Monthly Archives: December 2013

Summary of (my) 2013

Let me share with you a brief recap of my 2013. (1)

I defined my 2011 as a year on the run and my 2012 as a year of change, and yet 2013 brought more running and more change that either 2011 or 2012! To me 2013 will be a family year: as Luca and I got married and we got a baby, Andrea.

At the beginning of 2013 I did not set a list of objectives to be fulfilled along the year as with the wedding preparations and the coming of Andrea I was going to have plenty of occupations. However, that does not mean that it was a quiet 2013.

Getting married.

Getting married.

May 11, 2013. On that day Luca and I celebrated our wedding. That was our highlight of the first half of the year. We celebrated it close to my parents’ place, in the hills close to Madrid, on a great spring evening , surrounded by most of our relatives and friends (many of you, coming not only from all corners in Spain but from Canada, Brazil, The Netherlands, France, Italy, Switzerland…). Apart from being a very emotive day we had lots of fun.

The monday after the wedding we departed for a honeymoon around the US west coast. We took the opportunity to visit the usual suspects of the area (LA, San Francisco, Grand Canyon, Sequoia Park, Yosemite…) and the not so common places: the aircraft cemetery known as The Boneyard and the AF Flight Test Center (this required visiting 2 US Air Force bases: Davids-Monthan and Edwards), the aviation museums of Pima and Seattle, the Lowell observatory, the Boeing 787 / 777 /747 Final Assembly Lines…

Family Irastorza Van Veen.

In February we announced here that we were expecting a baby. On August 11th, Andrea was born in Toulouse (2).

She weighed 3,610 grams at birth and measured 50cm tall. Now, 4 and half months later she is over 7kg and over 63cm. She has been the highlight of the second half of the year.

Family 2.0. All these events made me slow down the blog posts production rate at some times during the year, though not for the lack of ideas or contents! Nevertheless, I managed to write about 90 posts! Plus the blog received over 50,000 visits in 2013 and surpassed the 100,000 since I started it in 2010.

On top of that, we saw how Luca went forward with her own blog, check it here.

Learning. What did I learn this year? The main job here has been to internalize on time the turn to becoming a father. Once that was assumed, I would say that, with the good health Andrea has had so far, it has been rather easy, albeit energy and time-consuming.

I would say that trickiest that I am finding is the balancing of time between family, hobbies and work. And it has been at the other side of the work-life balance, at the work, where another leap forward was required: in terms of new concepts, new position within the team and several challenges encountered. Though, with the great courage and support from Ruth and Loreto, the year has passed way smoother than one could have suspected.

Other than that, this year I did not manage to formally study neither French (booh! to myself) or Dutch (another big booh! to myself), and this is something that I will have to make up for in 2014 (otherwise I risk to be left out in conversations between wife and daughter!).

Online education: after getting started in 2012 with online courses, in 2013 I completed in Coursera platform the following 4 courses: “Energy 101” (Georgia Tech), “Model Thinking” (Uni. of Michigan), “Nutrition and Physical Activity for Health” (Uni. of Pittsburgh) and “Exercise Physiology: Understanding the Athlete Within” (Uni. of Melbourne). On the down side, I did not fully complete other 3 online courses for which I obtained only about 60% of the credits, even though I enjoyed them even more than the previous ones: “Game Theory” (Stanford), “A Beginner’s Guide to Irrational Behavior” (Duke) and “Understanding Einstein: The Special Theory of Relativity” (Stanford), in all three cases I missed some deadlines due to being travelling without time and proper connections to complete assignments.

Reading. This year I didn’t set any objectives in terms of books due to the reasons mentioned above. Add to that that my eReader broke at the beginning of the year and I only replaced it in June and only started to use the new eReader in December (!). I have only read 7 books in 2013 (“Thinking Fast and Slow”, “Calico Joe”, “Born to Run”, “Les Cow-boys d’Airbus”, “Personal Memoirs of US Grant”, “Moneyball” and “The Art of War” for a second time). I think I will soon write a post about them.

