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Options for the Market Basket Board of Directors - John Davis, Harvard Business School

Jul 31, 2014|

Options for the Market Basket Board of Directors - John Davis, Harvard Business School by Barry and Kim

Transcript - Not for consumer use. Robot overlords only. Will not be accurate.

Well you know what I'm not an expert on this topic John Davis is he's the faculty chair and police in business program at Harvard Business School he joins us today. Hi John how -- Ripper you can you help us understand what the various options are at this point it's two weeks into the disruption in service that market basket in the strike if you will -- what are the potential outcomes for market basket two weeks into it. Well you know I agree with these previous person says that the you know this has been a long dragged down affair. Customers are getting probably set up. The suppliers are strong now the the reputation of the company his boat. Then you have been. Lionized in some ways because of employees world he which can help. Bring customers back that there's only so long you can go without serving people before people really start wondering away. I think it's hard to say as a -- I don't know what -- much for any of -- knows the real financial strength of the company. To be able to weather this kind. Disruption and so it's it's hard to -- from the outside. How long they can really go from a market point of view marketing point of you this is going to be pretty. Straining on the the viability of the company would now for the the options he. You know everybody's watching the -- and we're we're. It is their one of two things are going on either the partner as. The -- -- side is. Waiting for a better offer from partner he. Panelists -- doesn't war they're really looking for outside. Wire and my my guess is the latter that they're looking for an outside buyer. And it's not clear many of the communications. So far and the companies that that one has appeared or that there's a volatile. What would an offer look like because I think I agree with you that the the outside buyer strategy. Is that is the way to go because they're gonna come in and in just redo everything and on the ones I'm hearing about our cerberus and all those of the two that have the money. The cerberus in particular is is taking a similar strategy with their shots franchise. So if they came in and took it over what was the company look like when they're done. I I don't know. I don't know because I don't know all if they would keep the current positioning of the company. Or if they would know these locations and do another kind of store try I don't know. Is there any way it in what with the cost of money RDT clearly would like to buy the company. I I. Don't know that he can afford it you know and I look at its eight day the profit numbers I've heard is that it's approximately 800 million dollars a year on average over the last 1015 years. So when you look at that you say okay it's a hundred million dollar positive cash flow. And an asset that's worth three and a half billion dollars I don't know that anybody's gonna loaned him one point seven billion to buy this company what do you think. You know I think it's -- stretch. I really think you could you spot. I'm not privy to his bit. And and I think the last one is you don't know how he. Really expecting to get a -- even with the bit you're not exactly sure. So but I I agree with you I think -- -- it would be definitely a stretch but look you know I think that the business model is. It is good relative to. Other group restore company. Let us go active like why do you think it's a good business model the return on equity easily 3%. You know I think. It's a good business model if you really wanna be in this business. And and I think there's one just one of the issues that the family has wrestled over. Is what to do with the real estate on which the first restores our standing. And the the controlling. Management group wants to keep obviously the -- restorers company owned and -- The other side of the families that are at press time spent about -- but of course you know the worry is the grandson he on the stores and Applebee's. It'll raise prices and then -- organized into the business model I think that I mean it's a fundamental question about how do you want to run this business. Well Libya ASCII ET US have studied. The the purchase of Jordan furniture from that by Warren Buffett ranked. 3% -- You know -- and work. And and that's true at this comes down to write you know war when these private equity guys come in and you know the better not eat hot but these are -- kids that you had in school -- right. In a private equity guy comes in he's looking for fourteen to 18% return on this money is an. And I and I don't know what. I know how they yeah I think you do the job right don't like I talked to a PE firm and they said if I were to if they were to buy it. It would return everything back. To the way it was for six months and then they would very aggressively. Cut expenses meaning salaries and pensions and benefits right and they would gradually raise prices. And that's how they would get the return at three -- -- the they're the real crux of the issue here John I think is that it's a 3% return on equity and their competing. In -- in twelve to 14% world. You know in my reading it wrong. Nor I think you you've got the number. Number I wish I was wrong. The guy like for the employees say right I I really do wish I was wrong. We know. I think that many families there's. Their own Enron. Business. Are in it. For much more than in the return and the return that they're looking at. Here are reasonable. National returns you know different clothes. And good appreciation. Of value. But even you know you're if your family your intending to hold the business. It even the be appreciated value wanna keep -- modest level because you're gonna pass -- and state taxes means that. You that you wanted to have a pretty low. Transfer. Price that you don't get hit with a lot of the statement. Right you wanna take as many discounts as you can for loss of control and lots of marketability here and use. All carries LLC is all right. -- -- not interested in and it. And now having a big growth and value. That the IRS. -- bigger picture which you are interested in growing the value and passing it around for different reasons and and I think -- the you know very typical. Prototypical. Struggle between. Part of the Stanley is that is that as an investment. And part of the family that see -- as stewards. John we we -- going into a break but would you mind staying with -- -- we've got a couple more questions for you and some of our text audience would love to ask a couple questions if that's okay. Yeah of course there -- that John Davis faculty chair harbored joining us on the whole subject to market basket. Text us your questions 