Welcome the Wolverines

A quick postscript to last week’s blog about Microsoft-Yahoo (and then I’m done with this subject, I promise): Speaking strictly professionally, I view Carl Icahn (the old corporate raider, greenmailer and current CEO of the hedge fund Icahn Capital) the way I would a wolverine. I see both of them as ruthless, fanatically determined, and exceedingly dangerous when crossed. Since I wrote last week’s blog castigating Jerry Yang for failing to embrace Microsoft’s lofty life-support offer of $33 a share, Carl the Wolverine has entered the fracas with the obvious question: Where the hell has Yahoo’s board of directors been all this time? Of course, we know the answer, and the answer transcends Yahoo. Boards of directors are supposed to serve as a check to CEO power run amok. They are supposedly responsible for fiduciary oversight on behalf of shareholders. In reality, they are often a joke. In many companies, they’re cronies of the CEO (who often has chosen them). Or they’re part of a good-old-boys network operating with the implicit understanding that their job is to lob softball queries to the CEO without embarrassing him/her. Or, in a classic follow-the-money scenario, they make sure not to jeopardize their lucrative “director” gig by doing things like, well, asking uncomfortable questions and holding CEO’s accountable for dumb decision. That’s where Icahn comes in. As a self-professed shareholder advocate, he has been a royal pain in the butt to a number of lethargically performing companies laden with entrenched executives--like TWA, Motorola, and Blockbuster, among others. Sometimes he wins, sometimes not, but his “M.O.”, often sorely needed, is to shake up the complacency of top management when corporate performance has stagnated and shareholders are long-suffering. Icahn Capital has bought 4.3% of Yahoo shares, and along with allies like hedge fund investor John Paulson (3.7%) and old warrior T. Boone Pickens (.75%) Icahn is agitating to unseat Yahoo’s board and replace it with a new slate that would be more responsive to insanely generous offers like Microsoft’s. Of course, before we cast Icahn as a hero, let’s remember that like all wolverines, he and his ilk can be mindlessly destructive. Sometimes, these “shareholder advocates” are so self-centered and short-term in their approach to the business (‘do whatever it takes to raise my share price so I can clear out with a fat return on my investment, damn the consequences’) that the longer term prospects of the firm are seriously damaged. For example, I remember back in 2003, then- CEO of Kodak Daniel Carp unveiled his grand plan to dump much of the cash-cow film business, cut annual dividend by 72 percent, and plow billions into building a strong presence in the fast-growing digital imaging market. A lot of wolverine investors howled (which ironically helped depress their stock by the way). Their reasoning was that Kodak should have used its income and free cash flow not for the long-term risk of transformation, but for supplying investors with juicy dividends and for temporarily propping up the old business to get it ready for sale. Let Kodak die if the price is right, snarled the wolverines, which would have been a justifiable option if Kodak leaders were clinging to a dying business model. But they weren’t. To their credit, Kodak leaders ignored the nay-sayers and moved aggressively towards their new goals. Kodak is still shaky today, but at least it is off life support and I wish its current leaders luck.Sometimes the wolverines lose themselves in a feeding frenzy. Remember how “Chainsaw Al” Dunlap systematically gutted Scott Paper and Sunbeam in the 1990’s? Dunlap never lacked for “shareholder advocates” who loved his approach, because they were able to bet on Dunlap to eviscerate the companies he ran and then carve up the carcasses to sell off at the most attractive prices. Who cared that what Dunlap was doing was essentially destroying companies and hence participating in a grotesque parody of “creating shareholder value”? The wolverines loved it. Having said all this, sometimes shareholders need those wolverines when it’s clear that CEO’s and boards of directors are either paralyzed with incompetence, or serving their own interests more than shareholders’. And even though I’ve argued that Microsoft would not be wise to do this deal (see http://www.harari.com/blog/index.php?/archives/169-Poor-Goliath-Seeks-a-Bride.html), I think Icahn is absolutely correct to put public pressure on Yahoo’s directors to justify why they didn’t leap at it. I think it’s fair to state the following challenge to Yahoo’s senior leadership and board of directors: Please unveil a concrete growth plan that will arguably raise investors’ confidence to the same level of stock value that Microsoft was offering, or thanks for the memories and let someone else take the helm.

