Maximizing Shareholder Value Pert 2

The first step in the company’s strategic shift to ‘Maximizing Shareholder Value’ is the manipulation of the company’s financials.  Stock price can most easily be affected by direct manipulation of the factors that control price. 

The first thing the company did was to announce a huge stock buy back program.  They actually borrowed money to buy back shares of their own stock.  By having more money chasing fewer shares, the price of those shares remaining has to go up. 

Simple supply and demand, increase the demand for shares by flooding the market with ‘buy’ orders while limiting the supply of shares you offer and you have higher prices.

The next step was to increase the dividend.  By paying back more money to shareholders through dividends, the shares themselves have more value and therefore trade at higher prices. 

Short term this is great for the stock price, long term, not so much.  What the company is doing is openly admitting that they can’t think of anything to do with retained earnings that will make the company more valuable. Rather than risk trying to invest the money the company has back into the company, they have decided that the best course of action is to give the money back to shareholders. 

What the company is saying is in essence, “Our organization is so screwed up that we don’t even want to try and fix it. We are afraid that any money we spend trying to get our company to run better would be wasted, so we would rather just give the money back to you and ride this thing all the way into the ground”. 

That is great for shareholders and really great for executives and board members whose compensation is tied directly to share price.

It is not so good for everyday employees who now have to worry that the company the where they have worked for so long might not be here in a couple of years, but hey, that’s the way modern capitalism in our market based society works.  

Bad company management, good maximization of shareholder value. 

Rather than trying to make money for shareholders off of what they have invested, the company is simply going to give the money back and hope that we can give it back fast enough that the share price keeps rising. 

And it worked, the share price shot up 60% in a few months.  Wall Street loves a good deal and giving back money to shareholders with a little something added on from the sale of the company’s future is a good deal on Wall Street.

It doesn’t matter that the company has hindered its ability to function in a tough competitive market.  It doesn’t matter that they will have no “War Chest” to rely on if another jolt comes to the economy or the market they are in.  It doesn’t matter that they have sold off the company’s future for a better stock price today, because a better stock price today is all that matters when you are maximizing shareholder value.      

Combined with the buying back of stock and the increases in dividends is the manipulation of earnings per share.  Hitting specific earnings numbers has become more important than how those earnings are…well…..earned.  

For the next couple of quarters and perhaps the next couple of years, my company will be achieving earnings growth through the manipulation of the internal numbers of the company rather than through real growth or acquisition.  Reduce the number of shares outstanding and you can achieve growth in Earnings Per share.  (Less shares divided into the same amount of earnings gives you greater per share earnings growth.).

Lower expenses faster than sales decline and you achieve earnings growth.  Limiting the amount of inventory you carry and you have more money to add to the earnings line on the balance sheet.  The fact that you can’t sell what you don’t have won’t show up for at least a few more quarters.  Between now and then you can try to find another way to get the earnings up. 

Then there is the cutting back of pay and benefits for employees.  That has a similar effect on earnings and it is not as noticeable to share holders as when you close a number of stores and throw people out into the street.  By limiting what an employee can earn and reducing what they cost for the company you can improve earnings.  Again, the results of these changes will not show up for a while so you take the earnings increase now, get that reflected in higher share prices and worry about the downside effects of the decision at some later date. 

This and a myriad of other accounting manipulations are going on in my company on a daily basis.  It is the first prong of the strategy to increase Shareholder Value and its effect on share price has been incredibly positive. So far, so good, as far as shareholder value is concerned.

Maximizing Shareholder Value

The company had struggled through the near collapse of the American economy by doing what it had always done, they way it had always done it.  They clung to the Big Box model hoping that the economy would soon recover. It didn't.

The company had stoically resisted any changes for three years while being trounced by its largest competitor.  It sustained 14 quarters of dismal results all without feeling the need to change a single thing about the way it went to market.

None of these events was enough to convince the company I work for that things needed to change.

But then, one day, almost as if by magic, the company finally woke up and decided it needed to completely change everything about how it did business.

This revelation was not the product of deep thinking within the company.  Nor was it the outcome of some hotly contested deliberation of a strategic overhaul.  It was simply the result of one person, buying so many shares of the company, that he could not be ignored. 

An activist shareholder bought into my company and while I was not there to overhear the conversation, I am sure it went something like this:

“Mr. Chairman, I now own a significant portion of your company.  I would like you to change the way the company is run so that the shares I own are significantly more valuable in three to six months then they are now.   If you can not find a way to do that, I will replace you and your executive team with people that will.”

Simple individual self interest, that’s all it took to get my company to change.

Self interest, the power that drives the engine of capitalism. 

What finally motivated the company I work for to change was the realization by senior executives that they could either change the way the company operated, or they would loose their jobs. 

From that moment, the floodgates opened.  The company embarked on a multi-year, three pronged strategic shift that was designed to “Maximizing Shareholder Value.” 

The strategy consists, in simplest terms, of:

1. Manipulating the company’s finances to increase the share price. 
2. Introducing ‘Technology’ wherever and whenever possible and
3. Completely overhauling the corporate culture. 

There is nothing wrong with what the company is doing.  In many ways, maximizing shareholder value is exactly what a publicly traded company is supposed to do, it is by some definitions the only reason a public company exists at all. 

The problem lies in the definition of ‘Shareholder Value’.  My company is focused on getting the share price up regardless of how it impacts the company’s ability to function or even survive in the future.

Is a higher stock price the sole definition of shareholder value?

You can argue that it is because there would be no future, at least not for the executives in charge, if they don’t get the share price up right now.

The questions remains, however, does shareholder value mean the highest possible share price today or the value of the company over time?

It’s only a mental exercise.  In today’s market, there is no mechanism for looking at shareholder value over the long term.  The goal is to get the share price up as high as possible, as fast as possible and then struggle to keep it there.

The Big Box model of retailing relies on continuous growth to be effective.  There is no more real growth for Big Box stores in this economy so rather than finding a new model, my company has decided to continue with the same model but tweek its growth orientation away from more stores, more customers, and more sales to a focus on more ‘Shareholder Value’. 

It may be the only way the company can survive.  I would have liked to have seen a more creative solution to the problem of no growth/slow growth, but I am left with what I have.

Tan, Rested and Ready

It's time to get back to work.

I've been gone, but now I'm back. Where I went and why is not really important, mostly because no one else would care.

I have been in the middle of one the great cyclical transitions in retail.  These transitional events happen on a regular, if not frequent, basis.  They are times of great confusion where big companies loose their way and struggle against market forces, competition and their own myopic views to survive in an economy that has changed without them realizing it.

Then one day, they wake up and accept that the way they have been operating is no longer working.

I have been given a inside view into how one Big Box Retailer is handling (or not handling) this realization and how they are struggling to remake themselves.

There is a great deal to learn from the their efforts.  In the coming weeks I will be trying to share what I have seen.

I want to offer up some insight that may be of value for other companies, and individuals who can then profit from knowing where this former Master of the Retail Universe stumbled and how it is now struggling to remake itself.