Saturday, May 2, 2009


One of our followers, Dan, sent me this article by Mike Milken. Milken makes a compelling case why the capital structure of a company is critical to its viability.

I am a little perplexed that anyone would seriously take the other side of the argument. Mike, did the late Nobel laureate Merton Miller really believe that managing the capital structure was not the responsibility of corporate leaders? ( I call him 'Mike' since I was in a small four-person meeting with him a few years ago. But that, is yet another story.)

For the past 25 years, I have used a definition of viability. The definition is as follows: The company must have good management, the profit structure must be sound, the industry dynamics must be favorable toward the company, the company must be adaptable to economic conditions, and finally, the capital structure must be sufficient to allow the company to take advantage of opportunities and to withstand competitive pressures and inevitable downturns.

Take a look at the companies that are surviving or thriving today in the face of lower sales and enormous headwinds. They all have solid capital structures. This is not by mistake. This is a product of good leadership.

I also like how Mike uses the word leadership instead of management. Pretty telling, isn't it?

Cheers, Mike


  1. Great post. Among other points made by Mike Milken and yourself, I found the following fact to be interesting:

    "The experience of both periods highlights two fallacies that seem to recur in 20-year cycles: that any loan to real estate is a good loan, and that property values always rise. Fact: Over the past 120 years, home prices have declined about 40% of the time."

  2. BGT, thanks for the comment. I was at a conference last year where a former government official laid out why the housing bubble occurred and front and center was the assumption that over time real estate goes up. Another assumption that proved false was that when some real estate areas are down other areas are up.