Latest / Calm Under Fire / Franco Scalamandre
Transcript
- Col. John Boggs: Well, welcome back to Calm Under Fire. I'm Colonel John Boggs, the president of Fortitude Consulting, and we're an executive leadership and ⁓ development firm. Today, I'm joined by Franco Scalamandre, founder and managing director of Sterling Atlantic. Franco works with institutional investors around the world to support companies capable of significant valuation growth. often identifying opportunities others overlook. His background spans private equity, global markets, and emerging economies where disciplined leadership and clear thinking are essential. So Franco, I am really glad to have you with us here this morning or this afternoon. Franco Scalamandre: Hi, John, very proud to be with you and very honored about your background and everything and your service to our country. Thank you for that. Col. John Boggs: Thank you, Frank. Thank you, Frank. was truly an honor to serve. Say, Frank, you mind if we just jump right into it? Franco Scalamandre: ⁓ no, do we have to? Col. John Boggs: ⁓ my God, yes we do. All right, here we go. Franco, investors see hundreds of opportunities. I mean, they're seeing them all the time. What separates the leaders and companies that truly create long-term value from those that simply look promising on paper? Franco Scalamandre: Yeah. Yeah. It's a good question. I can answer for ourselves. Different investors look for different types of things. So, for example, if you're a program trader, you don't really care what's going on with the company. You care about is the stock moving in a certain direction related to other stocks? And can I do a million trades in two minutes and whatever they do? A lot of them are very successful of it. ⁓ Warren Buffett, on the on the other hand, doesn't really look at the stock price except for is it cheap compared to its intrinsic value, according to Warren Buffett? Right. So so ⁓ and he I'm not I'm not clear. in my mind about how obsessed he is with good leadership other than other than it's demonstrated over a period of time and it's a good corporate franchise and he has different investment criteria that he likes. Ray Dal, I'm just giving you a I'm just telling you the different there's all sorts of different perspectives as an answer to your question. I have my own, I'll come to. Col. John Boggs: Mm-hmm. Franco Scalamandre: Ray Dalio is Bridgewater Capital. He's, I think, I think he 700 billion assets under management. I don't know what it is, but it's a hedge fund. looks at, he looks at ⁓ global macro economic factors. For example, ⁓ if you read his book, they had that they were trading European bonds during the financial crisis. And they had to make a decision on like say Greek bonds. And so they took an internal vote. Is the European central bank going to come in and save the countries or not? Right. And the vote was split 50 50. But then he used his scorecards where he measures each person and weighs their vote based on their expertise. Col. John Boggs: Mm-hmm. Franco Scalamandre: And it came out 70 30, they were going to intervene and that's how they traded it. So that's another approach that doesn't care about long-term leadership. I don't think that much. However, we do. We do because what we do at sterling ⁓ think 70 % of our business is a non-U.S. exchange company. They're on it. Col. John Boggs: Wow. Mm-hmm. Mm-hmm. Franco Scalamandre: and the public company and they're, they're, they're mispriced in the market. Right. And, and we took us a long time to figure this out, which ones, what do you do about it? But we believe that, and then you have to have an economic theory is how can they, how can a market price be wrong? And what do you do about it? Right. Because it's, it's like, you can't Col. John Boggs: Mm-hmm. Yes. Franco Scalamandre: fix something if you don't know why it's broken. So we think that the market prices are wrong because somebody who's buying the stock or selling the stock doesn't know what's going to happen in the future. They don't know how much the company is going to be worth. They don't know whether it's going to happen. There's a lot of uncertainty as to what you're buying. Okay, so. Col. John Boggs: Mm-hmm. Franco Scalamandre: Part of resolving that is you've got to finance it without selling stock at 80 or 90 % discount. Why would you dilute your shareholders at 80 or 90 % discount? At the same