From the book called Billion Dollar Lessons by Paul Carroll and Chunka Mui, Portfolio Books, 2008. The book is subtitled What Can You Learn for the Most Inexcusable Business Failures of the last 25 Years.

The 7th Deadly Strategy is Consolidation Blues. Two or more companies joining together in a mature industry to be a larger force. The message is if the processes and values of the two companies are not similar, it will not work.

Watch out for – when you buy the assets, the company buys the problems of the other company. Be aware of dis-economies to scale because of increased complexity. Most companies believe they will keep all the customers of the company they buy, that is often not the case.

Ames a regional discount retailer in the northeast bought Murphy, Zayre, and Hills stores. Many of those stores did not meet up to expectations and had to be closed. DaimlerChrysler – Daimler bought Chrysler with all its problems – costs stayed high, union problems happened, engineers did not shared technology, management did not want to dilute the Mercedes brand.  Imperial Sugar Company bought others but on a razor thin margin that could not handle debt. People starting eating less sugar, the company deconsolidated. US Airways bought Pacific Southwest and Piedmont airlines to expand their reach. The systems did not talk to each other – more than once the computer systems broke down; labour costs went higher; scheduling pilots was a nightmare because US Airways rather than the pilots looked after it; the rigid hierarchical management style worked good in a mid sized company, not so good in a large one.Standardization made operations less productive.

Due diligence is needed before deciding to buy. (Ames spent one day on the Zayre buy)

There are always more questions than answers, till the next time – to raising questions

From the book called Billion Dollar Lessons by Paul Carroll and Chunka Mui, Portfolio Books, 2008. The book is subtitled What Can You Learn for the Most Inexcusable Business Failures of the last 25 Years.

The sixth Deadly Strategy is Fumbling Technology is a fundamental misreading of technology trends. Every company wishes to to have a breakthrough offering because it is similar to winning the lottery, there are great rewards for the breakthrough. Similar to the lottery, many will fail. All technologies solutions should remember the Pony Express. It made a great story to move the mail faster, but it operated for a year and was shut down 2 days after the transcontinental telegraph reached Salt Lake City.

Things to learn from Motorola and Iridium – the business case is who wants it and what are they willing to pay? new technology is exciting but someone has to decide when is it a good time to pull the plug? market research is not marketing, what are the alternatives?

Fed Ex and Zapmail (faxing) ; Western union could have own AT&T; the head of IBM Thomas Watson Sr. I think there is a world market for 5 computers and Ken Olson founder of DEC – there is no reason anyone would want a computer in their home.

It is hard to kill a strategy once launched. There is ego, creditability, and money on the line. Often times the design is all or nothing point of view. To get the new technology up and running, money has been spent, in terms of infrastructure, operating agreements, management time has been involved, and the first user has not paid.

The big question to ask – is the market real? Do you have to do it all at once or can it be piecemeal?

There are always more questions than answers, till the next time – to raising questions

From the book called Billion Dollar Lessons by Paul Carroll and Chunka Mui, Portfolio Books, 2008. The book is subtitled What Can You Learn for the Most Inexcusable Business Failures of the last 25 Years.

Deadly Strategy Number 5 is adjacent market strategies means an attempt to build on core strengths to expand while taking few risks. It sounds good, but most of the time, the efforts fail.The reason successful companies build on core strengths, and over time learn what is repeatable. Adjacent markets are hard to pull off and are risky.

An example is Oglebay Norton for 150 years its freighters moved iron ore to the steel mills. It decided to leave the steady but slow growth industry and go to limestone which was projected to have higher growth potential. It sounded logical, but problems began to surface. To move into the limestone industry debt was taken on. The company through acquisitions became number 5 in limestone, but not big enough to carry weight. The steel companies went into a downturn and prices went down. As well, limestone needed to travel on rivers, Oglebay’s fleet was for the lakes, their boats were too big for rivers – no advantage here.The company was eventually sold for a fraction of its previous price.

Other examples – Xerox and financial services; Avon Products and Health Care business including retirement homes; American Standard and laser medical technologies; Laidlaw – school buses and ambulances; Florida Light and Power buys Colonial Penn Life Insurance. Montana Power and Touch America; Blue Circle Cement company buys a lawn mower company,(the theory the loyal customers who owned the home that used Blue Circle (although most homeowners would not know who Blue Circle was) would buy a lawn mower from the same company).

To ask when it sounds good – how do the sales channels differ? how do the customers differ? how do the products differ? what about the regulatory environment? has the business plan a significant margin for error? what happens if the economy goes south? what assets do you lack in the adjacent market? what are the problems of the market? with your customers follow you?

There are always more questions than answers, till next time – to raising questions

From the book called Billion Dollar Lessons by Paul Carroll and Chunka Mui, Portfolio Books, 2008. The book is subtitled What Can You Learn for the Most Inexcusable Business Failures of the last 25 Years.

