by Adam Hartung | Jan 29, 2015 | Current Affairs, In the Whirlpool, Leadership, Web/Tech
This week Yahoo announced it is spinning off the last of its Alibaba holdings. This is a big deal, because it might well signal the end of Yahoo.
Yahoo created internet advertising. Yahoo was once the #1 home page for browsers across America. But the company has floundered for years, riddled with CEO problems, a contentious Board of Directors and no strategy for dealing with Google which overtook it in all markets.
To much fanfare the Board hired Marissa Mayer, a Google wunderkind we were told, in July, 2012 to mount a serious turnaround. And during her leadership the company’s stock value has tripled – from about $14.50/share to about $43.50. You would think investors would be thrilled and the company would be on the right track.
Only almost all that value creation was due to a stock investment made in 2005 – when Jerry Yang invested $1B to buy 40% of Alibaba. And Alibaba in 2014 became the most valuable IPO in history.
Yahoo today is valued at about $46B. The Alibaba shares being spun out are valued at between $40B and $44B. Which means that after adjusting for the ownership in Yahoo Japan (valued at $2.3B) the core Yahoo ad and portal business is worth between $2B and $4.7B. With just over $1B shares outstanding, that puts a value on Yahoo’s core business of between $2.00-$4.70/share – or about 1/6 to 1/3 the value when Ms. Mayer became CEO.
A highest value of $4.7B for the operating business of Yahoo puts it on par with Groupon. And worth far less than competitors Google ($347B) and Facebook ($212B). Even upstart, and often maligned, social media companies Twitter ($24B) and LinkedIn ($27B) have valuations 5 times Yahoo.
Unfortunately, this latest leader and her team haven’t been any more effective at improving the company’s business than previous regimes. Under CEO Mayer Yahoo used gains from Alibaba’s valuation to invest about $2.1B in 49 outside companies – with $2B of that being acquisitions of technology companies Flurry ($200M), BrightRoll ($640M) and Tumblr ($1.1). Under the most optimistic view of Yahoo, leadership spent 40% of the company’s value in acquisitions that have made no difference to ad revenues or profits.
In fact, Yahoo’s business revenues, and profits, have declined for 6 consecutive quarters. Despite the CEO’s mandate that employees could no longer work from home. A kerfuffle that proved yet another management distraction, and apparently an effort to cut staff without it looking like a layoff.
Meanwhile there have been big efforts to boost people going to the Yahoo portal. Such as hiring broadcaster Katie Couric to beef up the news section, and former New York Times tech columnist David Pogue to deepen tech coverage and New York Times Magazine political writer Matt Bai to draw in more readers. But these have done nothing to move the needle.
Consistently declining display advertising has left search ads a bigger, and more profitable, business. And while Yahoo’s CEO has been teasing ad agencies that she might begin another big brand campaign, including TV, to bring Yahoo more attention – and hopefully more advertisers – there is no evidence anyone cares as more and more dollars flow to “programmatic” ad buying where Google is king. In the digital ad marketplace Google has 31% share, Facebook 7.75% share and Yahoo a meager 2.36% share.
Soon there will be little left of the once mighty Yahoo. It has pretty much lost relevancy. Large investors are crying for a merger with AOL, whose inability to grow its portal, ad and media businesses has left its market cap at a mere $3.7B. But combining two companies that are market irrelevant, and declining, will probably have the same outcome as happened when merging KMart and Sears. The Yahoo growth stall remains intact, and revenues will decline along with profits as the market continues shifting to powerful and growing competitors Google, Facebook and other social media companies. Only now Yahoo’s leaders won’t have the Alibaba value mountain to hide behind
by Adam Hartung | Jul 15, 2014 | Current Affairs, Defend & Extend, In the Swamp, Leadership
Famed actor and comedian Tracy Morgan has filed a lawsuit against Walmart. He was seriously injured, and his companion and fellow comedian James McNair was killed, when their chauffeured vehicle was struck by a WalMart truck going too fast under the control of an overly tired driver.
It would be easy to write this off as a one-time incident. As something that was the mistake of one employee, and not a concern for management. Walmart is huge, and anyone could easily say “mistakes will happen, so don’t worry.” And as the country’s largest company (by sales and employees) Walmart is an easy target for lawsuits.