time, you have to have the leadership of the company has to hit its operating objectives. Col. John Boggs: Mm-hmm. Mm-hmm. Franco Scalamandre: and more importantly, to prove to the market that it will. Col. John Boggs: Got it, my. Hit it's operating. Franco Scalamandre: Right? So, and you, and you and I discussed this before. It's like, when you talk about leadership, what is leadership to me, it's we're at point A and we want to go to point B and then how do we get there as a most, you know, most effectively as a team. And so the leadership in that regard is critical to the, from the, to the valuation of the company. Critical. Col. John Boggs: Wow, okay. No, that was. Franco Scalamandre: Sorry for the long explanation. It's your fault. It's your fault you asked the question. Col. John Boggs: Ha ha ha ha! Well, and that's well the follow-on question then is is for you The decision ultimately comes down to leadership Franco Scalamandre: Yeah. Yeah. Yes and no. They, you know, they have to have, it's like, if you're Warren Buffett, he wants a defensible mode around the business. Right. So you have to have a brand name that everybody believes that it's hard to do. It's a question of how do you see in your comparative landscape? What's the size of the market? Where are they growing to? Right. And then, and then, but you know, leadership. Col. John Boggs: Mm-hmm. Mm-hmm. Franco Scalamandre: to us is like the wild card that can kill everything. Because even if you're in the right position with a long, long leadership, you can't execute and get a team of, know, whatever it needs to be. Right. It's normally your internal management team, your employees, but many times it's your distributors, your strategic partners and everything else. Col. John Boggs: Huh? Franco Scalamandre: The leadership needs to lead the team to get to the objective. Col. John Boggs: Okay, well that's like combat. Franco Scalamandre: So it's important. There's other factors. And if it's good, it's better. And if it's okay, we normally can live with it. And if it's hopeless, then the whole thing doesn't work. Col. John Boggs: Okay. Okay. Can you help me understand a little bit better? When is it that your leadership looks hopeless to you? Franco Scalamandre: in three CEOs in nine months. Col. John Boggs: ouch, ouch. Franco Scalamandre: ⁓ You mean, you mean things like that? Col. John Boggs: Wow, okay. Yeah, okay, that's a telltale, isn't it? ⁓ my goodness. Franco Scalamandre: Yeah, well, you know, it's a great company. I'm not gonna say the name. It's all what they do. It's a great company. Tremendous market opportunity. They're probably mispriced by close to $2 billion. And the guy who kind of they were in one business, they transitioned to another one, the guy that did that said, Hey, I bring in a new CEO to lead the transition. And then Col. John Boggs: No, no, we didn't mean that. Mm-hmm. Franco Scalamandre: It turns out that the new CEO was like trying to buy the assets she from the company. And so the old, and so the first CEO had to put in his buddy. And then I said, well, what about all the conversations we had in the last six months with you and your strategic partner and blah, blah, blah, blah, blah, blah, blah. And it's just, you know, it's a mess. But they haven't killed it yet. So it's gonna be a one. And there's a huge upside. It's a huge upside. Col. John Boggs: Yeah. I haven't killed him yet. Okay. ⁓ my goodness. Wow. Three C's. No, I could imagine. Well, know, Franco, you've invested in global, you've neglected in complex global environments. How do you evaluate risks when, the information is incomplete? Franco Scalamandre: Yeah, yeah, never, never a dull day over here. Well, ⁓ there's different types of risk, right? There's global market risk, like a financial crisis, right? If you have a financial crisis, like Lehman Brothers shows up on Monday morning and needs to finance 70 billion of repo agreements, of treasury bills, then they can't, right? There's not a lot you can do about that because you don't have any control over it. Col. John Boggs: Mm-hmm. Franco Scalamandre: Right. the thing that we do have over control over ⁓ is, and always have to work with the leadership of the company, right. ⁓ Is can take whatever their operating objective is fine. Make sure it's fully funded so they don't have to worry about money because may, you know, the many times the opportunities created because