40 years of the company the business plan was simple. Place giant stores in rural areas, kill off the local businesses with lower prices, and become the only game in town. People had to shop at Wal-Mart not only because it was cheap but often because Wal-Mart was it. The only place to buy groceries. The only place to buy clothes. The only place to buy medicine. etc…

Now, Wal-Mart has basically filled out the rural areas that can support their stores. The exurban and suburban areas are largely maxed out as well. They have to move into the more urban areas in order to keep growing. And in these areas, Wal-Mart isn’t the only game in town.

A reader letter from John Moody of Hudson, OH in the May 21st issue of the magazine summed up the situation perfectly:

Customers may be attracted to a store by low prices but will remain loyal only if the store can meet the customer’s needs.

Therein lies Wal-Marts problem. In the St. Louis area they are starting to build Supercenters, but the vast majority of stores are older. These stores are dirty, confining, and crowded. Even if I was to want to shop at Wal-Mart I couldn’t imagine going into one of their local stores on a Saturday afternoon. It’s total chaos. Lines are long, aisles are narrow, and people are pushy. It’s an altogether unpleasant experience.

Wal-Mart isn’t used to dealing with this. If Wal-Mart is the only game in town you shrug your shoulders and barrel through the front door. But I don’t have to shop at Wal-Mart for reasons of geography or economics. Wal-Mart has to make me want to shop there.

As part of their push to get more upscale shoppers, they’ve added lines like the cheap chic clothing lines. Wal-Mart is not used to being in the fashion business. The clothes they sold previously were traditional clothes that didn’t go in and out of style. Now, they have to manage their inventory on a quarterly basis and that goes against the “buy as much as possible at one time to save money” mentality that has been ingrained in every Wal-Mart executive from Sam on down.

Will they learn how to sell to urban professionals who don’t need them? Will they learn how to manage fashions like toothpaste? I wouldn’t bet against them. But I certainly won’t be switching from Target anytime soon.

I’ll admit it. Networking is one of the single hardest things for me to do. I am extremely shy and don’t like to talk to people I don’t know (it probably borders on fear). I have several nervous habits to boot, so I come off as “that weird guy in the back of the room” as one of my college acquaintances called me before knowing me.

Yahoo!’s Personal Finance portal has an article from Forbes on how to network without speaking. It has several excellent tips for getting off on the right foot (provided you don’t then stick it in your mouth).

1. Dress professionally. There’s a reason the basic business suit hasn’t changed in a hundred years.
2. Watch hand gestures. Looking at your watch and running your hands through your hair are telltale signs you are nervous. Keep them on the table if you are sitting and use them for emphasis whether sitting or standing.
3. Relatedly, practice that handshake. A good handshake doesn’t necessarily mean crushing the other person’s hand. A nice, tight handshake will always be more appreciated than a broken hand.
4. Eye Contact. Always look people in the eyes and keep looking them in the eyes (US only). This is one that I have a supreme problem with naturally and have to override my circuitry constantly in order to get the necessary eye contact.
5. Look authentic. Actively listen and look like you are. If I don’t watch it, I tend to wonder off similar to JD on Scrubs (though not that bad) and this is part of the eye contact problem.

A lot of these are pretty common sense, but it’s still important to remember and practice all of the ideas. It will complement what is coming out of your mouth and will make people remember you. Which, after all, is the whole purpose of networking.

Today is the day that millions of forwarded messages told you not to buy gas. The message tells you that the oil companies have artificially inflated prices and that they’ll lose so much money today they’ll drop prices to <insert price here>. It even worked in 1997!

Of course, the e-mail is crap. It’s been circulating since 1999 according to Snopes. As the date approaches, more and more people forward the message around and then promptly forget it. Hardly anyone takes them seriously and even if they did, it would never work.

See, even if no one bought gas for one day they would have to buy it eventually. All the gas that would be sold today will be sold tomorrow. The only thing that would happen is that there would be longer lines for gas tomorrow. There are two ways to lower gas prices: find more oil or use less gas. If you’re not doing one of those two things you can’t change gas prices.

If you get the message delete it immediately. Actually, that’s a good theory for any forwards that you get. You can check Snopes but 99.99% of them are fake so just delete them and move on.

Oh, and buy as much gas as you want today.

