What’s the Halflife of a Turnaround?
Posted by Bob Warfield on June 6, 2008
There’s been considerable discussion among the Enterprise Irregulars sparked by Vinnie Marchandani’s post about Jerry Yang. Vinnie is quite passionate about the idea that a venerable web entrepreneur like Yang should be given a lot more of a chance, and that a non-techie like Carl Icahn should be reviled. The Irregulars reacted pretty negatively to the post. The general sense was that it was time for Yang to move on. Larry Dignan picked up on this theme as well. Like me, he is generally tired of the whole spectacle.
Vinnie stuck to his guns though, and posted again, speculating about what might have happened if Steve Jobs was in this position after getting back to the helm at Apple, or Mark Hurd at HP, or Gerstner at IBM. All of those have been successful turnarounds. Perhaps there just hasn’t been enough time for Yang to make a difference.
While I am a bit fatigued as I mention with the whole topic of Microhoo, I was nevertheless curious about this comparison Vinnie draws with Apple, HP, and IBM. What if we could rearrange time and compare these three companies side by side, exactly aligning the timing of the new boss taking the helm. Could we tell which ones were undergoing a successful turnaround, or would we have to wait much longer to see a result?
It’s not hard to retrieve the historical stock quotes for these three, so I simply took those quotes for the equivalent length of time after Jobs, Hurd, and Yang took over the helm and plotted them in a chart:
During Mr Yang’s tenure, Yahoo’s stock is essentially flat. There was no real discernible trend until Microsoft got involved and as we know, that trend went away. As a matter of fact, the stock spends most of its time below the green line connecting the opening and closing of the period. Clearly the market immediately had little confidence.
Contrast that with the performance of HP’s Mark Hurd, where the stock closes out the period up 29%, or Apple where the market loved Steve Jobs immediately and closed up a whopping 67% by the end of the period.
Is this the wisdom of crowds or just good PR? It’s hard to tell from this data, especially since we know a lot more about what happened at HP and Apple after the period depicted–things continued to go much better. We don’t know for sure what would happen if Jerry Yang thwarts Carl Icahn and manages to stay in place.
The market is not a patient place. The halflife of a turnaround looks to me like it’s about a year or less. If a new CEO can’t inspire confidence in that time, the market is unlikely to leave him in place. Hard to say whether it’s fair or not, but it’s also hard to argue that Apple and HP didn’t do a lot better over the same period.
5 Responses to “What’s the Halflife of a Turnaround?”
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vmirchan said
Thanks for the analysis. The legends did not come through as well – you may want to fix.
Here is what would have represented my point better. Show what investors have seen in returns versus what the 30 to 50% premium if there had been a buy out within a year of Jobs or Hurd coming in.
Instead, like many you are making Jerry the issue. I have said in in both my posts, may be he should move on or in to background. My point is why does Yahoo need to be sold to accomplish that?
Icahn got what he wanted at Motorola and BEA. In your opinion, is Motorola better now months after Zander is gone. You know about the exodus of key employees happening at BEA …who really benefited?
I am a big fan of selective, strategic M&A and have written how firms like GE, Cisco etc do it. But this mob mentality of any management which does not accept a buy out offer offer is guilty of shirking fiduciary responsibility is a bit of a stretch. And ignores all other stakeholders – customers in particular.
My readership is enterprise customers not investors. I usually write with them in mind. I have asked many times on my blog how does all this M&A activity help customers. Few of the supposed M&A benefits in product and overhead rationalization flow through to the customers. In fact in many cases, their prices has gone up, instead of volume discounts and the quality of product/service often deteriorates as the new owner squeezes costs and keeps the margins.
Investors love to say – its’ our money. Over a decade customers invest many times more in a tech company than do investors, and it is stunning their zero say compared to an Icahn during M&A discussions (BTW – not just picking on him)
If the trend continues I will recommend to my CIO clients they seek warrants along with any license or product they buy. That is the only way they can have any say in any buyout decision. And they deserve a say.
smoothspan said
Vinnie, sorry I didn’t make your point better. Perhaps that is in part because I disagree with it! LOL
Showing total return on Apple or HP years later versus a quick 30-40% may be interesting, but you’ve completely overlooked that in those two cases investors had a reason to believe very early on and therefore to stay in the game. Apple and HP gave them the 30% or more in the first year, and Yahoo hasn’t offered up anything so far but the promise that if the strategy does fail, there will have been so many poison pills that it isn’t possible to sell and salvage.
I agree, I have made Jerry the issue. Jerry is clearly in control and has taken huge steps to block an acquisition that some are saying are unfair, not appropriate in the context of fiduciary responsibility, or otherwise bad. They’re steps that radically shape the value of the organization, at least to an acquirer.
I think you’ve misinterpreted my post if you think it’s about mob mentalities who insist on M&A at all costs. I don’t think that phenomenon exists really. Rather, you have a group that insists on having some confidence. What I’ve shown here is that they appear to have had confidence early on with 2 of these CEO’s but no the third, and also that the confidence was well placed when we look at the performance of the stocks in these timeframes.
It is the curse of the CEO that they get more credit for successes than they deserve as well as more credit for failure.
Your point about who invests more money, customers or investors, is one that carries zero weight for me. Why? Because both parties entered into an agreement with open eyes. The customer got value for product and was never promised anything more than that. The investor bought into share appreciation and has every right to expect the company to deliver on that. We’re back to my graph of who did or did not, and to the surprising conclusion that you can tell pretty quickly. It doesn’t seem to take years for a turnaround to start to take root.
As for Motorola, what does Motorola deliver to customers? Trendy new cell phones? If they miss a generation and are no longer trendy, how are they delivering? And BEA under Oracle’s wing. How exactly are customers harmed there?
The real truth is that the customers themselves were not that loyal to any of these companies. They started voting by not buying before any of these investors ever got involved. If the numbers had stayed good, the investors never would have gotten interested in any M&A activity.
So I find your customer angst a little bit misplaced given that many of them were clearly also very unhappy with these companies and hence quit buying.
Cheers,
BW
vmirchan said
Bob – most of us in tech are spoiled when it comes to customer aggressiveness. Spend some time in auto, retail, aviation…you will see what customers can dictate. CIOs are wimps and helpless when it comes to tech M&A and the frequent resulting margin increase and decline in product/service in acquired company.
Just because they slow down new purchases from a BEA is not a signal that they are happy Oracle bought it if talent leaves, rates go up etc. Survey after survey of CIOs shows growing concern about consolidation in various sectors. It cannot continue as it has the last few years. Warrants are just one mechanism – and frankly a clumsy solution. But Their voice is not being factored enough.
tfoydel said
Vinnie’s point is spot on. In auto the customer is king and he kicks the tier one vendor and before long the entire supply chain feels it. Silicon Valley was clever to avoid this fate. This expains why the industrial world really despises the tech world, deep down. It also explains why the tech world is so dynamic: That much price power leaves a lot of room for new market entrants. SaaS anyone?
It also explains why customers have so little voice in tech products. Again, SaaS anyone?
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