The lifecycle of businesses

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Harvard Business Review has a scathing article on once-revered icon of American business General Electric.

Quote:The General Electric story, of a long-proud initial member of the Dow Jones Industrial Average falling out of that index — and appearing to be in competitive free fall — provides a powerful illustration of two effects we see throughout today’s corporate world: clueless, but deep-pocketed, activist investors and mergers and acquisitions folks masquerading as strategists.

GE’s fall accelerated on October 25, 2015, with activist hedge fund Trian announcing a $2.5 billion equity investment in GE stock, one that made it a top 10 shareholder. GE stock was trading at $25.47 at the time of announcement, with a dividend of $0.92 per share. Trian announced that with its help, GE could look forward to a stock price in the $40–$50 range by 2017, and threatened a proxy battle unless GE put Trian cofounder Ed Garten on the board. In June 2017 longtime CEO Jeff Immelt resigned under unrelenting Trian and shareholder pressure, and John Flannery took over as CEO. Four months later Garten joined the board.

During the Immelt era, the dominant mode had been of strategy by way of mergers, acquisitions, and divestitures (MA&D), including most recently the disastrous merger of the GE oil and gas business with Baker Hughes in 2016. In the fall of 2017 under Flannery, MA&D unsurprisingly became GE’s turnaround strategy tool. Along with a surprise halving of the dividend, Flannery announced a review of the portfolio that would see the divestitures of numerous historic GE businesses, which ended up including light bulbs, appliances, and locomotive engines.

The approach of seeing strategy as the act of rejuggling one’s corporate portfolio of businesses is common in the large modern corporation. Many have strategy heads, who are ex-dealmakers at investment banks, whose default assumption is that if the company has a performance problem, the natural fix is to buy and/or sell something. The idea does not naturally come to mind that perhaps the problem is an uncompetitive value equation with customers. The result is a boon for the private equity business, which gets to buy underperforming corporate divisions for a song and turn them around at a huge profit, and for the sellers of growth businesses, who get paid crazy multiples of earnings and sales for businesses that are purchased to generate growth for big companies that are, on their own, incapable of organic growth.

It is not as though MA&D can’t help strategy. It can when the moves are designed to help improve the value equation delivered for the customer — like Google buying Android, or Facebook buying Instagram, or P&G buying Tambrands. But for a business that is struggling with growth and/or profitability, MA&D is not going to be of assistance if it distracts management’s time from fixing the core customer value equation problem — and it almost inevitably distracts. That is one reason why so many acquisitions are abysmal failures: They are distracting Hail Mary attempts. Take, for example, News Corporation getting into the exciting internet space by buying MySpace, or Microsoft into smartphones with Nokia, or HP into software and services with Autonomy — all written off virtually in their entirety.

More at the source.

I think that we can see a once-venerable company headed into a death spiral. It makes bad, desperate decisions that work out badly.  Some of these mergers suggest an aging tiger eating a healthy young lamb and expecting rejuvenation from the meal. The tiger is getting nothing more than a meal; it won;t gain any vitality.The lamb of course is no more.

See also Sears.