5 Leadership Lessons from 2015’s Business Headlines

5 Leadership Lessons from 2015’s Business Headlines

2015 was not short on bad decisions, nor bad outcomes. But there are 5 major leadership themes from 2015 that can help companies be better in 2016:

Bad decisions1 – Cost cutting, restructurings and stock buybacks do not increase company value – Dow/DuPont

There was no shortage of financial engineering experiments in 2015 intended to increase short-term shareholder returns at the expense of long-term value creation. Companies continued borrowing money to buy back their own stock – spending more on repurchases than they made in profits.

Unfortunately, too many companies continue to increase earnings per share (EPS) via financial machinations rather than creating and introducing new products, or creating new markets.

In a grand show of value reducing financial re-engineering, 2015 is ending with the massive merger between Dow and DuPont. There is no intent of introducing new products or entering new markets via this merger. Rather, to the contrary, the plan is to merge these beasts, lay off tens of thousands of employees, cut the R&D staff, cut new product introductions and “rationalize” the company into 3 new businesses intended to be relaunched as new companies, with fewer products, less business development and less competition.

Massive cost cutting will weaken both companies, put thousands out of work and leave the marketplace with fewer new products. All just to create 3 new, different profit and loss statements in the hopes of improving the EPS and price to earnings (P/E) multiple. This story has become all too familiar the last few years, and the only winners are the bankers, who will make massive fees, and hedge fund managers that rapidly dump the stock in the terrible companies they leave behind.

2 – Doing more of the same is not innovative and does not create value – McDonald’s

McDonald’s has been losing market share to fast casual restaurants for over a decade. Yet, leadership insists on constantly maintaining its undying focus on the fast food success formula upon which the company was launched some 60 years ago.

As the number of customers continued declining, McDonalds kept closing more stores. Yet, sales per store remained weak even as the denominator grew smaller. Unwilling to actually update McDonald’s to make it fit modern trends, in 2015 leadership decided the path to growth was serving breakfast all-day. Really. It is still hard to believe. No new products, just the same McMuffins and sausage biscuits, but now offered for more hours.

Because of McDonald’s size and legacy the media covered this story heavily in 2015. Yet, as 2016 starts we all can look back and see that this was no story at all. Doing more of the same is not in any way innovative or revolutionary. Defending and extending an outdated success formula does not fix a company strategy that is out of date and rapidly losing relevancy.

3 – Hiring the wrong CEO is a BIG problem – Yahoo

We would like to think that Boards are really good at hiring CEOs. Unfortunately, we are regularly reminded they are not. The Board at Yahoo has spent a decade making bad CEO selections, and now the company’s core business is valueless.

In 2015 we saw that the decision by Yahoo’s board to hire a CEO based on political correctness (gender advantages), and limited experience with a well known company (a short Google career) rather than leadership capability could be deadly. Although Marissa Mayer was hired in 2012 amid much fanfare, we learned in 2015 that Yahoo is worth only the value of its Alibaba shareholdings, and no more. Yahoo as it was founded is now worth – nothing.

After 3 years of Mayer leadership it became clear that “there was no there, there” at Yahoo (to quote Gertrude Stein.) The value of the company’s “core” search and content accumulation businesses dropped to zero. Although 3 years have passed, practically no progress has been made toward developing a new business able to compete in the market shifted to social media and instant communications.  Investors now realize Ms. Mayer has failed to grow future revenue and profits for the historical internet leader. Following a decade of incompetent CEOs, Yahoo has been left almost wholly irrelevant.

What was once Yahoo will soon be Alibaba USA, as the company gets rid of its old businesses – in some fashion, although who would want them is unclear – in order to allow shareholders to preserve their value in Alibaba stock purchased by Jerry Yang in 2005.

Yahoo has become irrelevant, replaced by its minority stake in Alibaba, largely due to a Board unable to identify and hire a competent CEO – ending with the wholly unqualified selection of Ms. Mayer, who will achieve at least a footnote in history for the outsized compensation package she received and the huge severance that will come her way, wildly out of proportion to her poor performance, when leaving Yahoo.