Deadly Strategy Number 4 is Staying the (Misguided) Course  – understanding it takes great work to achieve and maintain a company in the top tier. When the economic landscape begins to change,what should the company do?. For example, it you worked in the retail area and Wal-mart is coming to your town, what do you do? What profit margins do you hold on to? Can you look at the core assumptions and values of the company? If the solution is to sell the company, would you recommend it?  Those questions are not easy to answer, but the questions need answers.

Kodak and photography have always been in the same breath. Kodak was the dominant company in film. Then digital happened, what should Kodak do? Kodak made its money from film, the margins were in the range of 60%, Kodak was correct in their assumptions until the 1990’s when prices of digital equipment fell and people could do their own, and wanted to do their own. Then the cell phone with a camera was invented, a game changer for Kodak. Kodak’s position in the marketplace changes drastically, their biggest problem is they saw the world through the world of print film and consistently underestimated the speed with digital would overtake film and prints also digital’s margins were 38%. Why move from 60% to 38%?

The same story with the music industry, the paging industry, faxes as a business, MicroAge in computers retailing, Pillowtex in the manufacturing faced with overseas manufacturing.

Two questions to ask: does your industry have a favourable structure for decline? can you compete successfully on the remaining demand?

There are always more questions than answers, till next time – to raising questions.

From the book called Billion Dollar Lessons by Paul Carroll and Chunka Mui, Portfolio Books, 2008. The book is subtitled What Can You Learn for the Most Inexcusable Business Failures of the last 25 Years.

Deadly Strategy Number 3 is Rollups – making the market more efficient. There are many industries with lots of competition, it makes sense to bring them together. The larger company would have increased purchasing power (lower prices), it would raise money or capital at a lower cost; there would be brand recognition and advertising either regional or national; more people would work at the company or more opportunities in it and the revenue would be greater. What is not to like?

In the real world it is a rare rollup that actually works – SYSCO, Waste Management, AutoNation. Unfortunately they are many more that work for a while then died. They work for a while because the concept makes sense, growth is unbelievably good and problems have not come to the surface. One of the big problems is the growth – if growth slows (and it will) investors disappear, and financing stops. To keep the illusion of growth fraud happens – MCI, Philip Service Corp., Westar Energy, Tyco, FPA Medical, JWP, and Loewen Group are some examples.

Why does the theory often not work? standardization is hard to accomplish. When a business is bought, do the good things about the business get transferred to the new acquirer? Does the company always have to have growth? There are plenty of dis-economies of scale, what systems will break down? how will the competition react? Sometimes the acquirer allows the existing company to keep its autonomy which means the purchasing power expectation does not happen.

There are always more questions than answers, till next time – to raising questions.

From the book called Billion Dollar Lessons by Paul Carroll and Chunka Mui, Portfolio Books, 2008. The book is subtitled What Can You Learn for the Most Inexcusable Business Failures of the last 25 Years.

All of the world knows Deadly Strategy number 2 – the financial engineering known as the subprime mortgage bubble is the best example. Giving a mortgage out with no income, expecting property values to rise and securitizing those loans to the world on the basis if it is off my balance sheet who cares. The underlying premise was for years most people paid their mortgages, although that was because the previous system needed both income and a downpayment. The end result many billions were lost. Unfortunately, there are a great many other examples such as Green Tree Financial and Conseco. Green Tree gave mortgages out on mobile homes, which is an asset similar to a car and has a lifespan of 10 -15 years not the 30 years of a house and a house often times increases in value over time. .It was less expensive to declared bankruptcy than to pay the mortgage on a declining asset. Somehow Conseco missed this fact; it was lured in by the high returns Green Tree was reporting. The returns soured and Conseco ended up losing billions.

A variety of companies issue credit cards, some people do not pay them back and the company has to write it off. In 2000 VISA reported writeoffs of  6.7%, Target at 6.4%, Spiegel was 1.3%. By 2003 Spiegel was in bankruptcy as the numbers were lies

Heilig-Meyers spent 90 years being the small town furniture retailer, then they started going to the large urban areas with no competitive advantage. Credit terms became easier, fewer people paid and then the company tried to go upscale. Its customers did not like it and the chain was soon bankrupt .At the time 1 in 9 Americans who went bankrupt was holding a Heilig-Meyers credit card.

Tyco grew by acquisition and its stock price increased with each acquisition. The acquisition had to grow larger each time, the company was aggressive in accounting until it was no longer a secret and down it went.

Amerco, the holding company of U-Haul took on too much debt, on the advice of its auditors set up off-balance sheet SPE (Special Purpose Entities) to hold the debt. .After the Enron collapse, the SPEs had to come back to the balance sheet and the bankers were aghast, too much debt, means less credit from the bank.  The end of company happened fast.