But that would belie a much more concerning situation. One that should have investors plenty worried.
Walmart isn’t doing all that well. It is losing customers, even as the economy recovers. For a decade Walmart has struggled to grow revenues, and same store sales have declined – only to be propped up by store closings. Despite efforts to grow offshore, attempts at international expansion have largely been flops. Efforts to expand into smaller stores have had mixed success, and are marginal at generating new revenues in urban efforts. Meanwhile, Walmart still has no coherent strategy for on-line sales expansion.
Unfortunately the numbers don’t look so good for Walmart, a company that is absolutely run by numbers. Every single thing that can be tracked in Walmart is tracked, and managed – right down the temperature in every facility (store, distribution hub, office) 24x7x365. When the revenue, inventory turns, margin, distribution costs, etc. aren’t going in the right direction Walmart is a company where leadership applies the pressure to employees, right down the chain, to make things better.
Unfortunately, a study by Northwestern University Kellogg School of Management has shown that when a culture is numbers driven it often leads to selfish, and unethical, behavior. When people are focused onto the numbers, they tend to stretch the ethical (and possibly legal) boundaries to achieve those numerical goals. A great recent example was the U.S. Veterans Administration scandal where management migrated toward lying about performance in order to meet the numerical mandates set by Secretary Shinseki.
Back in November, 2012 I pointed out that the Walmart bribery scandal in Mexico was a warning sign of big problems at the mega-retailer. Pushed too hard to create success, Walmart leadership was at least skirting with the law if not outright violating it. I projected these problems would worsen, and sure enough by November the bribery probe was extended to Walmart’s operations in Brazil, China and India.
We know from the many employee actions happening at Walmart that in-store personnel are feeling pressure to do more with fewer hours. It does not take a great leap to consider it possible (likely?) that distribution personnel, right down to truck drivers are feeling pressured to work harder, get more done with less, and in some instances being forced to cut corners in order to improve Walmart’s numbers.
Exactly how much the highest levels of Walmart knows about any one incident is impossible to gauge at this time. However, what should concern investors is whether the long-term culture of Walmart – obsessed about costs and making the numbers – has created a situation where all through the ranks people are feeling the need to walk closer to ethical, and possibly legal, lines. While it may be that no manager told the driver to drive too fast or work too many hours, the driver might have felt the pressure from “higher up” to get his load to its destination at a certain time – or risk his job, or maybe his boss’s.
If this is a widespread cultural issue – look out! The legal implications could be catastrophic if customers, suppliers and communities discover widespread unethical behavior that went unchecked by top echelons. The C suite executives don’t have to condone such behavior to be held accountable – with costs that can be exorbitant. Just ask the leaders at JPMorganChase and Citibank who are paying out billions for past transgressions.
Worse, we cannot expect the marketplace pressures to ease up any time soon for Walmart. Competitors are struggling mightily. JCPenney cannot seem to find anyone to take the vacant CEO job as sales remain below levels of several years ago, and the chain is most likely going to have to close several dozen (or hundreds) of stores. Sears/KMart has so many closed and underperforming stores that practically every site is available for rent if anyone wants it. And in the segment which is even lower priced than Walmart, the “dollar stores,” direct competitor Family Dollar saw 3rd quarter profits fall another 33% as too many stores and too few customer wreak financial havoc and portend store closings.
So the market situation is not improving for Walmart. As competition has intensified, all signs point to a leadership which tried to do “more, better, faster, cheaper.” But there is no way to maintain the original Walmart strategy in the face of the on-line competitive onslaught which is changing the retail game. Walmart has continued to do “more of the same” trying to defend and extend its old success formula, when it was a disruptive innovator that stole its revenues and cut into profits. Now all signs point to a company which is in grave danger of over-extending its success formula to the point of unethical, and potentially illegal, behavior.
If that doesn’t scare the heck out of Walmart investors I can’t imagine what would.
by Adam Hartung | Jul 1, 2014 | Current Affairs, Defend & Extend, Leadership, Religion
Yesterday the U.S. Supreme Court ruled in favor of Hobby Lobby and against the U.S. government in a case revolving around health care for employees. I’m a business person, not a lawyer, so to me it was key to understand from a business viewpoint exactly what Hobby Lobby “won.”