Sports. After about 16 years, I got to practice again skiing (!), which used to be one of my favourite sports. We went with colleagues to Val Louron, Saint-Lary and Baqueira. I also got to play soccer again after about 3 years without playing… with the misfortune of getting injured (left leg adductor) just weeks prior to a marathon.

Skiing in Val Louron (France).

Running the San Diego marathon.

As you can imagine if you are a frequent reader of the blog, what I practiced often was running. In 2013 I managed to run over 2,000 kilometres, I took part in 16 races including: 3 marathons (Rome, San Diego – while on honeymoon!- and Athens), 2 half marathons (La Latina – Madrid – and Toulouse) and 4 trails of around 20km each. For the last marathon I manage to complete a training plan to the end which made me very proud and helped to beat my 10k and half personal records.

I don’t remember from whom I picked the sentence “the running shoes, always in the suitcase”, but I follow it to the point: The year 2012 caught me running in Toulouse (all kind of corners in the French south west region), Gruissan, Madrid (the day I got married included), Torrelodones, Rome, Santander, Murcia, Santa Monica, San Diego, San Francisco (Bay to Breakers race included, and along the Golden Gate bridge), Sequoia National Park, Mojave desert, Tucson, San Diego, Everett, Oakland, San Lorenzo de la Parrilla (Cuenca), Comillas (Cantabria), Athens, Wijchen… so in a way it was also a year on the run. Many of these times I have been running with friends (Jaime, Serna, Manuel, Juan, Kike, Jon, Nacho, Gon, Juan, Nervi, Pablete…), which made it even better.

Investing & helping others: with the organization of the wedding in sight, I had a cash preference for the use of savings. With the wedding gone, I will re-start looking for investment opportunities in 2014 (hopefully the stock market isn’t so hot then).  In a few weeks I will publish how our investments (made in previous years) have fared in 2013, but they have gone well (as most of the stock markets). On the charities side: this year I directed 1.1% of my net income to different NGOs and non-profits (soon I’ll make a similar contribution, check out which ones will I support this time).

Travelling. This year either with Luca, with friends or alone, I visited Santander, Murcia, United States (LA, SF, Seattle, Mojave, Flagstaff, Tucson, San Diego…), Comillas, Greece (Athens, Delphi, Meteora, Marathon), The Netherlands (Wijchen, Den Bosch)… take the case of Andrea, who with just 4 months has been 3 times in Spain, 3 times in The Netherlands and Greece (having flown 11 times already)… those were the leisure trips; the job made me go to Madrid another 20-25 times (?), that made it tiresome and difficult to combine with other things.

My first flight on-board the A400M.

My first flight on-board the A400M.

Flying: again, 2013 has been a difficult year to find slots to fly with the instructor. Due to weather conditions, work, etc., we had to cancelled several sessions. In the end I could only fly over 13 hours. However, on August, 30, I did my first solo flight!. That was another highlight of the year. During the summer time, while my parents and in-laws were visiting to see our newborn, I could take onboard my mother and father-in-law. 

On top of that, on August 29, I got to fly onboard the aircraft I work on at Airbus Military, the A400M! (yet another highlight).

Other reasons for joy in 2013 have been:

  • Family: My brother switched jobs within the same company and will soon depart again for Germany. My sister, after completing her degree in Political Sciences, pursuing a course on Energy Security in Madrid and getting yet another certificate in English, moved to Odense (Denmark) to study a Master in Energy Security (you can follow her in her blog). My mother keeps working on her massage business, and my father is now engaged with 2 or 3 NGOs spending part of is time as a pensioner teaching maths, physics, etc., to disfavoured people in Madrid.
  • Some more friends and relatives got married: Marlies, Pablo, Jose, Unai, Marlies.
  • And apart from Andrea, these newborns will share her promotion: Julia, Aaron, Mencía, Diego, Julia, Maeva

Now it’s time to rest, celebrate and soon to plan how we want the 2014 to turn out. I believe the next year I’m going to give it a try to the processes’ approach at the time of setting goals. I have been repeating to myself for years that each year that passes is getting better than the previous one. If I see at the account above, improving 2013 seems difficult, but who am I to question that 2014 will be, again, the best year of my life!?