4 – Even 1 dumb leadership decision can devastate a company — Turing Pharmaceuticals and CEO Shkreli

In 2015 former hedge fund manager Martin Shkreli raised a lot of money, and obtained control of an anit-parasitic pharmaceutical product. Recognizing that his customers either paid up or died, and being young, naïve, enormously greedy and without much oversight he decided to raise product pricing 70-fold. This would leave his customers either dead, bankrupt or bankrupting the insurance companies paying for his product – but he infamously said he did not care.

Thumbing your nose at customers, and regulators, is never a good idea. And even if they could not roll back the price quickly, they could target the CEO and his company for further investigation. It didn’t take long until Mr. Shrkeli was indicted for stock manipulation, leaving Turing Pharmaceuticals in disrepair as it rapidly cut staff and tried to determine what it will do next.  Now KaloBios Pharma, controlled by Turing, is forced to file bankruptcy.

Never forget that Al Capone did not go to prison for stealing, bribing police, bootlegging, number running, murder or other gangster behavior. He went to prison for tax evasion. The simple lesson is, when you think you are smarter than everyone else, can do whatever you want and thumb your nose at those with government powers you’ll soon find yourself under the microscope of investigation, and most likely in really big trouble.  And in the desire to take down the unwise CEO corporations become mere fodder.

The pharma industry is a regular target of consumers and politicians. Now not only are the investors in Turing damaged by this foolishly incompetent CEO, but the entire industry will once again be under close scrutiny for its pricing practices. Arrogantly making brash decisions, based on ill-formed thinking and juvenile egotism, without careful, thoughtful consideration can create enormous damage.

5 – Putting short-term results above good business practice will hurt you very badly long-term – Volkswagen and Takata

VW cheated on its emissions tests. Takata sold deadly, exploding airbags. Both companies are large organizations with layers of management. How could judgemenetal errors so big, so costly and so deadly happen?

These outcomes did not happen because of just “one bad apple.”   Cultural acceptance of lying takes years of leadership focused on short-term results, even when it means operating unethically or illegally, to be inculcated. It took years for layers of management to learn how to turn away from problems, falsify test results, fake outcomes, lie to customers and even lie to regulators. It took years to create a culture of tolerated deception and willful misrepresentation.

Unfortunately, the auto industry is a tough place to make money. There is a lot of regulation, and a lot of competition. When it becomes too hard to make money honestly, cheating can become far too easily accepted. Rather than trying to revolutionize the auto making process, or the product itself, it can be a lot easier to push managers all the way down to the front-line of procurement, manufacturing or sales to simply cheat.

“Make your numbers” becomes a mantra. If you want to keep your job, or even more importantly if you want to move up, do whatever it takes to tell those above you what they want to hear. And those above don’t ask too many questions, don’t try to figure out how results happen – just keep applying pressure to those below to do what’s necessary to make the numbers.

As VW and Takata showed us, eventually the company will be caught. And the consequences are severe. Now those companies, their customers, their employees and their shareholders are suffering. And industry regulations will tighten further to make it harder to cheat. Everyone loses when short-term results are the top goal, rather than building a sustainable long-term business.

Let’s hope for better leadership in 2016.

Why You Don’t Want To Own IBM

Why You Don’t Want To Own IBM

IBM had a tough week this week.  After announcing earnings on Wednesday IBM fell 2%, dragging the Dow down over 100 points.  And as the Dow reversed course to end up 2% on the week, IBM continued to drag, ending down almost 3% for the week.

Of course, one bad week – even one bad earnings announcement – is no reason to dump a good company’s stock.  The short term vicissitudes of short-term stock trading should not greatly influence long-term investors.  But in IBM’s case, we now have 8 straight quarters of weaker revenues.  And that HAS to be disconcerting.  Managing earnings upward, such as the previous quarter, looks increasingly to be a short-term action, intended to overcome long-term revenues declines which portend much worse problems.

This revenue weakness roughly coincides with the tenure of CEO Virginia Rometty.  And in interviews she increasingly is defending her leadership, and promising that a revenue turnaround will soon be happening.  That it hasn’t, despite a raft of substantial acquisitions, indicates that the revenue growth problems are a lot deeper than she indicates.

ibm4-1

CEO Rometty uses high-brow language to describe the growth problem, calling herself a company steward who is thinking long-term.  But as the famous economist John Maynard Keynes pointed out in 1923, “in the long run we are all dead.”  Today CEO Rometty takes great pride in the company’s legacy, pointing out that “Planes don’t fly, trains don’t run, banks don’t operate without much of what IBM does.”

