Sunday, April 27, 2008 2 comments ++[ CLICK TO COMMENT ]++

The Next Wilbur Ross?

"It's a little like a brick coming through your window..."
-- Marshall Morton, Media General CEO, on Phil Falcone's Move
(source: April 2008 BusinessWeek)

When it comes to vulture investors, Wilbur Ross is arguably one of the best of all time. Well, this BusinessWeek article makes me think that Phil Falcone of Harbinger Capital Partners is going to be the next Wilbur Ross. The article makes for a good casul read (thanks to DaveinHackensack for the original mention in a message board post.) Here is an excerpt:

(source: The Midas of Misery, by Emily Thornton. April 24, 2008. BusinessWeek)

Falcone is a Midas of Misery. With $19 billion—nearly 760 times the grubstake he started out with seven years ago—he is snapping up troubled assets in bankruptcy, shorting distressed bonds, and using huge stock positions to agitate for change at underperforming companies. His holdings read like a who's who of market castoffs: media companies, utilities, and steelmakers... "He will look at anything," says one investment banker who works with Falcone. "If it's cheap, he'll buy it."


At times, vultures like Falcone can be brutal on the companies they bite into. But with so much money, they could turn out to be an essential element of a recovery after one of the worst financial disasters since the Great Depression. Already they are providing critical cash to stalled markets by swallowing up piles of unwanted mortgages and loans used to fund buyouts. Additionally, they are buying the stocks of companies hampered by huge debt loads and offering lines of credit to desperate businesses. With much of Wall Street still frozen in fear, big vulture bets are among the first signs that the markets are beginning to thaw. And that, in turn, could be good news for the economy.

Basically Phil Falcone made a killing shorting subprime mortage assets.

Although vulture investors have a bad rap, I actually like reading about them and their strategies. The main reason is because they are probably the ultimate contrarian investors. They tread into areas that others never will. Vultures, like hyenas, have a bad reputation in world of nature ;) but they clean up the mess that no other animal will touch. Similarly, I also feel like that, although vulture investors are often short-term oriented and very selfish, often not caring about society, workers, corporate culture, fellow (existing) shareholders, and government, they increase efficiency of businesses and bail out businesses that otherwise would have gone bankrupt.

For instance, no one, including skilled investors with tons of cash sitting around like Warren Buffett would have touched the steel industry in the 90's. But you had someone like Wilbur Ross turn around some of the steel companies. He probably received some flak for laying off workers, eliminating a lot of the manufacturing services, and trampling existing shareholders and bondholders, but some of these companies would have closed up shop long before if it weren't for some vulture investors. Similarly, some of these vulture investors are cushioning the blow from the housing crash by investing in mortgage lenders, mortgage bonds, and so on (the irony, of course, is that some of these vulture investors made a lot of money by shorting these companies initially.) Phil Falcone, similar to Sam Zell, is also investing in media companies that are hard hit by a lack of capital, not to mention new business strategies for the modern world.

If you are in the mood for something fun, BusinessWeek also has this quick slideshow of the key vulture funds. The problem I see with some of these funds is that they are so big that they are going to have problems putting their money to work. A lot of distressed assets, even if they are large companies, have low valuations because the share price has collapsed (eg. Although it isn't a truly distressed company, GM with $188 billion in sales and 260,000+ employees only has a market cap of around $12 billion). If you have a lot of money, I think it's going to be difficult for these vultures to generate high returns in the future. However, the looming economic slowdown, along with the credit crunch, is the perfect time for vulture investors to find distressed assets.

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2 Response to The Next Wilbur Ross?

April 28, 2008 at 9:31 PM

Great Post and the argument about as a fund gets big it runs out of places to invest in. Buffet has talked about it for years. I think that the vulture funds will do better with bigger funds because they are willing to venture into new area's where as people like buffet will venture out but not like vulture funds.

April 30, 2008 at 5:30 PM

Great job Sivaram. Thanks for pointing this article out, it is great. I want to read the book The Vulture Investors by Hilary Rosenberg...supposedly a good book on vulture investors who've been successful...

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