I wish you the same: the best for 2014, enjoy it!

Enjoy!

Enjoy!

(1) This post is becoming a classic of the blog (like those talking about aircraft discounts, best and worst posts, charities I support, etc). You can see my 20102011 and 2012 recaps.

(2) For the avoidance of doubt: despite of being born in France and due to her parents being Dutch and Spanish, Andrea is of Spanish and Dutch nationality, not French. Quoting a work colleague: “here [on the possibility of getting French nationality at birth or not], French law protects our children…” 🙂

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Rebajas: descuentos de hasta -214%!

Como todos los años, tras las fiestas navideñas, llegará el periodo de las rebajas. Unos y otros iremos a alguna tienda buscando si determinado artículo que necesitamos ha sido rebajado, si encontramos alguna ganga… con un poco de suerte encontraremos descuentos de hasta un 50% o superiores.

¿Qué significa que un artículo ha sido rebajado en un 50%? Pensemos en un artículo, un par de zapatos cuyo precio inicial fuesen 100€. Si el precio final, en rebajas, es de 50€ diremos que ha sido rebajado un 50% porque la diferencia entre el precio inicial (100€) y el precio final (50€) es de 50€, y esa cantidad supone un 50% del precio inicial.

¿Y si los zapatos se vendiesen por 10€? Para ver cuál es el descuento aplicado hay de nuevo que ver la diferencia entre el precio inicial (100€) y el precio final (10€), que sería 90€. Esos 90€ suponen un 90% del precio inicial, por tanto el descuento en ese caso sería de un 90%.

¿Cuál sería el máximo descuento posible? Dentro de la lógica del mercado (1) el máximo descuento sería que el vendedor ofreciese gratis los zapatos (precio final de 0€), y por tanto el descuento sería de 100%.

Hasta aquí todo parece trivial. Nos encontramos cómodos hablando de porcentajes referidos a precios. Veamos el siguiente ejemplo.

El domingo 30 de diciembre El País publicaba un artículo sobre la caída de valoración de los ministros del gobierno según una encuesta del CIS (Centro de Investigaciones Sociológicas). Podéis ver el gráfico que aparecía en la edición impresa:

Caída de valoración de los ministros (fuente El País). [ver las cifras de caída bajo las columnas rojas]

Caída de valoración de los ministros (fuente El País). [ver las cifras de porcentajes de caída bajo las columnas rojas]

Se puede ver en la gráfica que hasta 5 ministros tienen asignada una caída en la valoración superior al 100%. El ministro Wert se lleva la peor parte con un supuesto -214,4%.

¿Es esto posible? Si los encuestados deben puntuar de 0 a 10 a los ministros,  ¿cuál es la máxima caída posible?

Veamos el caso de Wert, procediendo igual que en el caso de los precios y descuentos (donde parece que sí nos sentíamos seguros).

  1. Su puntuación inicial era 4,59, su puntuación final es 1,46.
  2. La diferencia entre ambas. 4,59 – 1, 46 = 3,13.
  3. La caída de valoración en términos porcentuales: 3,13 entre 4,59: 68.2%.
  4. Si la valoración final hubiese sido “0”; la diferencia habría sido 4,59, y la caída un 100%, nunca más de ese 100%. (2)

Este error, tras haber visto los ejemplos con los descuentos en los precios, nos puede parecer de bulto. Y, sin embargo, ni el periodista, ni su redactor, fueron capaces de caer en él antes de que saliese la edición impresa. Al verlo en la edición digital algunos lectores (incluido yo) informaron al periódico y se rectificó en la edición digital, aunque el periodista que firma la noticia (Francesco Manetto) no termina de reconocer que el error fuese suyo…:

Debajo podéis ver la tabla corregida en la edición digital:

Caíde de valoración de los ministros. Versión online corregida.

Caída de valoración de los ministros. Versión online corregida.