But powerful as that legacy has been, in markets that move as fast as digital technology any company can be displaced very fast.  Just ask the leadership at Sun Microsystems that once owned the telecom and enterprise markets for servers – before almost disappearing and being swallowed by Oracle in just 5 years (after losing $200B in market value.)  Or ask former CEO Steve Ballmer at Microsoft, who’s delays at entering mobile have left the company struggling for relevancy as PC sales flounder and Windows 8 fails to recharge historical markets.

CEO Rometty may take pride in her earnings management.  But we all know that came from large divestitures of the China business, and selling the PC and server business.  As well as significant employee layoffs.  All of which had short-term earnings benefits at the expense of long-term revenue growth.  Literally $6B of revenues sold off just during her leadership.

Which in and of itself might be OK – if there was something to replace those lost sales.  (Even if they didn’t have any profits – because at least we have faith in Amazon creating future profits as revenues zoom.)

What really worries me about IBM are two things that are public, but not discussed much behind the hoopla of earnings, acquisitions, divestitures and all the talk, talk, talk regarding a new future.

CNBC reported (again, this week,) that 121 companies in the S&P 500 (27.5%) cut R&D in the first quarter.  And guess who was on the list?  IBM, once an inveterate leader in R&D has been reducing R&D spending.  The short-term impact?  Better quarterly earnings.  Long term impact????

The Washington Post reported this week about the huge sums of money pouring out of corporations into stock buybacks rather than investing in R&D, new products, new capacity, enhanced marketing, sales growth, etc.  $500B in buybacks this year, 34% more than last year’s blistering buyback pace, flowed out of growth projects. To make matters worse, this isn’t just internal cash flow going for buybacks, but companies are actually borrowing money, increasing their debt levels, in order to buy their own stock!

And the Post labels as the “poster child” for this leveraged stock-propping behavior…. IBM.  IBM

“in the first quarter bought back more than $8 billion of its own stock, almost all of it paid for by borrowing. By reducing the number of outstanding shares, IBM has been able to maintain its earnings per share and prop up its stock price even as sales and operating profits fall.

The result: What was once the bluest of blue-chip companies now has a debt-to-equity ratio that is the highest in its history. As Zero Hedge put it, IBM has embarked on a strategy to “postpone the day of income statement reckoning by unleashing record amounts of debt on what was once upon a time a pristine balance sheet.”

In the case of IBM, looking beyond the short-term trees at the long-term forest should give investors little faith in the CEO or the company’s future growth prospects.  Much is being hidden in the morass of financial machinations surrounding acquisitions, divestitures, debt assumption and stock buybacks.  Meanwhile, revenues are declining, and investments in R&D are falling.  This cannot bode well for the company’s long-term investor prospects, regardless of the well scripted talking points offered last week.

 

 

How Amazon Whupped Facebook Last Week

It's been two very different stories for Amazon and Facebook this summer.  Amazon's market cap has risen about 20%, while Facebook lost about 50% of its market value
FB v AMZN 9.10.12

Chart source: Yahoo Finance

Why this has happened was somewhat encapsulated in each company's headlines last week.

Amazon announced it was releasing 2 new eReaders under the Paperwhite name requiring no external light source starting at $119.  Additionally, Kindles for $69 will be available this week.  These actions expand the market for eReaders, already dominated by Amazon, providing for additional growth and lowering a kaboom on the Barnes & Noble Nook which is partnered with Microsoft. 

Offering more functionality and lower prices gives Amazon an even larger lead in the ereader market while simultaneously expanding demand for digital reading giving Amazon more strength versus traditional publishers and the printed book market.  Despite a "nosebleed" high historical price/earnings multiple close to 300, investors, like customers, were charged up to see the opportunities for ongoing growth from new products.

On the other hand, Facebook spent last week explaining to investors a set of decisions being made to prop up the stock price.  The CEO promised not to sell any stock for several months, and explained that the company would not sell more stock to cover taxes on stock-based compensation – even though that was the original plan.  He even tried to promote the avoided transaction as some kind of stock buyback, although there was no stock buyback

Facebook was focused on financial machinations – which have nothing to do with growing the company's revenues or profits.  That the company avoided selling more stock at its deflated prices does help earnings per share, but what's more important is the fact that now $2B will be taken out of cash reserves to pay those taxes.  $2B which won't be spent on new product development, or other activities oriented toward growth. 

