Thomas Schinkel and Associates

(This is a follow up on a previous article with the same subject in which I asked my friends and readers to respond to a question about Social Media and the Value of a Business).

OK folks, I have been bombarded with answers to my most recent blog regarding “Social Media and the Value of your Business”. Here is a sampling of the more pertinent responses:

Stephen from Beverly, MA:

Thomas, You pose an interesting question. Certainly, the m/a community will value a business on financial attributes of a company, revenue, balance sheet, EBITDA, etc. And this in many ways forms the basis of a company’s valuation.

But we know that certain attributes will increase the value of a company.  These include IP, strategic significance, management, and customer loyalty.  And surely s ocial marketing can help develop a legion of loyal fans.  Technology changes so fast, that revenue can assume a reverse hockey stick quite fast as paradigms shift, let’s just think of Blockbuster here.  But loyal fans will be stickier, and less reluctant to move to the next best thing.  And social media can help us understand the stickiness of the customer.  A company with a good pulse on their customer is more likely to offer them products and services they desire.

I remember once, the famous author Steven King was worried that his novels sold only because his name was on them. He released a series of books under the pseudonym Richard Bachman. True to his belief, they were not as successful as they would have been had the books been released under his real name.

This shows us that customer loyalty is truly an asset that can translate to company value. The company with millions of followers has committed customers that feel part of the company, and will be less likely to jump ship when a better tablet comes along.  This company is going to get a higher multiple than the less social media savvy competition.

Nancy from Brooklyn, NY:

Yes, it surely makes a difference! Twitter followers and FB fans have become a common measuring stick, especially for media and speaking opportunities, which then lead to more biz. Case in point, my friend, Angela, has two companies and was picked for a reality series on women small biz owners sponsored by Chase or American Express. They told her outright that her solid social media following was one of the reasons they picked her. And, their expectations with regard to her promoting her show appearances to her following were clearly stated in her contract.

Arno from Duesseldorf:

After the dot.com crisis of the New Economy in 2000, venture capitalist, private equity, funds, and corporations are investing again billions of $ into the new web economy. Those services are no longer available on PCs only, but more and more on mobile phones, smart phones and tablet PCs. There is a major move to mobile devices and this trend will open these services to many more people around the world in a very flexible and mobile way. This enables local and/or regional advertising, couponing etc.

The so far anonymous web is changing to a social web. Look at your children from 6 years onwards. They communicate, learn and work in/with these social web platforms. And these children are the decision takers in the years to come!

Branded companies move their advertising budgets more and more from traditional above the line activities like TV and print  to social media in line to avoid increasing spreading losses of their advertising due to too many TV channels, print magazines and newspapers.

Millions of Facebook users are outing themselves as fans of top brands like BMW or Red Bull. This will be used for target group oriented advertising messages. However the trends even in the web are changing: there has started already a move of advertising budgets from search engines to new social media.

“Company A” is on a good way to advertise and communicate in this social network and can consequently reach very easily their target groups in a very efficient way. As a consequence they build up their brand recognition with the new generation of consumers who decide already today or tomorrow.

So the answer to your question for me is quite clear: “Company A” is worth much more than “Company B”.

David from London wrote:

The first thing that strikes me is that company A clearly gains no commercial advantage from it’s social media activities at least not at present. It hasn’t developed them into a sales channel and therefore reduced the cost of sale. The other possible commercial benefit would be that if it is able to talk directly to it’s consumers through the social media channel it could reduce the coat of marketing through conventional channels. It’s clearly not doing that either or we would see improved operating margins.
Which sort of leads me to the conclusion that company A has wondered down the social media path guided by the bearded ones who have no idea how to tailor social media for commercial benefits and have been sucked into the banality of it all.

But in answer to your question, providing the friends and followers are relevant to the business, ie they are mostly customers, I would pay more for company A than B. Not much but a little, purely because it has a channel that could be developed as a commercial proposition by selling directly to the 1m fb friends and reducing their conventional marketing budget. But as the channel is not developed and there is no sure-fired recipe for success doing this the valuation difference would be tiny, 1 or 2%. The reward for getting it to work could be quite substantial.