Hace semanas escribía un post sobre el informe de PISA 2012. En ese post hacía la siguiente reflexión:

Siempre me ha llamado la atención la cantidad de periodistas, tertulianos y adultos en general que se apresuran a criticar el bajo nivel de la educación que reciben los alumnos hoy en día. Viendo los resultados del informe PISA, parecen tener razón. Quería incluir aquí esta pregunta, porque estoy razonablemente seguro de que no más de un 8% de esos periodistas, tertulianos y adultos en general serían capaces de responder a esta pregunta correctamente. Aún así, viven en la creencia de que ellos sí recibieron una educación de calidad (ni que hablar de que la superaron satisfactoriamente).

Estos periodistas que hacen estos cálculos de porcentajes que se publican en la edición del domingo (la de más tirada) de El País en el informe de PISA no pasarían del nivel 1 o 2 (de 6 niveles).

(1) Aunque no quede dentro de la lógica del mercado, sí se puede hacer el ejercicio conceptual de ver qué supondría un descuento de 214%. Usando el mismo ejemplo de los zapatos con precio inicial de 100€, deberíamos ver a qué precio final corresponde una diferencia de 214%, es decir de 214€. Restando esos 214€ a los 100€ llegamos a -114€, que equivaldría a una situación en la que el vendedor le daría al comprador 114€ cuando se llevase los zapatos (gratis). [en el caso de los zapatos no parece dentro de la lógica del mercado, pero se pueden pensar en casos de final de vida de un producto donde para deshacerse de un producto haya que pagar]

(2) En este caso, la imposibilidad de una caída superior al 100% viene de la forma de valorar a los ministros, de 0 a 10. Si el CIS diese total libertad a los encuestados (3) a la hora de valorar a los ministros sí se podría dar una caída del 214,4%. ¿Cuál sería en ese caso la valoración final del ministro? -5,25 (negativa).

(3) Esto me recuerda una ocasión donde en un centro comercial me pidieron valorar un producto de 1 a 5, y mi respuesta fue “pi”.

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Drones

The use of drones (how unmanned aerial vehicles, UAVs, are commonly called) in military operations has been very criticized in the past years, partly due to the collateral civilian casualties from such operations (close to 300 just in Pakistan in the past years). Nevertheless, the use of drones is here to stay. The US Department of Defense includes as part of its budgetary information an “Aircraft Procurement Plan FY2012-2041” [PDF, 332KB], see in the graphic below how it is planned to almost duplicate the drones in the fleet along the next decade:

xxx

Unammned aerial vehicles in DoD inventory.

The civilian use of drones has been lagging behind these years mainly due to its integration in the air space. To that respect, the Federal Aviation Administration (FAA) announced last month an initial plan for integrating unmanned aircraft  into U.S. airspace by September 2015.

There are plenty of possible civilian applications that have been raised; from monitoring crops, to pipelines, oil rigs, forest fires, photography… to the dispatching of personal packages being announced recently by Amazon (Prime Air). The Economist issue of this week includes an article, Game of drones, which estimates that by 2017 there could be up to 10,000 drones flying in the USA and by 2025 the civilian drone market could have a size of up to 82bn$ per year, according to the Association for Unmanned Vehicle Systems International (AUVSI).

In this general picture Europe has been left behind.

European air forces are still relying on US and Israeli drones (just this week France has received its first 2 MQ-9 Reaper from the USA). That is why I hope that the conclusion at the recent EU Council  (see here a post I wrote about it) in relation to the launching of a European Medium Altitude Long Endurance (MALE) drone programme helps to put an end to that situation and enables Europe and its industry to bridge the gap:

[…] the development of Remotely Piloted Aircraft Systems (RPAS) in the 2020-2025 timeframe: preparations for a programme of a next-generation European Medium Altitude Long Endurance RPAS; the establishment of an RPAS user community among the participating Member States owning and operating these RPAS; close synergies with the European Commission on regulation (for an initial RPAS integration into the European Aviation System by 2016); appropriate funding from 2014 for R&D activities; […]

The bridging of that gap would not only ensure the security of supply of such drones for Europe but would help develop critical technologies to maintain the industrial base, its growth and employment; apart from the fact of being many of such technologies of dual use (as recognised in the EU Council conclusions) they would help Europe to access the market for civilian use of drones.

