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Selling one’s jewels

(Article published in the Oct 8, 2008 issue of Manila Standard Today)   

Estate owners asking what their options are in this our current season of world-wide economic difficulties and uncertainty would do well to see what course two giant companies have taken to stay alive.  AIG presently is doing what IBM did in the 90s: dispose of assets to gain liquidity.  Like captains of ships encountering a stronger than expected storm in the open sea, good corporate CEOs jettison cargo to keep their vessels afloat.  Including, when necessary, the valuable ones.

 IBM ushered in the digital computer age in the 60s with its System/360, a mainframe family that runs on high-performance integrated circuits making all peripheral devices such as printers, tape drives, punch-card reasons work with any processor in the family.  The System/360 thus solved the customer’s problem of having to “rip and replace” all his information systems devices if he wanted to upgrade his system or avail himself of new technology.

 On account of System/360’s dominance in the market, IBM’s revenues from 1965 to 1985 rose at the compounded rate of 14% p.a.  But when the 90s came, for reasons beyond the scope of this piece, IBM found itself in very dire financial straits.

 Lou V. Gerstner, Jr., tapped by the IBM Board to turn the company around, in his account of his tenure as Chairman and CEO from 1993 to 2002, written by himself and with no ghost writers, Who Says Elephants Can’t Dance?, narrates:

 “Only a handful of people understand how precariously close IBM came to running out of cash in 1993.  Whether we would have had to file for bankruptcy, I can’t say.”










     

 But, says Gerstner, “There were certainly lots of assets that could be sold to make the company solvent again.”

 Thus, the course of action was clear.  What could be sold without impairing corporate capability to perform its functions ought to be sold.  “That fall,” according to Gerstner, “Jerry York [formerly CFO of Chrysler Corporation whom Gerstner recruited to be his own finance head] and his team went to work to sell any asset that was not essential to the company.  We sold much of the corporate airplane fleet.  We sold the corporate headquarters in New York City.  We had massive investments in expensive training centers where we housed and fed thousands of people a year.”  Those valuable pieces of property had to go.

 Disposed too was IBM’s “large and important fine-art collection, most of which was stored in crates out of sight from anyone…In 1995, the bulk of it was sold at auction at Sotheby’s for $31 million.”  Though condemned by a number of art connoisseurs, their disposition was a clear choice over sending employees home jobless.

 Even IBM’s Federal Systems Company which “had an illustrious history of important technological breakthroughs for various national security and space programs” of the United States Government, went to Loral Corporation in January 1994 for $1.5 billion.  It had to be sold because it was a perpetually operating on a low margin of profit.

 The decision to sell assets, even those ones that could be considered by themselves valuable, paid off. Assesses Gerstner:  “The program of selling off unproductive assets continued for many years…[but] the need to raise cash became less important as we moved into 1995 and 1996.”

 This statement shows how to properly evaluate the sale in 1996 by Far East Bank and Trust Company, trustee of the IBM Retirement Trust Fund, of IBM’s office site on Paseo de Roxas Avenue, Makati City. Gerstner was very clear: “However, as the years went by, we continued to streamline the company for a different reason: focus.” Cash generation for IBM the company was not the purpose of that sale by its retirement fund trustee; it was focus.

 Fast forward to the “sub prime crisis” that, although ostensively months ago seemed limited to the world of low-end mortgages, now appears going beyond those junk obligations to pay.  AIG is doing an IBM.

 AIG is a giant American insurance company listed by 2008 Forbes Global 2000 list as the 18th-largest in the world. It was started as 1919, as an insurance agency in Shanghai, China, expanded to the rest of Asia, and then to Latin America, Europe, and the Middle East. It went public in 1969 and became part of the Dow Jones Industrial Average on April 8, 2004.

 But barely four years thereafter, on September 22, 2008, it was taken off officially from the index.  On account of resulting illiquidity due to the downgrade of its credit rating, thereby putting at risk the insurance taken out by other financial institutions against default of the borrowers they had been selling to the public, the   AIG suffered a liquidity crisis following the downgrade of its credit rating. The United States Federal Reserve had to lend it money in the form of a US$85 billion credit facility.  AIG, in exchange, had to issue the Fed warrants for 79.9% of its equity that could result in the US government being owner of the company if the loan is not repaid in two years.  AIG also gave the Fed the right to suspend dividends to previously issued common and preferred stockholders.

 To cope up with such dire adversity, AIG, like IBM, is resorting to disposing of its assets.  On September 14, 2008, two days before the package, AIG announced it was considering selling its aircraft leasing division, International Lease Finance Corporation.  Early this month, Reuters reported that it was selling its three Japanese life insurance businesses that could fetch about $9.5 billion in proceeds. Even our own Philippine American Life Insurance Co. the largest and most profitable insurance company and the undisputed market leader in the country for the last 60 years, is, as candidly admitted by president and CEO Jose L. Cuisia, Jr., also up for sale.

 I wouldn’t worry, though, about the change of corporate owner if I were still, as I was when my mother many decades took out a policy for my education, a holder of a PhilAm policy or a beneficiary of any of its policies.  Thanks to the “over-regulation” of our domestic insurance industry, PhilAm’s funds are mostly invested in home-grown government income earning securities.

 Such hard-nosed response of IBM and AIG to crisis is the model for estate planners.  Without even getting into the holy merits of the Ignatian ideal of detachment, it makes good sense for estate owners to consider their property as dispensable and disposable.  Anything less makes the estate owner subservient to mammon which in recent times has revealed itself as a faithless lord.
 

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