Why McDonald’s and Apple Investors Should Be Very Wary

Why McDonald’s and Apple Investors Should Be Very Wary

Growth Stalls are deadly for valuation, and both Mcdonald’s and Apple are in one.

August, 2014 I wrote about McDonald’s Growth Stall.  The company had 7 straight months of revenue declines, and leadership was predicting the trend would continue.  Using data from several thousand companies across more than 3 decades, companies in a Growth Stall are unable to maintain a mere 2% growth rate 93% of the time. 55% fall into a consistent revenue decline of more than 2%. 20% drop into a negative 6%/year revenue slide. 69% of Growth Stalled companies will lose at least half their market capitalization in just a few years. 95% will lose more than 25% of their market value.  So it is a long-term concern when any company hits a Growth Stall.

Growth StallA new CEO was hired, and he implemented several changes.  He implemented all-day breakfast, and multiple new promotions.  He also closed 700 stores in 2015, and 500 in 2016.  And he announced the company would move its headquarters from suburban Oakbrook to downtown Chicago, IL. While doing something, none of these actions addressed the fundamental problem of customers switching to competitive options that meet modern consumer food trends far better than McDonald’s.

McDonald’s stock languished around $94/share from 8/2014 through 8/2015 – but then broke out to $112 in 2 months on investor hopes for a turnaround.  At the time I warned investors not to follow the herd, because there was nothing to indicate that trends had changed – and McDonald’s still had not altered its business in any meaningful way to address the new market realities.

Yet, hopes remained high and the stock peaked at $130 in May, 2016.  But since then, the lack of incremental revenue growth has become obvious again. Customers are switching from lunch food to breakfast food, and often switching to lower priced items – but these are almost wholly existing customers.  Not new, incremental customers.  Thus, the company trumpets small gains in revenue per store (recall, the number of stores were cut) but the growth is less than the predicted 2%.  The only incremental growth is in China and Russia, 2 markets known for unpredictable leadership.  The stock has now fallen back to $120.

Given that the realization is growing as to the McDonald’s inability to fundamentally change its business competitively, the prognosis is not good that a turnaround will really happen.  Instead, the common pattern emerges of investors hoping that the Growth Stall was a “blip,” and will be easily reversed.  They think the business is fundamentally sound, and a little management “tweaking” will fix everything.  Small changes will lead to the  classic hockey-stick forecast of higher future growth.  So the stock pops up on short-term news, only to fall back when reality sets in that the long-term doesn’t look so good.

Unfortunately, Apple’s Q3 2016 results (reported yesterday) clearly show the company is now in its own Growth Stall.  Revenues were down 11% vs. last year (YOY or year-over-year,) and EPS (earnings per share) were down 23% YOY.  2 consecutive quarters of either defines a Growth Stall, and Apple hit both.  Further evidence of a Growth Stall exists in iPhone unit sales declining 15% YOY, iPad unit sales off 9% YOY, Mac unit sales down 11% YOY and “other products” revenue down 16% YOY.

This was not unanticipated.  Apple started communicating growth concerns in January, causing its stock to tank. And in April, revealing Q2 results, the company not only verified its first down quarter, but predicted Q3 would be soft.  From its peak in May, 2015 of $132 to its low in May, 2016 of $90, Apple’s valuation fell a whopping 32%!  One could say it met the valuation prediction of a Growth Stall already – and incredibly quickly!

But now analysts are ready to say “the worst is behind it” for Apple investors.  They are cheering results that beat expectations, even though they are clearly very poor compared to last year.  Analysts are hoping that a new, lower baseline is being set for investors that only look backward 52 weeks, and the stock price will move up on additional company share repurchases, a successful iPhone 7 launch, higher sales in emerging countries like India, and more app revenue as the installed base grows – all leading to a higher P/E (price/earnings) multiple. The stock improved 7% on the latest news.

So far, Apple still has not addressed its big problem.  What will be the next product or solution that will replace “core” iPhone and iPad revenues?  Increasingly competitors are making smartphones far cheaper that are “good enough,” especially in markets like China.  And iPhone/iPad product improvements are no longer as powerful as before, causing new product releases to be less exciting.  And products like Apple Watch, Apple Pay, Apple TV and IBeacon are not “moving the needle” on revenues nearly enough.  And while experienced companies like HBO, Netflix and Amazon grow their expanding content creation, Apple has said it is growing its original content offerings by buying the exclusive rights to “Carpool Karaoke – yet this is very small compared to the revenue growth needs created by slowing “core” products.

Like McDonald’s stock, Apple’s stock is likely to move upward short-term.  Investor hopes are hard to kill.  Long-term investors will hold their stock, waiting to see if something good emerges.  Traders will buy, based upon beating analyst expectations or technical analysis of price movements. Or just belief that the P/E will expand closer to tech industry norms. But long-term, unless the fundamental need for new products that fulfill customer trends – as the iPad, iPhone and iPod did for mobile – it is unclear how Apple’s valuation grows.

What the NBA All-Star Game Venue Change Teaches Us About Decision-Making

What the NBA All-Star Game Venue Change Teaches Us About Decision-Making

Most leaders think of themselves as decision makers.  Many people remember in 2006 when President George Bush, defending Donald Rumsfeld as his Defense Secretary said “I am the Decider.  I decide what’s best.”  It earned him the nickname “Decider-in-Chief.” Most CEOs echo this sentiment, Most leaders like to define themselves by the decisions they make.

But whether a decision is good, or not, has a lot of interpretations.  Often the immediate aftermath of a decision may look great.  It might appear as if that decision was obvious.  And often decisions make a lot of people happy.  As we are entering the most intense part of the U.S. Presidential election, both candidates are eager to tell you what decisions they have made – and what decisions they will make if elected.  And most people will look no further than the immediate expected impact of those decisions.

However, the quality of most decisions is not based on the immediate, or obvious, first implications.  Rather, the quality of decisions is discovered over time, as we see the consequences – intended an unintended.  Because quite often, what looked good at first can turn out to be very, very bad.

NBA-All-Star-ExitThe people of North Carolina passed a law to control the use of public bathrooms.  Most people of the state thought this was a good idea, including the Governor.  But some didn’t like the law, and many spoke up.   Last week the NBA decided that it would cancel its All Star game scheduled in Charlotte due to discrimination issues caused by this law.  This change will cost Charlotte about $100M.

That action by the NBA is what’s called unintended consequences.  Lawmakers didn’t really consider that the NBA might decide to take its business elsewhere due to this state legislation.  It’s what some people call “oops.  I didn’t think about that when I made my decision.”