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Common Security and Defence Policy (CSDP)

Security and Defence is a topic which only makes it to the front pages of the media when there are actual war operations. Rarely a debate is centered on whether the country needs to foster its capabilities, invest in new defence technologies, or protect a certain industry base. I cannot recall a single electoral programme calling for such initiatives. The defence is not popular in today’s (European) society.

“The supreme art of war is to subdue the enemy without fighting.” Sun Tzu

Despite of that, and even if some Europeans take them today for granted, defence and security are no less crucial than many other public services which we expect States to provide us. As Javier Solana (former EU High Representative for Foreign and Security Policy, Secretary-General of NATO and Foreign Minister of Spain) put it few days ago in an article titled “Globalizing European Security“:

Global security – a safe and peaceful environment free of conflict – is a public good. In other words, all of the world’s citizens and countries benefit from it, regardless of whether they contribute to supplying it. Given this, free riders (those who enjoy the benefits of the good without investing in its provision) are likely to be plentiful. But, when it comes to global stability, the world simply cannot afford a free-riding Europe.

This obviously includes Europe: Europe cannot afford a free-riding Europe. As Anders Fogh Rasmussen (current Secretary-General of NATO and former Prime Minister of Denmark) put it yesterday:

I truly believe that we should do much more to educate society in the importance of peace, security and defence as goods to be protected and spread, so they can be better valued and supported.

EUCO Conclusions Defence, December 19, 2013 [PDF, 118KB]

EUCO conclusions on Defence, December 19, 2013 [PDF, 118KB]

Having said that, yesterday took place the first session of a 2-day EU Council in which one of the main topics to be dealt with was Security and Defence. Apart from the one cited above, there have been plenty of interesting articles in days prior to the meeting calling for decisions and actions to be taken by the council. To name a few:

In this post I just want to bring the European Council conclusions [PDF, 118KB] as already published and outline some of the passages.

2. The EU and its Member States must exercise greater responsibilities in response to those challenges if they want to contribute to maintaining peace and security through CSDP […]. The European Council calls on the Member States to deepen defence cooperation by improving the capacity to conduct missions and operations and by making full use of synergies in order to improve the development and availability of the required civilian and military capabilities, supported by a more integrated, sustainable, innovative and competitive European Defence Technological and Industrial Base (EDTIB). This will also bring benefits in terms of growth, jobs and innovation to the broader European industrial sector.

4. […] the European Council has identified a number of priority actions built around three axes: increasing the effectiveness, visibility and impact of CSDP; enhancing the development of capabilities and strengthening Europe’s defence industry.

5. […] The European Union and its Member States can bring to the international stage the unique ability to combine, in a consistent manner, policies and tools ranging from diplomacy, security and defence to finance, trade, development and justice. […]

8. […] The European Council emphasises the need to improve the EU rapid response capabilities, including through more flexible and deployable EU Battle groups […]

9. New security challenges continue to emerge. […] the European Council calls for:

  • an EU Cyber Defence Policy Framework in 2014 […]
  • an EU Maritime Security Strategy by June 2014 […]
  • increased synergies between CSDP and Freedom/Security/Justice actors […]
  • progress in developing CSDP support for third states and regions […]
  • further strengthening cooperation to tackle energy security challenges.

10. Cooperation in the area of military capability development is crucial to maintaining key capabilities, remedying shortfalls and avoiding redundancies. Pooling demand, consolidating requirements and realising economies of scale will allow Member States to enhance the efficient use of resources and ensure interoperability, […]

11. The European Council remains committed to delivering key capabilities […]. Bearing in mind that the capacities are owned and operated by the Member States, it welcomes:

