What Do Mike White and Bill Erbey Have In Common

I recently came across this old Fortune article on Indra Nooyi (http://money.cnn.com/2008/02/18/news/companies/morris_nooyi.fortune/index.htm), who has been under a lot of pressure lately from Nelson Peltz (White Paper http://trianwhitepapers.com/) to break Frito-Lay away from Pepsi.

While Indra Nooyi is indeed an interesting lady, what really caught my eyes in this article is the little part where it talks about Mike White, who lost out to Nooyi in the race to get the top job at PepsiCo following the retirement of the previous CEO in 2006 (White would leave PepsiCo in 2009 to join DirecTV as its new CEO). Indra Nooyi’s first project? Keep Mike White at PepsiCo at all costs.

Pepsi can have a strange effect on people. The company, that is, not the beverage. No sooner had PepsiCo president Indra Nooyi gotten word 18 months ago that she was to become the next CEO than she hopped on a plane to Cape Cod, where Mike White, her main challenger for the job, was vacationing. The two had worked together for years. Both had been CFOs and rising stars. Both loved music. When they’d been kicked out of a board meeting the previous month while their fates were being discussed, they went to the Jersey Boys musical on Broadway and sang along to all the Frankie Valli songs.

As Nooyi’s plane landed on Cape Cod, there was White waiting for her at the airport with a card he’d written to congratulate her. They took a long walk on the beach. Back at his beach house, he played the piano and she sang. Before she left, they went for ice cream. “Tell me whatever I need to do to keep you, and I will do it,” she told her longtime colleague, who was vice chairman at the time. White said he would sleep on it.

That kind of scene may be rare in the hypercompetitive realm of C-suites, but not at PepsiCo (PEPFortune 500) (rank on the 2007 Fortune 500: No. 63). PepsiCo’s three ex-CEOs, all on good terms with one another, weighed in to help Nooyi keep White onboard. She says she asked the board to increase White’s compensation to nearly match hers (Nooyi’s 2006 compensation: $7.1 million). White was Pepsi’s best operations man – the kind of guy who would be indispensable in a downturn. He would be an important advisor. In the end, White decided to stay. When it was his turn to speak to the troops at the meeting the following week to announce Nooyi’s appointment, he put it this way: “I play the piano and Indra sings.” Says Nooyi: “I treat Mike as my partner. He could easily have been CEO.” At key meetings she makes sure he is seated on her right.

Matching an manager’s salary to the new CEO’s just to keep him around? I’m not sure that I have ever heard of something like that before. Mike White must have been worth A LOT to the company for PepsiCo to make such an unusual effort to retain him.

The reason Mike White intrigues me is that while he is repeatedly referred to as a great operator in the Fortune article, he has also proven himself to be a terrific capital allocator at DirecTV (I read somewhere that DTV has bought back a bigger % of its share count in the last 10 years than any other company in the S&P 500 – that’s some Henry Singleton-scale equity shrink and really takes guts). Indeed, while it is hard enough to find ANY good capital allocators at public companies, managers that are masters of both operational and capital allocation skills are even rarer creatures. Most good capital allocators are like value investors; they  delegate the operational duties at their companies to more hands-on managers and prefer to sit in a corner all day, reading, and scheming their next move to take advantage of the inefficiencies presented by capital markets. Managers who are good at both running a company and moving money back and forth? Those are pretty hard to find. But when you do manage to find one, I think you would be wise to follow their activities as closely as you can.

Introducing Bill Erbey – the John Malone of Mortgages

One such manager I recently discovered (credits to my friend Samir who introduced Ocwen to me) is a guy by the name of Bill Erbey, who is the chairman of Ocwen Financial (NYSE: OCN), Altisource Portfolio Solutions (NASDAQ: ASPS), among other public companies that he managed to spin off in the last few years (you see where I’m going with this). TheStreet.com wrote an excellent profile article on Mr. Erbey: http://www.thestreet.com/story/12083751/1/bill-erbey-made-23b-off-your-underwater-mortgage.html.

Bill Erbey is in the business of mortgage servicing, which is a much tougher and more competitive business than satellite pay TV. Despite that, Erbey has produced some terrific long-term results for his shareholders:

asps

Erbey is a phenomenal operator.  Under his leadership, Erbey’s mortgage servicing platform has achieved a 70% cost advantage over their competitors. The interesting thing is that even Wilbur Ross admitted that he couldn’t compete with Erbey on cost. You know how good an operator someone is when they can manage an operation with a sustainably lower cost structure than someone who’s made a career by cost-cutting distressed businesses into profitability.