Irwin from Chicago had this to say about the question:

In response to your provocative question, there can legitimately be two correct answers. Certainly, the value of Company may be argued to be higher (based upon the perceptions of the buyer) provided that all of the Facebook and Twitter followers like the company and its product (s). In consulting with enterprises to establish a favorable social media presence with cross functional teams, I have seen instances where companies run promotions requiring one to “friend” that company’s Facebook page but once the promotion is over those turn out to be “fair-weather friends.”

In the absence of a formal well planned social media policy, Company A may very well shoot itself in the foot. In that scenario, I would prefer to be Company B with a blank slate and the opportunity to provide a valuable social media presence to improve enterprise value.

David from Hauppauge, NY:

Just like you used social media to reach out to your readers and solicit feedback, Company A will be able to monetize their investment in social media over time. I would suggest that it is somewhat of an intangible at the moment you are measuring, but creates the potential for better growth and branding.

Brad from Concord, NH, added:

In my opinion the company with the strong Facebook and Twitter presence has greater value than the company without that presence. Customers select companies to friend and follow on Twitter. A large following indicates interest in the company and its products or services. A large following must lead to bottom line results.

As a side note, to me it seems unlikely that the only difference between company A and company B would be their Facebook and Twitter following. With such a following company A would soon outperform company B in all respects.

Bob emailed this response from Stowe, VT:

I’m rather interested in the sort of thing.  No direct experience with Social Media but my experience during the nascence of electronic communication (ARPA, DARPA and evolving to Email and ultimately the Internet) may be instructive.  Basically what we found at Digital was that when we could target our audiences it was better and faster than WOM (word of mouth) and had a higher quantity of eyeballs than any broadcast or print media.  I am reminded of one axiom:  ”There is no such thing as bad publicity”.  – Zsa Zsa Gabor and one operational reality:  “It is difficult to accurately quantify the direct cost/value of advertising.  Most corporations lack the understanding and skill to adequately determine the cost-benefit of broad based communication.

Howard from Boston wrote:

Agree! The effective use of social media is vital to a company in this day and age. I emphasis EFFECTIVE, because overuse and babble will turn off customers. Further, companies should constantly review their Internet sites to make certain that they are simple to use and provide information thoughtfully and thoroughly. (To see the opposite, simply view the corporate/investor web pages of most international banks.)

Gary from Portland, ME, added:

If one of the companies has achieved this growth and success without working the social media channels, the case might be made — “what’s the value of all the social media hype”.  However, a case can also be made that moving forward into the future, the social-media-intensive company will have a far larger exposure and might use that exposure to pull ahead of the company that has not made that investment in social media contacts.  The extent to which the media-intensive firm might pull ahead – and thus be more valuable at this point in time – might be a function of the firms’ products.  If the products are public-consumer-oriented, the social media exposure might prove to be much more valuable than would be the case in a situation of business-to-business products where exposure and hype in the consumer marketplace is less important and valuable.

Brian from Cleveland, OH:

A company with one million fans is worth much more than the identical company with no fans. But how much more depends on:

• what can be done to leverage the asset (untapped potential)
• what is presently being done to leverage the asset  (already impacting present profitability)
• the ability and degree to which one can leverage the asset into commercialized, profitable revenue streams

Janet from Columbus, OH:

Although Company A & B have equal profits, customers and revenues today, they will not in the future. Company A will quickly outpace Company B as their market awareness increases and they begin to be perceived as a much larger company. If they leverage social media correctly, they will be perceived as industry experts.

And Satish from Bangalore:

Assuming both companies sell FMCGs, as a consumer, I would value company A more, since the FB and Twitter exposure allows consumers to share product experiences.  If these were banks, I would treat both companies as equals. If these companies that I would outsource work to, I would treat them as equals. If these businesses were hospitals, I would value Company A more. And so on.

And last but not least, here is Jaume from Barcelona:

I assume that A and B are consumer businesses and in this case the value of A should be higher because they have a potential to be more known and to increase their customer base and sales per customer so that profits in the future should be higher. I assume that the friends in Facebook and the followers in Twitter is a rather recent thing that has not had an impact on the P & L account yet. However, being more in the public eye has also its risks and company A should devote some resources to manage this to avoid the pitfalls and, at the same time, find a way to translate this large exposure into profits.

In summary, folks, this was a great exchange. I hope you enjoyed it too! In closing, my own sense is that Social Media together with Cloud Computing are two converging forces that will present enormous challenges to the status quo everywhere. Those who embrace those new technologies and embed them into their business models will find opportunities galore. Although there is no consensus among business valuation experts on this topic, my own take on it is that Social Media as an Intangible Asset are going to be a major issue in the valuation of companies going forward. It may take another year or so, but it is a matter of time.