  • the development of Remotely Piloted Aircraft Systems (RPAS) in the 2020-2025 timeframe: preparations for a programme of a next-generation European Medium Altitude Long Endurance RPAS; the establishment of an RPAS user community among the participating Member States owning and operating these RPAS; close synergies with the European Commission on regulation (for an initial RPAS integration into the European Aviation System by 2016); appropriate funding from 2014 for R&D activities;
  • the development of Air-to-Air refuelling capacity: progress towards increasing overall capacity and reducing fragmentation, especially as regards the establishment of a Multi-Role Tanker Transport capacity, with synergies in the field of certification, qualification, in-service support and training;
  • Satellite Communication […]
  • Cyber: developing a roadmap and concrete projects […]

13. The European Council welcomes the existing cooperative models, such as the European Air Transport Command (EATC), and encourages Member States to explore ways to replicate the EATC model in other areas.
14. […] It encourages the further development of incentives for and innovative approaches to such cooperation, including by investigating non market-distorting fiscal measures in accordance with existing European law. […]

16. Europe needs a more integrated, sustainable, innovative and competitive defence technological and industrial base (EDTIB) to develop and sustain defence capabilities. This can also enhance its strategic autonomy and its ability to act with partners. The EDTIB should be strengthened to ensure operational effectiveness and security of supply, while remaining globally competitive and stimulating jobs, innovation and growth across the EU. These efforts should be inclusive with opportunities for defence industry in the EU, […]

17. A well-functioning defence market based on openness, equal treatment and opportunities, and transparency for all European suppliers is crucial. […] with a view to opening up the market for subcontractors from all over Europe, ensuring economies of scale and allowing a better circulation of defence products.

18. To ensure the long-term competitiveness of the European defence industry and secure the modern capabilities needed, it is essential to retain defence Research & Technology (R&T) expertise, especially in critical defence technologies. The European Council invites the Member States to increase investment in cooperative research programmes, […]. Civilian and defence research reinforce each other, including in key enabling technologies and on energy efficiency technology. The European Council therefore welcomes the Commission’s intention to evaluate how the results under Horizon 2020 could also benefit defence and security industrial capabilities. […] to develop proposals to stimulate further dual use research. […]

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Hudson Miracle Approach

Most of you probably heard about the US Airways flight 1549 which on January 15th, 2009, had to land on the river Hudson (New York, USA) due to the loss of engine thrust right after bird strikes in the climb path.

Despite of the recognized initial denial reported by the Captain in the interview below, crucial decisions were taken within the 1st minute after the event. See the captain’s explanations [10 minutes]:

If you want to “re-live” what happened, see the 3-D animation of the flight with the real recorded voices of the conversation between the airplane and air traffic controllers:

This accident had a happy ending thanks to the several layers of safety that exist today in commercial aviation, just to name a few: contained engine failure, pilot training, clear communication protocols and phraseology, etc.

Today we can remember that episode with the following chart I found in Twitter via a work colleague:

Jeppesen KLGA/LGA chart, or "Hudson Miracle Approach".

Jeppesen KLGA/LGA chart, or “Hudson Miracle Approach”.

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On Boards of directors and CEOs

The Economist issue published last week included an article (“From cuckolds to captains”) about the transformation of corporate boards. However, I wanted to extract the following passages:

For most of their history, boards have been largely ceremonial institutions: friends of the boss who meet every few months to rubber-stamp his decisions and have a good lunch. Critics have compared directors to “parsley on fish”, decorative but ineffectual; or honorary colonels, “ornamental in parade but fairly useless in battle”. Ralph Nader called them “cuckolds” who are always the last to know when managers have erred.

[…]

The first is that boards should focus on providing companies with strategic advice. This sort of common sense is often in short supply in the ego-driven world of boards. Boardrooms contain too many people with different priorities: corporate veterans who give lectures on how they would have handled things; egomaniacs who like to show how much they know about everything; hobby-horse jockeys who mount the same steed regardless of the race; captives of compliance who are obsessed with box-ticking. The authors say that in their experience perhaps half of the Fortune 500 companies have one or two directors they would regard as “dysfunctional”.

While reading these passages from the article I couldn’t help but remembering Warren Buffett on board of directors in his 2009 letter to Berkshire Hathaway shareholders [PDF, 116KB] (the emphasis is mine):

“In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe.

It has not been shareholders who have botched the operations of some of our country’s largest financial institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been “bailed-out” is to make a mockery of the term.

