Points of Interest – Spring 2014 The X-Factor

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The Empire Builder

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 11 October 2014.

In a recent column I discussed how one of the unscientific indicators we follow in assessing the health of the stock market is whether or not the ‘funny money’ had arrived. This of course refers to the temptation by companies and investment bankers to take advantage of cheap credit to fund a range of ridiculous and complicated deals, usually just before the market falls off a cliff (in this regard, the recent proposed takeover by Glencore of miner Rio Tinto definitely hit a warning light on the funny money dashboard). One of the other unusual indicators we look for is the rise of the ‘Empire Builder’, though this tends to be more company specific, rather than an insight into the overall health of the stock market.

The Empire Builder is a company CEO who displays a number of characteristic traits. Often they are the founder of the company, or they got on board when it was just a minnow in its industry. The Empire Builder is an aggressive deal-maker, with the growth of the company almost solely due to takeovers and acquisitions. Once the takeover target has acquiesced and been folded into the parent company, the Empire Builder is already close to sealing the next deal, looking for the next opportunity. The Empire Builder is also usually feted in the financial press, lauded as a visionary leader who can do no wrong. Most Empire Builders also need a company jet, preferably a long-range Bombardier, needed to be able to visit the far-flung empire at the drop of a hat. The Empire Builder thrives in boom markets, taking advantage of low interest rates and willing lenders to build a global business empire underpinned by vast quantities of debt.

The problem with the Empire Builder, is that he or she is usually harder to spot than the funny money. Most times you only know you had encountered an Empire Builder once they have retired, generally with a large gold watch and an enormous severance package. This is because the financial statements provide no hint of the actions of an Empire Builder. Much like a pyramid scheme needs a willing influx of new victims, the Empire Builder masks his or her activities through consistent increases in company revenue as more and more acquired companies are added to the empire. It’s only when a new CEO is appointed and finds out that no-one had been actually running the company, that it becomes apparent than an Empire Builder had been in the executive suite. You can make money from an Empire Builder however: sell before they retire and use any gains to invest in a real business run by competent management. Use the Empire Builder as a boost to building your own little investment empire.