THE ENTERPRISE
When the radio talk show hosts need to take a little time off, they re-run the "best of" shows.
When I want to take a weekend off in the summer, I dig into the files of the several hundred columns I've written over the past 10+ years and find one of my own "best of" and put it out just before the weekend starts.
According to my editor at the time, this was a good one. I am surprised how current it seems, given that it was written 9 years ago. I hope you enjoy it.
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When Growth Is Elusive, Don't Panic.
How to prop up the stock price and please Wall Street
© John L. Mariotti 1997
Growth is the hot word these days in business circles. The era of cutting and trimming, downsizing and right sizing seems to be over. Lean and mean is yielding to innovative, entrepreneurial growth. At least that's what my fellow pundits are saying.
There is a small glitch in all this growth talk. Really meaningful growth is often hard to come by in an economy that is only growing at 2 1/2% per year. It takes really new, exciting products and services. If we go back to basics, growth is only achieved one of three ways: 1) Take market share from your competitors, which may be tough and is usually costly in terms of lower prices which could even touch off a price war! 2) Find new markets to sell something into, which infers learning new businesses and creating whole new products, services, marketing skills, etc. 3) Expand the current market by innovating in products or services or adding some of either products or services to the ones already sold, and do it before (and better than) competitors do! See the glitch--this growth thing is hard work! Takes real skill and brains!
Fortunately there is another approach that will satisfy the Wall Street sharks (analysts), and that many companies are practicing these days. No, I am not going to talk about mergers and acquisitions. Those aren't real growth--just rearranging who owns the real estate--that's too obvious to fool anyone. I am talking about real subterfuge! Here's the drill:
When there is the slightest inkling that the current earnings estimates of Wall Street for your company are a pipe dream, start this way.
o First, downsize something--a division, the whole corporation, whatever. Nothing like a little blood to get the sharks enthused.
o Next, announce some closings of facilities. There must be a few around you don't need. So what if they serve customers, what's important here anyway, serving customers or propping up the stock price (so the old options pay off)?
o Then take a big write-off, to cover the severance and facility closings. Use this to disguise the chance to fill up the "tomato cans*."
(* "tomato cans" are just one of the euphemisms used to describe those lovely accounting " restructuring reserves" and "deferred accrual accounts" that money can be charged against now and "discovered" to be available/unused later, when the earnings for the next quarter or two need to be propped up--because that old devil growth didn't materialize!)
Now we have taken care of the first "growth shortfall!" What happens when the growth dreams become nightmares the next time (in a couple quarters usually--most "tomato cans" don't hold enough to last for a year or more!). We have more trickery up our sleeve! And it sounds pretty reasonable too!
o Cut products or stock keeping units (this helps fill the "obsolete inventory tomato can" and that's a hard one for the auditors to argue with!) Claim you are simplifying the business, and everybody knows that's good (even if customers still want those discontinued products--after all who are we here to serve anyway?)
o Next, consolidate a couple divisions. This will create more closing reserves, some additional heads will roll, so severance reserves can be raised again.
o Take a big write-off and refill the "tomato cans" again. (Are you getting the hang of this yet?)
Of course, all of this is more likely to depress growth than help it, but Wall Street will be ecstatic. The company is getting "repositioned" for more profitable growth in the future, and lowering its break-even in the present. The fact that it hasn't generated any real growth in several quarters goes unnoticed in all this "positive" restructuring! This is like losing weight by amputating limbs! The scale looks great until you try to use the mutilated body!
Finally the tomato cans are running low again, and the darn growth just isn't happening yet! I wonder what comes next?
o First, sell a division or two. This will generate some cash (if it is a good one) or some more write-offs (if it is a loser). Either way, claim that the division(s) were not "core" to the business. Wall Street will rejoice--we are getting down to what is core! (In eating an apple, when you get to the "core" not much useful is left!)
o Next, buy acquisitions for stock (it is up handsomely because of the "good news" about restructuring) and be sure to sell the divisions for cash. This will sufficiently confuse the earnings per share enough to let you do what...?
o Of course, take another write off for "absorption of acquisitions" and "exit costs for divestitures," and re-fill the tomato cans--again! By now, any smart executives will have cashed in their stock options for a few million more than they should have been worth and are ready to "pursue other interests"--like their vacation home in the Caribbean, or their new boat and sports cars. You see growth does pay off in the end, for the few who know how to manage it--whether they actually create any or not.
P.S. Someday--after a few consecutive years of this, there will be an expose', but the miscreants will be long gone--or else they will be summarily terminated (and only receive a multi-million dollar severance package for the mischief). You see this story is a composite of a few true ones. Only the names have been omitted to protect the perpetrators!
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FYI--I was a Group President at Rubbermaid from 1992-1994, when "growth was elusive" and I learned a lot. Some of it was good, and some of it was not so good. 'Nuf said?
Best, John
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