One of the dilemmas of firms in rapidly transforming environments is that their ownership structure may get in the way of making tough decisions. Investors in publicly traded companies are understood to desire stable, predictable earnings and growth. But such expectations are unrealistic in many industries. As noted management expert Geoffrey Moore told me with respect to high-velocity competition, "I'm not sure you ever want to be in the public markets." The problems with public markets and quarter-by-quarter thinking are many, but for companies in fast-changing environments the biggest issue is that public markets are not patient — miss a quarter and the punishment can be severe.
Take Motorola, for instance. Its RAZR
thin phone was a huge success in the mid-2000's, and the market raved.
The next few product launches were not nearly as successful and Ed Zander,
a CEO who came in during the successful period, was unable to come up
with any more hits. The pressure on the company by the investing
community (among others) was so severe that it eventually split into
two, Motorola Mobility and Motorola Solutions in January of 2011.
One interesting consequence of the indigestion experienced by the public markets over the volatility of strategy in rapidly changing businesses is that we are beginning to see evidence of a sort of division of labor, as it were, between different kinds of investors at different stages of a firm's lifecycle.
In the early stages, incubation and launch, historically venture capitalists and angels (in addition to the "friends, families and fools" beloved of the entrepreneurship literature) have provided seed funds for organizations to develop an idea. The venture capital industry has now become fairly large and robust. Moreover, firms are often investing in venture capital-type organizations with the hope of striking it lucky with a new technology or offer. We are also increasingly seeing large firms partnering with small ones to provide the resources essential to launch and ramp up. Such a pattern is well established in the pharmaceutical industry as large established firms partner with smaller biotech firms. Such investors are not too concerned with stable earnings. Rather, they invest with an options-oriented motivation, looking for a large payout at some uncertain point in the future.
As a company matures and enters a period of exploiting a competitive advantage, it makes sense for the firm to be publicly traded if it requires the capital. The danger, of course, is that the pressure placed upon management by the drumbeat of investors looking for steady gains can lead to an unwillingness to make the tough calls required to disengage from businesses with declining value. Remember the pillorying Ivan Seidenberg got from the public markets when he moved Verizon out of cash-generating but slow-growing businesses like phone books?
It is far more likely that the hard work of restructuring will be the task of private equity firms, leveraged buyout firms or hedge funds, all of whom have a financial motivation to make whatever disengagement decisions are necessary to profit from the eventual re-sale of a healthier company. Of course, all is not joy and sunshine in this world as sometimes over-leveraged companies fail to create or sustain the capabilities they need to be successful, but in theory it makes sense for a single investor with a reasonably long-term perspective to take on the difficult work of restructuring. Even better would be for management to have done that work without needing a savior to come and do it, but, as we have seen over and over again, being a publicly listed company can make a firm prone to short-termism, which can put off the tough decisions — until it's too late.
Take the case of Dell, whose attempts to go private have been hotly contested by its investors. As some observers have noted, Michael Dell believes that the massive changes required in the company to bring it back to health and growth would be poorly received by investors. He plans to make significant R&D investments, hire lots of sales people to approach enterprise customers, expand in emerging markets and develop entirely new product categories. As Dell's public statements have pronounced, these changes will reduce near-term profitability, raise operating and capital expenditures and involve a lot of risk.
So we are left with a quandary. As the pace of competition intensifies, it is going to be harder and harder for companies like Dell to keep a leadership position. And yet, the hunger of public markets for stability and steady profits can prevent leaders from making the very changes that would ensure a firm's long-term viability. So, how does this get resolved? Do we depend on private equity to help companies clean up obsolete activities? Do we hope that analysts will learn to use different metrics to judge management teams — metrics that realize that with fast-moving markets and short-lived competitive advantages a different set of criteria should be used to gauge performance?
One interesting consequence of the indigestion experienced by the public markets over the volatility of strategy in rapidly changing businesses is that we are beginning to see evidence of a sort of division of labor, as it were, between different kinds of investors at different stages of a firm's lifecycle.
In the early stages, incubation and launch, historically venture capitalists and angels (in addition to the "friends, families and fools" beloved of the entrepreneurship literature) have provided seed funds for organizations to develop an idea. The venture capital industry has now become fairly large and robust. Moreover, firms are often investing in venture capital-type organizations with the hope of striking it lucky with a new technology or offer. We are also increasingly seeing large firms partnering with small ones to provide the resources essential to launch and ramp up. Such a pattern is well established in the pharmaceutical industry as large established firms partner with smaller biotech firms. Such investors are not too concerned with stable earnings. Rather, they invest with an options-oriented motivation, looking for a large payout at some uncertain point in the future.
As a company matures and enters a period of exploiting a competitive advantage, it makes sense for the firm to be publicly traded if it requires the capital. The danger, of course, is that the pressure placed upon management by the drumbeat of investors looking for steady gains can lead to an unwillingness to make the tough calls required to disengage from businesses with declining value. Remember the pillorying Ivan Seidenberg got from the public markets when he moved Verizon out of cash-generating but slow-growing businesses like phone books?
It is far more likely that the hard work of restructuring will be the task of private equity firms, leveraged buyout firms or hedge funds, all of whom have a financial motivation to make whatever disengagement decisions are necessary to profit from the eventual re-sale of a healthier company. Of course, all is not joy and sunshine in this world as sometimes over-leveraged companies fail to create or sustain the capabilities they need to be successful, but in theory it makes sense for a single investor with a reasonably long-term perspective to take on the difficult work of restructuring. Even better would be for management to have done that work without needing a savior to come and do it, but, as we have seen over and over again, being a publicly listed company can make a firm prone to short-termism, which can put off the tough decisions — until it's too late.
Take the case of Dell, whose attempts to go private have been hotly contested by its investors. As some observers have noted, Michael Dell believes that the massive changes required in the company to bring it back to health and growth would be poorly received by investors. He plans to make significant R&D investments, hire lots of sales people to approach enterprise customers, expand in emerging markets and develop entirely new product categories. As Dell's public statements have pronounced, these changes will reduce near-term profitability, raise operating and capital expenditures and involve a lot of risk.
So we are left with a quandary. As the pace of competition intensifies, it is going to be harder and harder for companies like Dell to keep a leadership position. And yet, the hunger of public markets for stability and steady profits can prevent leaders from making the very changes that would ensure a firm's long-term viability. So, how does this get resolved? Do we depend on private equity to help companies clean up obsolete activities? Do we hope that analysts will learn to use different metrics to judge management teams — metrics that realize that with fast-moving markets and short-lived competitive advantages a different set of criteria should be used to gauge performance?
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