The iPad, The Laptop & Schumpeterian Dynamics

This week has seen some interesting fireworks between Intel and various analysts concerning the future of personal computers and laptops.

Specifically, upon learning of Apple's blowout quarter and torrid pace of iPad2 sales, many pundits have pronounced he laptop effectively dead. With a generally-acknowledged 2% p.a. growth rate, the former desktop killer has been itself eclipsed by X-pads of several varieties.

I had the occasion recently to assist a friend in buying an iPad2. What I saw caused me, prior to the flurry of this week's analyst and pundit remarks, to conclude that the laptop as a home device has seen its best days.

It began with a visit to Barnes & Noble. My friend picked up a Nook, sneered and asked why she'd ever want to read books like that? A few minutes later, she wanted to buy one! When I saw the $249 price of a color screen Nook, I told her to wait and visit the nearby Apple store to check out an iPad.

Specifically, per my prior posts, I suggested that she buy a pad made by the firm selling it, and that she choose one with more applications than simply ebook reading. I had in mind that she could replace a laptop's functionality at a fraction of the price, with much greater ease of use.

How right I was.

She asked me to accompany her to the local Apple store a few days later. After steering the Apple rep to some specific topics of interest for my friend, we left the store and discussed what we'd heard. We returned about an hour later and she bought an iPad2 without the cellular modem.

As expected, the post-sale support to configure her iPad was superb. She left the store with iTunes, a web browser, text writing and ebook apps on her device, plus a few books to start. It took no effort for the iPad to recognize my friend's home wireless network and connect.

Since then, she's been attached to the device whenever possible.

And, just as I expected, she no longer needs to use a laptop, with its long bootup time, operating system and hard drive. Instead, the solid state, unbelievably small and thin iPad does everything she needs as a casual user who does not run a business on a laptop. Whatever questions she has can be answered during the store's afternoon workshops held, for free, just for that purpose.

It's no surprise to me that Apple is selling all the iPads it can assemble. And why laptop sales have faltered.

I doubt I'd buy another laptop, except for business purposes. For home use, traveling and general non-business daily use, it would be difficult to see why an expensive laptop would be necessary.

Despite Intel's attempts to rebut the analysts' 'death of the laptop' theme this week, I believe the latter are correct. Schumpeterian dynamics are hitting laptops with a vengeance.

Just as lighter, cheaper and better laptops eventually made consumer desktop computers obsolete, so, too, are the many X-pads, particularly the iPad, rapidly cannibalizing laptop sales growth.

Yet another reason not to sell Apple short, literally, just yet. But I wouldn't want to be caught holding equity in HP or Dell.

The Fading Fortunes of PC Firms

Hewlett-Packard's warning this week as it announced quarterly earnings threw Tuesday's equity markets into the tank at the market's open.

Predictably, a stream of analysts, portfolio managers and other pundits weighed in on HP, how it was different than Dell, whether it had major challenges ahead of it, etc.

I heard various analyses of HP's businesses, including focusing on corporate services.

To me, however, it simply boils down to HP, like Dell and Microsoft, being a company with the bulk of its fortune still tied to personal computers.

This is clear from inspection of the nearby price chart for HP, Dell, Microsoft, Apple and the S&P500 Index from 1990 to the present. The first three firms, which have relied more heavily on conventional personal or business computing for their revenues and profits, have had their stock prices languish or fall over the past decade.

In contrast, Apple, which transformed itself from a mere computer maker to a special-purpose digital device company early in the decade, has significantly outperformed the other three firms.

That is why, in my opinion, unless you are hoping for a near-term timing play on Dell or HP, or even Microsoft, for that matter, you will be disappointed if you buy or hold those equities anymore. They are obviously no longer the firms they once were, either fundamentally or in terms of market appreciation of their performances.

Apple is a very rare firm in its having arisen from near-disaster during the Scully era and been transformed by Jobs upon his return. Dell, HP and Microsoft are unlikely to duplicate that feat. They are, for the most part, firms, the fortunes of which rose meteorically, then plateaued, with the fortunes of the personal computer.

As iPods, iPads and enhanced smartphones increasingly cannibalize functions and activities PCs once dominated, the firms which remain largely defined by the latter are destined to continue to decline. Even having the largest share of the global PC market does HP little good when it has become a commodity business with a comparatively slow growth rate.

