From: Zhang, Yangkun (Yangkun.Zhang@FMR.COM)
Date: Mon Oct 16 2000 - 08:08:55 PDT
Q&A
Finance prince Herb Allen talks to Herring Communications CEO Anthony B.
Perkins.
By Red <mailto:edit@redherring.com> Herring
From the October 1998 issue
http://www.redherring.com/mag/issue59/qa.html
<http://www.redherring.com/mag/issue59/qa.html>
For media moguls, there is no greater friend than Herb Allen. The CEO of
Allen & Company, a small New York investment bank, is undisputed royalty in
the entertainment industry, having brokered almost every major deal in the
past few years, including the Disney-Capital Cities/ABC merger,
Westinghouse's $5.4 million acquisition of CBS, and Seagram's $5.7 billion
purchase of 80 percent of MCA from Matsushita.
Mr. Allen is notoriously secretive, especially where the press is concerned.
He prefers that his investment strategy speak for itself. His success in
letting it do so is what draws luminaries like Bill Gates, Andy Grove,
Michael Eisner, John Malone, and Warren Buffett (to name but a few) to Mr.
Allen's Sun Valley, Idaho, retreat each year.
Recently Mr. Allen talked to Red Herring cofounder and CEO Tony Perkins--the
first time in years that he had spoken on the record with a reporter for any
publication--about Allen & Company's investment strategies, his political
preferences, and the roots and sustainability of the United States' current
economic boom.
How would you describe the forces driving the current economic growth in the
United States?
What has driven the bull market is the change to lower interest
rates--nothing more and nothing less. The flow of funds out of bonds and
into stocks in roughly the last seven years was the engine that began
growth. Today interest rates remain low, and the flow of capital into
equities continues. But I cannot predict how long it will last.
What do you think caused interest rates to drop so low?
If I were to pick one event, I would say it was the defeat of President
Clinton's plan to restructure the health care industry in this country. That
the plan failed saved Mr. Clinton's rear end and saved all of ours at the
same time. It was a watershed moment that signaled the end of big
government.
And it allowed President Clinton to balance the budget.
The Clinton health plan would have thrown the budget into a massive deficit.
The Federal Reserve would have had to raise interest rates to find the
billions necessary to pay for the flawed program. Of course, the political
irony of the health plan is that it has been totally forgotten, enabling Mr.
Clinton to take credit for the turnaround in the economy.
But the balanced budget that we have today that is so exciting to so many
people is not truly balanced. The government doesn't account for all its
expenditures at cost. If you threw in all the off-balance-sheet items, the
budget is out of whack. If you took Social Security [tax revenues] out, then
it would be way out of whack. The balanced budget is a myth.
Did the collapse of communism and the spread of the free market also have a
positive effect on the American economy?
The opening up of the eastern front and the failure of communism is, of
course, a factor in the boom. That was inevitable. I wouldn't give anybody
credit for that. Communism fell apart because it was structurally flawed,
not because Ronald Reagan thought up Star Wars.
And American companies restructured during this period as well.
Yes. The streamlining and tightening up of American business over the past
ten years has paid off. There has also been a significant change--sometimes
overdone--in executive compensation, which is now often tied to earnings per
share and stock performance. That tends to make people work harder and try
to be a little more accurate.
Is government just too big?
My disappointment with government is that it gets all this money to spend,
and it spends it inefficiently. My problem with government is not that it is
big--270 million people need a big government. Ten percent of our population
lives under the poverty line. We have to help them out. Somebody has to
build the highways and other public works. But the size of government
agencies, departments, and staffs has grown so great that you no longer can
get anything done. Everything is choked by an inadequate administration and
an unyielding bureaucracy. We ought to go in with an ax and take one-third
of all the jobs away. The unions might not like it, but most everyone else
would.
I understand you voted for Clinton.
Once. Because a second kick in the head by a mule is not instructive. He has
been a very ineffective president both domestically and in foreign policy.
Everything good that has happened--with one or two exceptions--has happened
around him, not because of him.
Is there a "new economy" that justifies higher price/earnings ratios?
I think sometimes people confuse sections of a business cycle with a new
paradigm. We are in a cycle, probably at the tail-end of a bull market. To
take that piece of the cycle and turn it into a standard for a new society
is dangerous.
Allen & Company makes a point of employing no security analysts. Is that
because you think they inflate stock values?
Wall Street analysts are usually fairly weak historians and very poor
prognosticators. They don't buy what they're recommending, so they
immediately have a conflict of interest with their customers.
Analysts today are used primarily to get investment banking business for the
big firms. So if you're using the analyst to get the investment banking
business, how trustworthy is his opinion going to be on the other side when
he's selling the stock to some poor jerk? After the next sustained market
break, analysts will be laid off wholesale.
Unlike other investment bankers, you never charge a set fee when you help
put together entertainment megadeals. Why is that?
How can you set a fee before you add any value to the transaction? Most of
what Wall Street does in mergers and acquisitions is legal protection, not
value-add. But when you come up with a proprietary idea, convince someone to
go along with it, and create a good deal for both sides, you add enormous
value and, as a result, deserve to be significantly rewarded.
Can you give an example of a deal in which your expertise made the
difference?
We added value to Coca-Cola when we sold them a stake in Columbia Pictures,
and added value again when we sold it for them. Those deals were completely
in our hands. The return on Coca-Cola's investment today is equivalent to
what they paid for Columbia Pictures. Sometimes we add value by putting
money into a deal when no one else will. Years ago, MCA was bankrupt. We put
up the money to take them out of bankruptcy. That added value.
What goes on at your Sun Valley conference?
We invite 40 institutional financial buyers to the ranch, and we stage
discussions that would be interesting to them or relevant to the companies
in which they invest. We hope to come up with themes that are a little
offbeat but topical. This year there will be a panel on management issues
moderated by Don Keough, Allen & Company's chairman and a former president
of Coca-Cola. Panelists will include Gerry Levin, Andy Grove, Rupert
Murdoch, and Barry Diller. We'll have a panel on race and business,
moderated by Tom Brokaw, with panelists like Dick Parsons of Time Warner,
Bob Johnson of Black Entertainment Television, and Don Graham of the
Washington Post Company. We have invited companies like Microsoft--we let
Bill Gates talk about whatever he wants--Nokia, America Online, Disney,
ComCast, and Loral, which I assume will talk about satellites and politics.
It's also a family conference. Everyone brings their children and spends
half the time doing family things. It's a bit of a free-for-all, where
people enjoy being with colleagues and friends. Deep thinking is not the
primary motive for coming but a bonus of the whole experience.
_____
Software program
The Fox Television Network is preparing a midseason drama about employees of
a fledgling software company in Silicon Valley who are looking for the
application that will make their fortunes. The series, called Killer App, is
being written by Doonesbury creator Garry Trudeau and directed by Hollywood
veteran Robert Altman. No word yet on how the creators will wring dramatic
tension from a story about introverts who sleep under their desks and spend
all their waking hours pounding on their keyboards.
_____
Just deserters
On July 13, BridgePath, an online recruiting firm, announced that in the
three days following news of the merger between Bank of America and
NationsBank, roughly 10 percent of BancAmerica Robertson Stephens's
employees signed up for its employment service.
(c)1997-2000 Red Herring Communications. All Rights Reserved.
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