Why Did The Chicken Cross The Road? Because.

 

I’ve been to countries all over the world, some more developed than others and I’ve had a few dicey moments (not exactly Indiana Jones but definitely uncertain).

In the more out-of-the-way places, life just works differently and can be interrupted by things that we usually take for granted.

Once, I was someplace where they lose power quite frequently and the people were pretty much unfazed and went about their lives. No looting, no riots in the street, it was just business as usual.

I asked my colleague about it and he said something I’ve never forgotten. He said, “some countries are ‘why’ countries, and some countries are ‘because’ countries.”

What he meant was that in “why” countries, when, for example, the power shuts down, everyone wants to know why.

“WHY...why is this happening? Who is responsible? Somebody needs to fix this right away!"

In “because” countries, the same situation is met with a simple shrug of the shoulders and they just say “because” and accept that.

Now I don’t mean to get into a whole philosophical thing here but here in the U.S., we are very much a “why” culture.

• “Why does it take two days to receive my packages from Amazon?”
• “Why does it have to rain on my birthday?”
• "Why, with every streaming service known to mankind, is there still nothing on TV?”

I think most of the time, I’m a “because” person – which I know is downright INFURIATING to the “why” people in my life and sometimes, just to be puckish, I do it on purpose.

“Why is the refrigerator door open?” “Because someone didn’t close it”

I think pragmatically, sometimes we need to accept things the way they are and move on. I don’t know if we could remain sane otherwise.  At home, I’m a “because” person but in my work, I’m an insufferable “why” person.

• “Why is there suddenly such a concentration of sales to one customer?”
• “Why did the cost of raw materials go up?”
• “Why is working capital behaving like a @#$%$ yo-yo?’

Way back there in business school, a professor said that to be a good analyst, you need to be a cynic. You need to be a pain in the neck and and dig until you know why what happened happened. That way, you can better ascertain what’s in the future, what’s driving value and, where the risks lie.

Once upon a time, I was working on a valuation for a “business divorce” and my client was one side of the family (the “good guys” and the minority shareholders) and the other side of the family ran the company (the “bad guys” and controlling shareholders).

The bad guys had been pulling shenanigans for years to the detriment of the good guys and the good guys finally said “enough of this, just buy us out and we’ll go placidly along and live our lives” - or something to that effect. This sets up a scenario where the good guys wanted to sell high while the bad guys wanted to buy low.

The company in question bakes bread. I’ll let that sit for a moment...THE COMPANY BAKES BREAD.

They don’t make rocket parts; they didn’t make the “killer app-du-jour”; they didn’t figure out how to make sure there’s always something good to watch on TV – they bake bread.

Now, as I understand it, not a lot has changed in a few thousand years. It’s basically flour, water, heat, and time. But the question in my mind was where the value lived inside this 90-year-old company and how the heck was it able to keep running profitably for so long?

The bad guys (remember, they are lobbying for a low value) were 100% sure that the whole thing would collapse and be worthless any day now. At first glance, I thought they might be right... but you know bad guys are never right.

I wondered how this crummy business (pun fully intended), could keep making money for so long. The building had not been updated since the last ice age and the ovens were grossly inefficient and outdated. The book value of company’s assets was pretty darn close to zero. Anything and everything in that place was so old that it had been depreciated down to almost nothing and yet, the company made money every year.

According to management (the bad guys, remember?), the company walked a constant tightrope, and the fear was that any day now, some big company would swoop in and build a state-of-the-art facility across the street and the family’s precious business would be worthless. I asked myself, “WHY…why hasn’t someone already done this?

It seems so obvious and WHY oh WHY does this company have a stranglehold on every grocery store, convenience store, and deli within 150 miles?”

After wondering and asking everyone I could think of (including a friend who is a baker) a few facts came out:

1. It would cost $60 million+ to build a facility with enough output compete effectively.
   • The fancy word for that is “high barrier to entry” and it protects the company from someone opening a facility in their backyard. Strike one for the bad guys.
2. There are certainly baking facilities that could bake bread and ship it into this region and compete with this company, right?
   • Well, not really. The thing about bread is…it begins to go stale the moment it comes out of the oven and the logistics of getting fresh bread from here to there becomes complicated and costly. Strike two.
3. A whole other business line was never even discussed because the bad guys were using the flour, ovens, trucks, trade name, etc. to produce bagels and set up a separate company to keep it away from the good guys (the aforementioned shenanigans). Strike three.

Clearly, the value was really driven by the fact that it would cost too much and be too difficult for someone else to do what they do where they do it - plus, the shenanigans.

In the end, the good guys won, the bad guys were vanquished.

OK, I’m being overly dramatic, they paid a fair amount for my clients’ shares and that constitutes a win here. The bottom line is that sometimes you need to be a “why” person and sometimes a “because” person and the trick is knowing which one to be and when.

And now, here are some words of wisdom from people who aren’t me:

• "It takes considerable knowledge just to realize the extent of your own ignorance." - Thomas Sowell
• "What we observe is not nature itself, but nature exposed to our method of questioning." - Werner Heisenberg
• "Questioning anything and everything, to me, is punk rock." - Henry Rollins

Thanks for reading. As always, I appreciate and welcome your comments and feedback.

Be good and be well.