Sterling Performance

March 2010 marks the 10th anniversary of the dotcom bubble bursting. Yet what did that boom and bust teach us? Not enough to stop the financial sector imploding a few years later. Are company directors too stupid to learn lessons from such collapses or so sensible they have strategies to survive them?

The dotcoms that started in 2000 and are still around have probably never seen their shares at those millennium levels again.

The FTSE 100-index celebrates the anniversary 20 per cent below its dotcom peak while the Dow Jones is down 10 per cent.

Yet it’s now hard to find a businessman, never mind banker, who does not claim now to have foreseen the current financial crisis. The coming crash’s date and depth were open to debate, but the bursting of the last bubble was a dead cert.

So why does business not avoid these clearly coming crises? Here are four reasons:

1. Uncertainty over timing and degree: acting early can be riskier than being there when the crash comes. A fund manager wants to avoid holding shares after the market has turned down, but they don’t want to sell early and watch the market rise to perhaps double it’s volumes. Waiting to see the zenith and selling as shares slide makes more sense than exiting before the manager knows the market’s upside.
2. Not knowing what to do, even if the crash is accurately foreseen: Fund mangers can sell, but a manufacturer cannot quit its core business.
3. Bursting bubbles affect everyone: A CEO cannot be responsible for a recession, but he can happily blame it for the company’s failings. The reliance on relative performance for everything from directors’ remuneration to investment outcomes allows boards to ignore the macro economy, including those bursting bubbles.
4. Directors define their job as coping with crises, not averting them: They know some disasters will hit them — and not only the obvious ones — but they hope they know how to handle them. So the lesson of the dotcom collapse was not lost; the real lesson was that most businesses survived — just as they have with the current crises and previous recessions.

Executives who protect a company against every potential disaster miss every opportunity too. The dotcom crash was just the latest of many setbacks - bruising but not fatal. Good managers ride bubbles rather than run away from them.

(Pic: chefranden cc2.0)

The mega-deal is back, but whereas the bids for ABN-Amro helped cause the global financial crisis, Prudential’s offer for AIG’s Asian business helps solve it. Is it the best sign yet that the crisis is over or the first indication that financial services companies are ready to make the same mistakes again?

Governments bailed out the financial services industry after the 2007 credit crunch. Now the financial services sector is starting to bail out government.

And not only are mega deals back, Prudential has shown mega finance is available for growth as well as for repairing balance sheets. Having forked out huge sums merely to return Lloyds, HSBC and Royal Bank of Scotland to their former positions, shareholders now seem eager to subscribe an even larger amount to expand the Pru.

The price for AIA, the Asian subsidiary of America’s AIG insurance group, exceeds the UK life and pension company’s stockmarket value. It is betting the ranch – and with cash, not shares — but the deal differs from RBS’s acquisition of ABN in being nearer the bottom of the market than the top. It is an opportunistic purchase.

There have been other opportunistic deals since the financial crisis, of course, but Barclays Lehman Brothers acquisition was modest by comparison and some acquisitions were misjudged - Bank of America’s Merrill Lynch takeover and Lloyds’ merger with HBoS proved to be pigs in pokes.

AIG insured the bad banks’ bad loans and as one falling domino knocked over the next, the US taxpayer bailed out AIG in return for an 80 per cent stake.

A planned flotation of AIA on Hong Kong’s stockmarket would recover some of the state’s $182bn investment but markets are fickle and taxpayers would have been left with a large part of this unwanted subsidiary.

Selling outright removes the risk and recovers more upfront cash - and for US taxpayers, holding a stake in the Pru is preferable an investment in AIG.

The UK company not only buys a business for below the planned flotation price but buys into growing Asian economies.

However the deal is most important for marking stage-three of the financial crisis. The ABN takeover represented the problem phase; the government rescues and rescue rights issues were the stabilizing period; now Pru’s deal signals the way out of the crisis.

