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peterbirksWay back in the day, a then young Mr Harrington and I once had a chat about companies that really should have taken a different turn. One of these companies was Wang, which I see from the perhaps accurate Wikipedia was generating revenue of $3bn a year in the 1980s and employing 30,000 people. Sometime in 1989 it should have said "that's it, we've had a good run, we've made bucketloads. Here's a massive dividend, loyal shareholders. We're off. The word processor is dead, and other people are better at the replacement than we will ever be".
It didn't quite work out like that. There was the Wang PC, the Wang Freestyle, the Wang Office Information System, the Wang 2200 and possibly other things besides. All that they had in common was that they burnt up the revenues generated by the Wang word processor at a terrific rate. Wang filed for bankruptcy protection in 1992 and effectively ceased to be.
I used to think that this was the inevitable way with companies. Pressured by moronic fund managers who do not understand scalability, profitable companies expand where they shouldn't (UK companies into the US being an old favourite), diversify into less profitable lines, or attempt to scale up existing lines that are not scalable (see LTCM). Eventually there are tears before bedtime and the fund managers blame the CEOs, whose only real mistake was failing to tell the institutional investors to go fuck themselves.
But now, finally, we've got a company that talks sense. I refer to Lancashire Holdings, formed in late 2005 by Richard Brindle.
Hats off to Brindle, I say, who has effectively stated the following witgh this morning's Q3 figures.
1) We've been lucky for two years;
2) Insurance rates are falling;
3) We might not be so lucky next year and the EV is far less anyway;
4) So, we are cutting back.
5) First, a $100m share buyback (benefits holders looking for capital appreciation)
6) Massive "special dividend" to shareholders (benefits holders looking for income)
And what's the institutional response to this? What do you expect in a society where growth and increasing profits are all? The share price was virtually unchanged as the donkeys in the institutional investor world go in search of companies offering the fools' gold that is growth at any price.
If the cost is too high, don't buy it. Brindle knows this, but the fund managers don't. Far be it for me to recommend a share, but I'd rather back the "realistic" CEO than the blind optimist.
And special dividends are nice, even if you do have to pay tax on them.
It didn't quite work out like that. There was the Wang PC, the Wang Freestyle, the Wang Office Information System, the Wang 2200 and possibly other things besides. All that they had in common was that they burnt up the revenues generated by the Wang word processor at a terrific rate. Wang filed for bankruptcy protection in 1992 and effectively ceased to be.
I used to think that this was the inevitable way with companies. Pressured by moronic fund managers who do not understand scalability, profitable companies expand where they shouldn't (UK companies into the US being an old favourite), diversify into less profitable lines, or attempt to scale up existing lines that are not scalable (see LTCM). Eventually there are tears before bedtime and the fund managers blame the CEOs, whose only real mistake was failing to tell the institutional investors to go fuck themselves.
But now, finally, we've got a company that talks sense. I refer to Lancashire Holdings, formed in late 2005 by Richard Brindle.
Hats off to Brindle, I say, who has effectively stated the following witgh this morning's Q3 figures.
1) We've been lucky for two years;
2) Insurance rates are falling;
3) We might not be so lucky next year and the EV is far less anyway;
4) So, we are cutting back.
5) First, a $100m share buyback (benefits holders looking for capital appreciation)
6) Massive "special dividend" to shareholders (benefits holders looking for income)
And what's the institutional response to this? What do you expect in a society where growth and increasing profits are all? The share price was virtually unchanged as the donkeys in the institutional investor world go in search of companies offering the fools' gold that is growth at any price.
If the cost is too high, don't buy it. Brindle knows this, but the fund managers don't. Far be it for me to recommend a share, but I'd rather back the "realistic" CEO than the blind optimist.
And special dividends are nice, even if you do have to pay tax on them.
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Date: 2007-10-30 07:32 pm (UTC)Oddly enough, this doesn't seem to apply on the macro level. There is no such thing as a "flexible company." Which is peculiar, given that companies have legal status as individuals. They just don't seem to be perceived the same way.
Incidentally, re Wang, if you haven't read "In Search of Stupidity," you should. Highly entertaining, and it backs up basically everything you're saying here.
Wang Ker-Ching!
Date: 2007-10-30 07:41 pm (UTC)Even technological businesses in a niche/vertical market are still traditional companies. At some stage in scale, and I'm not sure where the sweet point is, they start to self-define as "brands, channels, and sales force." At this point they could switch to selling dog-food, for all they care, and they'd still have the brands, channels, and sales force, so they'd still be equivalently successful.
The secret here is to recognise two things:
(a) "We're fucked." Nobody likes to admit this. Particularly not after ten successful years.
(b) "We can sell this doomed enterprise for dollars on the penny (as it were)." Nobody likes to admit this either, but it's probably one of the most important decisions a manager will ever make. I refer you to Mr Steve Case, m'lud, and quite possibly FaceBook. (At the moment I'd be tempted to sell anything short if Microsoft is buying a desperate slice of it for nine figures or so.)