Dell's Non-Existent Turnaround Becomes Visible At Last

My last two posts concerning Dell, here and here, detailed my belief that, despite the founder's return in January of 2007 as CEO, the company is still doomed.

The nearby 5-year price chart of Dell, Hewlett Packard and the S&P500 Index confirms this. Dell's recent equity price rise is about the same as the index's, after having fallen much further since Michael Dell returned.

Even since early January, HP's equity price has risen, while Dell's has fallen.

Dell's recent quarterly earnings report provides more bad news. Its profit dropped 54%, while the rest of the technology sector has been on fire.

Its sales also fell, by 15%. That should be the real worrisome trend. My proprietary research has shown that growth firms are so-noted chiefly by consistent revenue growth, relative to the market. Dell is now going south.

Rival HP reported higher profits in this quarter than the year-ago period, amidst revived demand.

According to an analyst cited in the Wall Street Journal article about Dell last Friday, Dell's gross margin has dropped by half a percentage point, as prices fall while component costs rise.

Schumpeterian dynamics continue to bedevil the aging direct-purchase computer maker. Michael Dell has returned, executives have been shuffled, and Perot Systems has been bought, all to no avail.

Dell's golden age continues to recede further into the past, while the current management team burns through more money and continues to provide no compelling reason for shareholders to remain and see their equity investment underperform an inexpensive S&P index fund.

About Dell's Purchase of Perot Systems

Yesterday morning's big corporate news was Michael Dell's computer making company buying Perot Systems. For a hefty $30/share, a hefty premium to the $17 or so Perot closed at on Friday. A price the consultant/system integrator hasn't seen in ten years!

I'm sure Dell shareholders are thanking Michael profusely for squandering their money so unwisely.

I happened to have lunch with my friend and former/sometimes business partner, B. He noted that all of Ross Perot's companies had now been purchased, i.e., EDS by HP, and Perot Systems by Dell.

I added that a third, GM, was now owned by the US government. We both laughed. For those too young to recall, GM once purchased EDS, making Ross Perot the largest single shareholder, and a gigantic thorn in the side of then-CEO Roger Smith. Eventually, they paid Ross to go away. And spun off EDS, as well.

But, back to Dell.

The nearby 5-year price chart for Dell, Perot Systems and the S&P500 Index clearly displays the folly of Michael Dell's move. For the past five years, Dell has been on a long, slow decline. My many posts discussing the firm's fall from its prime, and Michael Dell's inability to recover its lost ability to generate consistently superior total returns, provide background on this.

With a loss of 50% of its value over the past half-decade, Dell is headed toward the graveyard of Schumpeterian dynamics. There's just not that much juice left in manufacturing, selling and distributing computers the Dell way.

Compared to Dell, Perot Systems have performed spectacularly well. It's managed to remain even, and even slightly outperform the S&P over the whole period, though not consistently.

For Dell to buy Perot is essentially a bid to diversify into a different business, using spare cash. It's a classic example of the financial theory argument that investors can more cheaply diversify for themselves. At a premium exceeding 50%, that's certainly true in this case!

In fact, the nearly $4B acquisition begs the question of what Dell is doing with some $10B in liquid assets on its balance sheet while its value decays?

The Wall Street Journal opinion piece lauded Dell for diversifying. Personally, I don't see it that way. Instead, Michael Dell, like so many other CEOs, can't let go. He should just sell or merge Dell to create a larger PC manufacturer. Let his shareholders buy a pure systems integrator play, or HP, if that's what they desire.

Michael Dell is using his shareholder's money to continue having a company to run. How he is going to make Perot something it can't be on its own should worry Dell shareholders. Perot could have borrowed money, were its business opportunities sufficiently attractive. If Michael Dell better knows how to run a systems integrator than do the senior management of Perot Systems, Dell could have grown its own unit, for much less money.

Finally, as usually occurs in these situations, Dell seems to be buying the weakest of the breed of remaining systems integrators. The better ones, such as EDS, were already picked off.

There's nothing about this deal that makes sense, except prolonging Michael Dell's personal joyride running a Fortune 500 company.