Robert Reich, Secretary of Labor for President Clinton, was a staunch supporter of unions.  In his book “Locked in the Cabinet” he tells the story of visiting an auto plant in Oklahoma supporting the union and workers rights.  He thought his support would incent the company’s leaders to negotiate more favorably with the union.  Instead, the company closed the plant.  Laid-off everyone.  Oops.  The unintended consequences of what he thought was an obvious move of support led to the worst possible outcome for the workers.

President Obama worked the Congress hard to create the Affordable Care Act, or Obamacare, for everyone in America.  One intention was to make sure employers covered all their workers, so the law required that if an employer had health care for any workers he had to offer that health care to all employees who work over 30 hours per week.  So almost all employers of part time workers suddenly said that none could work more than 30 hours.  Those that worked 32 (4 days/week) or 36 suddenly had their hours cut.  Now those lower-income people not only had no health care, but less money in their pay envelopes.  Oops.  Unintended consequence.

President Reagan and his wife launched the “War on Drugs.”  How could that be a bad thing?  Illegal drugs are dangerous, as is the supply chain.  But now, some 30 years later, the Federal Bureau of Prisons reports that almost half (46.3% or over 85,000) inmates are there on drug charges.  The USA now spends $51B annually on this drug war, which is about 20% more than is spent on the real war being waged with Afghanistan, Iraq and ISIS.  There are now over 1.5M arrests each year, with 83% of those merely for possession.  Oops.  Unintended consequences.  It seemed like such a good idea at the time.

This is why it is so important leaders take their time to make thoughtful decisions, often with the input of many other people.  Because the quality of a decision is not measured by how one views it immediately.  Rather, the value is decided over time as the opportunity arises to observe the unintended consequences, and their impact.  The best decisions are those in which the future consequences are identified, discussed and made part of the planning – so they aren’t unintended and the “decider” isn’t running around saying “oops.”

As you listen to the politicians this cycle, keep in mind what would be the unintended consequences of implementing what they say:

  • What would be the social impact, and transfer of wealth, from suddenly forgiving all student loans?
  • What would be the consequences on trade, and jobs, of not supporting historical government trade agreements?
  • What would be the consequences on national security of not supporting historically allied governments?
  • What would be the long-term consequence not allowing visitors based on race, religion or sexual orientation?
  • What would be the consequence of not repaying the government’s bonds?
  • What would be the long-term impact on economic growth of higher regulations on banks – that already have seen dramatic increases in regulation slowing the recovery?
  • What would be the long-term consequences on food production, housing and lifestyles of failing to address global warming?

Business leaders should follow the same practice.  Every time a decision is necessary, is the best effort made to obtain all the information you could on the topic?  Do you obtain input from your detractors, as well as admirers?  Do you think through not only what is popular, but what will happen months into the future?  Do you consider the potential reaction by your customers?  Employees?  Suppliers?  Competitors?

There are very few “perfect decisions.” All decisions have consequences.  Often, there is a trade-off between the good outcomes, and the bad outcomes.  But the key is to know them all, and balance the interests and outcomes.  Consider the consequences, good and bad, and plan for them.  Only by doing that can you avoid later saying “oops.”

Starbucks and JPMorganChase Pay Raises – Just Following Trends

Starbucks and JPMorganChase Pay Raises – Just Following Trends

This week Starbucks and JPMorganChase announced they were raising the minimum pay of many hourly employees.  For about 168,000 lowly paid employees, this is really good news.  And both companies played up the planned pay increases as benefitting not only the employees, but society at large.  The JPMC CEO, Jamie Dimon, went so far as to say this was a response to a national tragedy of low pay and insufficient skills training now being addressed by the enormous bank.

Dimon and SchultzHowever, both actions look a lot more like reacting to undeniable trends in an effort to simply keep their organizations functioning than any sort of corporate altruism.

Since 2014 there has been an undeniable trend toward raising the minimum wage, now set nationally at $7.25.  Fourteen states actually raised their minimum wage starting in 2016 (Massachusetts, California, New York, Nebraska, Connecticut, Michigan, Hawaii, Colorado, Nebraska, Vermont, West Virginia, South Dakota, Rhode Island and Alaska.)  Two other states have ongoing increases making them among the states with fastest growing minimum wages (Maryland and Minnesota.)  And there are 4 additional states that promoters of a $15 minimum wage think will likely pass within months (Illinois, New Jersey, Oregon and Washington.)  That makes 20 states raising the minimum wage, with 46.4% of the U.S. population.  And they include 5 of the largest cities in the USA that have already mandated a $15 minimum wage (New York, Washington D.C., Seattle, San Francisco and Los Angeles.)

In other words, the minimum wage is going up.  And decisively so in heavily populated states with big cities where Starbucks and JPMC have lots of employees.  And the jigsaw puzzle of different state requirements is actually a threat to any sort of corporate compensation plan that would attempt to treat employees equally for common work. Simultaneously the unemployment rate keeps dropping – now below 5% – causing it to take longer to fill open positions than at any time in the last 15+ years.  Simply put, to meet local laws, find and retain decent employees, and have any sort of equitable compensation across regions both companies had no choice but to take action to raise the pay for these bottom-level jobs.

Starbucks pointed out that this will increase pay by 5-15% for its 150,000 employees.  But at least 8.5% of those employees had already signed a petition demanding higher pay.  Time will tell if this raise is enough to keep the stores open and the coffee hot.  However, the price increases announced the very next day will probably be more meaningful for the long term revenues and profits at Starbucks than this pay raise.

At JPMC the average pay increase is about $4.10/hour – from $10.15 to $12-$16.50/hour.  Across all 18,000 affected employees, this comes to about $153.5million of incremental cost.  Heck, the total payroll of these 18,000 employees is only $533.5M (after raises.) Let’s compare that to a few other costs at JPMC:

Wow, compared to these one-off instances, the recent pay raises seem almost immaterial.  While there is probably great sincerity on the part of these CEOs for improving the well being of their employees, and society, the money here really isn’t going to make any difference to larger issues.  For example, the JPMC CEO’s 2015 pay of $27M is about the same as 900 of these lowly paid employees.  Thus the impact on the bank’s financials, and the impact on income inequality, is — well — let’s say we have at least added one drop to the bucket.

The good news is that both companies realize they cannot fight trends.  So they are taking actions to help shore up employment.  That will serve them well competitively.  And some folks are getting a long-desired pay raise.  But neither action is going to address the real problems of income inequality.

