Monday, September 20, 2010

So What's Wrong With Gerry Schwartz?

{A slightly abridged version of the following piece has appeared in The Mark News  as part of a series of op-eds attempting to answer the question: "Who is Canada's Most Influential Person?" I nominated Mr. Schwartz, who has been dubbed "Canada's Ultimate Capitalist"  for his success in the field of mergers and acquisitions,  an area of business activity that needs sober re-assessment in light of the current Great Recession.  It is perhaps also significant that a couple of weeks after I wrote this piece, it was announced that Nigel Wright, Schwartz's right hand man at Onex, was going to work for prime minister Stephen Harper as his Chief of Staff in the PMO.  This was further evidence of Schwartz's close connections, and deep influence, within both of Canada's major political parties.}

From the perspective of the financial crisis and deep recession of 2008-2010, one has to look back on the great wave of mergers and acquisitions that gathered steam in the 1980s and 1990s with a degree of ambivalence. Back then,  it became respectable for the first time to borrow 90% of the purchase price of an acquisition as a regular business practice.  But now....let's just say that the entire U.S. economy is in a process of "de-leveraging", and that we are all feeling the pain.

 Jerome Kohlberg, Henry Kravis and George Roberts—all American giants of corporate finance— and Canada's Gerry Schwartz cut their  financial teeth at the Wall Street investment bank Bear Stearns (yes, that Bear Stearns) in the early 1970s. Their great innovation—obtaining highly leveraged loans (and using junk bonds whenever necessary) to buy (often under-valued or poorly managed) businesses—has provided an additional discipline on the market and has been good for many stockholders. On the other hand, it is not difficult to see how the seeds of the 2008 Financial crisis (which saw under-capitalized mortgages spilling into the leverage-financed and high –yield debt markets) were sown in the age of the mega buy-outs that preceded it.  And while Mr. Schwartz was not particularly responsible for packaging or re-packaging sub-prime mortgage debt, there is a certain guilt by association.

Gerald W. (“Gerry”) Schwartz ranks about 30th on lists of Canada’s wealthiest people, with an estimated net worth of over $1.5 billion. He founded the private equity (buyout) firm Onex Corporation, which now has revenues of $26 billion and over 220,000 employees worldwide, making it one of Canada’s top ten companies. Yet even these statistics may understate Mr. Schwartz’s influence. From his early role as co-founder, along with his mentor Izzy Asper, of CanWest Global in 1977, to his founding of Onex in 1983 and his emergence in the 1980s as Canada’s Leveraged Buy-Out King, to his audacious bid to take over and merge Canada’s two national airlines in 1999, to his recent investments in the U.S. housing and auto industries (not to mention his business and philanthropic ventures with his wife, Chapters/Indigo CEO Heather Reisman), Schwartz has represented the new face of Canadian capitalism.

Onex is publicly traded, which is unusual in the buy-out world. And whereas most private equity or investment management firms “flip” companies for a quick profit, Schwartz prefers to grow firms over a number of years and help them to expand their market share. On more than one occasion, investors have complained about Schwartz having his cake and eating it too—as in 1987-88 when Schwartz raised $246 million by going public, but still skimmed a private-firm-like 20 per cent of the profits as a fee. But what shareholders have not generally complained about is the rate of return on their investments, or Schwartz’s sterling reputation as a long-term, patient investor.

Largely as a result of Reisman’s influence, Schwartz became more involved in Liberal Party politics in the early 1980s. He became a major fundraiser for Liberal leaders John Turner and Ontario's David Peterson, and became friends with finance minister and prime minister Paul Martin. Schwartz also grew personally close to prominent Conservatives, such as then prime minister Brian Mulroney, Toronto financier Hal Jackman, former federal finance minister Michael Wilson. Today, when Stephen Harper, Michael Ignatieff, and Bob Rae fall over each other to court Jewish voters, they will all have to beat a path to Gerry and Heather’s door. “Gerry has been involved with just about everybody in power," a top Liberal strategist has been quoted as saying. "But you also have to realize that this stems in part from a strong sense of public service. And that it's real, not fake."

Real, to be sure, but one need not be either a Marxist or an anti-Semite to see that Schwartz’s own ethnicity is as much at play as is altruism in his political and philanthropic activities. The Israeli military does not rank high on most people’s lists of needy charities, but Schwartz has created a $3-million scholarship for 6,000 non-Israeli born Jews serving in the Israeli Defense Forces. In 2004 Schwartz also founded the Canadian Council for Israel and Jewish Advocacy, an umbrella group that has been criticized as an attempt to “corporatize” the funding of Jewish community organizations and tie them to pro-Israel advocacy.

His advice for young entrepreneurs sounds almost hokey, but also rings true: “Get an education. Have, maintain, and don’t give up on the principle of integrity. And stick to it. Nixon put it well: it is not over when you fail, it is over when you quit.” For better or for worse, Mr. Schwartz has followed his principles.

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