A couple of weeks ago, I covered the new HP printer that HP won’t sell because it fundamentally alters the economics of the printing industry. In the article I implored HP to get ahead of the change in the razor and blade model that has been oh so profitable for printers for the last two decades. I pointed to Kodak’s attempts at breaking that model.

Portfolio, the new business mag from Conde Nast (coverage here), has a blog entry on another company aiming to take down HP and Lexmark. At the end of March an Austrialian R&D company raised the curtain on a new company called Memjet. Per the Press Release (pdf link), Memjet claims that it’s technology can produce full page color prints with inkjet quality at the rate of 60 pages per minute, or 90 pages per minute if you choose draft mode. The printers will retail for under $300 and will “help eliminate the price penalty for printing color”.

Memjet is not a manufacturer, so it will be up to manufacturers to pick up the technology before it will come to market. I can’t imagine it will take too long for this to come to market, if the technology really works.

And therein lies the rub. How does the technology hold up to not printing for a month? Do the ink nozzles clog, rending the cheap tank useless? Will it have the capacity to replace high-usage business printers that print thousands of pages per day?

We can hope that this technology will lead to a breakthrough in printers that will finally break the razor and blade method utilized by the current crop of printers, but it’s hard for a company to break through when there are such large and established players. Will HP, Lexmark, or Canon pick up these printers and disturb their very profitable business model? Will a new company be able to convince consumers that paying more for a printer upfront is better than paying nothing for the printer and then getting gouged on ink?

There’s a lot of hope but also a lot of questions.

Engadget has a post today about a new HP Color Laserjet printer that is so revolutionary that no one can buy it. The printer is the first output (pun intended) of a $1.4 billion bet on next generation printer technology. The problem that HP has found is that the print technology is too good.

So how can a technology be held back because it is too good? The Engadget articles says that HP can’t figure out how to make money on the printer because it completely throws off the economics of the printing industry. The printer industry follows the old razor blade theory of pricing, whereby they give the printer away and make all their money back on the ink that you have to buy to run the printer.

HP’s new printer is so frugal on the ink that HP can’t mark it up enough to get a decent return on investment. So, they are simply renting the machines and providing the ink to high volume customers. HP’s basically restricting a revolutionary product in order to preserve their business model.

The business model may be under attack anyway. In February, Kodak announced that it was introducing a line of printers whose whole selling point was cheap refills. Walgreens has begun refilling ink cartridges en masse attempting to take over an industry that has been threatened a number of times by the printer companies backhanded tactics.

It’s funny that a technology company is fighting so hard to preserve a pre-digital age business model. We’ve seen HP fight with media firms that attempt to restrict their content to protect their business models despite customers telling them over and over again that the business model is dead and they need to adapt. Hopefully, HP will listen to customers and allow a technology that saves customers money to thrive. It would be a huge competitive advantage for HP to tell customers that they can get inkjet quality prints with laser quickness and cost.

But right now they can’t see the forest from the trees and they want to protect the business model that they are comfortable with rather than do something to rock the boat. The boat is going to be rocked and HP needs to be the one rocking rather than trying to hold on. They are the 800 lb. gorilla of the industry and they have the most to lose (it’s what is keeping HP afloat at this point). But first they have to recognize no industry leader stays that way forever without working for it.

In the midst of all of the “print is dead” stories that the media harps on about (”look at our jobs disappear!”), Conde Nast has bucked the trend and launched a high-end business magazine called Portfolio. Announced 18 months ago with a launch price tag nearing $100 million, the new magazine aims to be the Vanity Fair for the business set.

The website is excellent and contains every article in the print version plus exclusive online content. The design is crisp and definitely appealing. Though, I don’t understand the “beta” tag unless it is some sort of dig at websites that stay in beta forever *cough*Google*cough*. Conde Nast plans to fully leverage their other titles for cross-promotional opportunities (best places to stay for business travel, etc…).

The articles from the initial issue include a close look at Ford family and Tom Wolfe taking on the new Masters of the Universe (a take on his original article twenty years ago).

There’s no doubt who Conde Nast is aiming for with the new glossy. Forbes and Time Warner’s Fortune magazine are clearly in the crosshairs. Other business magazines like BusinessWeek will probably suffer less because they are more news and less story driven than Forbes and Fortune.

Right now, you can subscribe to Portfolio for two years for a buck an issue. I plan on getting a copy of the initial issue to check it out.