Monday, March 24, 2008

Car Talk Meets IAC

There’s a popular weekend show on National Public Radio called “Car Talk.” The two hosts (the very knowledgeable and funny Maggliozzi brothers) act as car docs, answering people’s questions on odd, nagging, maddening auto problems. One of the periodic features of the program is called “Stump the Chumps.” In this segment, someone who had asked the hosts a question in a prior show is brought back to tell them whether their analysis and advice had been accurate. I listen to the show only sporadically, but in my experience the hosts have been correct 100% of the time. I thought about “Stump the Chumps” when I read some reports that Barry Diller is trying to break up the conglomerate mish-mosh called IAC/InterActiveCorp—the very mish-mosh he has so assiduously put together over the past few years. IAC is a bewildering array of online sites—you know many of them: Expedia, LendingTree, Match.com, Ticketmaster, to name just a few. Two years ago, I predicted that the “synergy” that CEO Diller was touting was basically bogus. On their own, I conceded that some, maybe several, maybe even many of these companies might perform well at the operating level—if they operated as fully independent firms. But in tandem, I argued that they provided no compelling additional composite value. On the contrary, I predicted that the unfocused, practically nonexistent corporate mission of IAC (I don’t consider “synergy” a mission) and the inevitable corporate bureaucracy that would emerge would actually diminish the value that these companies could potentially offer on their own. I documented some of my thoughts in my April 4, 2005 blog “A Synergy Fantasy”—see http://www.harari.com/blog/index.php?/archives/10-A-Synergy-Fantasy.html. I urge you to read it. I think you’ll find it both amusing and informative.My knowledge of company ailments is nowhere near as good as Tom and Ray Maggliozzi’s knowledge of car ailments—but if I was playing Stump the Chump about my 2005 IAC analysis, I’d have hit the bulls eye. Consider a couple extracts from a March 16, 2008 New York Times feature on the company: • “At it’s core, it is a mergers-and-acquisitions deal shop”, said one executive at the company who requested anonymity…. “IAC does not have a mission as to why you want to be all together. Its mission is nothing more than doing what is interesting to Barry.”• “If you listened to (Diller) the months before, this is a great ball of wax,” said Mr. Vogel, the media analyst. “If it was so great six months ago, how come we are breaking it up? IAC does not seem to have any strategy. You would need a playbook to figure out what was bought and what was sold and what were the gains and what were the losses.” • In testimony last week, John Malone (IAC’s largest shareholder) said IAC’s results “have lagged seriously behind Nasdaq and other indexes”.I predicted it all, but I’m no genius. It’s fairly easy to predict that companies built primarily via serial acquisition (despite their executives’ lame rationalizations of “scale, scope and synergies”) will, like Wile E. Coyote, eventually accelerate towards a cliff drop off. I remember back in 2004, Cendant (a megamix of real estate services, car rentals, hotels, mortgage brokerage, time-share, truck leasing, and more) was crawling back from some near death experiences. At the time, CFO Ronald Nelson (today the company’s CEO) told Investors Business Daily: “The market viewed us as serial acquirers who couldn’t shake the narcotic of growing by acquisition. We had to convince the market we were adamant about our strategy to improve transparency, buy back stock, make no acquisitions, and provide organic growth.” Don’t get me wrong; I’m not suggesting that M & A is a no-no. Strong successful companies are always on the prowl for judicious acquisitions. But as an investor, you’d be wise to avoid those companies whose growth depends primarily on pasting together a collage of acquisitions. That’s true even if you’ve got rock star leaders like Barry Diller and John Malone at the helm. You know, I'm thinking about calling Car Talk to tell the Maggliozzi brothers that they inspired my latest critique of IAC, but I suspect they probably wouldn’t know what the hell I’m talking about—or care! Check out the show.

Thursday, March 13, 2008

Dear Frank

Here we go again. Every once in a while I have to stop ranting about bland myopic strategies, insipid change efforts, and dully conventional leadership styles in order to get right to the core: How your company treats your customers is a superb predictor of how successful your company will be. Ron Havner, CEO of Public Storage, the largest self-storage company and REIT in the U.S., tells me succinctly: “The next frontier in our business is the customer’s experience.” That is why I was delighted to get a copy of a letter (not an e-mail, but a real letter!) that Phil Green sent to Frank Blake, the CEO of Home Depot. Phil is a regional sales manager for Pioneer Mobile Electronics. Phil had heard me deliver a speech to Pioneer distributors a couple months prior, and he knew I’d be interested in the experience he had with Home Depot. His experience (remember Ron Havner’s comment) no doubt helps explain why a healthy Lowe’s has taken so much business from a wounded Home Depot, despite the latter’s high-profile initiatives in mega-technologies, massive re-organizations, capital infusions, Six Sigma trainings, rock star CEO’s (remember Bob Nardelli?) and so on. Phil’s problem was utterly mundane. He had purchased a Ruby-red Eljer toilet at a Home Depot a few years prior. Now the toilet’s base was leaking, and he wanted to replace it. He wanted a Ruby color in order to match the toilet color itself, as well as matching the Ruby colors of the refrigerator and sink that he had also purchased from the same location. So Phil cheerfully and naively went back to the Home Depot where he had bought all these appliances, and from then on, his “experience” basically sucked. First of all, the response he received from store personnel was that it was no longer possible to get the color desired for the base, even though that store had sold him the original unit. Phil said he would be willing to buy the entire unit (list price $481.90) just to get the base color. Again, no luck. He was persistent because he had seen the toilet color on websites, but the supervisor at Home Depot was, to quote Phil, “…not very involved, and not too helpful. His attitude bordered on condescending.” The supervisor eventually, grudgingly, agreed to pursue the matter and get back to his customer. Of course, Phil didn’t get a call. He left messages on the supervisor’s voice mail, and when he called the main switchboard of the store, and was put on “hold” (a.k.a. phone hell) indefinitely. Now let me quote directly from Phil’s “Dear Frank” letter to CEO Blake: “I went back to the Eljer website, and found out that Lowes also sells Eljer. Guess what? I was able to call Lowe's, and speak to a real person in the plumbing dept. He checked on the Eljer Toilet in Ruby, and called me back in 5 minutes, and said ‘we can get it.’ By then, I had discovered the Eljer part number for just the base and asked Lowe's if they could get only the base. 5 minutes later, my new Lowe's buddy called back, and said they could. The cost? $162.37. ‘By the way’, said the Lowes salesman when I visited the store to order up, ‘would you like the base delivered to your home at no additional cost?’ I thought I had died and gone to heaven.” There it is: an utterly mundane story that is completely un-sexy to typical CEO’s and MBA graduates. Too bad, because Phil Green tells me that he and his wife plan both a complete kitchen remodel and an addition of a front porch. “Lowe's will figure prominently in our plans”, he assures me. “Home Depot will not.” There are no villains in this little story. The Home Depot people were not mean or evil. It’s just that customer care is a strategic priority at Lowe's, and the appropriate steps, decisions and responses that impact customers positively have been institutionalized at Lowe's. As many reports have noted, this is not currently the case at Home Depot—which is why Phil Green’s experience was tarnished. If I were Frank Blake—or for that matter, any CEO in any company—and I received a letter like that, I’d go nuts. I’d realize that there must be oodles of unhappy Phil Greens, and their unhappiness is like a fire alarm—indicating that a big problem in the organization needs to be addressed right away. I’d drop everything and work urgently with my people to figure out what needs to be done to authentically prioritize customer care throughout the company and effectively institutionalize the kinds of systems, processes, cultures