Although I am very bullish on Facebook, last week was not a good sign.  A young CEO is clearly feeling heat over the stock value, even though he has control of the company regardless of share price.  It gave the indication that he wanted to mollify investors rather than focus on producing better results – which is what Facebook has to do if it really wants to make investors happy.  Rather than doing what he always promised to do, which was make the world's best network offering users the best experience, his attention was diverted to issues that have absolutely no long-term value, and in the short term reduce resources for fulfilling the long-term mission.

Given the choice between

  1.  a company talking about how it plans to grow revenues and profits, and maintain market domination while outflanking the introduction of new Microsoft products, or
  2. a company apologetic about its IPO, fixated on its declining stock price and apparently diverting focus away from markets and solutions toward financial machinations

which would you choose?  Both may have gone up in value last week – but clearly Mr. Bezos showed he was leading his company, while Mr. Zuckerberg came off looking like he was floundering.

As you look at the announcements from your company, over the last year and anticipate going forward, what do you see?  Are there lots of announcements about new technology applications and product advancements that open new markets for growing revenue while warding off (and making outdated) competitors?  Or is more time spent talking about layoffs, cost cutting efforts, price adjustments to maintain market share, stock buybacks intended to prop up the value, stock (or company) splits, asset (or division) sales, expense reductions, reorganizations or adjustments intended to improve earnings per share? 

If its the former, congratulations! You're acting like Amazon.  You're talking about how you are whupping competitors and creating growth for investors, employees and suppliers.  But if it's the latter perhaps you understand why your equity value isn't rising, employees are disgruntled and suppliers are worried.

Why Cost Cutting Never Works – Ignore Hillshire Brands (Sara Lee)

Cost cutting never improves a company.  Period.

We've become so used to reading about reorganizations, layoffs and cost cutting that most people just accept such leadership decisions as "best practice."  No matter the company, or industry, it has become conventional wisdom to believe cost cutting is a good thing.

As a reporter recently asked me regarding about layoffs at Yahoo, "Isn't it always smart to cut heads when your profits fall?"  Of course not.  Have the layoffs at Yahoo in any way made it a better, more successful company able to compete with Google, Microsoft, Facebook and Apple?  Given the radical need for innovation, layoffs have only hurt Yahoo more – and made it more likely to end up like RIM (Research in Motion.)

But like believing in a flat world, blood letting to cure disease and that meteorites are spit up out of the ground – this is just another conventional wisdom that is untrue; and desperately needs to be challenged.  Cost reductions are killing most companies, not helping them.

Take for example Sara Lee.  Sara Lee was once a great, growing company.  Its consumer brands were well known, considered premium products and commanded a price premium at retail.  

The death spiral at Sara Lee began in 2006.  "Professional managers" from top-ranked MBA schools started "improving earnings" with an ongoing program of reorganizations and cost reductions.  Largely under the leadership of the much-vaunted Brenda Barnes, none of these cost reductions improved revenues.  And the stock price went nowhere. 

With each passing year Sara Lee sold parts of the business, such as Hanes, under the disguise of "seeking focus."  With each sale a one-time gain was booked, and more people were laid off as the reorganizations continued.  Profits remained OK, but the company was actually shrinking – rather than growing. 

To prop up the stock price all avaiable cash was used to buy back stock, which helped maximize executive compensation but really did nothing for investors.  R&D was eliminated, as was new product development and any new product launches.  Instead Sara Lee kept selling more businesses, reorganizing, cutting costs — and buying its own shares.  Until finally, after Ms. Barnes left due to an unfortunate stroke, Sara Lee was so small it had nothing left to sell.

So the company decided to split into two parts!  Magically, it's like pushing the reset button.  What was Sara Lee is now an even smaller Hillshire Brands.  All that poor track record of sales, profits and equity value goes POOF as the symbol SLE disappears, and investors are left following HSH – which has only traded for about 2 days! No more looking at that long history of bad performance, it isn't on Bloomberg or Marketwatch or Yahoo.  Like the name Sara Lee, the history vanishes.

