Transcript: Doug Braunstein
The transcript from this week’s, MiB: Doug Braunstein, Hudson Executive Capital, is below.
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VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast. I know, I say it every week, but I have an extra special guest. His name is Doug Braunstein. You may recognize the name from his years at JPMorgan Chase where he not only served as chief financial officer but he was also head of investment banking, global M&A, a member of JPMorgan’s executive committee.
Doug is currently founder and managing partner of Hudson Executive Capital. They are, for the lack of a better word, an investment firm, private equity firm, a little bit of an activist firm, they manage about $1.6 billion.
And they have recently become quite the active SPAC underwriter. Their first SPAC did really well; it’s up about 28 percent or so. Their second SPAC launched last year and their third SPAC is coming out shortly. Doug has just a unique background in the world of finance and M&A. An incredible network, he’s from First Boston to Merrill Lynch to more recently JPMorgan Chase, just an incredible network of people and contacts and company executives and finance people gives him just a unique perch to look out at the world of what companies are attractively priced, where can midsize companies find a way to obtain capital to turn around their fortunes, and how does the SPAC structure work in those areas, really just a master class on the intersection of corporate finance and company management and how to produce value for shareholders.
I found this to be absolutely fascinating, wonky, and informative, and I think you will also.
So with no further ado, my interview with Hudson Executive Capital’s managing partner, Doug Braunstein.
VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: This week, I have an extra special guest. His name is Doug Braunstein and he is the founder and managing partner of Hudson Executive Capital, a private investment firm that engages in private equity, public offerings, activist investing, managing about $1.6 billion.
Previously, Doug was the chief financial officer for JPMorgan Chase & Co.
Doug Braunstein, welcome to Bloomberg.
DOUG BRAUNSTEIN, FOUNDER AND MANAGING PARTNER, HUDSON EXECUTIVE CAPITAL: Thanks, Barry. Good to be with you.
RITHOLTZ: So in addition to being CFO of a major public bank, you are head of JPMorgan’s American Investment Banking Group, you are head of the Global M&A Group; you’re a member of the executive committee. Tell us a little bit about where you began your career and how you rose to those positions at JPMorgan.
BRAUNSTEIN: Yes, so Barry, in some sense, it was a little bit circumstance.
I was actually I went to law school and I had planned actually be the law school professor, that was my objective, and I read this remarkable article in the New York Times Sunday business — Sunday magazine section on lawyers becoming investment bankers and it sparked my interest.
And that year was the first year First Boston came to campus to recruit directly. And I dropped my resume into a box because that’s what you did back in the 1980s and I interviewed with a bunch of bankers in the M&A group at First Boston, thought it sounded incredibly exciting and so that’s where I went. I spent close to eight years at First Boston working originally for Bruce Wasserstein and Joe Perella in the M&A Group and just had an extraordinary start to my career.
RITHOLTZ: Yes, you could do a lot worse than cutting your teeth with those two gentlemen. How did you end up at JPMorgan?
BRAUNSTEIN: Well, I took — my boss at the time at First Boston who was running the M&A group brought a bunch of us about six senior bankers to Merrill Lynch to help build out their M&A practice and I was there for you know for very good years, but I got a call actually from the late Jimmy Lee and he was at Chase and they wanted to build out their investment banking businesses and he and Bill Harrison convinced me that I could come and make a difference.
So I joined that organization in early 1997 to run at the then time, their healthcare investment banking practice and to co-head their M&A group. And I think the year before, I joined the chase M&A groups revenues were about $35 million …
BRAUNSTEIN: I think actually Joe’s pizza shop and M&A group probably ranked higher in the league table.
BRAUNSTEIN: And you know, we –I had a wonderful, we’ll talk a little bit about it, I had a wonderful close to 20 year career at JPMorgan, but you know, when I left the role of the head of M&A, the business was doing $1.6 billion about seven or eight years later. So it was a remarkable run in building out that business with the firm.
RITHOLTZ: Yes, to say the least.
And you know it’s funny, coming from a legal background, you went to Harvard Law and then you spent time doing banking. That’s not the usual career path to CFO in a publicly traded company, usually it’s some combination of accounting, an MBA and that side of the company. How did you end up at as JPMorgan Chase’s CFO?
BRAUNSTEIN: Yes, well, my first — to be fair, my first exposure to Jamie was — I was helping Bill Harrison as advisor to JPMorgan in the merger discussions with Bank One. And actually, I can remember distinctly a quite forceful conversation around the exchange ratio at a conference room table with what I knew would be my future boss.
And you know, I think we got to know each other quite well during that process. I was fortunate enough to be — in addition to the advisor to the company, I had the opportunity to run the number of the important businesses in the investment banking business. So at the time, I was running both M&A and the coverage units. I later took on responsibility for running a number of the capital markets businesses. And I think during that timeframe, the businesses I was working with did very well, you know, I think we had the opportunity to demonstrate a fairly high degree of rigor as a business matter, and I got to develop an even stronger relationship with Jamie and quite a number of the members of the operating committee.