It appears Hobby Lobby’s leaders “won” the right to refuse to provide certain kinds of health care to their employees as had been mandated by the Affordable Care Act. The justification primarily being that such health care (all associated with female birth control) violated religious beliefs of the company owners.
As a business person I wondered what the outcome would be if the next case is brought to the court by a business owner who happens to be a Christian Scientist. Would this next company be allowed to eliminate offering vaccines – or maybe health care altogether – because the owners don’t believe in modern medical treatments?
This may sound extreme, and missing the point revolving around the controversy over birth control. But not really. Because the point of business is to legally create solutions for customer needs at a profit. Doing this requires doing a lot of things right in order to attract and retain the right employees, the right suppliers and customers by making all of them extremely happy. I don’t recall Adam Smith, Milton Friedman, Peter Drucker, Edward Demming, John Galbraith or any other historically noted business writer saying the point of business to set the moral compass of its customers, suppliers or employees.
I’m not sure where enforcing the historical religious beliefs of founders or owners plays a role in business. At all. Even if they have the legal right to do so, is it smart business leadership?
Hobby Lobby Store
Hobby Lobby competes in the extraordinarily tough retail market. The ground is littered with failures, and formerly great companies which are struggling such as Sears, KMart, JCPenney, Best Buy, etc. And recently the industry has been rocked with security breaches, reducing customer faith in stalwarts like Target. And profits are being challenged across all brick-and-mortar traditional retailers by on-line companies led by Amazon, who have much lower cost structures.
All the trends in retail bode poorly for Hobby Lobby. Hobby Lobby does almost no business on-line, and even closes its stores on Sunday. Given consumer desires to have what they want, when they want it, unfettered by time or location, a traditional retailer like Hobby Lobby already has its hands full just figuring out how to keep competitors at bay. Customers don’t need much encouragement to skip any particular store in search of easily available products and instant price information across retailers.
Social trends are also very clear in the USA. The great majority of Americans support health care for everyone. Including offering birth control, and all other forms of women’s health needs. This has nothing to do with the Affordable Care Act. Health care, and women’s rights to manage their individual reproductiveness, is something that is clearly a majority viewpoint – and most people think it should be covered by health insurance.
So, given the customer options available, is it smart for any retailer to brag that they are unwilling to offer employees health care? Although not tied to any specific social issues, Wal-Mart has long dealt with customer and employee defections due to policies which reduce employee benefits, such as health care. Is this an issue which is likely to help Hobby Lobby grow?
Is it smart, as Hobby Lobby competes for merchandise from suppliers, negotiates on leases with landlords, seeks new store permits from local governments, recruits employees as buyers, merchandisers, store managers and clerks, and seeks customers who can shop on-line or at competitors to brandish the sword of intolerance on a specific issue which upsets the company owner? And one where this owner is on the opposite side of public opinion?
Long ago a group of retired U.S. military Generals told me that in Vietnam America won every battle, but lost the war. Through overwhelming firepower and manpower, there was no way we would not win any combat mission. But that missed the point. As a result of focusing on the combat, America’s leaders missed the opportunity win “the hearts and minds” of most Vietnamese. In the end America left Vietnam in a rushed abandonment of Saigon, and the North Vietnamese took over all of South Vietnam. Although we did what leaders believed was “right,” and fought each battle to a win, in the end America lost the objective of maintaining a free, independent and democratic Vietnam.
The leaders of Hobby Lobby won this battle. But is this good for the customers, suppliers, communities where stores are located, and employees of Hobby Lobby? Will these constituents continue to support Hobby Lobby, or will they possibly choose alternatives? If in its actions, including legal arguing at the Supreme Court, Hobby Lobby may have preserved what its leaders think is an important legal precedent. But, have their strengthened their business competitiveness so they will be a long-term success?
Perhaps Hobby Lobby might want to listen to the CEO of Chick-fil-A, which suffered a serious media firestorm when it became public their owners donated money to anti-gay organizations. CEO Cathy decided it was best to “just shut up and go sell chicken.” Business is tough enough, loaded with plenty of battles, without looking for fights that are against trends.
by Adam Hartung | May 8, 2014 | Current Affairs, Leadership
Lots of press this week about Target’s CEO and Chairman, Gregg Steinhafel, apparently being forced out. Blame reached the top job after the successful cyber attack on the company last year. But investors, and customers, may regret this somewhat Board level over-reaction to a mounting global problem.