68680. You're listening to the financial exchange with Barry Armstrong and can care. Yeah. This is the financial exchange on the financial exchange radio network. -- Follow -- on Twitter at Barry G Armstrong its Barry Armstrong. -- here on the financial listings radio network. I forgot to put out our first trip -- question of the day every day weekly tribute here. In today's trivia related to the New England Patriots will begin playing the. -- before you know how many years did Steve Grogan. Played for the New England Patriots 68680 is our text number you can send us your answer there and you have a chance to win a prize. -- we are getting inundated yes that text message via our Twitter questions comments. On this is still a huge story in people. And yet people are just fascinated not feels like you know this all happening behind closed doors so we're now it's all just about speculation until we hear something speculation in math. Right. Speculation -- math and I know you've got some questions for John Davis he's from the Harvard Business School he's an expert on this topic. -- -- -- it it would have -- done it again thanks so much for joining us today word or happy could be -- let me let me ask you we've been talking about options the options of some kind of combined. Party he an employee owned business. Yeah you know I think that that's another that's another option here. And it's certainly would. It seems to fit with the the philosophy. Of the partner he thought that the family. You know highly engaging employees then they certainly feel whole lot of what is called psychological ownership of the company. They've demonstrated that in the last couple weeks so I think that that is actually. A good a good option here. -- it might be good option but again it comes down to where they get the money right. Yeah the abilities -- the employees the average wage of these in places probably 3040000 bucks a year fifty many. And and that's something that I can't comment on. But I think that the I agree. I mean all of these come down to. You know but he gets the money. You know I think -- that. Don't monopoly party here and what they've got a very different idea popped out to. Management company. Mean that there would be. Coming in and installing other management and trying to convince the employees to. You know trust them. With their new business model etc. That may not go so recently. I mean you gotta you would have probably a lot of disaffection. On the employee side to truly overcome. And to build trust the -- Ever that are you know over over next year you replace. The employee group in -- You know installed new management to Federer Federer but that's easier said than done. When you look at you know when when. Warren Buffett bought Jordan's. He kept well I can't remember which. Elliott a camera one of them. Employed and he still there he still don't run out of a threat running the deal that was a critical component. Whoever buys this now they've -- could be conceivably. Right so if if you've had a spark group a private equity investors they might say OK Marty you're going to be our guy. But here here the rules -- here's here's what we're going to do we're gonna raise prices and reduce expenses. 82 in order to make this thing work financially. RDT would stay in that scenario. I don't know I I really don't I think there's. Some families are. Very focused on having control of whatever they've gone right. And and I don't know the the party movement dual side and and their views on that other families. Are willing to take an outside investment. Even a controlling stake in their company. And continue to run it because what their interest dividends to run it for the long term. And it could capital -- allowed you to do that you know the Thursday rowing -- the small. But there -- -- growing group. Private equity investors. Who bet on good families. And therein it for the long term and and by the way they they don't. But this is not just this is not as am I think this is an -- I think that if you split the Stanley and the united ownership based. On the party besides that the family -- Then. It seemed that I -- from from an outsider point dispute that that would be stable long term. Quality oriented management. Ownership group. And betting on that side of the family to run this thing purple long term. And private equity that investors are some. Are getting on board and saying betting on -- gambling impairment men -- management model. Even if it doesn't produce the typical -- he return. Of 15%. You know at least 50% return. Started but. You know. They often he did in the DP group bigamy and they can -- one out of five years and that usually means that in year three if it's Turkey amid the noise does. And that they push through big big destructive changes. In the first two years and that's hard to absorb and any company. But also the in a family does. That typically prefer gophers persistent. Ongoing change as opposed you know and innovation as opposed the disruptive change. It's particularly hard and so that the traditional PE model. Does that work very well on average. Outfitters is this growing. He investors that. And if -- weren't offered by the way it is in the group yes he is saying well we just -- good return. Over a long period of time that's better. Right because he'll say if a guy like Warren Buffett will say with a -- states canoe appreciated 3% Lugar. I'm gonna make 7% and were Buffett wouldn't take three I'll get a -- EU knows wealth idea Warren's gonna -- at least seven to 9%. But you can do that without totally dismantle break up right. Bet that is right and and I look I think war and I think the PU world relief work. Expectations about what realistic returns are in business. I mean if in my view you're getting 6% 7% real return. Our year -- year like dirt hitting the cover off the ball. Yeah you are in and in remember private equity firms today. The error they're working on behalf of their share folders and hedge funds and and that's how they get hit to get more money -- -- -- they they kill it. Right they they direct the they -- ago. -- the nature of the business John let me ask you one more question that -- allowed to go but one of our one of our techsters asked this and what would you see the viability of the possibility of Arthur T going in to just buying out shares. From some of the other stockholder so that he can take control of this company again. You know that you know that kicking off a couple of sure folders just to get over 50%. But obviously he's the but you know the best tactic that the report off. But given the device that -- -- older group and apparently the unity on the other side. Gosh I would be I would peace -- the possible. -- Thank you very much Johnny -- to ensure that you really have been used the you've shed some light on a very complicated topic. -- my pleasure. Earned him thank you and John Davis from Harvard.