Studying Predators

Thoughts on the book From Predators to Icons

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“The things we admire in men, kindness and generosity, openness, honesty, understanding and feeling are the concomitants of failure in our system. All those traits we detest, sharpness, greed, acquisitiveness, meanness, egotism and self-interest are the traits of success. And while men admire the quality of the first, they love the produce of the second.” John Steinbeck

Sometimes I struggle with the stories I research. Profiles of successful investors and entrepreneurs can be inspirational and chock-full of valuable lessons. But sometimes questionable and obnoxious behavior lurks behind the polished origin stories. Rags-to-riches fantasies can camouflage apex predators.

Why even profile controversial individuals? Corporate raiders were quick to denounce overpaid management teams and inefficient, overstaffed corporations. But once in control, many didn’t hesitate to enjoy lavish pay and perks. Or take Marc Rich, an upcoming profile of mine, who came to the US as a refugee during WWII and built a commodity trading empire. In his quest for profits he engaged in illegal trading schemes and continued to do business with sanctioned Iran. He escaped prosecution by Rudy Giuliani and spent his life in exile in Switzerland.

These stories resemble Necker Cubes, ambiguous drawings that reveal a different shape depending on which part you focus on. Inspiration, lessons, cautionary tales, and sometimes deplorable or even illegal behavior — they can all part of the same story.

Two French professors wrote about the ambiguity of business fortunes in their book From Predators to Icons. It is a frontal assault on the hero worship of self-made businessmen. They looked for patterns in a sample of 32 businessmen (no women, sadly) and found that fortunes were built on “predatory behavior.” This included exploiting market imperfections or asymmetries, acquiring misunderstood assets, taking advantage of motivated sellers, and using political connections or loopholes in regulatory frameworks. In other words: Self-made tycoons were ruthless competitors who used any advantage they could find.

The authors focused on the early stages of each career, what they called the moment of “intense accumulation of capital.” Like companies, people transition from startup to blue chip, from pirate to captain of the navy. Peter Thiel says a startup has to move from “zero to one.” In the same way, people have to learn how to create and capture wealth before compounding and competing at scale. Both phases can hold lessons. But while the second phase typically happens in the public eye, with financials and deals scrutinized in the open, the initial transition happens under the radar.

A note on the book’s sample. The French original was published in 2005, in the wake of the dotcom bust. And the authors focused on European, and particularly French, businessmen. As a result, they almost completely ignore the enormous wealth created by technology entrepreneurs. Not unsurprisingly, the authors found that fortunes in capital-intensive, traditional industries were made through astute dealmaking and shrewd competitive actions, rather than through value creation by innovation. While still intriguing, the book’s findings speak to the zero-sum nature of those industries.

Once wealthy, the authors argue, the businessperson embarks on a quest for redemption, either out of guilt over how they acquired their wealth, or out of concern for their legacy. To establish a reputation as an icon of capitalism, they obscure the early phase of wealth accumulation and all its predatory antics. A carefully constructed story is presented to the public through glowing profiles, laudatory biographies, and softball interviews.

For this reason the authors approached business biographies, on which their work was based, with skepticism and what they called a "dream interpretation framework." In their view, the biographies “bear resemblance to the lives of saints, soldiers, kings, and occasionally repentant criminals” in the sense that “a remarkable person is offered as a model” to achieve either “salvation of the soul or wealth in this world.” I have to agree that these books can turn into a kind of escapist literature. The reader can insert themselves into an Horatio Alger fantasy and live through the highs and lows of a business career with a guaranteed happy ending.

However, the reader remains in the dark about important factors in the protagonist’s success. Distasteful actions and privileges that distract from the narrative are shrouded in secrecy. To find some semblance of truth, we must study the context and be sensitive to nuance. We must read between the lines and pay attention to the silences and omissions. Important events and people may be mentioned in passing while entire chapters are devoted to drivel.

The authors’ analysis focused on two areas:

  • The initial conditions that enabled a talented and ambitious person to accumulate great wealth.

  • What they called the “good deal,” the career-defining transaction (or sequence of transactions) that led to breakout success.


Initial conditions

The authors examined a range of factors including family background, education, early professional experience, and social networks. These are common patterns they found among many of the individuals:

  • Raised in a family with exposure to business/trade.

  • Earned an above-average education (has to be viewed in context of their time).

  • Had access to early capital from either family or in-laws.

  • Gained early experience in business, particularly in sales, negotiating, or management of a small business. (Bill Gates famously said: “In business, you don’t get what you deserve, you get what you negotiate.”)

  • Obtained an early competitive advantage. This included anything from: access to cheap labor, access to exclusive supply, anticompetitive agreements, privileged access to information or financing, barriers to competition, or government contracts.

  • Received support from a mentor (such as introductions, capital, advice).

  • Had access to valuable networks (such as alumni, associations, unions, military, even long-established family, community, or religious ties).