And so, I think when I was approached to do the CFO job, as you might expect, I spent a lot of time talking actually to Mike Cavanaugh who was my predecessor in the role speaking to literally all of the operating committee members before deciding that it would be a great opportunity for me, and hopefully, the right decision for the bank.
RITHOLTZ: And I assume it turned out to be, you’re CFO not only of a giant company, but of a publicly-traded one, what is that like? Being public gets a bad rep these days, what was it like being JPMorgan Chase’s chief financial officer?
BRAUNSTEIN: Yes. You know, it — I mean to be fair, Barry I think it was in aggregate, a remarkable privilege to be the CFO of JPMorgan. It is a, I think, one of the world’s great companies, and obviously I got to work directly for what I believe is one of the world’s great business leaders in Jamie. You know there — it was it — the remarkable part about it is the what I believed was this awesome sense of personal responsibility because the company had, you know, 250,000 employees and while we had bankers and guild doers, you know, we had literally thousands of people in teller jobs and back-office jobs and the security teams that you know greeted you on your way into the office.
And so you just — you came in every day with this feeling of responsibility to make sure that the company was both safe and secure and a good place for them to work. We had millions of consumer customers, you know, millions of small business customers and obviously we were you know, bank to many of the largest businesses in the world.
And then of course you have a $2 trillion balance sheet and to then times six independent lines of business, so it was it was, you know, it was a privilege to serve in that role, you know you worked every day to make sure that we were maintaining a fortress balance sheet. Obviously my responsibility in communicating with external investors was to make sure that what we said was accurate transparent that we were you know clear and consistent with that reporting both to the public and obviously to our regulators.
And the last thing that was really fascinating about the job was you know I took on that role right on the heels of the implementation of Dodd Frank, so you know at the early days of a post global financial crisis if you will.
RITHOLTZ: You mentioned the fortress balance sheet, JPMorgan Chase probably came through the financial crisis better than any other bank — certainly better than any major money center bank. You weren’t the CFO during the crisis but I assume because of your role in M&A, you were witness to what you know that quick Bear Stearns deal…
RITHOLTZ: Did you participate in that puncture something that and what on Earth was that like?
BRAUNSTEIN: Yes, and so it was — it was actually I did get to participate, it was an extraordinary experience. At the time, I was in my role running banking and M&A and so I ended up doing the what was a very short lead advisory assignment for our work at the company. So we knew, you know, midweek that Bear Stearns was having what ended up being a devastating liquidity crisis. And we originally you may recall, were called by the fed…
BRAUNSTEIN: To provide Bear Stearns a loan and then literally over the course of that Friday, Saturday, Sunday, we — I helped to organize and lead teams around diligence and then obviously helped Jamie and the senior management in the negotiation of the actual transaction.
So you know that the process itself given the time constraints and the risks involved was one of the most fascinating ones I’ve been involved with.
RITHOLTZ: I can imagine. And then I assume a similar shotgun romance a year later with Washington Mutual, I assume that was sort of similar although given the overlap between regulators, I would imagine you going into that with a little more confidence that there were no surprises and perhaps you saw at Bear Stearns?
BRAUNSTEIN: Yes, I mean Bear Stearns obviously we had, you know, we had this weekend, they had — they were businesses were quite familiar with but we knew in part that if we didn’t act over the course of the weekend and Bear Stearns filed for bankruptcy which they were preparing to do…
BRAUNSTEIN: That they would be just cascading effect that could potentially impact many others.
RITHOLTZ: Sure. JPMorgan was a big counterparty, right…
BRAUNSTEIN: Yes, there was but that was less at issue actually for us. Again, because of the fortress balance sheet and the vast amount of liquidity we had, you know, had others incurred problems, we thought we would be fine but it wasn’t necessarily a good thing for both the economy and the country and so at the time there was a real sense that you know if we could do something that was good for our shareholders and also good for the country, that we would do that.
Washington Mutual was a different set of circumstances and a different process and different regulators as you said, Barry.
BRAUNSTEIN: And as it turned out, we had taken a hard look at Washington Mutual previously and was also, to be fair, a simpler business and a less complicated balance sheet and so that process was, you know, less time constrained though obviously important and it was really run in a very different way. Interestingly, at the time and if I’m recollecting correctly, the FDIC which round that process, they actually required you to bid over a fax machine which, you know…
BRAUNSTEIN: Even at the time was unusual.
BRAUNSTEIN: And so we actually had to put our bid letter in over the fax machine and both of those transactions, obviously, the opportunity set arose because you know, we were a fortress balance sheet and we were able to take on those businesses, and I think in hindsight, both have created you know a lot of value for the JPMorgan shareholders.
RITHOLTZ: Yes, quite interesting. Let’s talk a little bit about Hudson and what they do.
What motivated you after working in a series of giant banks to launch your own firm?
BRAUNSTEIN: Thanks for asking, Barry.
It actually — it was a function of some of the most extraordinary people I had met over a 30 year career on Wall Street, had been a successful entrepreneur. In fact, my wife had been a very successful entrepreneur and I thought that it would be an exciting and invigorating opportunity to launch out at you know, 55, and start my own business.