Richard Clark is probably America’s foremost authority on cyber attacks. He was on America’s National Security Council, and headed the counter-terrorism section. Since leaving government he has increasingly focused on cyber attacks, and advised corporations.
In early 2013 I met Mr. Clark after hearing him speak at a National Association of Corporate Directors meeting. He was surprisingly candid in his comments at the meeting, and after. He pointed out that EVERY company in America was being randomly targeted by cyber criminals, and that EVERY company would have an intrusion. He said it was impossible to do business without working on-line, and simultaneously it was impossible to think any company – of any size – could stop an attack from successfully getting into the company. The only questions one should focus on answering were “How fast can you discover the attack? How well can you contain it? What can you learn to at least stop that from happening again?”
So, while the Target attack was large, and not discovered as early as anyone would like, to think that Target is in some way wildly poor at security or protecting its customers is simply naive. Several other large retailers have also had attacks, include Nieman Marcus and Michael’s, and it was probably bad luck that Target was the first to have such a big problem happen, and at such a bad time, than anything particularly weak about Target.
We now know that all retailers are trying to learn from this, and every corporation is raising its awareness and actions to improve cyber security. But someone will be next. Target wasn’t the first, and won’t be the last. Companies everywhere, working with law enforcement, are all reacting to this new form of crime. So firing the CEO, 2 months after firing the CIO (Chief Information Officer), makes for good press, but it is more symbolic than meaningful. It won’t stop the hackers.
Where this decision does have great importance is to shareholders and customers. Target has been a decent company for its constituents under this CEO, and done far better than some of its competitors. The share price has doubled in the last 5 years, and Target has proven a capable competitor to Wal-Mart while other retailers have been going out of business (Filene’s Basement, Circuit City, Linens & Things, Dots, etc.) or losing all relevancy (like Abercrombie and Fitch and Best Buy.) And Target has been at least holding its own while some chains have been closing stores like crazy (Radio Shack 1,100 stores, Family Dollar 370 stores, Office Depot 400 stores, etc.)
Just compare Target’s performance to JCPenney, who’s CEO was fired after screwing up the business far worse than the cyber attack hurt Target. Or, look at Sears Holdings. CEO Ed Lampert was heralded as a hero 6 years ago, but since then the company he leads has had 28 straight quarters of declining sales, and closed 305 stores since 2010. Kmart has become a complete non-competitor in discounting, and Sears has lost all relevancy as a chain as it has been outflanked on all sides. CEO Lampert has constantly whittled away at the company’s value, and just this week told shareholders that they can simply plan on more store closings in the future.
And vaunted Wal-Mart is undergoing a federal investigation for bribing government officials in Mexico to prop up its business. Wal-Mart is constantly under attack by its employees for shady business practices, and even lost a National Labor Relations Board case regarding its hours and pay practices. And Wal-Mart remains a lightning rod for controversy as it fights with big cities like Chicago and Washington, DC about its ability to open stores, while Target has flourished in communities large and small with work practices considered acceptable. And Target has avoided these sort of internally generated management scandals.
CEOs, and Boards of Directors, across the nation have been seriously addressing cyber security for the last couple of years. Awareness, and protective measures, are up considerably. But there will be future attacks, and some will succeed. It is unclear blaming the CEO for these problems makes any sense – unless there is egregious incompetence.
On the other hand, finding a CEO that can grow a business like Target, in a tough retail market, is not easy. Destroying KMart, while battling Wal-Mart, and still trying to figure out how to compete with Amazon.com is a remarkably difficult job. Perhaps the toughest CEO job in the country. Steinhafel had performed better than most. Investors, and customers, may soon regret that he’s not still leading Target.
by Adam Hartung | Dec 19, 2013 | Current Affairs, Leadership
Everyone has a stake in America’s big, public corporations. Either as an investor, employee, customer, supplier or community leader. So how these corporations perform is a big deal for all of us.