Examples of a family background in business:

And of early experience in sales:

Examples of important mentors and teachers:

It is intuitive that the most successful business people benefited from early advantages. As I mentioned, this excludes technology entrepreneurs whose common threads might look different (although networks and mentors and education probably still play an important role). However, I had not paid much attention to these conditions and was surprised at how consistently they surfaced once I started looking for them.

Bernard Arnault took over a family business and received an excellent education. Networks in banking and politics were crucial to his success, as was the support of his mentor Antoine Bernheim.

Francois Pinault built the luxury company Kering after rolling up distressed lumber mills. He got his start by marrying into a family with control of a mill. 

Sam Walton married into a wealthy family and his in-laws were instrumental in the opening his first store. 

Larry Stroll entered the family’s textile business. Through his work he met Silas Chou, who became his partner in key deals.

Michael Milken’s father trained him in accounting at a very early age and by the time he entered college he was already managing money for friends and family.

“I was only 8 years old and, at first, didn't really understand what a balance sheet was. But I'd shown a knack for numbers and my father, a lawyer and C.P.A., encouraged this gift by teaching me how he analyzed different businesses. Soon, I was able to tote up the items in financial statements and, within a few years, began to appreciate their mathematical symmetry.”

Marc Rich’s father was involved in a variety of ventures, including a bank in Bolivia. Upon joining Philipp Brothers, Rich quickly became their point person for emerging markets and Latin America.

Sumner Redstone left his career as a Harvard-educated lawyer to join and built out the family’s cinema business. That business and its real estate holdings were the foundations for his takeovers of Viacom, Paramount, and CBS.

For Reginald Lewis, the ticket to success was Harvard Law School, which he was able to attend through pure persistence and fighting spirit. Lacking other favorable conditions, education unlocked his path to opportunity.

Steve Ross married into a funeral company business, expanded it into leasing cars, and acquired a parking lot operator. On this gritty foundation he built Time Warner.

Kirk Kerkorian on the other hand became a billionaire despite not having graduated high school. But his father was a businessman, speculating in real estate and selling raisins before going bust during the Great Depression. And before stepping into the world of aviation, where he earned his initial capital flying planes across the Atlantic during WWII, Kerkorian got experience with a steam-cleaning business as well as trading refurbished used cars.

Of course, this does not mean that any of these factors are either required or sufficient to attain great wealth.


The good deal

The authors also created a framework to dissect career-defining transactions (single deals or sequences of transactions) which often included:

  • Identifying an opportunity provided by market imperfection. Exceptional profits were possible because other parties didn’t see value the same way or were motivated by non-economic factors in their decisions.

  • Elements of reducing risk and ways to protect the reputation or avoid litigation.

  • Allies and associates that had to be managed and motivated.

  • Time constraints, in that the dealmaker had to close the transaction before the misperception of value was resolved and the opportunity disappeared. Speed could be a key advantage; delays could risk everything.

  • Keeping secret key information to avoid sending a premature signal to competitors.

“The greatest successes are explained by the establishment of clever arrangements for the reduction of risks rather than by excessive risk taking.” From Predators to Icons

Examples of risk reduction:


Conclusion

While I would not call the book a must read, it offered some interesting nuggets and anecdotes (did you know that one of IKEA’s competitive advantages was that Kamprad sourced furniture from communist Poland where labor was much cheaper?). It also reinforced the idea that there are many stories outside the US that are completely uncovered. For example, Claude Bébéar turned a sleepy mutual insurance company into AXA, the world’s third-largest insurer, through a series of daring takeovers.

And I like to apply the book’s two frameworks. Arnault’s daring takeovers might be the prototypical example of the  “good deal.” Or take Craig McCaw who came from a family with a business background and gained early experience with his father. McCaw attended Stanford and had a strong local network. He rapidly acquired wireless spectrum when it was not correctly valued by the market. McCaw understood that speed and secrecy were crucial before competitors caught up. He also reduced risk with contractual backdoors that allowed him to back out of transactions. In addition, he was convinced he could sell his spectrum to the Bell companies if needed.

While I don’t share the authors’ dim view of self-made fortunes, I agree that it is necessary to look past hero worship. In the world of business and finance, we face ferociously competitive “predators,” like the ones in the book, as colleagues, bosses, competitors, potential partners, investors, and leaders of the companies we may invest in. It is in our best interest to study them and their tactics thoroughly. Without an understanding of their initial conditions and their key transactions, we risk missing the most important lessons.

Even without intending to do so, we may adopt their desires. As Steinbeck called it, we may covet their achievements: their success, freedom, power, and prestige. And if we decide to walk the path of the predator ourselves, we will inevitably be shaped by it, good, bad, and ugly. To understand the rich tapestry of life, and separate the inspirational from the cautionary tale, we have to make every effort to look behind the curtain. In business this means breaking through the façade of great fortunes.


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