Thomas Schinkel

Why a Different Kind of Stimulus Plan

may be much more effective as a tool for creating new jobs!

by

Thomas Schinkel

April 13, 2009

Part One of this series of articles about America’s New Deal with Capitalism estimated the size of the hit that the economy had taken as a result of converging forces in the realm of financial globalization. The article concluded that for 2008 alone, it would be in the range of $9 trillion. Now, don’t get me wrong, $9 trillion is a lot of money but it does not throw the entire country into bankruptcy. Yet, it is a big number and it did get the attention of the disproportionately hit middle class!

The second part of this series articulated a remedy to the crisis, in essence suggesting that the government should stop bailing out banks that are supposedly too big to fail, and intervene instead by making direct (once in a lifetime), interest-free loans to those families that had gotten into trouble.

The program would have a rigorous repayment schedule and participants would automatically agree to a higher tax bracket. This way all parties would maintain a stake in the positive outcome of such a program. In other words, no bailouts, but a solid agreement between tens of thousands, maybe even hundreds of thousands of families and their government to prevent an avalanche of problems in credit, real estate and job markets that could throw the entire system into disarray.

All along the position was that this is not just a single crisis; it is a series of embedded crises that are interconnected.  It is the aggregate result of long term failures in the realm of industrial, fiscal, monetary and foreign policy fueled by a strategy of exceedingly aggressive deregulation, a strategy fed by theories and mantras that would cause our forefathers to turn over in their graves.

The third part of this series takes a closer look at the present situation and it articulates some suggestions for beginning to fix our capitalist system, one step at a time.

Globalization 2009: A Witch’s Brew of Contradictions

Taking a candid look at our present day state of affairs in the realm of Globalization, one cannot escape the conclusion that the Global Economy A.D. 2009 is a Witch’s Brew of Contradictions. This witch’s brew consists of the following ingredients:

• Fiat Currencies: Ever since President Nixon nixed the gold standard, we have had a global system of Fiat currencies, IOU’s with nothing to back it up;
• Free Trade: We are continuing to preach and pursue that sacred cow of Free Trade among nations without any regard to the severe structural imbalances that have emerged among the largest;
• Interest Rates: We pursue artificially low interest rates to stimulate consumption sectors of an economy without regard to its ability to absorb such growth and pay for it with money that results from productivity improvements;
• Guns and Butter: We are embracing Guns AND Butter economics without any mechanisms in place whatsoever to fund either, except for drawing checks on future generations’ ability to pay down debt;
• Off-shoring: In business, for more than ten years now, we have pursued a mantra of Value-Chain Management that embraces off-shoring of domestic manufacturing activities as a quick, short-term way to achieve lower costs. While the overall economy has grown and grown, predominantly through consumption and expansion of the services sector, capital expenditures in surplus value creating activities have been sidelined from the economic equation.

Exhibit One shows capital expenditures, payroll and value added for the manufacturing sector from 1977 to 2006. These values are presented as a Pct of GDP.

And we know from previous research, that our services economy lacks the international prowess to earn sufficient foreign currency to feed our appetite for imported goods.

Nobody in America, or Europe, or among the leading international institutions such as the World Bank, the OECD or the WTO, seems to have a coherent fix on these contradictions with any level of forward vision at all. Everyone is fighting for the status quo, for protecting their turf, and defending mantras, theories and strategies that were appropriate for yesteryear.

Let me give you an example. The whole world know that America has a huge structural trade deficit and that there is no way we can continue this way without a severe price to pay. During the discussions about the Stimulus Program, the idea came up to say that all this money should be earmarked for products made in America.

This way we would kill two birds with one stone. The ink was not dry on the Program, or the international howling started. The Representative of the European Commission in Washington actually appeared on TV, uttering stern warnings that this was against WTO rules, and that this entire talking about “Buy American” had to stopped. “OK my friend, but how are we going to fix the U.S. trade imbalance that threatens to undermine not only our own economy, but that of the rest of the world? Will you, and the Chinese, and the Japanese and everyone else, continue to lend us our own money to keep the racket going?” Of course, there was no answer to this question.

