CEO Daily: The Best in Business Reading

What’s the connection between Los Angeles gang violence and the person who answers your customer service call for Dell or AT&T? A lot more than you might think, according to a New Yorker feature entitled “The Deportees Taking Our Calls.” This surprising article marries two sensitive topics from the 2016 presidential election: immigration and moving jobs offshore. It turns out that a surprising number of El Salvadoran immigrants to the U.S. Were deported back to back to their home country, sometimes because of gang activity. Many of these individuals have spent the majority of their lives in the U.S., which mean they speak fluent English with an American accent. That in turns means that El Salvador has become an unlikely island of call centers, employing 20,000 people (albeit dramatically fewer than in India or the Philippines). “At one call center I visited,” the New Yorker’s Jonathan Blitzer writes, “more than half the employees had been deported from the U.S. Recruiters show up at an isolated hangar of the San Salvador airport to intercept deportees as they get off small jets flown in by Immigration and Customs Enforcement.” I’m not going to try to make sense of the complexities of U.S. Immigration policy in a paragraph, but there’s got to be a metaphor here. At minimum, I’m guessing most of us wouldn’t anticipate that the soothing voice advising us to reboot our laptop may be a former gang-member who has attempted to scratch off his tattoos because even in El Salvador (especially in El Salvador) they can put his life in jeopardy.

It's 3G's World

If you didn't get a chance to read it when Alan Murray praised this story earlier this week, I want to add a second endorsement: Geoff Colvin’s "Buy. Squeeze. Repeat." In Coins2Day delivers clarity and insight on an outfit that now controls many billions of dollars worth of some of the world's best known brands. The story is a dissection of Brazilian private equity firm 3G, which assembled AB InBev, and is now feeling its oats with Kraft Heinz. The 3G firm, you may know, makes the average private equity firm seem slack in their attempts to cut costs in their portfolio companies. But rather than succumb to one of the standard manicheistic views of private equity—They’re corporate saviors! No, they’re corporate destroyers!—Colvin offers a nuanced portrait that lays out the strength of 3G’s approach…and its inescapable limitations.

This passage offers a core piece of Colvin's argument:

Unlike other PE firms, which have an exit in mind from the day they buy a company, Lemann and partners have stuck with their beer venture for 28 years and counting….The pattern is buy, squeeze, repeat. The 3G managers developed extraordinary operating skills and greatly increased the value of every company they bought, but they were not great innovators. They achieved growth through acquisitions—not organically. And there’s the rub: A central feature of this model is that it can’t work forever. It builds value only by buying more companies. “It’s like the shark that can’t stop swimming,” says a director of another major foodmaker.

In other words, 3G’s model has been phenomenally successful…and it will run up on the limits of its growth sooner rather than later.

Remember Eliot Spitzer vs. Henry Blodgett?

My vote for the most depressingly unsurprising—but important—corporate reporting this week comes in a Wall Street Journal article that examines a practice that was supposedly abolished more than a decade ago when then-New York attorney General Eliot Spitzer extracted $1.4 billion from Wall Street investment banks because their analyst reports were, let’s say, less than honest. Unfortunately, the article is written in a confusing manner so it took me a few times through to understand the points; but the reporting is excellent, so it’s worth sticking with.

I think part of the problem is that the article doesn’t do a good enough job of separating two related, but separate, points. Here’s a disturbing passage relating to the first point—that companies expect buy ratings on their stock in exchange for providing access to analysts: “Media analyst Richard Greenfield of BTIG LLC says his emails, phone calls, and a request for an investor meeting with Walt Disney Co. Have gone unanswered since he issued a sell rating on the company in December 2015.”

Here’s an equally discomfiting passage on the second point—that brokerages make a lot of money delivering access (which brokerages receive in return for favorable coverage): “U.S. Investors paid $2 billion in brokerage commissions for corporate access in 2016, or more than a third of all the money spent on stock research and related services, according to consulting firm Greenwich Associates.”