Much as I suggested for Kodak's shareholders, Dell's should be bringing a lawsuit over this egregious use of their money. Or, better yet, just sell Dell immediately and take the recent loss as a lesson in being more judicious investors when the company is run by the guy it's named for, but the firm is over the hill.

Dell's Failed "Turnaround" Confirms My Prediction

Over a year ago, I wrote this post concerning a Wall Street Journal article about CEOs returning to rehabilitate the companies they founded or led to prominence.

"In Dell's and Starbuck's cases, I question if they ever will. I believe, for reasons I've discussed in labeled posts on both CEOs and their companies, that competition, growth and simple Schumpeterian dynamics have worked to end their time of consistent outperformance."

This past Friday's Journal reported on Dell's most recent quarterly results. They bear out my prediction. Profits slid 48%, so the firm is planning even more cuts.

This is what is known as a death spiral.

Sure, Michael Dell returned. He's reshuffled executives and pushed some new products. It's not working.

As I expected over a year ago, many trends are against him and his company. Frankly, it remains somewhat surprising to me that so many observers- pundits, analysts, journalists- continue to expect some sort of resurrection of Dell.

But, as my business partner reminds me, most people are sentimental. They like a good human-interest story. They enjoy the emotions accompanying a would-be come back story. Or the failure of one.

But people continue to expect businesses to live forever.

They just don't. Some die. Others should die sooner than they are allowed.

Would not Dell's shareholders have been better off with an orderly dismantling of the firm a year ago, when more value might have been realized for them? Rather than feeding the founder's ego?

Dell's Failing Turnaround

Today's Wall Street Journal featured an article about the Dell 'turnaround' in the Marketplace section.

Almost a year ago, in January, I commented on a Journal piece about returning CEOs reviving their companies. I wrote about Dell,

"Why do you suppose that these CEOs, as a group, mostly failed to move their firms to consistently superior total return performance?

In Dell's and Starbuck's cases, I question if they ever will. I believe, for reasons I've discussed in labeled posts on both CEOs and their companies, that competition, growth and simple Schumpeterian dynamics have worked to end their time of consistent outperformance."

It won't matter what sort of shuffling of deck chairs on his personal Titanic that Michael Dell does now. He can change executives, shuffle one to another post, but it won't change the business. Or customer behavior.

As this nearby, one-year price chart for Dell and the S&P500 Index clearly demonstrates, the company still struggles relative to the market.

Dell is down for the count. Nothing Michael Dell does is going to change this Schumpeterian fact.

Michael Dell Seals His Company's Fate

Yesterday's Wall Street Journal contained an article discussing Michael Dell's efforts to cut $3B from his company's expenses.

From my proprietary research on company performance, Dell has now entered a pattern that will leave it very little chance of outperforming the S&P in the foreseeable future.

The nearby, Yahoo-sourced chart displays Dell's last five years' performance, along with that of the S&P500 Index. The company hasn't outperformed the index for several years, and has underperformed significantly over the period.

My research indicates that companies which attempt to turn around from a formerly-successful, high-growth strategy have little chance of success.

Furthermore, the total return performance premium over the index shrinks dramatically from what it was in the company's better days. The result is a very minimal expected return premium from a shrinkage of the firm, followed by an attempt at a return to growth from its 'right-sized' base.

The second chart illustrates Dell's price performance since the late 1980s. It obviously roared past the S&P in its prime, but has flattened since the dot com crash of 2000. In effect, this decade has been a 'lost' one for the company.

At this late date, Michael Dell's attempts to cut his way back to superior performance is basically wrong-headed.

Sometimes, companies are just outdated, with business models which no longer merit investment.

Michael Dell would do himself and his shareholders a favor by declaring the end of the era in which his model excelled. Next, he should merge Dell with another retail tech product provider, or close it, and spare his shareholders further needless loss of their remaining capital.

Dell's Further Demise

The last time I wrote about Dell was in this post, last January. I contended in that piece,

"Why do you suppose that these CEOs, as a group, mostly failed to move their firms to consistently superior total return performance?
In Dell's and Starbuck's cases, I question if they ever will. I believe, for reasons I've discussed in labeled posts on both CEOs and their companies, that competition, growth and simple Schumpeterian dynamics have worked to end their time of consistent outperformance."