uncertainty of the company. Hey, can they get to their operating objective? And if they don't have the money to do it, how are they going to do it? Right. And then, and then are you going to sell 70 % of the value of my asset to get there because you're diluting stock at the wrong price. So, so ⁓ a lot, ⁓ a lot of variables there in uncertainty. And we think that creates a market opportunity. by eliminating it. Col. John Boggs: Okay. Okay. Franco Scalamandre: Right? Because if you know something's going to be worth $3 billion in 12 months and somebody who's credible comes along and guarantees it, how much is it worth next week? Col. John Boggs: Wow. Yeah. Franco Scalamandre: Right? So, so, so that's sort of the fundamentals of what we do. But as you're correct, as you say, our sole focus is eliminating risk. Col. John Boggs: Mm-hmm. Mm-hmm. Okay. you talk about a time when your judgment kind of had, it comes in there, it matters more than the data. Your judgment was no, no. Franco Scalamandre: God, I hope not. I, I don't what, what I'm doing right now is my judgment is, is how many red flags are there on this deal? Right. All right. I don't want to use another example. It's too painful to say, but right. Are the wet red flags. Col. John Boggs: Mm-hmm. Okay. Mm-hmm. Mm-hmm. Franco Scalamandre: You know, should you even mess with it? Are they? How do they weigh up against the benefits of doing it? And that's really what it comes down to. So I think the judgment is really, hey, what's a red flag? Col. John Boggs: Yeah, absolutely. That's going to be my next question. So what's a red flag? Yeah. Franco Scalamandre: Well, you mean, ⁓ I need 5 million bucks and I got, I got no financials. I can't prove that my product works. And like I had a plan and it didn't happen. mean, and that one, think we're going to get involved with ⁓ because the red flags are huge, but so is what the company is. It's a big deal. Col. John Boggs: ⁓ Mm-hmm. Franco Scalamandre: So, right, it's five million to start and they don't actually need too much because they become self-sufficient very quickly. Col. John Boggs: Okay, okay. Okay. Are there signs, are there signs, okay, you talked about your red flags, but are there signs that signals, this is definitely gonna be a ⁓ three or 10X sort of valuation growth? Are there signs that show that? Franco Scalamandre: ⁓ yes, and I'm not going to discuss what they are because I've been working on it 25 years. I started off with, it started off with economic theory or backgrounds in economics. So it started up with, if you look at numbers in Bloomberg, what changes in the numbers and I won't go into derivatives, right? Col. John Boggs: ⁓ okay. Okay. Right. Franco Scalamandre: Derivatives are like rates of change of rates of change. We started with what changes in the numbers will indicate the answer to your question. It's not going up. And then it took us, ⁓ think it was about seven or eight years of ⁓ you know, drudging through it and talking to company and making deals and blah, blah. Col. John Boggs: Hmm. Franco Scalamandre: to change our economic theory and we changed it to it didn't go up. It was already worth it. Right. Which if you're an economist and you went to Chicago with Milton Friedman or you were Harvard where they teach the Samuelson and all portfolio theory is based on that. Right. From my college. Col. John Boggs: Mm-hmm. ⁓ huh. Franco Scalamandre: thesis on it because I wanted a great degree with honors, right? It's based on Markowitz in the mid-60s. He came up with the efficient market theory, which the central premises is all information is reflected in the price. Col. John Boggs: ⁓ huh. Franco Scalamandre: So we had to say that was wrong. And if you're an economist in Chicago or in Boston, they'll probably tie you to a stake and light you on fire. So we do that. And then it gets more entertaining. then, and then so we thought we'd find a few companies that were like that. But that's not what happened. We found a lot of companies. Right. Col. John Boggs: ⁓ my god. ⁓ my god. ⁓ Mm. Mm-hmm. Franco Scalamandre: So then five, six years, we've had a lot of companies and we go, wait, we're finding too many companies. Which caused the problem because why are there so many companies that are at the wrong price? That's where we got to. If you don't know what the problem is, you can't fix it. So we had to figure out what the problem is. Col. John Boggs: