Monday, October 28, 2013

Technology, The Mirage of Shareholder Value, and Why Icahn Should Just Retire

“We may see the small Value God has for Riches, by the People he gives them to.”
Alexander Pope (1688-1744)

There are some days that I feel as if I am a late night talk show host blessed with a particularly inept politician. This past week was particularly fortuitous for me, as Carl Icahn has proven himself to be a gift that keeps on giving. I have been fairly blunt in my assessments of his spectacular effort to morph the Dell LBO into a goat rodeo (See here and here.) Hence, it makes me crazy that he managed to show up in the headlines once again this week, engaging in the same fatuous behavior that makes him a caricature of what my friends in finance would call "dumb money". This time, despite the ostensibly impossible odds of success, he decided to take on Apple. For a quick primer, the NY Times Dealbook blog does a great job:

Icahn Amps Up Pressure on Apple, but His Stake Limits His Leverage

It is hard to overstate the the pointlessness of this move. As I type this, Apple's market capitalization is an immense $484 billion. For Icahn to get the 5% stake in Apple needed to incite his usual proxy cat fight, he would need to come up with well north of $20 billion in cash. Which would be fine, except that he just doesn't have that kind of money. How do we know?  Because he was such an abject failure at topping the $24.4 billion offer that Michael Dell and Silver Lake were making for Dell. With bluffing skills like these, he needs to be kept away from the poker table at all costs. I haven't had this much fun watching M&A since a fish oil company called Zapata tried to buy an Internet company 6 times its size with stock in during the .COM boom. Here's some advice for Carl: Stick to raiding businesses where you might have some rudimentary understanding of their operations, like, say, lumber, fish oil, or buggy whips. If you you can't find any, it is far better to quit at the top of your game rather than have us remember you as a laughing stock.

With that said, Icahn is but a pathological symptom of a much bigger problem in the industry: Management's over reliance on optimizing for a high stock price rather than for building a sustainable business. This is especially true for the information technology industry, where the reductionist private equity strategy of cutting research and development in order to run the business for cash flows makes no sense. The fact is that no business can really be run as an accounting identity. In technology however, the product sets and platforms have a half life measured in low single-digit years. Killing a single dollar of R&D will set up for certain failure two years into the future. Tragically, stock prices get managed in 90 day intervals, so, if you are a CEO, firing your entire engineering organization will make you look like a hero in 12 months. In 30 months, you will likely yourself be fired; and your company, your customers, and your employees will be irremediably damaged.

The correct way to run a technology business - any business, for that matter - is to focus on the needs of the customer first. Build a world class product and solution set. Provide a lavish support infrastructure and build lasting relationships. The only way to do this is to assemble a talented and productive team, and show them that their contributions are valued. Build their loyalty. Enable them to to delight customers, and support them and their needs. The wants of the typical shareholder are so far removed from business success because the typical institutional shareholder is far removed from the customer. Does Carl Ichan care about the product needs of Apple's or Dell's customers? Absolutely not. He is clearly eyeing the cash in the bank and would hire new management to implement his redistributive strategy.

Managing for shareholder value rather than for happy customers is a problem that has reached almost crisis proportions. Thankfully, at least in technology, there are always cadres of small nimble companies out there who focus on their customers. They are the ones that are privately held and VC-backed, however. In most successful companies backed by venture capital, not only are the employees focused on the customer, but so are the investors. Maybe it's not a coincidence then, but these investors seem to score some of the most amazing returns for their money over the long term. Hopefully that will not go unnoticed. In business, customers - and not shareholders - always come first.

No comments:

Post a Comment