Unfortunately, we’ve had all too many corporations that have their problems. But, amazingly, we see little change in the CEO, or CEO compensation. When one of the USA‘s largest employers, McDonald’s, uses its hotline to tell low-paid employees they should avoid breaking open Christmas gift boxes, and instead return gifts for cash to buy gas and groceries, it’s not a bad idea to take a look at top executive pay. And with so many people still looking for work, and unemployment for people under 25 at something like 15%, there is an ongoing question as to whether CEOs are being held accountable or simply granted their jobs regardless of performance.
Given that Scrooge was a banker, why not start by looking at bank CEOs? And who better to glance at than the ultra-high profile Jamie Dimon, CEO and Chairman of JPMorganChase.
In 2012 Mr. Dimon told us there were really no problems in the JPMC derivatives business. We later learned that – oops – the unit did actually lose something like $6billion. Mr. Dimon was nice enough to admit this was more than a “templest in a teapot,” and eventually apoligized. He asked us to all realize that JPMC is really big, and mistakes will happen. Just forget about it and move on he recommended.
But in 2013 the regulators said “not so fast” and fined JPMC close to $1billion for failure to properly safeguard the public interest. The Board felt compelled to reflect on this misadventure and cut Mr. Dimon’s pay in half to a paltry $18.7million. That means in the year when things went $7billion wrong, he was paid nearly $37million – and the penalty was to subsequently receive only $19million. Thus his total compensation for 2 years, during which $7billion evaporated from the bank, was (roughly) $50M.
It appears unlikely anyone will be returning gifts to buy ham and beans in the Dimon household this year.
Mr. Dimon was spanked by the Board, and he is no longer the most highly paid CEO in the banking industry. That 2013 title goes to Wells Fargo CEO John Stumpf, who received about $23M. Wells Fargo is still sorting out the mess from all those bad mortgages which have left millions of Americans with foreclosures, bankruptcies, costly short-sales and mortgages greater than the home value. But, hotlines are now in place and things are getting better!
CEO compensation is interesting because it is all relative. Pay is minimally salary – never more than $1M (although that alone is a really big number to most people.) Bonuses make up most of the compensation,based on relative metrics tied to comparisons with industry peers. So, if an industry does badly and every company does poorly the CEOs still get paid their bonuses. You don’t have to be a Steve Jobs or Jeff Bezos with new insights, lots of growth, great products and margins to be paid a lot. Just don’t do a whole lot worse than some peer group you are compared against.
Which then brings us to the whole idea of why CEOs that make big mistakes – like the whopper at JPMC – so easily keep their jobs. Would a McDonald’s cashier that missed handing out change by $7 (1 one-billionth the JPMC mistake) likely be paid well – or fired? What about a JPMC bank teller? Yet, even when things go terribly wrong we rarely see a CEO lose their job.
During this shopping season, just look at Sears. Ed Lampert cut his pay to $1 in 2013. Hooray! But this did not help the company.
Sears and Kmart business is so bad CEO Lampert changed strategy in 2013 to selling profitable stores rather than more lawn mowers and hand tools in order to keep the company alive. Yet, as more employees leave, suppliers risk being repaid, communities lose their stores and retail jobs and tax base, Mr. Lampert remains Sears Holdings CEO. We accept that because he owns so much stock he has the “right” to remain CEO.
Perhaps Mr. Lampert deserves a visit from his own personal Jacob Marley, who might make him realize that there is more to life (and business) than counting cash flow and seeking lower cost financing options. Mr. Lampert can arise each morning before dawn to browbeat employees via conference webinars, and micromanage a losing business. But it leaves him sounding a lot like Scrooge. Meanwhile those behaviors have not stopped Sears and KMart from losing all market relevancy, and spiraling toward failure.
CEO pay-to-worker ratios have increased 1,000% since 1950. (How’s that for a “relative” metric?) Today the average CEO makes 200 times the company’s workforce (the top 100 make 300 times as much – and the CEO of Wal-Mart has a pension 6,182 times that of the average employee.) Is it any wonder so many investors, employees, customers, suppliers and community leaders are paying so much attention to CEO performance – and pay?
We are all thankful for the good CEO that develops long-range plans, spends time investing in growth projects, developing employees, increasing revenue and margins while expanding the communities in which the company lives and works. It just doesn’t happen often enough.
This Christmas, as many before, as we look at our portfolios, paychecks, pensions, product quality, service quality and communities too many of us wish far too often for better CEOs, and compensation really aligned with long-term performance for all constituencies.