Mm. at Do founders most often struggle with, no, that's the wrong question. Where do founders most often struggle with their companies as they're trying to scale? Franco Scalamandre: think of the time they have their day to day problems. And if they're a public company, there's there, there, they're never happy with their stock price. Right. If you're below a billion dollar market cap or ⁓ the price, never happy. Right. And it starts off with like, I don't know, it's probably. Col. John Boggs: Mm-hmm. Franco Scalamandre: seven or eight years ago, we found this company on London, they're good friends of ours now, found this gold producer on a London stock exchange. And I said, we don't think your hundred million pound market capitalization is the right price. I said, let me ask you something. If you had to liquidate your assets next Tuesday night in some cold, obscure place of Asia, how much would you get for it? ⁓ a billion dollars. Col. John Boggs: Mm-hmm. Franco Scalamandre: So they were trading at 10 % of the liquid liquidation value and in production Right. So there it's there. And, know, if you're a public company, it's, know, and you're responsible for your shareholder value, it's a problem. Col. John Boggs: Mm-hmm. Wow. So what are the leadership habits then? You're kind of going right in there. The habits that limit a company. What limits their ability to grow? Franco Scalamandre: ⁓ we've had some private companies that get distracted by shiny objects, right? Shiny objects are always a problem. I'm not saying always a problem, but it happens a lot, often enough. And like a shiny object, which is not on your mission and your mission needs to be hitting your objective. Right. Cause a problem. Col. John Boggs: Okay, right. Mm-hmm. Mm. Keeps them from going after the objective. Okay. Franco Scalamandre: Yeah, get dumb now I'm going in three different directions, right? Instead of going after the objective and, and that's one problem. Another problem is no defined objective. Col. John Boggs: Yeah. ⁓ huh. Mmm. Franco Scalamandre: You would be amazed how many CEOs do we talk to and say, OK, where do you plan to be in three years? Well, we don't know. We're going to drill this out and see what happens. You know, so that's a problem. Col. John Boggs: Ouch. That's a problem. That seems like that would be a huge problem. Franco Scalamandre: That's a problem. It's also a problem for your shareholders, right? Because if the CEO doesn't know, how does anybody else know? Col. John Boggs: ⁓ well that's not going to happen. Absolutely right. Franco Scalamandre: Well, then how do they know how much to pay for the stock or whether they should sell it or not? Col. John Boggs: Mm-hmm. All right. So tell me, is this the same on a global scale? Franco Scalamandre: ⁓ yeah, we look in all markets is we got, we got our machines. We look in all markets, ⁓ except for some are. And I won't, you mentioned the company countries name, cause I don't want to disparage anybody, but if you have a regulatory system from the 1600s, it doesn't help the country. Right. And if you have six regulatory bodies. Col. John Boggs: Mm-hmm. Mm-hmm. Franco Scalamandre: overseeing your capital markets, then almost all the public companies are capital starved because nobody can deal with the regulations. Right. And if you have price control, certain country has effective price controls on stock, believe it or not. And that doesn't help either. Because it's really, it's really the regulators interfering with the ⁓ free market mechanism. Now, is there a good reason for them to do so? Sure. I mean, I don't know. I think it was 20 years ago. There's a company in in a country where, I've got two billion dollars or three billion dollars of gold in the ground. It's not there. Right. So that's not good. And then recently in a different country, I got 600 million cash in the bank audited financials. It's not there. OK, that's not good. So we need regulation. We need it to not interfere with standard market pricing mechanisms. And I do not want to. Col. John Boggs: It's not there. Franco Scalamandre: advise any regulators or exchange what to do because if they fix it, it eliminates our opportunities. I don't want to root against ourselves. Col. John Boggs: Okay. Okay. Okay, so tell me then, are the fundamentals of leadership, does leadership still have the same impact on a global scale, or is it because of those regulations