And I wanted to do something different and exciting and energizing and I came up with the idea of building an investment firm around the notion that I could tap into this remarkable network of current and former chief executive officers and other senior executives that I had built over that 30 year career and try and offer that wisdom and expertise and mentoring and judgment to small and mid-cap companies where we could make an investment and try and help those companies to improve their performance.
So that was really, it was it was the excitement of doing something entrepreneurial and really sort of leveraging those capabilities and relationships I had built over you know, three decades.
RITHOLTZ: So when I think of Hudson Capital, I kind of think of it as one part private equity, one part underwriter, one part activist investor, am I oversimplifying that? How would you describe it?
BRAUNSTEIN: You know, I think the way to think about it is I think we try to take up private equity like approach to public market investing and what I mean by that is we invest in companies where we think we can add value by helping them from an operational standpoint. We can add value by helping them allocate capital efficiently and that doesn’t, by the way, mean share repurchases or dividend, that means for small companies, you know, how do I put a dollar of investment to work in my business to optimize my return on investment for my shareholders?
We look at how to help the company reposition themselves in the capital markets attract better long-term investors, get better coverage from research analyst, tell their stories succinctly and clearly. And then perhaps the most important thing we end up doing is helping the company position themselves strategically. For a lot of these small companies, they participate in businesses where scale ultimately can be a real competitive advantage and often times are investments in the companies we invest in end up being acquired by much larger strategic partners.
So that’s the — our philosophical approach, it is very active but much of what we do — almost all of what we do is typically behind-the-scenes, you know, out of public view consultative with both the CEO and the management team and the board. And we find if we can do that, it usually gets to the place we want to get you faster and more efficiently and it ends up working out much better for the shareholders.
RITHOLTZ: Interesting. So I’m going to guess with your background and your experience doing M&A for all these you know August companies that have fantastic reputations, you develop a sense for what makes for a good acquisition, what deals work out well, where is the value hidden that perhaps the market is missing, but the thing that makes it even more interesting these days is then you then take that background and say you use the SPAC structure as the shell to make acquisitions hopefully that bring — unlock some of that value for the marketplace. Why SPACs?
BRAUNSTEIN: Yes, it’s a great question, Barry, and you know I began Hudson a little under six years ago when we were simply you know investing principally in public companies. Companies that are already public where we could go and acquire their shares. And I was, to be fair, over the last several years, I was somewhat skeptical of SPACs, the history for me with SPACs was you know, one that typically involved very troubled companies, and some very dear banker friends of mine worked very hard to convince me that this market was changing, and that the skills that I just described that we use in Hudson to help position public companies would be directly applicable to these private companies and the SPAC structure in going public.
So we launched our first SPAC in June of 2020 so right on the heels of the turnaround in the markets following the pandemic’s initial impact and we been very fortunate, we announced a merger for that first SPAC early in January with a company called Talkspace which we’re really excited about.
RITHOLTZ: Right, that deal is now up more than 28 percent since the SPAC was launched. Talk us through the experience, what is the process like of looking to a merger company into a SPAC compared to the traditional M&A type of transaction?
BRAUNSTEIN: Yes, it’s actually remarkably similar in many ways to a traditional M&A transaction. So the important part of ultimately finding a successful transaction is identifying businesses, in our view that have long term sustainable competitive advantage, right? Because you’re going to be merging with a company that ultimately for us we think we want to we want to look out and be successful shareholders not just at the transaction, but two years, five years, 10 years out, right?
So it’s important as part of an M&A process to identify companies that you think are going to create long-term value. The second piece of that is you actually have to find a great management team, right? To help execute that vision. And then the third piece is, is this a business that you can be an effective partner with, right? And do you — do you share a common vision, do you share a common mission, do you think about how to build that business and create value for shareholders consistent with the management team?
And you know in talk space, we you know we found each of those three opportunity sets were fantastically filled by the company both its management, the core business which I’ll happily talk a bit about and you know and our shared vision of what the opportunity set is for the shareholders overtime.
RITHOLTZ: So you mentioned the first SPAC HEI 1 was filed in June 2020, the second version HEI 2, came out later in the year and you just filed for HEI 3 for a $500 million SPAC, is there something to the rhythm of this to keep a full pipeline of future SPACs teed up or is this just you know, a land rush these days and everybody is looking to do what they can do?
BRAUNSTEIN: Yes, you know it is certainly there is a lot of activity I can’t speak to the logic behind others. For us, you know, one of the things that we have found is that our business model has created really even for me; I thought it would be a good level of transaction flow, it’s been an extraordinary level of transaction flow.
And we source businesses from really multitude of sources. We have this network of my founding CEO partners almost 35 executives that are out looking for opportunities for us to merge with in the SPAC, we have of full research team that’s doing bottoms up work that’s part of the Hudson Executive Investment team, we have what turns out to have been the benefit of 30 years on Wall Street is, we’ve gotten wonderful relationships with the M&A banker community on Wall Street, so we are getting and more than our fair share of opportunities that we look at.