‘The Founder’s Mentality’ Recommended For Your Summer Reading

‘The Founder’s Mentality’ Recommended For Your Summer Reading

Summer is here, and everyone needs a business book or two to read. I’m recommending The Founder’s Mentality – How To Overcome the Predictable Crises of Growth by two very senior partners and strategy practice heads at Bain & Company — Chris Zook and James Allen. Bain is one of the top three management consulting firms in the world, with 8,000 consultants in 55 offices, and has been ranked as one of the best places to work in America by Glass Ceiling.

Since both authors are still part of Bain, the book is somewhat bridled by their positions. No partner can bad mouth current or former clients, as it obviously could reveal confidential information — and it certainly isn’t good for finding new clients who would never want to risk being bad-mouthed by their consultant. So don’t expect a lambasting of poorly performing companies in this review of global cases. But after reviewing the work at their clients for over 20 years, and many other cases available via research, these fellows concluded that most companies lose the original founder’s mentality, get bound up in organizational complexity, and simply lose competitiveness due to the wrong internal focus. And they offer insights for how underperformers can regain a growth agenda.

founders mentality

Photo courtesy of Chris Zook

Moving From Mediocre To Good

I interviewed Chris Zook, and found him rather candid in his observations. When I asked why people should read The Founder’s Mentality I really liked his response, “Many people have read Good to Great. But, honestly, for many organizations the challenge today is simply to move from mediocre to good. They are struggling, and they need some straightforward advice on how to make progress toward growth when the situation likely appears almost impossible.”

 You should read the book to understand the common root cause of corporate growth problems, and how a company can address those issues. This column offers some interesting thoughts from Chris about how to apply The Founder’s Mentality to eliminate unnecessary complexity and make your organization more successful.

Adam Hartung: What is the most critical step toward undoing needless, costly, time consuming complexity?

Chris Zook: The biggest problem is blockages built between the front line and the top staff. Honestly, the people at the top lose any sense of what is actually happening in the marketplace — what is happening with customers. 80% of the time successfully addressing this requires eliminating 30-40% of the staff. You need non-incremental change. Leaders have to get rid of managers wedded to past decisions, and intent on defending those decisions. Leaders have to get rid of those who focus on managing what exists, and find competent replacements who can manage a transition.

 Hartung: Market shifts make companies non-competitive, why do you focus so much on internal organizational health?

Zook: You can’t respond to a market shift if the company is bound up in complex decision-making. Unless a leader attacks complexity, and greatly simplifies the decision-making process, a company will never do anything differently. Being aware of changes in the market is not enough. You have to internalize those changes and that requires reorganizing, and usually changing a lot of people. You won’t ever get the information from the front line to top management unless you change the internal company so that it is receptive to that information.

Hartung: You say simplification is critical to reversing a company’s stall-out. But isn’t focusing on the “core” missing market opportunities?

Zook: Analysts cheered Nardeli’s pro-growth actions at Home Depot. But the company stalled. The growth opportunities that external folks liked hearing about diverted attention from implementing what had made Home Depot great — the “orange army” of store employees that were so customer helpful. It is very, very hard to keep “growth projects” from diverting attention to good operations, and that’s why few founders are willing to chase those projects when someone brings them up for investment.

Hartung: You talk positively about Cisco and 3M, yet neither has done anything lately, in any market, to appear exemplary

Zook: It takes a long time to turn around a huge company. Cisco and 3M are still the largest in their defined markets, and profitable. Their long-term future is still to be determined, but so far they are making progress. Investors and market gurus look for turnarounds to happen fast, but that does not fit the reality of what it takes when these companies become very large.

Hartung: You talk about “Next Generation Leaders.” Isn’t that just more ageism? Aren’t you simply saying “out with the old leaders, you have to be young to “get it.”

Zook: Next Generation Leadership is not about age. It’s about mentality. It’s about being young, and flexible, in your thinking. What’s core to a company may well not be what a previous leader thinks, and a Next Gen Leader will dig out what’s core. For example, at Marvel the core was not comics. It was the raft of stories, all of which had the potential to be repurposed. Next Gen Leaders are using new eyes, dialed in with clarity to discover what is in the company that can be reused as the core for future growth. You don’t have to be young to do that, just mentally agile. Unfortunately, there aren’t nearly as many of these agile leaders as there are those stuck in the old ways of thinking.

Hartung: Give me your take on some big companies that aren’t in your book, but that are in the news today and on the minds of leaders and investors. Apply The Founder’s Mentality to these companies:

Microsoft

Zook: Did well due to its monopoly. Lost its Founder’s Mentality. Now suffering low growth rates relative to its industry, and in the danger zone of a growth stall-out. They have to refocus. Leadership needs to regain the position of attracting developers to their platform rather than being raided for developers by competitive platforms.

Apple

Zook: Jobs implemented The Founder’s Mentality brilliantly. Apple got close to its customers again with the retail stores, a great move to learn what customers really wanted, liked and would buy. But where will they turn next? Apple needs to make a big bet, and focus less on upgrades. They need to be thinking about a possible stall-out. But will Apple’s current leadership make that next big bet?

WalMart

Zook: One of the greatest founder-led companies of all time. Walton’s retail insurgency was unique, clear and powerful. Things appear to be a bit stale now, and the company would benefit from a refocusing on the insurgency mission, and taking it into renewal of the distribution system and all the stores.”

It’s been almost a decade since I wrote Create Marketplace Disruption – How To Stay Ahead of the Competition. In it I detailed how companies, in the pursuit of best practices build locked-in decision-making systems that perpetuate the past rather than prepare for the future. The Founder’s Mentality provides several case studies in how organizations, especially large ones, can attack that lock-in to rediscover what made them great and set a chart for a better future. Put it on your reading list for the next plane flight, or relaxation time on your holiday.

Microsoft and Linked-In – Same Song, Different Key

Microsoft is buying Linked-In, and we should expect this to be a disaster.

It is clear why Linked-in agreed to be purchased.  As revenues have grown, gross margins have dropped precipitously, and the company is losing money.  And LInked-in still receives 2/3 of its revenue from recruiting ads (the balance is almost wholly subscription fees,) unable to find a wider advertiser base to support growth.  Although membership is rising, monthly active users (MAUs, the most important gauge of social media growth) is only 9% – like Twitter, far below the 40% plus rate of Facebook and upcoming networks.  With only 106M MAUs, Linked in is 1/3 the size of Twitter, and 1/15th the size of Facebook.  And its $1.5B Lynda acquisition is far, far, far from recovering its investment – or even demonstrating viability as a business.