Over a year ago, in April of 2007, I wrote this post, in which I opined,

"Finally, someone there said something with which I can strongly identify. Not that I ever expected it from staffers at firm, founded by Jim Cramer. But one of their number spoke truth to power last week on CNBC, boldly contending, about Dell's recent malaise and accounting troubles,

'who cares? it's an old tech has been,' or words to that effect.

When the CNBC on-air anchor/interviewer sputtered unbelievingly, and stated that many people have a lot of money in Dell, and it's a big company, the Street guy retorted something like,

'so is Xerox. How big is its market cap? Does anyone think it is a leading tech firm anymore?'

Very well put. Big does by no means equal important. Often, it simply means 'still bloated and primed to collapse like a souffle' when sufficient technological change finally sweeps away the last of its ancient underpinnings. Like Kodak. A victim of corporate senescence. Its best days of profitable growth are in the rear view mirror. Consistently superior returns, if they ever happened at Kodak, are a thing long past."

According to today's Wall Street Journal article about the aging PC maker,

"Dell, Inc. reported a 17% drop in quarterly profit, raising questions about the company's 18-month turnaround effort and whether a slowdown in business spending is spreading to Europe and Asia."

I'd say Dell's latest quarterly results answer questions, rather than raise them. Specifically, they confirm that Dell, while still producing laptops and desktops, will probably never regain its prior record of consistently superior total returns for its shareholders.

Dell had to spend heavily to raise its revenues 11% in the last quarter. In effect, whatever goodwill and consumer franchise it once had that enabled it to enjoy higher margins is gone.

The nearby Yahoo-sourced price chart of Dell and the S&P500 Index for the past two years shows that the computer vendor only outperformed the index for the past four months.

For an investor, that means you have been taken for a mostly loss-ridden ride over two years, unless you happened to time your entry- and maybe exit- just right.

This isn't a resurgent performance. It's a technical bounce for a few months.

The fact that most of Dell's initiatives now involve cost-cutting is a pretty good sign that its days of profitable growth are past.

As I've written about this once-great computer maker before, it just isn't going to be coming back as an equity to own. It will make computers, and sell them. But as an investor, you are unlikely to be able to enjoy consistently superior returns from simply holding Dell anymore.

Whither Mark Hurd's HP?

Mark Hurd became CEO of HP just over three years ago, In that time, he has undeniably improved the operating performance of the firm, as well as its total returns.

When he took over HP, Hurd had to finish making sense of the mess left by Carly Fiorina's acquisition of Compaq. The logical comparison for the firm at the time was Dell, the major direct PC seller.

After running somewhat similarly on a total return basis since 2003, Hurd's arrival at HP coincided with, if it didn't actually affect, Dell's steady negative total return performance for most of the years since. On that comparative basis, HP has clearly pulled ahead of its major PC manufacturing competitor.

Now, Hurd is buying EDS. Allegedly, he is fashioning HP into a firm capable of going after the likes of IBM and Accenture.

The trouble is, in my view, what the performance of IBM and EDS already appear to be. The nearby, Yahoo-sourced five-year price performance chart of HP, Accenture, IBM, EDS, Dell and the S&P500 Index tells a very revealing story.

Over five years, IBM's stock price is just even with the S&P, while EDS has been flat, while Dell has lost ground. So, from a performance standpoint, Mark Hurd has already done a better job for his investors than has IBM for its shareholders. And Hurd has clearly outperformed the still-struggling Dell.

HP has even outperformed Accenture (in the interest of full disclosure, a firm for which I once worked, when it was still Andersen Consulting) over the past five years, and since Hurd assumed command of HP.

So my question is,

"What does Mark Hurd intend for the EDS acquisition to do for HP shareholders?"

He's already outperforming current and future comparable firms- Dell, IBM and Accenture. And he's planning to acquire a firm whose own total return performance has been dismal.

From a Schumpeterian dynamics view, HP is bound, at some point, to meet, rather than exceed, investor expectations, and see its total returns flatten out. It might even be that this would occur within a few years.

The question is, will it have a better chance continuing to focus on excellence in its major businesses, which now feature personal computers, or does it need to risk diluting its focus by building up/entering the IT consulting services business?