“They were getting much more productivity at much lower costs out of their people than we were, and with smaller turnover of people,” Ross says. He attributes this success to superior training. “It’s very tricky in any kind of service business to have the combination of high quality service and yet a low-cost delivery system. They’ve accomplished that,” he says.

So that’s operations, what about capital allocation? Read on:

“He has a very unusual combination of capabilities,” says billionaire investor Wilbur Ross, who joined Erbey on the board of Ocwen after it bought a company called Homeward Residential for $750 million in cash and stock from him last year. “You find some executives who are good strategists but not so good at the details of operation. He’s good at both. And then in addition he has been totally brilliant at capital markets activities.”

Reading about Bill Erbey is like reading an alternate-history version of John Malone’s biography. I just couldn’t help but to notice how similar these two were in their approaches to capital allocation and fanatical devotion to shareholder value creation:

1. Both men hate taxes and make tax avoidance a priority in capital allocation decisions. While Malone avoids taxes by setting up complex deal structures to get around the tax code, Bill Erbey just took the direct way and moved his family to the U.S. Virgin Islands (to justify having his companies domiciled there). Both also eschew dividends, which are a tax inefficient method of capital return.

2. Both are masters of spin-offs. Bill Erbey’s spin-offs are especially interesting because he does them to lower his companies’ overall cost of capital, by separating different quality cash flow streams and selling them to investors with different investment objectives and risk appetite.

3. Both make use of aggressive share buybacks to create value for shareholders when they feel that their stocks are trading below their intrinsic business value.

4. Both employ prudent levels of leverage to enhance the experience.

5. Both have made large, accretive acquisitions with their stocks as currency when they were richly valued.

6. Finally, both have delivered sensational long-term performance for their shareholders and have in the process made themselves billionaires.

What Do Mike White and Bill Erbey Have In Common

What do Mike White and Bill Erbey have in common? They both belong in the next edition of the book “The Outsiders”.

P.S. I am currently writing up on Altisource Portfolio Solutions, one of Bill Erbey’s companies, and will talk about Erbey and his industry in greater detail.

4 thoughts on “What Do Mike White and Bill Erbey Have In Common

  1. D says:

    Interesting post. One miss here, especially given the Blog’s name, relates to the following comment:

    “Matching an manager’s salary to the new CEO’s just to keep him around? I’m not sure that I have ever heard of something like that before. Mike White must have been worth A LOT to the company for PepsiCo to make such an unusual effort to retain him.”

    While not an identical situation, people should recall the compensation arrangement in place for a decade or so at Midamerican, for David Sokol and Greg Abel. Buffett talked about Sokol negotiating his compensation package down and Abel’s up to parity with Sokol’s comp in the 2004 Berkshire Shareholder Meeting, and then again (and at length) in the 2011 Berkshire Shareholder Meeting – post scandal.

    This may not fit with the theme of the post but given the twin perils of attribute substitution (salience for knowledge) and confirmation bias, ignoring disconcerting / disconfirming evidence is most always imprudent.

  2. Yes you are right. I do remember reading that somewhere but forgot about it when I wrote this (but I would blame it on my inferior memory/inability to connect relevant facts instead of other things you pointed out which I’m too dumb to understand anyway).

    I would also note the following differences:

    1) Sokol requested to be treated equally as Greg Abel mostly likely already having in mind that he would one day take a greater, more strategic role at Berkshire and Abel at the time was already being groomed to be his successor, whereas Nooyi requested to have White’s compensation match hers knowing that White was the biggest threat to her job as long as he was kept around.

    2) Sokol was independently very very wealthy at the time (I think Buffett confirmed this at a CNBC interview after the Sokol scandal – same reason I felt the scandal was handled improperly but that’s topic for another day), being practically the founder of Mid-American. I don’t think Sokol cared how much he was getting paid anyway. Indra Nooyi and Mike White hadn’t had their taste of CEO -level compensation yet when the leadership transition occurred and they would naturally take their new pay grade a lot more seriously.

    3) The Sokol request was private and did not carry nearly as much symbolism to the public as when Nooyi made her request to the board.

    I think by the blog’s name you are referring to the URL. I didn’t create it and don’t know how to change it but would love to.

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