23 August 2011

Strategic Alternatives - A Corporate Exercise in Futility

When a publicly traded company announces that it is exploring "strategic alternatives" for a part of its business, something has gone terribly wrong.  In the short-term, it signals a failed strategy; more importantly, it is an indicator of a company with a lack of a good long-term strategy and management discipline.  There's nothing more destructive to shareholder value than a pattern of corporate restructurings, mergers, divestitures, and other "strategic alternative" type transactions.  They usually fail to deliver what they promise, cost the company tons of cash and lost focus, and generally result in a big waste of time.  

HP got trounced last week when it announced it was exploring strategic alternatives for its PC business, shutting down tablet/phones, and overpaying for a software company.  Huh?  They just bought Palm a year ago and made the blockbuster Compaq deal less than 5 years ago (they also dub the Autonomy deal as "transformative").  HP spent billions on these deals, incurred huge transaction and restructuring costs only to completely unwind them years later.  What was the point all this nonsense? HP shares are trading now below what they were prior to Compaq; wouldn't shareholders have been better off with cash dividends or stock buybacks rather than years of poor M&A and divestitures?  And think about all of the employee mindshare lost and customer confusion created during the decade long period of uncertainty.  Dell is licking their chops right now.

Companies try to get bigger for many reasons and use many business school terms to justify it.  Phillip Morris and PepsiCo did so to diversify away from their core businesses.  What happened years later?  Phillip Morris spun out its food business resulting in a standalone a cigarette company. PepsiCo sold its restaurant business and is under fire from shareholders to spinoff many of its non-core assets. More recently, Kraft announced it will split into two companies only months after it completed the Cadbury deal.  I thought bigger was better?  And think about it, can Phillip Morris ever diversify enough from being a cigarette company? 

Slow changing companies that seek growth around the trenches of its core generally are more sound for the long-term as they effectively look at the business beyond fiscal quarters.  Exxon, for years, has caught flack by analysts to invest in high-growth renewable energy and alternative sources; its response has always been: We're an oil and gas company, not a solar research company.  P&G has always stayed in the consumer staple business, only making acquisitions as product or geographic extensions.  They've rewarded shareholders well in the long-term; and further, they've created a culture of stability and a focused long-term vision along the way.

Besides the advisors, corporate executives and others that stand to gain from large scale corporate transactions, there is often very little value created besides a week of headlines. When companies listen to Wall Street more than its customers and employees, it usually leads to myopic thinking and superfluous deals.   Sometimes the best policy is to do nothing and focus on your core business.  So when a CEO wants to be transformative, he or she is basically telling you that they have no confidence in what they are doing and betting the farm on something they are even less certain about.

07 August 2011

Patent Lawyers Gone Wild!

The modern day patent system has no doubt provided substantial societal gain throughout the years.  Government grants of exclusivity arrangements have encouraged R&D, promoted invention, and protected new ideas.  As most things that have political fingerprints, however, it seems the very system that was supposed to keep the public from being held hostage by large corporations is now helping them create barriers to entry.   In the current mobile patent war, for example, its the richest companies that gobble up patents to stifle competition through through lawsuits (yes Apple I mean you).  Is innovation being left in the hands of the few with the largest war chests and most lawyers on the payroll? 

The patent infringrement assault on Android is bloody.  Apple is suing every handset manufacturer they can think of to essentially take the guts out of the free mobile OS.  HTC pays Microsoft $5 per handset sold (Microsoft makes more from HTC sales than their own Windows phones).  Samsung cannot sell their Galaxy tablet in Australia thanks to Mr. Jobs.   Mobile "patent troll" companies like Interdigital have tripled in price on speculation that they will get sold to the highest bidder.  Remember Motorola?  They are back from the dead sporting a 17,000 patent portfolio.  Some of these companies actually have more attorneys on their staff than any other discipline.  I've never seen a case when this is a good thing for the general public (read:  Congress).  Are these R&D havens or lawyers gone wild?

Its one thing if Apple had some sort of super patents that companies were blatantly stealing.  If this was the case, Apple wouldn't have the need to drop nearly $3B to purchase Nortel's patent assets (incidentally with other "consortium" monopolists like Microsoft) and continue their shopping spree.  They are filing claims for patents around the fringes, ones they acquire after the fact, or even ones they might not be using or so insignificant to the overall OS.  Apple just became the second most valuable company on the planet, why do they see the need to stoop to this level?

Simple.  The Iphone represents almost half of Apple's revenue.  Android is inching towards a 50% market share in smartphones.  What they spend on patents is a fraction of what they can defend by taking the largest competitor out.  And of course, consumers will suffer the most by reduced choice.  It is fortunate that Android is backed by deep pockets (Google) who can afford to fight back, but what if they weren't ?  How would they fight back against Apple's $80B cash balance? Why can't Apple just continue to disrupt the market through innovation instead of focusing on legal brinksmanship? 

We saw similar games in the pharmaceutical industry.  Most of the blockbuster drugs that came out were brought by a limited number of companies with vast resources.   And as the 17 year patent period would expire, they would work the system by making minor tweaks to their drugs to extend the patent life.  You saw very little innovation coming from smaller players who don't have the resources and knowledge of the system to compete.  There were rarely any development firms or smaller companies that could bring wide scale drugs to market in large part because of the muscle of the big boys.  And remember how much your prescriptions cost as a result?

I don't want to imagine a world where my only choice is Apple and Microsoft (didnt we have that in PC-land?) or where the only drugs being developed are by 3 or 4 firms.  I continue to hope the patent system will favor inventors like Robert Kearns in Flash of Genius who miraculously defeated the Detroit automakers that stole his design.  With patents being so easy to file for sophisticated lawyer groups, however, its the large companies with vast resources that are being aided the most.  But lets hope in the long run, things work out the way they should  A warning to Apple:  just look at Pfizer now -- they are nothing more than a large cash balance.