Through the prism of an independent business adviser such as me, our present world increasingly comes to resemble that of a volcano, rapidly amassing huge amounts of negative energy. For those of you who are not inclined to think in terms of what this means, the following pictures may help stimulate the imagination:

Keeping with that analogy, here are some very short-term developments that may further increase the pressure on this not so imaginary economic volcano:

• Final year-end reports on mutual funds’ performance will be published shortly – the public will not be pleased;
• Batches of commercial (real estate) loans are ready to implode on bankers’ books (this may be the very reason why bankers are not lending. They want to hang on to the tax-payer funded reserves they got during the bailout to weather yet another storm they see on the horizon);
• Automotive sales continue to slump, with at least one major bankruptcy looming, taking down with it an entire infrastructure of suppliers;
• Real estate markets continue to slump, taking another hit of 5-10% before hitting bottom by the end of 2009;
• Unemployment continues to rise and may soon exceed 9.5%;
• Banks continue to tighten credit standards on even their best customers, despite having received billions in Federal aid;
• Major manufacturers tighten credit on marginal players in their distribution channels, setting off a silent contraction throughout the economy.

As the pressure builds up inside that volcano, a release can take place in one of two ways. One way is an organic, uncontrolled explosion that sets off the entire system. If the wrong medication is administered, or the right medication is administered to the wrong group in society, or at the wrong time, like in “too little too late”, or nothing is done at all, the volcano will go off, unleashing centrifugal forces that will make minced meat of the entire political, financial, industrial, trade, social, military and cultural infrastructure that emerged after the Fall of the Berlin Wall in 1989.

If this happens all bets are off. But there is some good news as well, that gets drowned out in the pervasive psychology of fear that permeates from the media:

• The Chinese Stimulus Plan is already showing signs that it is working, creating a new wave of demand for imports from all corners of the world;
• The American Stimulus Plan is getting into action very shortly; <li>U.S. Real estate markets that have shown the steepest decline are indicating that bargain hunters are returning to the market;
• The U.S. Savings Rate is shooting straight up into territory it has not seen in a long while; there is every reason to support the assumption that it will hit 10% of GDP by 2010.

So rather than join the herd of people who believe that the roof is caving in, I would like to develop a different scenario, one that is characterized by “a series of mini-explosions”, and economic earthquakes that each carry their own costs and benefits. In my next article we will discuss this at length.

For now, I want to conclude with comments on the actions taken by government during the last six months.

The Bailout Program of October 2008

In October of last year we had the Bailout Bill, to the tune of $800 billion. It is now clear that this program was and is an example of crass self-preservation, keeping the failing banking giants on their feet. An opportunity missed? And here is my question. For example, instead of propping up the top-tier banks with large amounts of taxpayer provided cash, the government could also have said: To prevent these problems from happening in the first place, we are going to break up the banking system into smaller, separate and distinct components. While it would definitely be “out-of-the-box”, such a way of thinking would have been nothing special. Years ago, the government broke up AT&T, the (very well functioning) telephone monopoly. Also, for years the government has been toying with the idea of breaking up Microsoft. So why not break up the top-tier banks? The Charter of the Federal Reserve Bank, stipulates that its commitment is to the preservation and protection of the top-tier of the American Financial Services Industry. Not to be irreverent or anything, but it is nothing but a cartel that – since its inception in 1913 – has managed to maintain a “very cozy relationship” with officialdom. When you see Ben Bernanke on TV, lest you get the idea he is looking out for you, remember he is on the payroll of the cartel, and his mandate is to look out for the best interests of the top-tier banks. With the help of taxpayer dollars, a break-up has not even been considered. Mission Accomplished, at least for now. From a banker’s perspective, 2008 must have been a year of Great Accomplishment.

The Stimulus Program of February 2009

Short on the heels of the largest economic rescue in the history of America, now comes the Stimulus Program, again to the tune of $800 billion. That number seems to take on magic connotations. Taking a close look at the component that includes specific cash disbursements in that program (the other component being “tax cuts”), one cannot help but notice that these disbursements are largely being poured into the veins of the entire Federal, State and Local Bureaucratic Infrastructure. In other words, one cannot help but get the impression that here too there is an element of institutional self-preservation at work. Short-term, my sense is that the program may have a mildly positive effect, as it will create and preserve jobs throughout the economy. But what about the Long-Term? Much money will be spent on fixing the old infrastructure, an infrastructure that created wealth during the 1960′s, 1970′s and 1980′s.