Well, "if you can't dazzle 'em with brilliance you baffle 'em with bull**it" W.C. Fields once said.

Cost cuts don't work because they don't compound.  If I lay off the head of Brand Marketing this year I promise to save $300,000 and improve the Profit & Loss Statement (P&L) by that amount.  So a one time improvement.  Now – ignoring the fact that the head of branding probably did a number of things to grow revenue – the problem becomes, what do you do the next year?  You can't lay off the Brand V.P. again to save that $300,000 twice.  Further, if you want to improve the P&L by $450,000 this time you actually have to find 2 Directors to lay off! 

Shooting your own troops in order to manage a smaller army rarely wins battles. 

Cost cuts are one-time, and are impossible to duplicate. Following this route leads any company toward being much smaller.  Like Sara Lee.  From a once great company with revenues in the $10s of billions, the new Hillshire Brands isn't even an S&P 500 company (it was replaced by Monster Beverage.)  And how can any investor obtain a great return on investment from a company that's shrinking?

What does create a great company? Growth!  Unlike cost cutting, if a company launches a new product it can sell $300,000 the first year.  If it meets unmet needs, and is a more effective solution, then the product can attract new customers and sell $600,000 the second year.  And then $900,000 or maybe $1.2M the third year.  (And even add jobs!)

If you are very good at creating and launching products that meet needs, you can create billions of dollars in new revenue.  Like Apple with the iPhone and iPad.  Or Facebook.  Or Groupon.  These companies are growing revenues extremely fast because they have products that meet needs.   They aren't trying to "save the P&L."

And revenue growth creates "compound returns."  Unlike the cost savings which are one time, each dollar of revenue produces cash flow which can be invested in more sales and delivery which can generate even more cash flow.  So if growth is 20% and you invest $1,000 in year one, that can become $1,200 in year two, then $1,440 in year three, $1,728 in year four and $2,070 in year five. Each year you receive 20% not only on the $1,000 you invested, but on returns from the previous years!

By compounding year after year, at20% investor money doubles in 5 years.  That's why the most important term for investing is CAGR – Compound Annual Growth Rate.  Even a small improvement in this number, from say 9% to 11%, has very important meaning.  Because it "compounds" year after year.  You don't have to add to your investment – merely allowing it to support growth produces very, very handsome returns.  The higher the CAGR the better.

Something no cost cutting program can possibly due.  Ever.

So, what is the future of Hillshire Brands?  According to the CEO, interviewed Sunday for the Chicago Tribune, the company's historically poor performance could be blamed on —– wait —– insufficient focus.  Alas, Sara Lee's problem was obviously too much sales!  Well, good thing they've been solving that problem. 

Of course, having too many brands led to too much lateral thinking and not enough really deep focus on meat.  So now that all they need to think about is meat, he expects innovation will be much improved.  Right. Now that HSH is a "meat focused meals" company, and the objective is to add innovation to meat, they are considering such radical dietary improvements for our fat-laden, overcaloried American society as adding curry powder to the frozen meatloaf. 

Not exactly the iPhone.

To create future growth the first act the new CEO took to push growth was —- wait —– cutting staff by $100million over the next 3 years.  Really.  He will solve the "analysis paralysis" which seems to concern him as head of this much smaller company because there won't be anyone around to do the analysis, nor to discuss it and certainly not to disagree with the CEO's decisions.  Perhaps meat loaf egg rolls will be next.

All reorganizations and cost reductions point to leadership's failure to create growth.  Every time.  Staff reductions say to investors, employees, suppliers and customers "I have no idea how to add profitable revenue to this company.  I really have no clue how to put these people to work productively – even if they are really good people.  I have no choice but to cut these jobs, because we desperately need to make the profits look better in order to prop up the stock price short term; even if it kills our chances of developing new products, creating new markets and making superior rates of return for investors long term."

Hillshire's CEO may do very well for himself, and his fellow executives. Assuredly they have compensation plans tied to stock price, and golden parachutes if they leave.  HSH is now so small that it is a likely purchase by a more successful company.  By further gutting the organization Hillshire's CEO can reduce staff to a minimum, making the acquisition appear easier for a large company.  This would allow a premium payment upon acquisition, providing millions to the executives as options pay out and golden parachutes enact. 