it's nullified? Franco Scalamandre: No, I think it does because the leadership has to know how to deal with the regulations. Right. And, and, and like from an investment perspective, we stay out of the countries that are problematic in terms of their regulatory structure. Right. We just don't go near it. It's not worth the trouble. Right. But, but the other places with the, with the right situation, the right management and leadership, and, and then, and then what we do in terms of the financing and communication with the capital markets and everything, there's tremendous opportunities. Col. John Boggs: when When large investments are on the line, uncertainty is high, how do you stay steady and make clear decisions? How does Franco do that? Franco Scalamandre: we focus, ⁓ on math. Right. We focus on math. Math is not particularly ambiguous. Col. John Boggs: Focus on the math. ⁓ that's great. Okay. Okay. Franco Scalamandre: So we focus on math, say, hey, what's the math of this? And then there's some judgment in there. Sometimes if something go left or right, what's the probability? Col. John Boggs: Mm-hmm. Franco Scalamandre: But we stay focused on what are the numbers. Col. John Boggs: If a founder wants to build a company that an investor is going to take seriously, what leadership discipline should they start to develop now? They want to be taken seriously by Franco and by Sterling Atlantic. What should they be focusing on now? Franco Scalamandre: Yeah. They should focus on a clear operating objective number one. Number two. It's almost, you know, risk and risk mitigation. Right. And number three, and when I say like risk, risk is like in a perspective, there's risk factors, but what they don't let you say is part of problem is risk mitigation. Here's why the risk factors won't happen. Right. And we've got that backed up three ways to Sunday. Right. You need a clear operating objective. You need risk and risk mitigation. Col. John Boggs: Mm-hmm. Mm-hmm. ⁓ okay. Mm-hmm. Franco Scalamandre: And then you need communication skills. You need to be able to communicate that in a clear and simple way like Steve Jobs is one of the best ever. There's an article on our website about that. has pictures, ⁓ is one of Steve's favorite things. Sample pictures. ⁓ Col. John Boggs: Mmm. clearance. Okay. Yeah. Okay. There we go. Even a Marine could understand it. Okay, perfect. I need to go check that out for myself. That's it. we go. For Franco, you're you're you're a smart guy, though, Franco. ⁓ my goodness. No, no. Okay. ⁓ yeah, yeah, yeah, you are. When you look at a company, Franco Scalamandre: That's right. I can understand it. That's my criteria. Even I can understand that. Yeah, I don't know about that. Col. John Boggs: When you look at a company, what kind of leadership excites you? What is it, hey, this person's got their act together. What is it about that person that would excite you? Franco Scalamandre: A track record of execution. Col. John Boggs: Okay. Franco Scalamandre: Right. And like, uh, we have a great gal working with us L and, and, and she kind of handles our front end of how we deal with the companies and find them. And I mean, we've got systems, but we need people too. Uh, she's injured when she first sends me her resume. She says, Hey, here's all the great stuff I did. Right. And, I increased the sales and I'm going L. Col. John Boggs: Mm-hmm. Mm-hmm. Mm-hmm. Franco Scalamandre: I don't like your resume. Did you increase it 2 % or 3000 % be specific. Right. You know, it's like, what have you done it before? Have you executed before and what specifically happened almost numerically? Col. John Boggs: Yeah. Yeah. I agree. Exactly. ⁓ Mm-hmm. Mm-hmm. Franco Scalamandre: Right. And I'll give you example. So, uh, so it was a long time ago. We invested in this, uh, was pretty much an infomercial production company, but we turned it into a product company, right? Because how else are you going to get $7 million in sales in 90 days? Right. That was, it was a product you smell and you don't eat. was like, it was like the smell of Zip-A-Except 30, 30, 30 years ago. Col. John Boggs: Okay. Mm-hmm. Okay. Franco Scalamandre: Right. So, so we got invited to go to home shopping network when Barry Diller bought it. Right. And, and so, so the C the new CEO of home shopping network is in there. We're in Tampa, Florida, and there's like 20 people who are own products and can sell them