What I am missing in this entire conversation about the economy and the society it is supposed to support is the whole question of New Surplus Value Creation. What about Innovations in the private sector in general and in industry in particular? Where is the next Microsoft? Where is the next aviation industry? Where are the next high paying jobs? Where are the next waves of productivity enhancing investments? Waves of new start-ups? New job creation? We have tried hyper-deregulation. We now know, and perhaps should have known all along, that did not work. How about stimulating venture capitalism across a borad swath of sectors of re-industrialization? My own sense is that we need a third leg under the stool of programs to stimulate the economy, and perhaps it should be called:

The Innovation Program of September 2009.

Such a program would have at least four components. One component would allocate large amounts of money to venture capital endeavors of all kinds. Fixing the electricity grid is great but it takes ten to twenty years to produce results. Another component would be addressing all the bottle necks that have formed in our society that stand in the way of breakthrough technologies not just in esoteric industries like bio-tech but mundane ones like aviation, agriculture, distribution, transportation, conversion of shopping malls into business incubation centers. It would also include very attractive prizes for innovations and breakthroughs in 80-100 different areas of industrial endeavor. And it would completely revamp the way federal taxes are collected, no longer based on old ideas supporting old infrastructures but based on the knowledge we have today about the economy, society and the environment. For example, it would include a Value Added Tax Structure that included the services sector, and it would include a much heavier tax on fuel consumption than what we have today. These new companies, the new innovations, the numerous trials and errors of entrepreneurs, some will fail, some will survive, but some will be extremely successful, creating the productivity improvements we saw during the mid 1990′s when a whole family of companies descended upon the community of small and medium size businesses offering inexpensive new productivity tools that pushed them from survival to prosperity.

My point is this: If you can find $800 billion to come to the rescue of a small group of very big banks, you can also find $800 billion to provide funding for thousands, nay, hundreds of thousands of new small companies and start-ups throughout all corners of society.

One thing is clear and that is that we are on the brink of tinkering with an entirely new form of capitalism. The difference between the old form and the new form of capitalism would have to be that the micro capitalists (main street) get protected from the predatory practices of the hyper-capitalists (i.e. eight of nine very large banks and quasi-banks) that seem to have unrestrained access to tax dollars provided by the rest of society.

What is the bottom-line of my argument? Stop throwing GOOD money against BAD! Instead of using another $800 billion to bail out a small band of big-time shadow bankers at the top of our capitalist pyramid, invest all that money at the bottom of the pyramid, thereby creating a culture of renewal and revitalization from the bottom up. Not through consumption but through the creation of New economic Value!

Thomas Schinkel

The $700 Billion Bailout:

A Crisis of the Commons!

By

Thomas Schinkel

September 2008

In the midst of yet another spectacular crisis allow me to step back and take you to a small community way up in Northern Maine. The name of the town is Millinocket.

Background

It was early 2002, not more than five months after 9/11. The fellow who shared an office with me in an office building close to downtown Boston came in to see me. A practicing bankruptcy attorney, he had received a call from a colleague, a respected lawyer in Bangor, way up in Northern Maine. My colleague had known me for several years and he was familiar with my work in the office products and paper industry. That is why he wanted to talk to me.

Bankruptcy!

What was the call from Bangor all about? A giant problem had erupted in one of their wilderness communities in the North country. It was in the middle of an unusually cold, harsh winter, and The Great Northern Paper Mill of Millinocket had been forced to file for bankruptcy! The question he had, were there any consultants in the Boston area who could help figure out what to do? Oh, and don’t look for anybody to expect any big fees because we are all stressed to the max up here!

During the next twenty minutes, my neighbor briefed me on what he had learned. At the end of his pitch, he asked if I had an interest going up there with him to see if there was anything we could do. At various intervals in my own career I had come up against the forestry and paper industry but never from this angle. Not knowing what to expect, I figured that – if nothing else – this might be a good learning opportunity. To make a long story short, the next day we called the Bangor attorney, told him of our intentions and started driving North. The attorney in Bangor in the meantime, made several appointments for us so that we would make good use of our time while there. Eight hours later we checked into a motel in the center of Millinocket, getting ready for meetings the next day.

Pandemonium!

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