In terms of competitive position, HP would seem to be at least temporarily advantaged in its current businesses. Consumer computing and the evolution thereof is going to continue to make the market leader serious money going forward. Whether the PC and laptop morph into new devices, or just get more involved, better, etc., HP could still seek to dominate this market.

By buying EDS and turning HP's attention to the business of cutthroat, big-contract consulting services, Hurd may well stumble into a hornet's nest of unrealized difficulty.

I don't know for certain, of course. But few business expansions of this type work out as well as the architects hope.

Mark Hurd has done a tremendous job truly 'turning around' HP after Carly Fiorina. He's brought it to a fine edge of dominance in its product markets, and in terms of shareholder return.

My proprietary research has shown that, on average, a company can outperform the S&P500 consistently for less than a decade. Things happen that eventually hinder its consistent, ongoing excellent total return performance- limits to growth, competition, regulation, or simply investor expectations catching up with the reality of the firm's performance.

The nearby 30+ year view of these same companies' equity price performances demonstrates, perhaps surprisingly, that Dell is actually still the best performer, despite flattening out for most of this decade. IBM and EDS, both around for decades, and the former, for more than the last decade, heavily into computer services and consulting, have nearly identical pre-dividend returns, slightly below the S&P.

Even allow for the maturity of the PC industry, I can't help but look at Dell's long term performance and wonder if HP's Hurd isn't unwisely taking his eye off of the more attractive segment, and potentially committing HP to a grueling, ugly slugging match in a business where differentiation is difficult, customers can be troublesome, and engagement costs can run amok.

Then there will be the internal management attention drawn away from the now-dominant PC business. And probably issues of succession as EDS takes on more importance in HP's fortunes going forward.

Mark Hurd has distinguished himself both at HP and with his former employer. His acquisition of EDS probably marks the largest risk he will have taken. Perhaps within a few years we'll see whether it has cost HP any ground in its consumer computer business, and whether Hurd has been able to prove the exception to Schumpeterian forces in business.

Bill Gates' Stupid New Charity Idea

Bill Gates made big news this week with his charity pitch at the Davos World Economic Summit. Called 'kinder capitalism,' Bill wants his corporate friends to assign their best minds to charity projects, and to donate some of their net income, as well.

Give me a break!

There's Bill, looking appropriately nerdy, sitting with Michael Dell and.....Bono!

Now we get it!

Here's the five-year price chart for Bill's company, Microsoft, Dell, and the S&P500 Index.

Notice how neither Bill nor Michael have managed to do for their shareholders in the past five years what a cheap, passive S&P500 Index fund could have done?

Dell ends up flat- his shareholders basically finished dead even over five years. Bill returned 1/3 less to his shareholders than the index- and most of that occurred in just the past six months.

Gates has it all wrong. But, hey, if it gets you face time with a real rock star, who cares how you treat your shareholders? And looking at Gates and Dell, you can just see these guys as the nerdy college-age kids they were, busily building businesses in their dorm room or buying MS-DOS on the cheap from the original owner/developer, rather than develop normal social networks.

According to the plan, companies assign bright personnel to figure out what they can do to alleviate some global poverty ill, and levy a mandatory tax on their shareholders out of net income with a donation.

Bono had a great big, silly grin while telling CNBC viewers,

'You don't have to donate anything. You buy these guys' products, and make them donate.'

Well, uh, not quite Bono. Make that,

'..and make their shareholders donate, whether they want to, or not.'

Here's another idea, Bill. How's about you and Michael Dell learn how to outperform the market again. Then, ask shareholders if they will vote, individually, for their shares, to donate a portion of any dividend you pay, out of equity gains above those of the S&P, to the charity you choose?

That way, you have an incentive to actually do your job. And Mike, too, for that matter.

Honestly, if this wasn't so pathetic, it'd be funny. Gates makes his billions, and people still don't like him.

So he establishes a foundation, perhaps in hopes that this will make people like him. Then he suddenly gets religion, like Ebenezer Scrooge, and declares that now he'll be a kind and nice guy.

Perhaps Gates has it backwards. Allowing for his last five years of drought in performing for his shareholders, Gates at least once was good at making money from software. What if Bill concentrated on using his unique talents for that, and using some of the excess profits to do good.