And it is potentially good news for British taxpayers, corporate and personal. The UK owns 85 per cent of RBS and 41 per cent of Lloyds after their mistaken bids and plans to sell those shares over several years. AIG has shown exits can be sooner and bigger than planned because there are bidders ready to write big cheques again.

Pru’s cheque could have bought the whole of RBS. It preferred to look abroad but other opportunistic bidders may be prepared to snap up large parts of Britain’s state-owned banks. And now megabids are back, maybe a mighty merger outside the financial services sector is possible again too?

I’m just back from Mobile World Congress (MWC) in Barcelona, and I’m feeling a little self-important.

MWC is a huge telecoms tradeshow where the great, the good and the proflagate debate the future of the industry. I went along because I’ve recently launched a tech-startup in the mobile technology space. This year there was change in the air, a power-shift from the giganta-networks like AT&T, Vodafone et al, towards the nimble and powerful web-based players such as Google and Skype. Even better, those upstarts are falling over themselves to work with little players, like me.

Of course some things never change. Tech giants are still building exhibition stands with more space and better décor than my own apartment. Eastern European companies continue to fluff their stands with under-dressed pretty girls like it’s 1977. Best of all are the national stereotypes, from the sports-jacketed US executives to the buttoned-up, terrified looking Japanese ladies. When all of those are gone I’ll know times have really changed.

You probably already know that some Big Stuff happened. Samsung screamed about a new phone called Wave, based on an operating system called Bada. Microsoft (the ‘Bing’ people, there’s a joke in there somewhere) released Windows Phone 7, replacing the antiquated Windows Mobile operating system. All this is happening because these companies have Big Problems with iPhone (and its App Store) Google (and it’s Android operating system) and the fact that mobile innovation now resides with the global army of app developers. I’m one of those people, though I claim no special credit - there were thousands of us in Barcelona.

I didn’t see these big launches. I was too busy, and knew I could check them out online later. Instead I spent my time briefing journalists on our latest exploits while keeping my business running from hotel hotspots and quiet corners. I think I managed it, though I’ll know if I’m bankrupt when my mobile roaming charges become clear.

This year, the new kids were given their own playground - A hall at the top of the hill named App Planet. This was my favourite spot and was never less than packed to the rafters. Here the suits gave way to t-shirts, Blackberries became iPhones and exhibitors appeared a decade younger than those in other halls. Sensing the mood, Skype were there offering free phone calls, while beaming developers carried around their free Nexus One phones from Google. Sadly I arrived too late for the giveaway and am still kicking myself.

My company is into mobile augmented reality, and the organizers invited us onto a panel to debate this emerging industry. With 300 people packed into the hall, three start-ups flanked a nervous Nokia executive on the stage. A sense of humility is required. After all, Nokia’s event budget probably exceeds the combined revenue of all the other companies on the stage, but the point is that we belonged there. Later, I took part in an augmented reality demonstration event - Essentially technology speed-dating. It had been billed as a press event, but in truth most of the demos were given to the big exhibitors who were all keen to know “where are you going with this? How many downloads have you had? What is your business model?”

Perhaps I’m getting a little carried away, I’m sure my mother would say I’m over-tired, but there really was something different this year, a palpable changing of the guard. Now though, I’m planning on sleeping for the whole weekend.

(Pic: James Nash cc2.0)

Freezing top directors’ pay plays to the public gallery but it creates problems in remuneration structures rather than solves them. Who wants to run Barclays or Shell if it means forfeiting the reward?

If a high pay culture runs right through an organisation, tackling it only at the top leaves a rich cake, covered in a fat layer of marzipan, but spread with only a thin coating of icing.

Management at every level must have an incentive to improve and people will not seek promotion unless there is sufficient extra pay. 

It is top salaries that receive publicity, not least because directors’ rewards are revealed publicly and voted on. And last year, Royal Dutch Shell’s shareholders voted against the remuneration report. The oil company has thus written to investors pledging to freeze and cut pay. (more…)

The business is in trouble. The finance director has bought some time from the creditors, and now you need to deliver a turnaround in the trading performance. Here are the five basic steps you need to follow.