And then my partner and I, Doug Bergeron, we’ve got no long-standing historical relationships on both East and the West Coast into the venture community and the private equity community. So for us raising capital is really reflective of the opportunity set we see in front of us and we’ve been very purposeful in sizing those two SPACs quite differently to reflect the different size of the opportunities so that we got the appropriate level of sponsor capital to really help effectuate you know smaller and larger transactions.
So for us, we think this is this is a new and I think long-lasting corporate finance tool that private companies are going to look to utilize, it won’t be perfect for all companies but it will be really an excellent Capital Market solution for many and we think we are going to be you know, we’re built to be successful in this asset class.
RITHOLTZ: So I have two more questions on SPACs, the first is I think was last month I saw a column on TechCrunch that asked could giant SPACs be next raises the question how big can SPACs get or are we going to see a billion or a multibillion-dollar SPAC coming down the pipe?
BRAUNSTEIN: Yes, so, Barry, there have already been several that are a billion or multibillion that it have been launched and there is no question that there’s the investor appetite for that, you know, to me, it’s you want to have the right tool in your toolkit for the right opportunity set.
And what’s really exciting for us is you know, SPACs in that’s 250 to 750 range lost the ability to raise capital through the pipe gives you an enormous flexibility to really optimize the number of potential merger partners out there. You know, the larger you get, the shorter the list comes of eligible transactions, and so we’d rather, you know, to us, it’s less about the headline you grab and it’s more about finding really good businesses that generate a lot of value for our investors and for the shareholders.
RITHOLTZ: And that leads to the related question at what size does an IPO make much more sense than a SPAC and you sort of hinted at that a little bit.
BRAUNSTEIN: Yes, it’s honestly it’s less about size and it’s — so let me just step back for second and you know from our perspective, what I’ve come to firmly believe is there are some very significant competitive advantages of a SPAC over an IPO, right?
It’s a faster process so speed can sometimes be important. It’s actually a more certain process in terms of pricing, because you don’t actually end up announcing the transaction, the actual merger until you raise the pipe and the pipe confirms the price, right? So you presold at that given price.
And so you know in a relatively short period of time not only you’re going to effectuate the — to go public but you know the price. Structurally, the SPAC gives you I think a greater degree of flexibility to raise both more primary and secondary capital in most instances and then the last piece is the actual disclosures of a proxy, a merger proxy versus an IPO filing.
It means that you can actually provide your investors with projections and it allows particularly for growth companies, it allows them to tell a much more fulsome story to the investor and the corresponding opportunities the investor gets a lot more information when making that investment decision.
So those characteristics are offset by a spec can be marginally higher in terms of its cost of capital than an IPO, and you are actually – a SPAC means you’re choosing a partner and in an IPO, you don’t have to do that. So you know, each company that goes through this evaluation has to decide do the benefits outweigh the cost. For Hudson, what we articulate to our SPAC partners and we did this with talk space quite effectively is our partnership because of this network of executives and our experiences actually accelerates growth and adds value to the company, and therefore, over time, the shareholder should be better off with that partnership.
So we think that you know and I go back to you know your question about is a SPAC like a merger. At the end of the day, many, many mergers are successful or fail on the chemistry and interaction of the two companies.
So this partnership concept actually matters as much if not more often times in the underlying economics of the deal.
RITHOLTZ: Okay, so, Doug, I was reading a quote of yours that I really am intrigued by, you had said quote “We like to apply a private equity approach to investing in public markets” unquote, explain what you mean by applying private equity to public markets.
BRAUNSTEIN: You know, Barry, it is a combination at the front end of rigorous due diligence so before we make an investment, it often times it takes us you know, four to six months to complete our work. So we will be following a company for a long period of time and we try to dig in as deep as possible to that business.
Now we are aided by the fact that you we have this network of current and former chief executive officers that have lifetimes of experience and domain knowledge in the industries in which we invest. And so we often rely on them and their networks to help us analyze the businesses that we invest in.
You know, we only make three to five investments per year, we’re very concentrated, so we have to make sure you know when you make very few bets you want to make sure that those bets are good ones the other piece is after we’ve made the investment, how involved we are with the companies? So we will be involved assisting the management, providing advice, mentoring, as it relates to their operational execution, as it relates to the how they position themselves in the capital markets, as a relates to how they allocate the shareholders capital to optimize value and returns, and ultimately how they position the company strategically.
And so we will often get our – we will often go on boards of the companies that we invest in, we will often make recommendations for board members we think bring lots of value to the company, we will, in many if many instances actually sign NDA’s — nondisclosure agreements and actually work side-by-side with the management for periods of time.
We presented to all of the company boards that we invest in to give the board members a perspective on how shareholders view their company. So we’re, you know, we’re kind of a roll up your sleeves kind of investors. I will tell you it’s — we think it not only creates a lot of value but it’s actually personally quite rewarding to work with some of these companies. And you know see them doing a better job delivering for their customers, for their employees and ultimately for their shareholders.
RITHOLTZ: Very interesting. You have mentioned several time your limited partners in your the investors, tell us a little bit about these folks, it sounds like you have not only a network of ready sources of capital but what I only could describe as smart money.
BRAUNSTEIN: Yes, it’s — I would actually say you’re — if you met these folks, smart wouldn’t do justice to the extraordinary capabilities of these individuals.