Anyone can give (someone else's) money away. Or exhort others to do so. It seems to me that corporations should focus on enriching their shareholders, preferably in a consistently superior manner, and let the shareholders decide whether or not to support charities.

Gates' idea would sound a lot better had he discovered it when he was leading Microsoft to consistently superior total returns. Now, he just looks desperate to get attention and hang with the Davos "in" crowd.

Not content to merely underperform for his shareholders, now he wants to take their profits, too, so he can be popular with the international set.

Meg Whitman's Decade At eBay

eBay's CEO Meg Whitman announced her retirement this week, effective later in the year.

How good a job did she do in her decade of leadership at the online auction house?

From the nearby Yahoo-sourced chart stretching back to 1999, pretty well, it would appear.

The slope of the blue curve depicting eBay's stock price easily has outstripped the S&P500. More than that, however, it also handily outperformed those of Dell, Microsoft and Yahoo.

Yes, Meg Whitman did a very capable job creating superior amounts of shareholder wealth over more than half of her tenure.

But this chart shows something else, too. I think it provides a snapshot of the reality of Schumpeterian dynamics.

First, look how eBay flattened almost exactly when Google took off as a public offering. eBay has not outperformed the market for the past three years. Google has taken off like a rocket.

But look more closely down near the S&P500's price curve. Yahoo had a brief, sharp rise in value creation from 1999-2001, then crumpled. It ended the time period about even with the S&P.

Microsoft and Dell actually fell below the S&P500, since 1999, in terms of stock price growth.

To me, this picture documents the natural comings and goings of technology companies. Microsoft was a giant in an earlier era, but declined as other computer-related and -based product categories became more important.

Dell led box manufacturing and distribution for a time. But it, too, fell behind as the source of technology-based shareholder value creation.

Instead, the source moved onto the web, driving Yahoo, the internet's first general-purpose information provider.

But, as I've written in many posts (see label 'Yahoo') concerning the firm, it was a mile wide and an inch deep, with no driving central objective.

While eBay was not a direct competitor, per se, the auction site tapped into a new, advanced form of value creation while Yahoo's became less unique.

Finally, as eBay's business model began to reach saturation, Google's search engine model ramped up and, through judicious inclusion of online advertising, shot up above all the one-time technology stars from a shareholder value creation perspective.

Seen in this tableaux, it's much easier to understand why I don't ever expect the older technology names to regain their prior abilities to consistently outperform the market.

Even Meg Whitman, capable as she was at eBay, only managed that feat for a few years.

Of course, the most interesting question isn't what Whitman's replacement will do for eBay- he's actually been dealt a fairly weak hand.

No, it's what and who might wrest technological sizzle, excitement and shareholder value creation capability from the search-ad-tied in online product space now dominated by Google.

Returning CEOs: Buying Opportunity, or More Trouble?

Herb Greenberg wrote a fascinating piece in the weekend Wall Street Journal entitled "Why Investors Should Applaud A CEO's Encore Performance."

Drawing on the work of an Ohio State University assistant professor of finance named Rudi Fahlenbrach, Greenberg wrote

"Here is some good news for Howard Schultz and Michael Dell, both of whom have boomeranged back to become chief executives of their respective companies, Starbucks and Dell: History is on their side. It is for their investors, too.

This doesn't guarantee a happy ending, but a study of encore performances led by Rudi Fahlenbrach, an assistant finance professor at Ohio State University, shows that, on average, the stocks of companies run by CEOs on a second tour of duty outperform the market by 6% annually during their comebacks."

I like Herb Greenberg's work and am typically interested in his opinions. So when I read these opening paragraphs to his article, I took notice. My own proprietary research, while not confined to turnarounds involving returning CEOs, found them to be rarely profitable for shareholders. So I was, and am, very interested in Greenberg's and Fahlenbrach's views on this. Greenberg further wrote,

"According to Mr. Fahlenbrach, from 1995 through 2004 at least 75 CEOs at the country's 1,500 largest companies were called back to active duty from either retirement (especially if they still have a large financial stake in the company) or having been relegated to the chairman's outpost.

"One of the most significant predictors of someone coming back is poor stock-market performance of the current CEO," he said.