Even though the price is below the all-time highs for LNKD investors, Microsoft’s offer is far above recent trading prices and a big windfall for them.

But for Microsoft investors, this is a repeat of the pattern that continues to whittle away at their equity value.

MSFT + LINKOnce upon a time, in a land far away, and barely remembered by young people, Microsoft OWNED the tech marketplace.  Individuals and companies purchased PCs preloaded with Microsoft Windows 95, Microsoft Office, Microsoft Internet Explorer and a handful of other tools and trinkets. And as companies built networks they used PC servers loaded with Microsoft products. Computing was a Microsoft solution, beginning to end, for the vast majority of users.

But the world changed. Today PC sales continue their multi-year, accelerating decline, while some markets (such as education) are shifting to Chromebooks for low cost desktop/laptop computing, growing their sales and share.  Meanwhile, mobile devices have been the growth market for years.  Networks are largely public (rather than private) and storage is primarily in the cloud – and supplied by Amazon.  Solutions are spread all around, from Google Drive to apps of every flavor and variety.  People spend less computing cycles creating documents, spreadsheets and presentations, and a lot more cycles either searching the web or on Facebook, Instagram, WhatsApp, YouTube and Snapchat.

But Microsoft’s leadership still would like to capture that old world.  They still hope to put the genie back in the bottle, and have everyone live and work entirely on Microsoft.  And somehow they have deluded themselves into thinking that buying Linked-in will allow them to return to the “good old days.”

Microsoft has not done a good job of integrating its own solutions like Office 365, Skype, Sharepoint and Dynamics into a coherent, easy to use, and to some extent mobile, solution.  Yet, somehow, investors are expected to believe that after buying Linked-in the two companies will integrate these solutions into the LInked-in social platform, enabling vastly greater adoption/use of Office 365 and Dynamics as they are tied to Linked-in Sales Navigator.  Users will be thrilled to have their personal information analyzed by Microsoft big data tools, then sold to advertisers and recruiters.  Meanwhile, corporations will come back to Microsoft in droves as they convert Linked-in into a comprehensive project management tool that uses Lynda to educate employees, and 365 to push materials to employees – and allow document collaboration – all across their mobile devices.

Do you really believe this?  It might run on the Powerpoint operating system, but this vision will take an enormous amount of code integration.  And with Linked-in operated as separate company within Microsoft, who is going to do this integration?  This will involve a lot of technical capability, and based on previous performance it appears both companies lack the skills necessary to pull it off.  How this mysterious, magical integration will happen is far, far from obvious, or explained in the announcement documents.  Sounds a lot more like vaporware than a straightforward software project.

And who thinks that today’s users, from individuals to corporations, have a need for this vision?  While it may sound good to Microsoft, have you heard Linked-in users saying they want to use 365 on Linked in?  Or that they’ll continue to use Linked-in if forced to buy 365?  Or that they want their personal information data mined for advertisers?  Or that they desire integration with Dynamics to perform Linked-in based CRM?  Or that they see a need for a social-network based project management tool that feeds up training documents or collaborative documents?  Are people asking for an integrated, holistic solution from one vendor to replace their current mobile devices and mobile solutions that are upgraded by multiple vendors almost weekly?

And, who really thinks Microsoft is good at acquisition integration?  Remember aQuantive? In 2007 Microsoft spent $6B (an 85% premium to market price) to purchase this digital ad agency in order to build its business in the fast growing digital ad space.  Don’t feel bad if you don’t remember, because in 2012 Microsoft wrote it off.  Of course, there was the buy-it-and-write-it-off pattern repeated with Nokia.  Microsoft’s success at taking “bold moves” to expand beyond its core business has been nothing less than horrible.  Even the $1.2B acquisition of Yammer in 2012 to make Sharepoint more collaborative and usable has been unsuccessful, even though rolled out for free to 365 users. Yammer is adding nothing to Microsoft’s sales or value as competitor Slack has reaped the growth in corporate messaging.

The only good news story about Microsoft acquisitions is that they missed spending $44B to buy Yahoo – which is now on the market for $5B.  Whew, thank goodness that one got away!

Microsoft’s leadership primed the pump for this week’s announcement by having the Chairman talk about investing outside of the company’s core a couple of weeks ago.  But the vast majority of analysts are now questioning this giant bet, at a price so high it will lower Microsoft’s earnings for 2 years.  Analysts are projecting about a $2B revenue drop for $90B Microsoft next year, and this $26B acquisition will deliver only a $3B bump.  Very, very expensive revenue replacement.

Despite all the lingo, Microsoft simply cannot seem to escape its past.  Its acquisitions have all been designed to defend and extend its once great history – but now outdated.  Customers don’t want the past, they are looking to the future.  And no matter how hard they try, Microsoft’s leaders simply appear unable to define a future that is not tightly linked to the company’s past.  So investors should expect Linked-In’s future to look a lot like aQuantive.  Only this one is going to be the most painful yet in the long list of value transfer from Microsoft investors to the investors of acquired companies.

 

Apple – The Sustaining Innovation March – What a Defend & Extend Strategy Looks Like

Apple – The Sustaining Innovation March – What a Defend & Extend Strategy Looks Like

My last column focused on growth, and the risks inherent in a Growth stall. As I mentioned then, Apple will enter a Growth Stall if its revenue declines year-over-year in the current quarter. This forecasts Apple has only a 7% probability of consistently growing just 2%/year in the future.

This usually happens when a company falls into Defend & Extend (D&E) management. D&E management is when the bulk of management attention, and resources, flow into protecting the “core” business by seeking ways to use sustaining innovations (rather than disruptive innovations) to defend current customers and extend into new markets. Unfortunately, this rarely leads to high growth rates, and more often leads to compressed margins as growth stalls. Instead of working on breakout performance products, efforts are focused on ways to make new versions of old products that are marginally better, faster or cheaper.

Using the D&E lens, we can identify what looks like a sea change in Apple’s strategy.

For example, Apple’s CEO has trumpeted the company’s installed base of 1B iPhones, and stated they will be a future money maker. He bragged about the 20% growth in “services,” which are iPhone users taking advantage of Apple Music, iCloud storage, Apps and iTunes. This shows management’s desire to extend sales to its “installed base” with sustaining software innovations. Unfortunately, this 20% growth was a whopping $1.2B last quarter, which was 2.4% of revenues. Not nearly enough to make up for the decline in “core” iPhone, iPad or Mac sales of approximately $9.5B.