1. Identity Check that everyone around the table is absolutely clear on what the business is about; “what you do” and, more importantly “what you don’t do”. A diversified or multi-segment business needs fast decisions on which parts have a future, and which would be better owned by someone else. The decision needs to be logical and simply explainable, to everyone in the business, so the ones that are staying know what the future holds. Move fast, move once, and move on. (more…)

Stockmarket-quoted companies have had no trouble raising money, so how come unquoted companies are finding it so hard to come to market?

In short order, Travelport, fashion retailer New Look, and the Merlin leisure group have pulled planned flotations at the last minute because of investor resistance. Many other directors and advisers are thus rethinking the initial public offers currently taxiing towards the runway.

But this is a problem of private-equity not public businesses. The common theme of those pulled share issues is their ownership: private-equity firms and funds desperate to crystalise profits — not least to offset paper losses elsewhere.

The businesses they are selling are often as mature as the quoted companies that raised record sums in rights issues through the stockmarket over the past year: New Look has been selling fashion since the 1960s and first floated on the stockmarket in 1998, for instance, while Merlin’s Madame Tussauds subsidiary dates from Victorian times.

The problem is the corporate structures encouraged by private-equity. Despite the name, these funds are based on debt rather than equity: they gear up businesses to lever the returns but must eventually repay those loans.

That means trade sales, flotations or — the ultimate parcel-passing — sales to other private-equity funds. That last option is off because the credit crunch has made borrowing impossible but trade sales require buyers with free cash too. So stockmarkets look appealing, especially after the rise in share prices. However, markets differentiate between companies raising money for expansion and owners issuing shares to take profits.

Investment managers have a choice of buying any travel group, retailer of leisure company; why would they buy a fully-priced flotation when they can buy discounted shares in a rival with a long trading history and which understands the disciplines demanded of public companies? Any business seeking to come to market with questionable corporate governance, excessive incentive schemes or unproven profits records will be treated with suspicion.

And the private-equity sector has only itself to blame: managers of quoted funds have not forgotten how Debenhams was taken private, geared up and refloated at a price the retailer has never seen again. Investment managers have no wish to be caught again. If a company is such a good purchase, why would private-equity mangers be selling?

But that stream of successful rights issues shows fund managers do have money to invest in quoted shares and markets are not closed to new issues.

However, private-equity funds have misread the market and expected too much: a conservatively-priced company with a cleaned-up board and rewards scheme ,plus a business plan that delivers growth, is likely to receive a reasonable reception.

Investors would rather their money went into the business than finance the owners’ exit and they would have more confidence if the private-equity owners retain a stake after flotation, but stock markets need new companies as well as new money.

Private-equity sellers should expect less and deliver more.

(Pic: Muffet cc2.0)

Beware leaders trying to tamper with the way we vote. Cadbury’s defeated chairman wants to disenfranchise the speculators who delivered the UK confectionery company into Kraft’s hands.

Instead of control comprising one share more than 50 per cent of the company, Roger Carr proposes raising the hurdle to 60 per cent — with anyone investing during the bid barred from voting at all. Carr explained his reforms in a lecture at Oxford’s Said Business School and as a senior UK businessman — his chairmanships include Centrica gas group and, in the past,  Mitchells & Butlers, Thames Water besides Cadbury — he deserves to be heard.

Investors do not actually vote on takeovers: they either accept of abstain, not vote for or against. And at Cadbury they accepted, not least because Carr advised them to, after correctly anticipating they would.

Carr may be sore at seeing Kraft Foods’ bid succeed but Cadbury can blame only itself. The US company and its countrymen saw value that UK investors did not: before the bid, UK institutions owned just 28 per cent of the shares while American funds held 49 per cent. When Kraft’s bid boosted the share price, long-term investors of both nationalities sold out to take long-term gains and short-term investors bought in seeking short-term profits.