So I had you know that the remarkable opportunity having worked you know running banking at JPMorgan as I got to work with us many of the world’s great companies and I developed relationships over those you know 30 years with a lot of chief executive officers, CFOs who became CEOs, heads of corporate development and when I started Hudson, the first 250 million of capital that I raised was principally from that group of executives.
And what I asked of them was not only for their capital but I asked him to help to identify opportunities to invest, to help provide mentorship and guidance to the companies that we invested in, to make recommendations for board members or for management team members, and really to be actively involved.
And so we use that group, they’ve been with me for six years as an investor, we use that group for all aspects of identifying opportunities and diligence, and then execution.
And wk, we’ve talked a little bit about our new and growing SPAC business, they are all actively involved in that as well. So it’s a — it’s an extraordinary group of professionals and you know, literally many of them have helped build and run and create some of the world’s best companies.
RITHOLTZ: So let’s talk about some of your other non-SPAC investments. At one point in time, you owned a 19 percent stake in Cardtronics, where is that investment, are you still active with them and that’s a pretty substantial chunk, tell us a little bit about that deal.
BRAUNSTEIN: It is. And maybe I’ll actually step back. So we — and we still do own that stake, we acquired that stake a little over three years ago, and the logic behind it Cardtronics is – it’s one of these, you know, interesting small companies that many people have never heard of but have a remarkable market position.
They are the leading provider of ATM machines, independent ATM operators in the world they don’t make the machines, they actually run and manage a network of almost 40,000 ATMs in the United States and many outside the United States, and what’s unique about them is that they are in seven of the 10 largest retail locations.
So if you go into a CVS or Walgreens or a target or a Speedway and you see an ATM in there, that ATM is owned and operated by Cardtronics. And the company at the time we invested was struggling, they had just made two very large acquisitions, levered their balance sheet operating performance had gone south, they had lost their largest customer, and you know we invested in the company, based on again months of diligence using our network of chief executive officers and our relationships and obviously my own personal background in the banking industry, and worked with the then new CEO to help reposition the company and change its strategic focus.
And over the last several years that CEO and his management team have done an extraordinary job in repositioning the company. In the pandemic, the stock took a very significant hit despite the fact that the company operated exceptionally well through the pandemic, and as a result of what I thought was an ongoing long-term opportunity but a short-term disruption, I partnered with Apollo Global Management private equity firm and actually made an offer which was ultimately accepted by the board to take the company private.
RITHOLTZ: And when you made — when you had made that offer, it attracted the attention I believe of one of the big manufacturers of ATMs, NCR, who got involved, how did their role come about and how did that resolve?
BRAUNSTEIN: Well as you know, Barry, meaning – though Cardtronics is headquartered in the UK, public company boards have a fiduciary responsibility when selling a company to optimize value.
BRAUNSTEIN: And after our transaction was announced, the board received a series of inbound inquiries from a whole host of companies and at the end of a process that they ran, the board made the determination that the NCR offer which was $39 versus our $35 offer was superior and they therefore recommended that the shareholders, and that transaction now — the vote and the transaction remains pending.
RITHOLTZ: Let’s talk a little bit about the pandemic and the opportunities the market crash might’ve created last year, normally when you get of 34 percent crash like we saw in 2020, the value investors get it opportunity to go out and pick their favorite targets on the cheap. But it seemed like this was over if you blinked you missed it, how was last year as an environment to find either discounted or distressed assets that looked attractive?
BRAUNSTEIN: Yes, I know. It actually is remarkably different in tone nature and I would argue over time, the impact of the pandemic on the way companies do business I think will be far more long-lasting and different in the global financial crisis.
So the speed at which the market recovered, I think, created a very small brief opportunity for folks brave enough to step in. In some sense, it was similar to your March 9 of 2009 right if you if you put money into the market on the 10th and walked away, you would have done extraordinarily well.
BRAUNSTEIN: But investing isn’t there are some folks who are market timing investors, we really are focusing on you know fundamentals of businesses that have that long-lasting sustainable competitive advantage and what is clear is that the pandemic has accelerated and highlighted trends that will make for different winners and losers in the market going forward.
So on a long-term basis, I think it has really changed the nature of how companies will compete effectively and be successful.
And you see that for example in healthcare in the digital delivery and acceleration of digital healthcare. So Barry we talked about our investment in Talkspace which is digital behavioral health company, that business in many ways is now the future of behavioral healthcare whereas pre-pandemic, it was an important vehicle but not but it wasn’t as clear that it will ultimately be a winner as it is today.
And so I think it’s really — the pandemic I think forces value investors and individual stock pickers to reassess the strategic positioning for many companies, and that’s what I think the long-term consequence is going to be of the pandemic.
RITHOLTZ: So let’s talk about a specific company. Hudson took a 3.14 percent stake in German banking giant Deutsche Bank back in October 2018, tell us a little bit about what attracted you to Deutsche Bank, they’ve had a recent history of some regulatory problems going back to LIBOR and a whole run of things, what makes them an attractive investment here.