And it might give a return to the shareholders.  If the ongoing slaughter finds a buyer.  Otherwise investors will see the stock crater as it heads to bankruptcy.  Like RIM and Yahoo.  So flip a coin.  But that's called gambling, not investing.

What investors need is CAGR.  Not cost cutting and reorganizations.  And as I've said since 2006 – you don't want to own Sara Lee; even if it's now called Hillshire Brands.

 

Avoid the 3 card monte – Sell Abbott


The giant pharmaceutical company Abbott Labs announced today it was splitting itself.  Abbott will sell baby formula, supplements (vitamins,) generic drugs and additional products.  The pharmaceutical company, (gee, I thought that's what Abbott was?) yet to be named, will spin out on its own.  Chairman and CEO Miles White will continue at the new non-pharma Abbott, and the Newco pharma company will be headed by the company's former COO, being brought back out of retirement for the job.

The big question is, "why?"  The CEO gamely has described the businesses as having different profiles, and therefore they should be split.  But this is from the fellow that has been the most acquisitive CEO in his industry, and one of the most acquisitive in business, putting this collection together. He spent $10B on acquisitions as recently as 2009, including dropping $6.6B on Belgian drug company Solvay – which will now be espunged from Abbott.  Why did he spend all that money if it didn't make sense? And how does this break-up help investors, employees and all us healthcare customers? 

Or is this action just confusion, to leave us wondering what's going on in the company – and why it hasn't done much for any constituency the last decade.  Except the CEO – who's been the highest paid in the industry, and one of the highest paid in America during his tenure.

Mr. White became CEO in 1998, and Chairman in 1999.  Just as the stock peaked.  Since then, investors have received almost nothing for holding the stock.  Dividend increases have not covered inflation for the last decade, and despite ups and downs the share price is just about where it was back then – $50

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Source:  Yahoo Finance 10/19/11

Abbott has not increased in value because the company has had almost no organic growth.  Growth by acquisition takes a lot of capital, and because purchases have multiple bidders it is really tough to buy them at a price which will earn a high rate of return. All academic studies show that when big companies buy, they always overpay.  And that's the only growth Abbott has had – overly expensive acquisitions.

Mr. White hid an inability to grow behind a flurry of ongoing acquisitions (and some divestitures) that made it incredibly difficult to realize that the company itself was actually stagnant.  Internally in a growth stall, with no idea how to come out of it.  Hoping, again and again, that one of these acquisitions would refire the stalled engines. 

This latest action is another round in Abbott's 3 card monte routine.  Where's that bloody queen Mr. White keeps promising investors, as he keeps mixing the cards – and turning them over? 

Because his acquisitions didn't work he's upping the financial machinations.  By splitting the company he will make it impossible for anyone to figure out what all that exasperating activity has been for the last decade!  He won't be compared to all those pesky historically weak results, or asked about how he's managing all those big investments, or even held accountable for the tens of billions that he spent at the "old Abbott" when he's asked questions about the "new Abbott."

But re-arranging the deck chairs does not fix the ship, and there's nothing – absolutely nothing – in this action which creates more growth, and higher profits, for Abbott shareholders.  Because there's nothing in this that produces new solutions for health care customers. 

And look out employees – because now there's 2 CEOs looking for ways to cut costs and create layoffs – like the ones implemented in early 2011!  Expect the big knife to come out even harder as both companies struggle to show higher profits, with limited growth prospects.

Along the way, like any good 3 card monte routine, Abbott's CEO has had shills ready to encourage us that the flurry of activity is good for investors.  Chronically, they talked about how picking up this business or that was going to grow revenues – almost regardless of the price paid or whether Abbott had any plan for enhancing the acquisition's value.  Today, most analysts applauded his actions as "making sense." Of course these were all financial analysts, MBAs like Mr. White, more interested in accounting than actually developing new products.  Working mostly for investment banks, they had (and have) a vested interest in promoting the executive's actions – even if it hasn't created any value. 

Meanwhile, those betting for the queen to finally show up in this game will just have to keep waiting.