Apple has also been talking a lot about selling in China and India. Unfortunately, plans for selling in India were at least delayed, if not thwarted, by a decision on the part of India’s regulators to not allow Apple to sell low cost refurbished iPhones in the country. Fearing this was a cheap way to dispose of e-waste they are pushing Apple to develop a low-cost new iPhone for their market. Either tactic, selling the refurbished products or creating a cheaper version, are efforts at extending the “core” product sales at lower margins, in an effort to defend the historical iPhone business. Neither creates a superior product with new features, functions or benefits – but rather sustains traditional product sales.

Of even greater note was last week’s announcement that Apple inked a partnership with SAP to develop uses for iPhones and iPads built on the SAP ERP (Enterprise Resource Planning) platform.  This announcement revealed that SAP would ask developers on its platform to program in Swift in order to support iOS devices, rather than having a PC-first mentality.

This announcement builds on last year’s similar announcement with IBM. Now 2 very large enterprise players are building applications on iOS devices. This extends the iPhone, a product long thought of as great for consumers, deeply into enterprise sales. A market long dominated by Microsoft. With these partnerships Apple is growing its developer community, while circumventing Microsoft’s long-held domain, promoting sales to companies as well as individuals.

And Apple has shown a willingness to help grow this market by introducing the iPhone 6se which is smaller and cheaper in order to obtain more traction with corporate buyers and corporate employees who have been iPhone resistant. This is a classic market extension intended to sustain sales with more applications while making no significant improvements in the “core” product itself.

And Apple’s CEO has said he intends to make more acquisitions – which will surely be done to shore up weaknesses in existing products and extend into new markets. Although Apple has over $200M of cash it can use for acquisitions, unfortunately this tactic can be a very difficult way to actually find new growth. Each would be targeted at some sort of market extension, but like Beats the impact can be hard to find.

Remember, after all revenue gains and losses were summed, Apple’s revenue fell $7.6B last quarter. Let’s look at some favorite analyst acquisition targets to explain:

  1. Box could be a great acquisition to help bring more enterprise developers to Apple. Box is widely used by enterprises today, and would help grow where iCloud is weak. IBM has already partnered with Box, and is working on applications in areas like financial services.  Box is valued at $1.45B, so easily affordable. But it also has only $300M of annual revenue. Clearly Apple would have to unleash an enormous development program to have Box make any meaningful impact in a company with over $500B of revenue. Something akin of Instagram’s growth for Facebook would be required. But where Instagram made Facebook a pic (versus words) site, it is unclear what major change Box would bring to Apple’s product lines.
  2. Fitbit is considered a good buy in order to put some glamour and growth onto iWatch. Of course, iWatch already had first year sales that exceeded iPhone sales in its first year. But Apple is now so big that all numbers have to be much bigger in order to make any difference.  With a valuation of $3.7B Apple could easily afford FitBit. But FitBit has only $1.9B revenue.  Given that they are different technologies, it is unclear how FitBit drives iWatch growth in any meaningful way – even if Apple converted 100% of Fitbit users to the iWatch. There would need to be a “killer app” in development at FitBit that would drive $10B-$20B  additional annual revenue very quickly for it to have any meaningful impact on Apple.
  3. GoPro is seen as a way to kick up Apple’s photography capabilities in order to make the iPhone more valuable – or perhaps developing product extensions to drive greater revenue. At a $1.45B valuation, again easily affordable.  But with only $1.6B revenue there’s just not much oomph to the Apple top line. Even maximum Apple Store distribution would probably not make an enormous impact. It would take finding some new markets in industry (enterprise) to build on things like IoT to make this a growth engine – but nobody has said GoPro or Apple have any innovations in that direction. And when Amazon tried to build on fancy photography capability with its FirePhone the product was a flop.
  4. Tesla is seen as the savior for the Apple Car – even though nobody really knows what the latter is supposed to be. Never mind the actual business proposition, some just think Elon Musk is the perfect replacement for the late Steve Jobs. After all the excitement for its products, Tesla is valued at only $28.4B, so again easily affordable by Apple. And the thinking is that Apple would have plenty of cash to invest in much faster growth — although Apple doesn’t invest in manufacturing and has been the king of outsourcing when it comes to actually making its products. But unfortunately, Tesla has only $4B revenue – so even a rapid doubling of Tesla shipments would yield a mere 1.6% increase in Apple’s revenues.
  5. In a spree, Apple could buy all 4 companies! Current market value is $35B, so even including a market premium $55B-$60B should bring in the lot. There would still be plenty of cash in the bank for growth. But, realize this would add only $8B of annual revenue to the current run rate – barely 25% of what was needed to cover the gap last quarter – and less than 2% incremental growth to the new lower run rate (that magic growth percentage to pull out of a Growth Stall mentioned earlier in this column.)

Such acquisitions would also be problematic because all have P/E (price/earnings) ratios far higher than Apple’s 10.4.  FitBit is 24, GoPro is 43, and both Box and Tesla are infinite because they lose money. So all would have a negative impact on earnings per share, which theoretically should lower Apple’s P/E even more.

Acquisitions get the blood pumping for investment bankers and media folks alike – but, truthfully, it is very hard to see an acquisition path that solves Apple’s revenue problem.

All of Apple’s efforts big efforts today are around sustaining innovations to defend & extend current products. No longer do we hear about gee whiz innovations, nor do we hear about growth in market changing products like iBeacons or ApplePay. Today’s discussions are how to rejuvenate sales of products that are several versions old. This may work. Sales may recover via growth in India, or a big pick-up in enterprise as people leave their PCs behind. It could happen, and Apple could avoid its Growth Stall.

But investors have the right to be concerned. Apple can grow by defending and extending the iPhone market only so long. This strategy will certainly affect future margins as prices, on average, decline. In short, investors need to know what will be Apple’s next “big thing,” and when it is likely to emerge. It will take something quite significant for Apple to maintain it’s revenue, and profit, growth.

The good news is that Apple does sell for a lowly P/E of 10 today. That is incredibly low for a company as profitable as Apple, with such a large installed base and so many market extensions – even if its growth has stalled. Even if Apple is caught in the Innovator’s Dilemma (i.e. Clayton Christensen) and shifting its strategy to defending and extending, it is very lowly valued. So the stock could continue to perform well. It just may never reach the P/E of 15 or 20 that is common for its industry peers, and investors envisioned 2 or 3 years ago. Unless there is some new, disruptive innovation in the pipeline not yet revealed to investors.

Can Netflix Double Pivot to Be a Media Game Changer?

Can Netflix Double Pivot to Be a Media Game Changer?

Netflix has been a remarkable company.  Because it has accomplished something almost no company has ever done.  It changed its business model, leading to new growth and higher profits.