BRAUNSTEIN: So Deutsche Bank is a really interesting investment and when we made the investment back in 2018, you know, we were clearly quite the contrarian investor, but you know, with the benefit now of two years of execution in hindsight. I think the management continues — the new management continues to take this company in the direction we think is going to create lots of value for our shareholders today.
What was compelling about Deutsche Bank is it is you know, the largest banks in one of the world’s largest economies and obviously, one of the most important economies in Europe with a number of businesses that if executed properly were leaders in their space, and the bank was troubled by a variety of shortcomings and mistakes of prior managements, a lack of the cultural focus, a lack of investment and leadership and ultimately trying to compete head-to-head on all fronts with companies like JPMorgan when that wasn’t really their strategic direction.
And so I invested after Christian Sewing was named the new Chief Executive Officer, we were actively involved with the company in helping them think through their strategic repositioning and we have been working actively with the company for the last several years as they have both rolled out that repositioning and now executed on it, and what Deutsche Bank really focuses in on from an investor standpoint is in a world in which the macro environment is very challenging for banks, much of the operating performance improvement of Deutsche Bank is driven by self-help.
And we believe that Christian and his management team who have now successfully executed on their plan for close to two years is really on a path to returning this company to both substantial profitability and generating a lot of excess capital that can ultimately be returned to the shareholders.
So that’s for us, in an environment that’s otherwise challenging for large banks given the interest rate environment we live in today, much of this opportunity set is driven by self-help for Deutsche Bank.
RITHOLTZ: Meaning management knows what they need to do to get the bank on the right path. You are clearly not the only one who sees Deutsche Bank this way, Capital Group just a three percent stake, there are rumors of other people taking around, taking a chunk, do you like to be early or do you not think in those terms of having to be the first one to turn over the rock and see all the critters underneath?
BRAUNSTEIN: Yes, well, sometimes, unfortunately you realize that when the rock is turned over, there are lots of critters, this one the critters had already been released …
BRAUNSTEIN: The question was whether or not the management was up to the task and that’s where the work that I talked about that we do on the front end leads us to make investments based on the confidence of that deep due diligence and domain knowledge and expertise.
So we don’t — we don’t want to be — we don’t need to be the earliest we don’t need to be the first, what we don’t know is whether we will pick the bottom but because we’re long-term investors, Barry, we’re — we know when we’re investing, we’re not taking the top. And that to us is the important part.
So this is a big complicated global institution that had to go through a fundamental change in leadership, in management, and culture and in strategic positioning, and that takes time but if you are patient and you’ve made the right bets in the early parts of an investment, it ends up being you know a very rewarding experience.
RITHOLTZ: So let me stay with your expertise at giant money center banks. Clearly JPMorgan Chase is a SIFI, is a systemically important financial institution, I have to imagine that in Germany, they are perceived as their version of SIFI or a national champion or whatever you want to call the hometown giant money center bank, what is going to happen across the globe with these sorts of banks? Are we going to continue to see consolidation? I look in France, at Societe Generale and BNP, I look in – at Switzerland at Credit Suisse and UBS. Are we just going to end up with a handful of giant banks in each and every country?
BRAUNSTEIN: Yes, it’s a great question, Barry and I want to step back and say one of the real you know if there are benefits that came out of the global financial crisis, it is the standards that were put in place whether it was you know the fed stress tests and capital requirements of the Basel 3 requirements, all of these designations that you mentioned you know systemically important financial institutions, means that today, those large banks start from a position of relative strength both in terms of their capital and liquidity.
So the good news today is in the course of what has been a very challenging economic environment in the pandemic, the banking system is far stronger, far more resilient than it was a decade ago. Having said that, there is no question that there remains what I would characterize as excess capacity or suboptimal returns that could certainly be enhanced through mergers.
And so, you know, t my expectation I think others expectation is that there will be another round of consolidation and that may very well you know, it may take some time to get there but there is no question that for a number of these large banks, gaining more scale, creating more efficiencies will ultimately over time, both, you know improve returns for the investors and actually build capital from a regulatory standpoint to keep these banks safer, so yes.
BRAUNSTEIN: I’m not sure we see it today but we will see it.
RITHOLTZ: Interesting, so that makes me think of two specific things, we will go backwards and currently, currently, there’s a ton of consolidation going on the asset management side, we have Schwab taking over TD, Morgan Stanley doing a few acquisitions, Franklin Resources and INVESCO, what are your thoughts on that side of the finance sector, are the same forces driving consolidation on the asset management half?
BRAUNSTEIN: Barry, it is unique and different, and I think the forces that are driving consolidation in the asset management side is really the prevalence and the amount of capital that has gone to passive investing with far lower cost structure.
BRAUNSTEIN: And so the traditional asset management model of active management and fees associated with active management has been squeezed. And when profits and margins are squeezed, one of the things that a company can do is look to improve that profitability or margin by merging and taking out excess costs. So what you see happening in asset management is that is a different driving force than what we talked about for the global financial institutions.
By the way, you know if you think about the investments that I make in some of the small or midsize businesses, they all — their targets of larger companies because there is a driving force that benefits through scale, so we’ve owned a number of medical device companies, great product but it costs an enormous amount of money to run a sales and marketing organization globally, and large medical device companies have those sales and marketing organizations in place, so they’re able to take a great product and put it into their channel and distribute it.
