After the Bell: A narrative walks into a bar
Corporate advisers often counsel companies to ‘construct a narrative’. I can see the logic of that: narratives are just the business plan explained in a way people can understand and interact with in a more immediate and relatable way.
A long time ago, I signed up on an internet site called Quora. The idea of the service was, and is, for its users to ask questions — any question at all — and then users of the site offer their answers. The kicker is that other readers vote up or down on those answers, so the best answer drifts to the top. It’s a great site.
As part of the sign-up process, you have to ask your first question. Partly out of confused frustration, I asked, “What is the best ‘…walks into a bar’ joke?” Mistake. For years now, I have received emails in response to this question, because if you ask a question and people answer, the site thinks you want to know. So now I am the world’s premier expert on “…walks into a bar” jokes. (The past, present and future walk into a bar — it was tense. Schrödinger’s cat walks into a bar. And also doesn’t. Etc.)
But occasionally, you get a good one. Like this: A horse walks into a bar. The bartender asks, “Why the long face?” That’s usually the end of the joke, but on Quora, there is more. The horse says, “I’ve just realised I’m a metaphysical concept residing within a fictional narrative and will cease to exist at the end of this sentence.”
The joke reminds me why I love the idea of narrative so much. Narrative is not so much the story as the unfolding of the connections which result in the position where you end up. It’s what gives the story its sense of movement and destiny. Corporate advisers often counsel companies to “construct a narrative”. I can see the logic of that: narratives are just the business plan explained in a way people can understand and interact with in a more immediate and relatable way.
But often the result turns out badly. The problem with corporate narratives is that they often seem so false because they overlap with the corporate mission. Still, it’s a good exercise to think about a company’s narrative.
The best corporate stories are often those in which the narrators are independent of the company, and it all happens afterwards. Companies all have their own stories, and rather than relying on their internal PR department to tell them, the best are those told in retrospect as an explanation for how things turned out, good or bad.
In the same vein, often the most interesting corporate narratives are not the ones told triumphantly once the company has become fabulously successful, as gratifying as those are, but the ones about corporate failures and the subsequent turnarounds.
There are few stories so rewarding and yet so difficult to explain as turnarounds. And yet for investors, understanding turnarounds is critical. Scott Galloway, one of the participants in the podcast called Pivot, made the point recently that over the years, he had invested in every part of the corporate food chain, from angel, to venture, to growth, to IPO, to growth public, to mature, to distressed. And the place where he made the most money was in distressed companies.
The problem, or the value, of distressed assets, is that they are like old people at a party, he said. People are polite to them, but they don’t want to mingle with them. Everybody wants to hang out with the Tom and Gisele Brady companies, making them massively overvalued. But actually, all the money is with the old people in the corner.
This past week, we have seen some very immediate and obvious examples of this in practice. Of the three banks that have gone bust in the US during the latest wave of bank failures, the white knights who bought them have seen their share prices just explode. First Citizens’ shares rose 54% on Tuesday after it bought most of Silicon Valley Bank from the government. New York Community Bank is up 32% over the past week after it rescued Signature Bank.
These deals are a little different because what investors are sensing is that the US government is taking all the risks and the buyers are getting all of the assets. Probably correctly. Still, it does tell you what kind of money can be made by focusing on distressed assets.
Interestingly, the share price of Swiss giant bank UBS has not enjoyed the same kind of kicker as First Citizens after becoming the government-organised buyer of its old Swiss rival Credit Suisse. On the face of it, it seems pretty much like a sweetheart deal for UBS. What they end up with is extraordinary: total assets of around $2-trillion, which will make UBS a global top-10 bank, or pretty close to it. Presumably, with two such large banks, there is a lot of execution risk.
My sometimes colleague, The Finance Ghost wrote poignantly this week about three companies in turnaround in SA. Turnaround stories end, he writes, in different ways. Some disastrously, like Tongaat Hulett now mostly in business rescue. Others have balance sheet issues, like Nampak, he writes.
EOH, on the other hand, has come back from the wars. But now, operating profit has stabilised, and the recent rights issue has in turn stabilised the balance sheet. The turnaround has been hard and long, it’s perhaps not quite complete, and the share price is still lagging. But you get a sense that the heavy lifting may be over.
Even more dramatic has been Murray & Roberts, whose share price has been on a charge, with lots of positive newsflow driving the speculation. And The Ghost also mentions PBT Group, which has not only turned around but could issue a special dividend.
The common element of the narrative is often someone in the organisation with massive resolve combined with dedication and a kind of pugnaciousness. Turnarounds are not for sissies. But oddly, that’s often what makes them such great narratives. Or, to put it another way, a turnaround specialist walked into a bar. Not sure what happened after that. DM/BM