Abbott, like most pharmaceutical companies, has painted itself into a corner.  There are more lawyers, accountants, marketers, salespeople and PR folks at Abbott (like all its competitors, by the way) than there are real scientists developing new solutions.  Blaming regulators and dysfunctional health care processes, Abbott has insisted on building an enormous hierarchy of people focused on a handful of potential "blockbuster" solutions.  It's a bit like the king and his court, filling the castle with those making announcements, arguing about the value of the king's court, sending out messages decrying the barbarians at the gate – while the number of people actually growing corn and creating value keeps dwindling!

Barely 100 years ago most "medicine" was sold based on labels and claims – and practically no science.  Quackery dominated the profession.  If you wanted something to help your ails, you hoped the local chemist had the skills to mix something up in his apothecary shop, using his mortar and pestle.  Often it was best to just take a good shot of opiate (often included in the druggist's powder;) at least you felt a whole lot better even if it didn't cure your illness.

But Alexander Fleming discovered Penicillin (1928), and we realized there was the possibility of massive life improvement from chemistry – specifically what we call pharmacology.  Jonas Salk sort of founded the "modern medicine" industry with his polio vaccine in 1955 – eliminating polio epidemics.  Science could lead to breakthroughs capable of saving millions of lives!  The creation of those injections – and later little pills-  changed everything for humanity. And that created the industry. 

But now pharmacology is a technology that has mostly run its course.  Like all inventions, in the early days the gains were rapid and far, far outweighed the risks.  A few might suffer illness, even death, from the drugs – but literally millions were saved.  A more than fair trade-off.  But after decades, those "easy hits" are gone. 

Today we know that every incremental pharmacological innovation is increasingly valuable in a narrower and narrower context.  10% may see huge improvement, 30% some improvement, 30% marginal to no  improvement, 20% have negative reactions, and 10% hugely negative reactions.  And increasingly, due to science, we know that is because as we trace down the chemical path we are interacting with individuals – and their DNA has a lot to do with how they will react to any drug.  Pharmacology isn't nearly as simple as penicillin any more.  It's almost one-on-one application to genetic maps.

But Abbott failed (like most of its industry competitors) to evolve.  Even though the human genome has been mapped for some 10 years, and even though we now know that future breakthroughs will come from a deeper understanding of gene reactions, there has been precious little research into the new forms of medicine this entails.  Abbott remained stuck trying to develop new products on the same path it had taken before, and as the costs rose (almost asymptotically astronomically) the results grew slimmer.  Billions were going in, and a lot less discovery was coming out!  But the leaders did not change their R&D path.

Today we all hear about patients that have remarkable recoveries from new forms of biologic medicines.  We know we are on the cusp of entirely new solutions, that will make the brute force of pharmacology look as medieval as a civil war surgeon's amputation solution to bullet wounds.  But Abbott is not there developing those solutions, because it has been trying to defend & extend its old business model with acquisitions like Solvay – and a plethora of financial transactions that hide the abysmal performance of its R&D and new product development.

Mr. White is not a visionary.  Never was.  He wasn't a research scientist, deep into solving health issues.  He wasn't a leader in trying to solve America's health care issues during the last decade.  He never exhibited a keen understanding of his customer's needs, trends in the industry, or presience as to future scenarios that would help his markets and thus Abbott's growth. 

Mr. White has been an expert in shuffling the cards – moving around the pieces.  Misdirecting attention to something new in the middle of the game.  Amidst the split announcement today it was easy to overlook that Abbott is setting aside $1.5B for settling charges that it broke regulations by illegally marketing the drug Depakote.   Changing investments, changing executives, changing  the message – now even changing the company – has been the hallmark of Mr. White's leadership. 

Now Abbott joins the list of companies, and CEOs, that when unable to grow their companies lean on misdirection.  Kraft and Sara Lee, both Chicago area companies like Abbott, have announced split-ups after failing to create increased shareholder value and laying off thousands of employees.  These efforts almost always lead to more problems as organic growth remains stalled, and investors are bamboozled by snake oil claims regarding the future.  Hopefully the remaining Abbott investors won't be fooled this time, and they'll find better places for their money than Abbott – or its Newco.

Postscript – the day after publishing this blog 24×7 Wall Street published its annual list of most overpaid CEOs in America.  #4 was Miles White, for taking $25.5M in compensation despite a valuation decline of 11.3%!