So and what I will say is asset management is no different than large financial institutions, is no different than medical device which is these businesses over time are increasingly global and the benefits of scale matter, and quite frankly if you, you know, you want to take the paradigmatic example of the benefits of scale, you know my old employer JPMorgan is it is the perfect example of that. They are — you know they are a dominant player in the space in part because of the scale.
RITHOLTZ: Makes a lot of sense. Since you were at JPMorgan during the crisis and we talked about Washington Mutual, we talked about Bear Stearns, I feel like I would not be completing the whole set of collectibles if I didn’t ask you about either Lehman Brothers or AIG, tell us a little bit about what you might have seen late 09 when everything was on fire, did you guys look at either of those companies and what was your take away?
BRAUNSTEIN: Yes so I think because JPMorgan was you know a bank if you will to so many other banks, we had you know the either the benefit or the challenge of being, you know, having a front row seat to almost every large financial institution and how they went through the financial crisis. We actually were called to evaluate in Lehman and that was a you know a short discussion, it really didn’t fit what we were doing strategically, AIG on the other hand actually called us to help them try and find a solution and it was one of those examples during the financial crisis I was actually you know, happily on my way to work one morning and I got a call from Jamie that he asked me to reroute downtowns AIG’s offices…
BRAUNSTEIN: And we spent quite a few weeks working with the management team and the board to try and find a private market solution, ultimately, we weren’t able to do that and the government as you know had to step in. But you know, we were both looking at businesses as a potential acquirer and we were actively engaged with businesses as an advisor to try and help the management crisis.
RITHOLTZ: So I see AIG as having some real value outside of their financial products division that blew up, the question with Lehman Brothers always seem to be that everybody who to– to use my private — to use my previous metaphor, everybody who flipped over that rock said all of these this is just a disaster we can’t get involved in this and it sort of looked like the Fed had the same attitude, they were comfortable letting them you know do the full face plants into the pavement. What was your perspective on Lehman?
BRAUNSTEIN: Yes, you know to be fair I was busy — Lehman and AIG kind of those bombs went off at about the same time.
BRAUNSTEIN: So it was quite an interesting period of time because there was a group down at the Fed trying to find a solution for Lehman and in many of those individuals weren’t aware that you know literally a block or so away there was another quite frankly larger financial institution that was also in massive distress.
I think, you know, in hindsight the markets — the Lehman bankruptcy obviously sent the markets into a material tailspin which accelerated issues at AIG and a number of other companies and it and you know it the end of the day, you know the Federal Reserve decided, to and the treasury decided to step in AIG to try and put the finger in the dike. It ended up being very important and ultimately you know financially not necessarily successful but at least financially neutral to the government.
But you know, part of the lesson, Barry, in all of this is financial institutions run — financial institutions are a little bit like marathoners, right? There in you know — they are in great shape and that shape is their capital base, right?
How prepared are they to weather a crisis? But they also need liquidity and matching the duration of your assets and liabilities is critically important and for a marathon runner it’s the oxygen they take in the race.
And you know you could be in the best shape of your life but someone puts a pillow over your head at night and you can’t breathe it’s not going to end well. And for many of these financial institutions, they believed capital was sufficient and in the end you need both capital and liquidity. And you know they — the system starved them of the oxygen they needed at the time they needed it most.
RITHOLTZ: Yes, that made sense. The world looks differently at mile one than it does at mile 26…
BRAUNSTEIN: 26, yes.
RITHOLTZ: Right? The world looks differently during normal times and it does in a liquidity crisis.
BRAUNSTEIN: Exactly and if you aren’t prepared for both, you know, you are not going to be successful in the race and I get back to you know the remarkable position and seat we all sat in at JPMorgan is in her we had both the capital and the liquidity to manage through this and our ability to try and help the system through the financial crisis was you know, for me, one of the parts of my career I’m most proud of.
RITHOLTZ: Quite interesting.
I know I only have you for a limited amount of time. Let’s jump to our favorite questions that we ask all of our guests, starting with tell us what you streaming these days what are you doing to keep yourself entertained with either Netflix or podcast, what do you — what’s entertaining you?
BRAUNSTEIN: Well, what’s entertaining me? So I am I will tell you, to be fair, I am happiest, happiest at work and I will tell you that I spend the vast preponderance of my time looking for SPAC candidates investment opportunities.
Now having said that when I do have a moment, I love the Queen’s Gambit and my children would be very upset if I didn’t also say that I kind of have a hankering for The Great British Baking Show .
BRAUNSTEIN: So that’s what I do watch and moments of relaxation you know and on the on the podcast side, Barry, I love your show, I am a sucker for Michael Cembalest’s “Eye on the Market” from JPMorgan I think you just he has a really innovative approach to two big global questions so when I do have a moment here or there, that’s what I try to listen to.
RITHOLTZ: Good stuff. Let’s talk a little bit about your mentors and dear Lord that’s quite a list you very mentioned already, tell us who helped to shape your career.