The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.”

[…]

“In evaluating a stock-for-stock offer, shareholders of the target company quite understandably focus on the market price of the acquirer’s shares that are to be given them. But they also expect the transaction to deliver them the intrinsic value of their own shares – the ones they are giving up. If shares of a prospective acquirer are selling below their intrinsic value, it’s impossible for that buyer to make a sensible deal in an all-stock deal. You simply can’t exchange an undervalued stock for a fully-valued one without hurting your shareholders.

Imagine, if you will, Company A and Company B, of equal size and both with businesses intrinsically worth $100 per share. Both of their stocks, however, sell for $80 per share. The CEO of A, long on confidence and short on smarts, offers 1 1⁄4 shares of A for each share of B, correctly telling his directors that B is worth $100 per share. He will neglect to explain, though, that what he is giving will cost his shareholders $125 in intrinsic value. If the directors are mathematically challenged as well, and a deal is therefore completed, the shareholders of B will end up owning 55.6% of A & B’s combined assets and A’s shareholders will own 44.4%. Not everyone at A, it should be noted, is a loser from this nonsensical transaction. Its CEO now runs a company twice as large as his original domain, in a world where size tends to correlate with both prestige and compensation.

If an acquirer’s stock is overvalued, it’s a different story: Using it as a currency works to the acquirer’s advantage. That’s why bubbles in various areas of the stock market have invariably led to serial issuances of stock by sly promoters. Going by the market value of their stock, they can afford to overpay because they are, in effect, using counterfeit money. Periodically, many air-for-assets acquisitions have taken place, the late 1960s having been a particularly obscene period for such chicanery. Indeed, certain large companies were built in this way. (No one involved, of course, ever publicly acknowledges the reality of what is going on, though there is plenty of private snickering.)

[…]

“I have been in dozens of board meetings in which acquisitions have been deliberated, often with the directors being instructed by high-priced investment bankers (are there any other kind?). Invariably, the bankers give the board a detailed assessment of the value of the company being purchased, with emphasis on why it is worth far more than its market price. In more than fifty years of board memberships, however, never have I heard the investment bankers (or management!) discuss the true value of what is being given. When a deal involved the issuance of the acquirer’s stock, they simply used market value to measure the cost. They did this even though they would have argued that the acquirer’s stock price was woefully inadequate – absolutely no indicator of its real value – had a takeover bid for the acquirer instead been the subject up for discussion.

When stock is the currency being contemplated in an acquisition and when directors are hearing from an advisor, it appears to me that there is only one way to get a rational and balanced discussion. Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through. Absent this drastic remedy, our recommendation in respect to the use of advisors remains: “Don’t ask the barber whether you need a haircut.”

After these paragraphs harsh on CEOs and directors, let me finish with two references to posts I wrote some time ago: “Is talent really worth it?“, a review of a book on CEOs pay, and “Buffett on shares buy back by companies“, excerpt from 1980 letter.

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The Titanic: a project management disaster

The Titanic (public domain image, taken from Wikimedia, by F. Stuart).

Few days ago, I attended a conference on an example of a project management disaster: the Titanic, the British ship which sank in its maiden trip from Southampton to New York in 1912 causing the death of above 1,500 passengers, above 2 thirds of those aboard.

[The conference was part of the same cycle of which I attended another one about 2 months ago about the success of the management project for the delivery of the infrastructure, design and construction of buildings, transport and the legacy of the London 2012 Olympic Games (I wrote about it here).]

Learning from a well-known disaster, as opposed to a success, made the audience more eager to listen to Ranjit Sidhu, a consultant who has made extensive research about the Titanic and has written the book “Titanic Lessons in Project Leadership“.

She was going to focus the conference on 3 sides of project management: communication, leadership and teamwork (1), and the problems which each of those originated in the disaster.

Titanic captain E. J. Smith (public domain image, taken from Wikimedia, author: New York Times).