Almost nobody pulls that off, because they remain stuck defending and extending their old model until they become irrelevant, or fail.  Think about Blackberry, that gave us the smartphone business then lost it to Apple and its creation of the app market.  Consider Circuit City, that lost enough customers to Amazon it could no longer survive.  Sun Microsystems disappeared after PC servers caught up to Unix servers in capability. Remember the Bell companies and their land-line and long distance services, made obsolete by mobile phones and cable operators?  These were some really big companies that saw their market shifts, but failed to “pivot” their strategy to remain competitive.

Netflix built a tremendous business delivering physical videos on tape and CD to homes, wiping out the brick-and-mortar stores like Blockbuster and Hollywood Video.  By 2008 Netflix reached $1B revenues, reducing Blockbuster by a like amount.  By 2010 Blockbuster was bankrupt.  Netflix’ share price soared from $50/share to almost $300/share during 2011.  By the end of 2012 CD shipments were dropping precipitously as streaming viewership was exploding.  People thought Netflix was missing the wave, and the stock plummeted 75%. Most folks thought Netflix couldn’t pivot fast enough, or profitably, either.

But in 2013 Netflix proved the analysts wrong, and the company built a very successful – in fact market leading – streaming business.  The shares soared, recovering all that lost value.  By 2015 the company had more than doubled its previous high valuation.

But Netflix may be breaking entirely new ground in 2016.  It is becoming a market leader in original programming.  Something we long attributed to broadcasters and/or cable distributors like HBO and Showtime.

Today’s broadcast companies, like NBC, CBS and ABC, are offering less and less original programming.  Overall there are 3 hours/night of prime time television which broadcasters used to “own” as original programming hours.  Over the course of a year, allowing for holidays and one open night per week, that meant about 900 hours of programming for each network (including reruns as original programming.)  But that was long ago.

Netflix Original ProgrammingThese days most of those hours are filled with sports – think evening games of football, basketball, baseball including playoffs and “March Madness” events.  Sports are far cheaper to program, and can fill a lot of hours.  Next think reality programming.  Showing people race across countries, or compete to survive a political battlefield on an island, or even dancing or dieting, uses no expensive actors or directors or sets.  It is far, far less expensive than writing, casting, shooting and programming a drama (like Blacklist) or comedy (like Big Bang Theory.)  Plan on showing every show twice in reruns, plus intermixing with the sports and reality shows, and most networks get away with around 200-250 hours of original programming per year.

Against that backdrop, Netflix has announced it will program 600 hours of original programming this year.  That will approximately double any single large broadcast network.  In a very real way, if you don’t want to watch sports or reality TV any more you probably will be watching some kind of “on demand” program.  Either streamed from a cable service, or from a provider such as Netflix, Hulu or Amazon.

When it comes to original programming, the old broadcast networks are losing their relevancy to streaming technology, personal video devices and the customer’s ability to find what they want, when they want it – and increasingly at a quality they prefer – from streaming as opposed to broadcast media.

To complete this latest “pivot,” from a video streaming company to a true media company with its own content, Morgan Stanley has published that Netflix is now considered by customers as the #1 quality programming across streaming services.  29% of viewers said Netflix was #1, followed by long-time winner HBO now #2 with 21% of customers saying their programming is best.  Amazon, Showtime and Hulu were seen as the best quality by 4%-5% of viewers.

So a decade ago Netflix was a CD distribution company.  The largest customer of the U.S. Postal Service. Signing up folks to watch physical videos in their homes.  Now they are the largest data streaming company on the planet, and one of the largest original programming producers and programmers in the USA – and possibly the world.  And in this same decade we’ve watched the network broadcast companies become outlets for sports and reality TV, while cutting far back on their original shows.  Sounds a lot like a market shift, and possibly Netflix could be the game changer, as it performs the first strategy double pivot in business history.

 

Tesla Model 3 – This is What a “Game Changer” Looks Like

Tesla Model 3 – This is What a “Game Changer” Looks Like

Tesla started taking orders for the Model 3 last week, and the results were remarkable.  In 24 hours the company took $1,000 deposits for 198,000 vehicles.  By end of Saturday the $1,000 deposits topped 276,000 units.  And for a car not expected to be available in any sort of volume until 2017.  Compare that with the top selling autos in the U.S. in 2015:

U.S.-Auto-Sales1Remarkably, the Model 3 would rank as the 6th best selling vehicle all of last year!  And with just a few more orders, it will likely make the top 5 – or possibly top 3! And those are orders placed in just one week, versus an entire year of sales for the other models.  And every buyer is putting up a $1,000 deposit, something none of the buyers of top 10 cars did as they purchased product widely available in inventory. [Update 7 April – Tesla reports sales exceed 325,000, which would make the Model 3 the second best selling car in the USA for the entire year 2015 – accomplished in less than one week.]

Even more astonishing is the average selling price.  Note that top 10 cars are not highly priced, mostly in the $17,000 to $25,000 price range.  But the Tesla is base priced at $35,000, and expected with options to sell closer to $42,000.  That is almost twice as expensive as the typical top 10 selling auto in the U.S.

Tesla has historically been selling much more expensive cars, the Model S being its big seller in 2015.  So if we classify Tesla as a “luxury” brand and compare it to like-priced Mercedes Benz C-Class autos we see the volumes are, again, remarkable.  In under 1 week the Model 3 took orders for 3 times the volume of all C-Class vehicles sold in the U.S. in 2015.

[Car and Driver top 10 cars; Mercedes Benz 2015 unit sales; Tesla 2015 unit sales; Model 3 pricing]

Although this has surprised a large number of people, the signs were all pointing to something extraordinary happening.  The Tesla Model S sold 50,000 vehicles in 2015 at an average price of $70,000 to $80,000.  That is the same number of the Mercedes E-Class autos, which are priced much lower in the $50,000 range.  And if you compare to the  top line Mercedes S-Class, which is only slightly more expensive at an average $90,0000, the Model S sold over 2 times the 22,000 units Mercedes sold.  And while other manufacturers are happy with single digit percentage volume growth, in Q4 Tesla shipments were 75% greater in 2015 than 2014.

In other words, people like this brand, like these cars and are buying them in unprecedented numbers.  They are willing to plunk down deposits months, possibly years, in advance of delivery.  And they are paying the highest prices ever for cars sold in these volumes.  And demand clearly outstrips supply.