There are always more questions than answers, till next time – to raising questions.

From the book called Billion Dollar Lessons by Paul Carroll and Chunka Mui, Portfolio Books, 2008. The book is subtitled What Can You Learn for the Most Inexcusable Business Failures of the last 25 Years. The strategies outlined are not necessary bad, sometimes they work. When they go are bad, lots of money is lost.  The authors’ research indicates most of the people who lost money were from well managed companies, not taking excessive risk, and there was no widespread fraud. In looking back, the question of what were they thinking? comes up. Basically good companies following the wrong strategy.One of the reasons the companies fail is the overestimation of company loyalty. If the customer buys your service, would they buy more than one product? why?

Deadly Strategy One is Synergy – maybe an overused word and a variety of groups make a good living promoting synergy – investment bankers, consultants. Synergy is the promise of something for nothing, leaving a legacy for the CEO. Synergy is alluring but does it work? has it ever worked in the past for the company? maybe but more often than not the answer is no. Even it it does not work, synergy is a great sound bite.

Synergies start with the best of intent – two companies in the same competitive space join each other to make a better company for customers and investors. The problem is the two companies do not exactly compete on the same field – one maybe better in company to company products, the other one in personal products but they are in same industry. These two companies on the outside look similar but just about everything about them are different. The companies are different in approaches, culture, all software programs are not the same – they were built to measure different parts of the business?  How do companies hire people or is there really synergies?

Some of the companies that tried and failed are Unum and Provident in disability insurance; UAL (United Airlines) bought Hertz and Westin Hotels; Sears and Dean Witter; JC Penny and buying pharmacies; Quaker Oats and Snapple; Time and AOL; Safelite Glass and Vistar; IBM and software business; Union Pacific and Overnite Transportation (trucking company), there are many examples they had the same result. Great efforts were made to find synergies only to locate very few and a short time later the people who made the decision to join have left the company.

Why? many costs expected to be saved are are easily moved to another department, and more importantly many people have a vested interested in ensuring nothing changes for people at all levels protect their jobs. Would you chop your job?

Synergies can work, they are sexy, but as a dividend holder of a company, when they happen to your company (ies) watch out and ensure you do not say what was management thinking?

There are more questions than answers, till the next time – to raising questions.

If you have been watching the Olympics or sports in general, you are aware in each race there is a strategy in place. If it is executed to the satisfaction of the coaches and athletes, a success is achieved, If a medal results so much the better. In the world of dividend paying stocks – the writer recently reread a book called Billion Dollar Lessons by Paul Carroll and Chunka Mui, Portfolio Books, 2008. The book is subtitled What Can You Learn for the Most Inexcusable Business Failures of the last 25 Years,

This blogs often highlights great stories of the past that continue as the companies pay dividends well into the future, but the reality in the marketplace is there is as much failure as there is success. In the book, the authors do not say these strategies are wrong, but with Murphy’s law  something that can go wrong often times does.

The 7 strategies dividend holders have to watch for (because loss billions generally means you had to make billions) are Synergy – the whole is great than the sum of the parts; Financial Engineering – the aggressive use of legitimate accounting or financial mechanisms; Rollups – buying small companies and making a big one for efficiencies; Staying the course – with a clear threat at hand, doing the same thing the company has always done; Adjacencies – moving into a adjacent market to stretch itself; Riding technology – the technology the management backs does not become industry standard or changes drastically; Consolidations – Buying your competitor except your competitor does not operate like you think it does.

Over the next few columns – the examples will be elaborated on, for today you can think of when you have heard the strategies before and continue to hear them.

There are always more questions than answers – to raising questions.

Hopefully you have heard about Venture Capital (VC) and understand people can make lots of money. In our economy there is an important role for the VCs, but as a dividend buyer, this role is not necessary for you. VCs play a valuable role in nurturing start up companies, helping them to increase in size to meet the solutions needed in the marketplace. A good book about how VCs work is Mastering the VC Game by Jeffrey Bussgang published by Portfolio in 2010. Mr. Bussgang works for a VC firm and offers insights into what the objectives and expectations of the VC firm are. Anyone looking for money from VCs should read the book. One of the expectations is how much money a VC company needs to make from an investment into a company – they often look at 5 times investment. To to get there, the VC companies typically examine hundreds of companies, try to find the gem of an idea, the right fit for their company and nurture it, and then sell it to redo the same thing.

As dividend buyers, none of the VC firms investments meet the criteria of companies paying dividends. It is interesting to see how other players in the industry work and function. The dividend paying companies are prospective buyers of the companies, then they become divisions of larger companies, which is one of the methods dividend paying companies continue to pay dividends.

There are always more questions than answers, till the next time – to raising questions.