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.

Big Box Blues: The Next Chapter

For almost two years I have been rambling on about the demise of the big box retail industry.

I have postulated that our current economic situation, highlighted by high unemployment, tight credit and slower GDP growth, will be with us for years. It has been my hypothesis that a low growth economy will end the reign of Big Box retail due to the model’s over reliance on the opening of new stores and the attraction of new customers.

Blah, blah, blah is what most people heard. The evidence just wasn’t there.

“You’re a bitter old man with a loose grip on reality.” Is what my closest friends and most of my family members have been telling me.

But before shuffling off to watch The Simpson’s, I was quick to respond:

“Sure I’m bitter, but you’d be too if they kept changing the packaging for Publix ice cream … and sometimes I see things that aren’t really there, but does that mean I’m wrong?”

But now, I think my screwball ideas might just be coming to light. Wall Street sharks are circling in the economic moats that Big Box retailers have built to protect their kingdoms.

Wall Street bought the shares of Big Box stores and rode a wave of phenomenal growth and spectacular returns for 20 years. But after 6 quarters of declining same store sales, Wall Street is looking for a better return on the assets retailers hold, than the management of these Big Box firms have been able to provide.

For Wall Street…It’s payback time.

Ron Burkle and his boys take a run at Barnes and Noble, Blockbuster just folds, Gymboree takes a sweetheart deal from Bain Capital and JC Penney runs for cover into the arms of Goldman Sacks (?) to fend off Bill Ackman's hedge fund Pershing Square Capital Management (which, by the way, just got done chasing after Borders).

I don’t think these are isolated events.

I think this is a warning shot for Big Box executives to get the cash they are hoarding back into productive use, to fish or cut bait regarding under performing stores and to find a new retailing model that can keep the sharks satiated.

Can Big Box respond fast enough for Wall Street? My thoughts…? No way!

There just isn’t enough original thinking inside the vaulted HQ to get it right fast enough.

Wall Street created these behemoths and they will dismantle the firms they can, and merge the ones they can’t, until the last drop of whatever value is in the assets is squeezed out.

When it’s over, there will be empty shells of retail companies all over this great land.

Out of the carnage will rise the new retail models that can survive in a low growth economy, at least until the sharks regroup and get hungry enough.

It’s moments of lucidity like this that I live for.. that and Publix ice cream sundaes!