Jerry Yang’s Empty Nest

I have a friend who will be an “empty nester” this fall. The last of his kids are off to college, and he and his wife will have to figure out what to do with each other and the rest of their lives. It’s a bit scary, he confesses, but he’s up for the next phase of his mortality.Too bad Jerry Yang isn’t. Yang, as you know, is the CEO of Yahoo, the same CEO who turned down Microsoft’s $47.5 billion acquisition offer. Those of you who follow my blogs know that I was critical of Microsoft’s pursuing this deal (see http://www.harari.com/blog/index.php?/archives/169-Poor-Goliath-Seeks-a-Bride.html). I thought it was a lousy buy. Still do. On the other hand, from Yahoo’s end, Yang’s refusal of Microsoft’s offer is, financially speaking, astonishing. Microsoft was offering $33 a share, a 62% premium over Yahoo’s closing prices during the mating dance between the two companies. The only logical reason to turn down the deal is if your own growth strategy will yield greater value for shareholders than the Microsoft offer. Fat chance. To be sure, Yahoo is a giant Web presence, boasting mega-traffic and an admirable 3 hour average time that visitors spend on the site per month. The only trouble is that over the past few years, the company hasn’t figured out a way to monetize that traffic into sustainable and profitable growth. Microsoft CEO Steve Ballmer offered Yang a magic bullet to solve his company’s woes in one fell swoop, and Yang threw it back in Ballmer’s face. Yang’s rejection of Microsoft has little to do with logic. It has everything to do with psycho-logic. You see, Yahoo is Yang’s baby. He fathered (mothered?) it with David Filo. He can’t bear to see the offspring leave home forever, especially into the embrace of a new lover in Seattle. He can’t deal with the possibility of the empty nest. It’s not about money. Yang doesn’t even take a salary at Yahoo. Based on his stock, he’s a billionaire one way or the other. It’s about ego and fear. If Yahoo is swallowed by Microsoft, what’s Jerry going to do with the rest of his life? How will he deal with no longer being the top dog alpha male independent rock star who started and runs one of Silicon Valley’s sexiest dotcoms? How’s he going to deal with his “kid” running off to join the “Evil Empire”? As Bay Area software consultant Lloyd Kurzweil says, “He’s thinking of himself, not the company.” We all think about our own welfare, but in a publicly traded company, the CEO’s primary fiduciary responsibility ought to be to shareholders. Over the years I’ve seen this syndrome pop up with some entrepreneurs. They can’t let go of their baby. When it’s time to sell, or even when it’s simply time to hire some new senior managers and let them run the show, or even when it’s simply time to delegate more control to existing managers, some entrepreneurs grit their teeth going forward. A few simply can’t go forward at all. Once again, if Yang had a legitimate growth plan that would surpass Microsoft’s offer, I’d applaud his efforts to stay independent. But what is it? There are rumors about a “partnership” with Google. Even if such a partnership passed the antitrust test, I predict that Google would eat Yahoo alive. And frankly, there’d be little benefit for Google to go through the hassle. Some say that all this is a bargaining ploy for a higher offer from Microsoft. I doubt it. I think Microsoft CEO Steve Ballmer was unwise to make the offer in the first place, but kudos to him for controlling his own ego and backing off when the ask price became absurd. Some analysts are predicting that Yahoo’s stock will sink down to $21 once the investment community is 100% certain that no Microsoft deal will happen. $21. Compare it to $33. Then tell it to shareholders. That’s some nest Jerry Yang is protecting.

Lessons From Swagelok

So a couple weeks ago I was in Athens, Greece, addressing a group of Swagelok executives and independent distributors of Swagelok products from Europe and Africa. (Swagelok, based in Cleveland Ohio, is a billion dollar global supplier of many vital manufacturing products like tube fittings, valves, gauges, transducers, regulators, hoses, filters, and a whole host of welding and fluid systems). My seminar was about strategic collaboration for competitive advantage, and I hope the participants learned something from it. But I myself always learn from my clients, and I'd like share with you four wonderful points that the Swagelok folks raised in the course of our discussions. 1. Simon Cooke, based in England, threw out a great observation: “Without mystery, there is no margin.” He was referring to the fact that regardless of a company’s size and marketing budget, if its product/service mix is basically conventional and “me-too”, margins will inevitably shrink. IBM CEO Sam Palmisano once echoed this sentiment: “If you do what everybody else does, you have a low margin business.” I wish more executives in all industries understood that all the size, scale, scope, reach and marketing pizzazz will not compensate in the long run for products that are mundane and “common”. It's when products and services break new ground—when they invoke some “mystery” and excitement—that margins will follow. 2. Hans-Peter Knippel, based in Germany, pointed out that one way to keep a company agile, brain-based, customer-focused and collaborative is to create digital networks that would bind all relevant constituencies—Swagelok employees, distributors, and customers, for example—together in one seamless grid. I loved this concept. Imagine, I suggested, if anyone in the Swagelok “community” could immediately access the right people in that community to obtain mission-critical information, or solve common vexing problems, or share important data and vital resources, or form a project team to pursue common goals. The capacity to digitally connect with the right people inside and outside the organization is the next wave of the future for any company, as far as I’m concerned. The people at Cisco Systems agree; they’re already pursuing what they call Cisco 3.0, the hardware building blocks for constant, real-time interaction and information exchange regardless of location. Ask your kids—they already know the enormous power of virtual communities like Facebook, MySpace and Ning. Maybe you should make sure that your company’s next consultant is no older than 16. 3. Pierre Fischer, based in Germany, with plenty of experience in Africa, observed that the most imaginative ideas about product application often come from customers in developing countries who use that product. Their resources overall are often so slim that they have to get really creative, so much so that they often use the products in a variety of ways that the vendors never anticipated. That struck a bell with me. I’ve been amazed when I’ve seen the creativity of mechanics in developing countries who fix things and make them work when they have nothing but the most rudimentary resources at their disposal. Pierre Fischer’s point is that if the vendor really “listens” to customers in developing countries—i.e., really observes what they do with products and why, rather than just view those people as a “sale”—then that vendor can glean some amazing clues as to new products, new product uses, and new markets. 4. Everyone discussed the importance of execution, and in that context the concept of time emerged. Time can either be a debilitating cost (when it drags on and on before decisions are made or things get done) or a value-adding currency (when it reflects speed and agility in individual decision-making and organizational process). Hence, the concept of “time”—as in internal cycle time, time to market, no time to waste, and don’t waste customers’ time—came up several times (no pun intended). We all agreed that businesspeople often don’t pay enough attention to time as a strategic issue and business priority. We should. If shrinking time was given as high a priority as shrinking costs (the first leads to the second, by the way), then execution would be a lot smoother, faster, more innovative, and more cost-effective.