Yet, Tesla is not without detractors.  From the beginning some analysts have said that high prices would relegate  the brand to a small niche of customers.  But by outselling all other manufacturers in its price point, Tesla has demonstrated its cars are clearly not a niche market.  Likewise many analysts argued that electric cars were dependent on high gasoline prices so that “economic buyers” could justify higher prices.  Yet, as gasoline prices have declined to prices not seen for nearly a decade Tesla sales keep going up.  Clearly Tesla demand is based on more than just economic analysis of petroleum prices.

People really like, and want, Tesla cars.  Even if the prices are higher, and if gasoline prices are low.

Emerging is a new group of detractors.  They point to the volume of cars produced in 2015, and first quarter output of just under 15,000 vehicles, then note that Tesla has not “scaled up” manufacturing at anywhere near the necessary rate to keep customers happy.  Meanwhile, constructing the “gigafactory” in Nevada to build batteries has slowed and won’t meet earlier expectations for 2016 construction and jobs. Even at 20,000 cars/quarter, current demand for Model S and Model 3 They project lots of order cancellations would take 4.5 years to fulfill.

Which leads us to the beauty of sales growth.  When products tap an under- or unfilled need they frequently far outsell projections.  Think about the iPod, iPhone and iPad.  There is naturally concern about scaling up production.  Will the money be there?  Can the capacity come online fast enough?

Of course, of all the problems in business this is one every leader should want.  It is certainly a lot more fun to worry about selling too much rather than selling too little.  Especially when you are commanding a significant price premium for your product, and thus can be sure that demand is not an artificial, price-induced variance.

With rare exceptions, investors understand the value of high sales at high prices.  When gross margins are good, and capacity is low, then it is time to expand capacity because good returns are in the future.  The Model 3 release projects a backlog of almost $12B.  Booked orders at that level are extremely rare.  Further, short-term those orders have produced nearly $300million of short-term cash.  Thus, it is a great time for an additional equity offering, possibly augmented with bond sales, to invest rapidly in expansion.  Problematic, yes.  Insolvable, highly unlikely.

On the face of it Tesla appears to be another car company.  But something much more significant is afoot.  This sales level, at these prices, when the underlying economics of use seem to be moving in the opposite direction indicates that Tesla has tapped into an unmet need.  It’s products are impressing a large number of people, and they are buying at premium prices.  Based on recent orders Tesla is vastly outselling competitive electric automobiles made by competitors, all of whom are much bigger and better resourced.  And those are all the signs of a real Game Changer.

 

Why Activists Succeed – and Will Change Yahoo

Why Activists Succeed – and Will Change Yahoo

Starboard Value last week sent a letter to Yahoo’s Board of Directors announcing its intention to ask shareholders to replace the entire Board.  That is why Starboard is called an “activist” fund. It is not shy about seeking action at the Board level to change the direction of a company – by changing the CEO, seeking downsizings and reogranizations, changing dividend policy, seeking share buybacks, recommending asset sales, or changing other resource allocations.  They are different than other large investors, such as pension funds or mutual funds, who purchase lots of a company’s equity but don’t seek to overtly change the direction, and management, of a company.

Activists have been around a long time.  And for years, they were despised.  Carl Icahn made  himself famous by buying company shares, then pressuring management into decisions which damaged the company long-term while he made money fast.  For example, he bought TWA shares then pushed the company to add huge additional debt and repurchase equity (including buying his position via something called “green mail”)  in order to short-term push up the earnings per share.  This made Icahn billions, but ended up killing the company.

Similarly, Mr. Icahn bought a big position in Motorola right after it successfully launched the RAZR phone.  He pushed the board to shut down expensive R&D and product development to improve short-term earnings.  Then borrow a lot of money to repurchase shares, improving earnings per share but making the company over-leveraged.  He then sold out and split with his cash.  But Motorola never launched another successful phone, the technology changed, and Motorola had to sell its cell phone business (that pioneered the industry) in order to pay off debt and avoid bankruptcy.  Motorola is now a fragment of its former self, and no longer relevant in the tech marketplace.

So now you understand why many people hate activists.  They are famous for

  • cutting long-term investments on new products leaving future sales pipelines weakened,
  • selling assets to increase cash while driving down margins as vendors take more,
  • selling whole businesses to raise cash but leave the company smaller and less competitive,
  • cutting headcount to improve short-term earnings but leaving management and employees decimated and overworked,
  • increasing debt massively to repurchase shares, but leaving the company financially vulnerable to the slightest problem,
  • doing pretty much anything to make the short-term look better with no concern for long-term viability.

Yet, they keep buying shares, and they have defenders among shareholders.  Many big investors say that activists are the only way shareholders can do anything about lousy management teams that fail to deliver, and Boards of Directors that let management be lazy and ineffective.

bad yahooWhich takes us to Yahoo.  Yahoo was an internet advertising pioneer. Yet, for several years Yahoo has been eclipsed by competitors from Google to Facebook and even Microsoft that have grown their user base and revenues as Yahoo has shrunk.  In the 4 years since becoming CEO Marissa Mayer has watched Yahoo’s revenues stagnate or decline in all core sectors, while its costs have increased – thus deteriorating margins.  And to prop up the stock price she sold Alibaba shares, the only asset at Yahoo increasing in value, and used the proceeds to purchase Yahoo shares. There are very, very few defenders of Ms. Mayer in the investment community, or in the company, and increasingly even the Board of Directors is at odds with her leadership.

The biggest event in digital marketing is the Digital Content NewFronts in New York City this time every year.  Big digital platforms spend heavily to promote themselves and their content to big advertisers.  But in the last year Yahoo closed several verticals, and discontinued original programming efforts taking a $42M charge.  It also shut is online video hub, Screen.  Smaller, and less competitive than ever, Yahoo this year has cut its spending and customer acquisition efforts at NewFronts, a decision sure to make it even harder to reverse its declining fortunes.  Not pleasant news to investors.

And Yahoo keeps going down in value.  Looking at the market the value of Yahoo and Alibaba, and the Alibaba shares held in Yahoo, the theoretical value of Yahoo’s core business is now zero.  But that is an oversimplification.  Potential buyers have valued the business at $6B, while management has said it is worth $10B.  Only in 2008 Ballmer-led Microsoft made an offer to buy it for $45B!  That’s value destruction to the amount of $35B-$39B!

Yet management and the Board remains removed from the impact of that value destruction.  And the risk remains that Yahoo leadership will continue selling off Alibaba value to keep the other businesses alive, thus bleeding additional investor value out of the company.  There are reports that CEO Mayer never took seriously the threat of an activist involving himself in changing the company, and removing her as CEO.  Ensconced in the CEO’s office there was apparently little concern about shareholder value while she remained fixated on Quixotic efforts to compete with much better positioned, growing and more profitable competitors Google and Facebook.  Losing customers, losing sales, and losing margin as her efforts proved reasonable fruitless amidst product line shutdowns, bad acquisitions, layoffs and questionable micro-management decisions like eliminating work from home policies.