on home shopping network. Right. There's like 20 different companies. Col. John Boggs: Mm-hmm. Mm-hmm. Right. Franco Scalamandre: So we're there and the CEO gets up and he says, I'm gonna start with our balance sheet. Let me show you our balance sheet. Here's how we're managing our balance sheet. And then the next thing he does is he goes, let me show you my income statement. Here's how we manage our income statement. And he's saying this to product people. He's one of the best CEOs I've ever seen. Col. John Boggs: Wow. Franco Scalamandre: starts with numbers because numbers is like, it's not numbers. It's not like, ⁓ we got the greatest thing there ever was. Numbers, numbers are numbers. Col. John Boggs: Started with numbers. Outstanding. Franco Scalamandre: started with numbers. Like, like Sergeant Bill Friday, just the facts, man. Col. John Boggs: And the math won't lie to you, it? Just the facts. Wow. That is an old one. That is an old one. ⁓ Franco Scalamandre: That was an old one. No, you got to see the reruns. doesn't mean how old you are. You just got to have those seen a rerun or, or, or nowadays you can see a clip on YouTube. Col. John Boggs: That's true. There we go. There we go. All right. So Franco for leaders, for leaders, founders listening who want to learn more about sterling Atlantic, they want to learn more about you. They want to learn how to scale their companies. How do they reach you? Or who is it you want to reach out to you? I mean, this is this is your opportunity. You tell me who do you want to reach out to you? Franco Scalamandre: Well, we want people that want to go someplace. Enthusiasm, charisma, background. They can distinguish their product in the market, but you know, you got it. It's almost like you have to believe in what you're doing. And the way they do it is they send me an email, which is fs at STATL.net like sternlyatlantic.net or go to our website and just click on it. You look up sternly Atlantic on the internet and click on it. and then you'll get one. Go to the Contact Us base. No, or or five me on LinkedIn, Franco Schalamandre. A lot of people find us unlinked. But they don't read our investment criteria. I would suggest read our investment criteria page first and we'll save you time. Col. John Boggs: Okay, read investment criteria first. Save time. Very good. Read that first. ⁓ gosh. Franco, thank you very much. Franco Scalamandre: The third thing is... Yeah, read that first. Read that. And then, and then you can also distinguish yourself, like by the people that send this stuff, that you, there's no way it fits, but they don't bother to do any homework. Right? That's another, that's another thing for your leadership, right? Your leaders do their homework. Don't they? Colonel John. Col. John Boggs: Mmm. That is true. That is true. Leaders do their homework. Absolutely. Franco Scalamandre: get leaders through the whole war. Col. John Boggs: leaders do their homework. Franco, this has been thoughtful, strategic conversation. It's been funny. It's been, ⁓ you know, you were lighthearted about it, Franco, but this is a very serious topic. If they're trying to scale their businesses, they need to pay attention and do exactly what you just said. Do the homework. And then summing this up, it's do the homework, start with math. If the math isn't there, you know, you can know you. Franco Scalamandre: Yeah, start with math. Start with math. Start with math. Col. John Boggs: Mm-hmm. Start with math and then you've got to be on top of your game, but start with the math and do your homework. ⁓ my gosh, that is talk about sum it up. That's a quick sum up. Well, for the listeners out there, yeah. Franco Scalamandre: I agree with you. There you go. That's why you're a Colonel. It's not an accident. Col. John Boggs: No, it's not an accident. ⁓ Franco, thank you very much. I greatly appreciate it. And for everybody that's listening out there, stay steady. You know what to do. you want to get, if you want to connect with someone like Franco, you've got some homework to do. So do it. Don't waste your time and definitely don't waste his. Okay. All right. So for everyone. Franco Scalamandre: sorry. Yeah, and you can send Colonel John an email. Col. John Boggs: Or send me an email. Yeah, that's that'll work, too Okay, well hey everybody that that's it out here and I look forward to the next time Franco Scalamandre: Send him an email. There you go.