By the time Kraft raised its terms, hedge-funds and other short-term investors owned 31 per cent of the stock. And as Carr’s 60 per cent threshold did not thwart them, he would disenfranchise investors who had bought since the bid started anyway. He also suggests preferential tax treatment for long-term holders.

His recommendations might keep more British companies British but they would protect poor management as well as protect independence. The threat of takeover is a key way to make companies improve and a change of ownership is the ultimate way to change the board and its strategy.

Indeed, Carr’s own career is based on mergers and acquisitions. He built the Williams Holdings conglomerate by acquiring brands such as Crown paints, Yale, Rawlplug and Chubb, and then divested them when conglomerates fell from favour. As Centrica chairman he last year fought a £1.3bn hostile bid for venture Petroleum.

And Cadbury has grown by takeover too, from Green & Black’s organic chocolate or Schweppes drinks to the Fry’s factory whose production it is now transferring to Poland: it bought Dr Pepper and Adams gum in America and demerged its beverages business out again.

Carr admits that those who live by the sword should be prepared to die by it. Cadbury enjoyed M&A when it won: its ousted chairman should not try to change the voting rules now it has lost.

(Pic: Cyron cc2.0)

During Apple’s recent iPad launch, the comment that made me really stop and listen was when Steve Jobs said that Apple were now the world’s largest player in the mobile devices market.

It struck me that Apple’s perception of its market has changed significantly over time. No longer is the company in the personal computer business; it is in a far more dynamic, amorphous and wide-ranging market called mobile devices, covering laptops, phones, cameras, music and entertainment systems and more.

To my mind, this is part of Steve Jobs’s genius. He recognises that companies shouldn’t define themselves by a narrow view of the products they have historically made, but by a broader view of the customer experiences they help create.

Kodak is struggling because, for too long, it continued to believe it was in the film processing market, not the mobile devices or picture sharing market. Olivetti made the mistake of believing it was in the typewriter market, not the word processing or document sharing market. (more…)

In the 1990s I argued that globalisation and technology’s advances were rendering competitive advantage unsustainable. Today, many companies are in the grip of an even more virulent form of hypercompetition – the commodity trap.

A commodity trap is where a company’s competitive position is eroded so that it can no longer command a premium price in its market.

Falling into your own trap

Tempting as it is to blame cheap producers in China or some other external factor, most commodity traps are very much related to how managers act or do not act.

The reality is that commoditization rarely happens to a business. It is usually the result of a failure to act early enough. It most often results from managers failing to innovate, issuing bad products, or denying trends already in motion.

Managers don’t see commoditization coming. Many are so focused on achieving short-time goals they could be said to be incentivised to ignore its onset.

What’s more, companies can be guilty of setting their own traps. Typically, they continue to fight against low-end competition by discounting higher-value offerings, inadvertently increasing the depth and severity of the trap.

Conventional wisdom argues for either cost and capacity reduction (without sacrificing margin) or increased differentiation (to maintain a higher end position).

But there’s little advice on how to identify the root cause of commoditization so it can either be avoided or turned to your advantage.

The Three Commodity Traps Framework offers strategies that have been proven to work in companies often caught up in fearsome price and proliferation wars. (more…)

I was in a meeting recently with a strategy director, when he shared his concern that his strategy team may be missing a trick. He wanted to make sure that the processes and approaches he is currently using to develop his company’s strategy were going to take the business forward, not backwards.

So, here are my seven strategy pitfalls. How many of these are evident in your business?

1. A failure to make trade-offs. Your strategy is defined as much by what you’re not about as it is about what you are about. A key differentiator of many market-leading companies is that they are willing to make choices about how they wish to compete. Struggling companies, in contrast, are often unwilling to make these trade-offs and end up stuck-in-the-middle, being outflanked by companies with more innovative products, lower prices or stronger customer relationships. (more…)
   Stuart Cross is a founder of Morgan Cross Consulting. Share strategy with Stuart