Sidhu started giving an introduction of some of the characters involved in the project to show the kind of power plays and conflicts that took place at the time of taking decisions. Some of those characters were: Bruce Ismay (chairman of White Star Line), Lord Pirrie (chairman of the shipbuilding company Harland and Wolff), J.P. Morgan (American banker who financed the formation of International Mercantile Marine Company, mother company of White Star Line), Alexander Carlisle (chief engineer of the project in Harland and brother-in-law of Pirrie), Thomas Andrews (successor of Carlisle), Captain Smith (sea-captain of the Titanic).

From the beginning of the project the mantra that the Olympic line of boats was going to be unsinkable was created due to some features which indeed made the boats more secure than others at the time, as well as the largest and most luxurious. From that point onwards, several psychological flaws impeded perceptions to be re-evaluated, messages to get across, decisions to be questioned, etc.

For some of the characters (Carlisle and Andrews) safety was the top objective, to the point that when the number of life boats was decided to be reduced against the engineers’ criteria Carlisle resigned as chief engineer of the project and left Harland despite of being a relative of the chairman.

For other characters in the story the emphasis was in the size or the luxury: an ample dinning room, clean views from the cabins (not disturbed by life boats, for instance), etc.

The power play, the financial pressure on the project, the deadlines of both departure and arrival in New York, the image to keep before the press, etc., all made that several decisions were taken despite of compromising technical features (life boats reduction and placement), manufacturing operations (working in increasing shifts due to the delay caused by the repair of the Olympic at the same shipyard), operational decisions (such as short time for sea trial of the ship, radio operators priorities and incentives misalignment…), etc., adding to the diminished safety of the trip.

Some of the psychological flaws that were going on when taking those decisions include: anchoring effect (the image of the Titanic as unsinkable was fixed in the mindset despite of decisions compromising safety), bandwagon effect, confirmation bias (negative signals being filter out vs. acknowledging supporting evidences), conformity to the norm, framing effect, normalcy bias (denial and underestimation of the consequences of the disaster once occurred), etc.

Last minute misfortunes added up to the disaster: missing binoculars for the scouts (due to the departure of a crew component who held them), a shorter rope to perform ice tests, radio messages from the Californian boat not being prioritized by operators to be brought to the main deck…

The end to the story is well-known.

Have we progressed as a society since them?

Today we like to think that yes. More requirements regarding safety are put into projects. Regulations are passed to ensure safety. Risk management is used as part of project management to ensure that the kind of decisions taken at the time of the Titanic today they are taken without overlooking the risks behind them.

However, I would like to bring 3 questions raised by colleagues in the Q&A session that followed the presentation:

  • Of the cited characters, who could have been more proactive to prevent the disaster? Taking into account that Carlisle, the chief engineer, went to the point of resigning without (a seemingly) major effect to the fate of the ship.
  • How can we react to a pressure situation under a powerful sponsor? We can try to find allies, framing the situation as an “us” as a group instead of opposing the sponsor.
  • If the Titanic hadn’t sunk, would it be seen as an example of success in project management instead of a disaster? You may dismiss the point too quickly by thinking “oh, yes, but it happened that it sank!“.

Here, I remembered the theory of the safety in systems seen as layers of safety added one after the other. Each of the layer may have some holes in it just as a portion of cheese (typical image used in aerospace projects). By having several layers, accidents are prevented in most of the cases. However, from time to time the holes in the layers are perfectly aligned and the accident happens (lack of sea trials, radio messages not passed, urgency to reach New York, scouts without binoculars, improper ice tests, power vs. authority struggle in that precise trip in which the chairman of the company travels alongside the captain…).

Cheese model of safety layers in a system.

Cheese model of safety layers in a system.

My takeaways from the conference are:

  • to continuously remind ourselves of the flaws we have in our mental processes (I recommend a couple of books to that respect: “Thinking Fast and Slow” by Daniel Kahneman and “Poor Charlie’s Almanack“, by Charlie Munger),
  • to sharpen our perception of risks (both at work and daily life),
  • to understand that we are a layer (with our own holes) in the safety system (both at work and daily life).

(1) She did not enter much into risk management despite of acknowledging that it had not worked (or rather overlooked).

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