BRAUNSTEIN: Yes, so I am a big believer by the way the for young people the importance of mentorship, I think but for the mentors I had, you know, my career in life would have been really different. I actually go back to college I had an extraordinary professor in college, a guy by the name of Sam Bacharach who really changed the trajectory of my academic and development.
I worked for him for a number years in research and it was just — it was great training and then when I went to First Boston, I had the privilege of actually working for both Bruce Wasserstein and Joe Perella, my long-term boss who ran the M&A group, Mike Koeneke, I think all three of them gave me great advice, and more importantly they kind of put me in positions where you know I had to swim on my own and that every once in a while, they would give you a nudge one way or the other but they just gave me great opportunities to develop as a professional.
And obviously I talked a little bit a JPMorgan about of the extraordinary experience of working with Jamie but you know I started my career working for Bill Harrison and you know, I think he had an enormous influence on my development professionally.
So I had a string of great folks to work for.
RITHOLTZ: Yes, that is an amazing list. Let’s talk a little bit about books, what are you reading currently and what are some of your favorites?
BRAUNSTEIN: Yes, so right now actually I haven’t read a book in the last couple of months, it’s just been really busy. I would say on the favorites front, probably my all-time favorite book is “Team of Rivals” by Doris Kearns Goodwin, I love the story behind Lincoln building out the cabinet, it’s just — it’s extraordinary lessons in leadership. I have to give a shout out to Andrew Sorkin for “Too Big to Fail” you know, we spent a lot of time talking about the global financial crisis and having had a front seat to most of it, I think Andrew did a remarkable job with that.
And then I am kind of a sucker for you know a bunch of Michael Lewis books, I love “Moneyball” for example and I try to read periodically books that my children are reading so we can have some interesting discussions, so and I probably have to give a shout out to “Lord of the Rings” so that’s one of those.
RITHOLTZ: So that’s a good list and you could add to your list I believe Michael Lewis’s book on the pandemic comes out in May or June of this year, that’ll be interesting.
BRAUNSTEIN: Yes, I’m excited to read it. I have to be fair, I have a pile of books sitting next to my bedside that I haven’t cracked in about four or five months, I — there’s lots of a downside but the ability to be active inefficient remotely has really changed the workday in a way …
RITHOLTZ: No doubt.
BRAUNSTEIN: Doesn’t let me get to very many books these days.
RITHOLTZ: Right, there was a study out not too long ago that showed that the average of white collar professional is working something like two hours more a week or a day I remember was what it was but it is a big uptick in time when you don’t have to commute shower get dressed, you just roll out of bed and you’re at your desk, it’s a whole different experience.
BRAUNSTEIN: It is a different experience and the other piece is, the typical boundaries between work and home get eroded…
BRAUNSTEIN: No complaints though because it’s you know obviously a lot of fun for me.
RITHOLTZ: What sort of advice would you give to a recent college graduate who was interested in a career in either M&A, finance, underwriting, what would your career advise be to them?
BRAUNSTEIN: So I would, you know, obviously at JPMorgan we literally recruited hundreds of college grad and graduate school students every year, you know what I would say first of all, I think the training and experience that you get in any of these large programs I think is extraordinary and I think that is true of you know many, many of the large companies in both in finance, in healthcare and technology, I really encourage young people to spend a couple of years in one of these well-run companies to learn the processes that make these companies successful, and to be around a senior talent that they can train and develop behind.
But then ultimately I think you to be successful you have to do things that you’re passionate about, r work is hard and do you want to do something that’s not only hard but what you enjoy doing, so really you know, spend the time figuring out what makes you happy because that that allows you to put your very best foot forward. And then the last thing I encourage people to do is look to go to organizations that reward performance. You know, I think it’s really important that you young people work hard with her head down to do as good a job with the things they are asked to do and which the reciprocal requirement is that you know, the companies they work for recognize that and you know promote and compensate them for that performance.
So and that’s not true across the board and you know you want to be in an environment that rewards that strong performance.
RITHOLTZ: And our final question what you know about the world of investing, mergers, M&A today that you wish you knew 30 years ago or so when you were first getting started?
BRAUNSTEIN: Well, on the investing front, I’m going to go back to the duration of your capital can be remarkable competitive advantage and the reason I say that is either what I’ve learned over the last 30 years is it often takes time to build a successful company, it’s hard to really manage these businesses and build them and grow them and you know create competitive advantage.
And capital needs to be long in duration in order to see that lifecycle through. And so for me, it’s all about matching the asset and liability duration, in this particular instance, you know, you’re investing in companies is the asset and you want to have capital that’s longer duration to match lifecycle of that investment.
RITHOLTZ: Thanks, Doug for being so generous with your time.
We been speaking with Doug Braunstein, he is the founder and managing partner at Hudson Executive Capital which runs about $1.6 billion in assets.
If you enjoy this conversation, well, be sure and check out any of the other previous 372 such discussions we’ve had over the past seven or so years, you can find that at iTunes or Spotify or wherever you feed your podcast fix.
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Reggie Brazil is my audio engineer, Michael Boyle is my producer, Atika Valbrun is our project manager, Michael Batnick is my head of research, I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.