There appear to be real buyers interested in Yahoo.  There are those who think they can create value out of what is left.  And they will give the Yahoo shareholders something for the opportunity to take over those business lines.  Some want it as part of a bigger business, such as Verizon, and others see independent routes.  Even Microsoft is reportedly interested in funding a purchase of Yahoo’s core.  But there is no sign that management, or the Board, are moving quickly to redirect the company.

And that is why Starboard Value wants to change the Board of Directors.  If they won’t make changes, then Starboard will make changes.  And investors, long weary of existing leadership and its inability to take positive action, see Starboard’s activism as the best way to unlock what value remains in Yahoo for them.  After years of mismanagement and underperformance what else should investors do?

Activists are easy to pick at, but they play a vital role in forcing management teams and Boards of Directors to face up to market challenges and internal weaknesses.  In cases like Yahoo the activist investor is the last remaining player to try and save the company from weak leadership.

 

What’s Really Happening with United’s Board?

What’s Really Happening with United’s Board?

United Continental Holdings is the most recent public company to come under attack by hedge funds. Last week Altimeter Capital and PAR Capital announced they were using their combined 7.1% ownership of United to propose a slate of 6 new directors to the company’s board. As is common in such hedge fund moves, they expressed strongly their lack of confidence in United’s board, and pointed out multiple years of underperformance.

UALUnited’s leadership is certainly in a tough place. The airline consistently ranks near the bottom in customer satisfaction, and on-time performance. It has struggled for years with labor strife, and the mechanics union just rejected their proposed contract – again. The flight attendant’s union has been in mediation for months. And few companies have had more consistently bad public relations, as customers have loudly complained about how they are treated – including one fellow making a music and speaking career out of how he was abused by United personnel for months after they destroyed his guitar.

But is changing the directors going to change the company? Or is it just changing the guest list for an haute couture affair? Should customers, employees, suppliers and investors expect things to really improve, or is this a selection between the devil and the deep blue sea?

Much was made of the fact that one of the proposed new directors is the former CEO of Continental, Gordon Bethune, who was very willing to speak out loudly and negatively regarding United’s current board. But Mr. Bethune is 74 years old. Today most companies have mandatory director retirement somewhere between age 68 and 72. Retired since 2004, is Mr. Bethune really in step with the needs of airline customers today? Does he really have a current understanding of how the best performing airlines keep customers happy while making money?

And, don’t forget, Mr. Bethune hand picked Mr. Jeff Smisek to replace him at Continental. Mr. Smisek was the fellow who took over Mr. Bethune’s board seat in 2004 after being appointed President and COO when Mr. Bethune retired. Smisek became CEO in 2010, and CEO of United Continental after the merger, and led the ongoing deterioration in United’s performance as well as declining employee moral. And then there’s that pesky problem of Mr. Smisek bribing government officials to improve United’s gate situation in Newark, NJ which caused him to be fired by the current board. Is it coincidental that this attack on the Board did not happen for years, but happens now that there is a new CEO – who happens to be recently recovering from a heart replacement?

Although Mr. Bethune has commented that the new board would be one that understands the airline industry, the slate does not reflect this. Mr. Gerstner is head of Altimiter and by all accounts appears to be a finance expert. That was the background Ed Lampert brought to Sears, another big Chicago company, when he took over that board. And that has not worked out too well at all for any constituents – including investors.

One can give great kudos to the hedge funds for proposing a very diverse slate. Half the proposed directors are either female or of color. And, other than Mr. Bethune, the slate is pretty young – with 2 proposed directors under age 50. Congratulations on achieving diversification! But a deeper look can cause us to wonder exactly what these directors bring to the challenges, and what they are likely to want to change at United.

Rodney O’Neal was the former CEO of Delphi Automotive. A lifelong automotive manager and executive, he graduated from the General Motors Institute and spent his career at GM before going to the parts unit GM had created in 1997 as a Vice President. Many may have forgotten that Delphi famously filed for bankruptcy in 2005, and proceeded to close over half its U.S. plants, then close or sell almost all of the other half in 2006. Mr. O’Neal became CEO in 2007, after which the company closed its plants in Spain despite having signed a commitment letter not to do so. He was CEO in 2008 when the company sued its shareholders.  And in 2009 when the company sold its core assets to private investors, then dumped assets into the bankrupt GM, cancelled the stock and renamed the old Delphi DPH Holdings.  Cutting, selling and reorganizing seem to be his dominant executive experience.

Barney Harford is a young, talented tech executive.  He headed Orbitz, where Mr. Gerstner was on the board.  Orbitz was originally created as the Travelocity and Expedia killer by the major airlines.  Unfortunately, it never did too well and Mr. Harford actually changed the company direction from primarily selling airline tickets to selling hotel rooms.

It is always good to see more women proposed for board positions.  However, Ms. Brenda Yester Baty is an executive with Lennar, a very large Florida-based home builder.  And Ms. Tina Stark leads Sherpa Foundry which has a 1 page web site saying “Sherpa Foundry builds 
bridges between the world’s leading Corporations and the Innovation Economy.”  What that means leaves a lot of room for one’s imagination, and precious little specifics.  What either of these people have to do with creating a major turnaround in the operations of United is unclear.

There is no doubt that United is ripe for change.  Replacing the CEO was clearly a step in the right direction – if a bit late.  But one has to wonder if the new directors are there to make some specific change?  If so, what kind of change?  Despite the rough rhetoric, there has been no proclamation of what the new director slate would actually do differently.  No discussion of a change in strategy – or any changes in any operating characteristics.  Just vague statements about better governance.

Historically most activists take firm aim at cutting costs.  And this is probably why the 2 largest unions have already denounced the new slate, and put their full support behind the existing board of directors. After so many years of ill-will between management and labor at United, one would wonder why these unions would not welcome change.  Unless they fear the new board will be mostly focused on cost-cutting, and further attempts at downsizing and pay/benefits reductions.

Investors will most likely get to vote on this decision.  Keep existing board members, or throw them out in favor of a new slate?  One would like to see United’s reputation, and operations, improve dramatically.  But is changing out 6 directors the answer?  Or are investors facing a vote that has them selecting between 2 less than optimal options?  It would be good if there was less rhetoric, and more focus on actual proposals for change.