On average, before the ex-CEO gets the call, the stock has fallen 40% over two years. Starbucks -- a broken stock, not yet a broken brand -- had skidded by a greater amount in a shorter amount of time. Ditto for Dell. When that happens, Mr. Fahlenbrach said, "They're in need of a quick turnaround."

Not that all former bosses are better than their successors. Notable failures the second time around include Gateway's Ted Waitt, Lucent's Henry Schacht and Xerox's Paul Allaire. And don't forget the late Ken Lay, whose return as CEO of Enron coincided with the final stages of the company's downfall."

Greenberg quotes Jeff Sonnenfeld of Yale, who speaks highly of Houghton, thusly,

"Mr. Sonnenfeld says those who succeed in coming back have three qualities. The first is they came back with great reluctance; they weren't trying to undermine their successor. Second is they aren't coming back for some unmet ego need. Many had better things to do with their time, and came back "because they were being drafted by all of their key constituencies -- because of relationships, knowledge and a cultural aura they can do things nobody else can do to fix the problem." Third, and perhaps most important, he said, is "they recognize what they had built isn't a religion. At Corning, Mr. Houghton had to revisit all kinds of decisions he may have been part of making." "

Stepping back, Greenberg lists Jamie Houghton of Corning, Michael Dell of Dell, Howard Schultz of Starbucks, William Stavropoulos of Dow Chemical, and Chuck Schwab of Schwab among those who either have been successful at returning to turn their old company around, or are expected to do so.

Let's have a closer look at these, dispensing with those even Greenberg cited as ineffective- Schacht of Lucent, Waitt of Gateway, and Allaire of Xerox.

Nearby is a long term price chart for Dell, Starbucks, Corning (GLW), and Dow Chemical. Have any of them returned to a consistent path of outperformance of the S&P? Because the 6% per annum mentioned by Fahlenbrach wouldn't be all that spectacular if it only lasts one or two, perhaps even three years.

It's easy to see Dell's slide and Starbucks slowly running out of gas before failing in 2006. Of course, Schultz didn't actually leave the company, just the CEO position. I think Michael Dell was further removed and out of Dell when it finally began to actually decline.

According to Greenberg's piece, Houghton and Stavropoulos returned to their respective firms in 2002, the former for three years, the latter for two.

I can't honestly see a difference in Dow from 2000 until now. Corning fell after Houghton returned, and seems to have only clawed back to even by the time he left. Since then, it's climbed a bit, but has only matched the S&P for the past two years.

This next chart displays recent price activity more clearly. Corning is definitely still wandering aimlessly since early 2006. That's a two-year stint of inferior performance. So much for Sonnenfeld's admiration for Houghton. In fact, if he left in 2005, it seems that things actually took off, briefly, for a year after his departure, before running out of steam again.

Dow, too, clearly has not been giving shareholders consistently superior returns, either, since 2004.

How about Chuck Schwab? He returned in mid-2004, making him CEO for the past 3 1/2 years. The nearby chart seems to show he's done better than the other examples in Greenberg's article.

Even so, he has yet to get Schwab back to consistent outperformance. But he may be close. If he can continue the firm's total return performance path in 2008, he'll have done it. And it looks as if he is the only one of those mentioned by Greenberg and Fahlenbrach who actually has done so.

Why do you suppose that Fahlenbrach, and Greenberg, are so enamored of a few short-run CEO return successes, and a few who didn't even manage that?

Personally, I think it demonstrates how low most analysts and observers set the bar for 'excellent' performance. To paraphrase Fahlenbrach and, by inference, Greenberg, a two or three years of besting the S&P by only 6 percentage points draws notice.

My own research shows this is actually well within the range of pretty average performance. Many companies can do that, and don't need to be turning around while they do it.

Why do you suppose that these CEOs, as a group, mostly failed to move their firms to consistently superior total return performance?

In Dell's and Starbuck's cases, I question if they ever will. I believe, for reasons I've discussed in labeled posts on both CEOs and their companies, that competition, growth and simple Schumpeterian dynamics have worked to end their time of consistent outperformance.

Dow and Corning represent, I think, business models which have been uneven at best for a long time. They don't tend to have even been consistently superior growth firms to begin with. Given their stock price paths, it's clear that holding the S&P instead of ever holding the those companies' shares would have been a safer and more profitable choice for over twenty-five years.

In the final analysis, while I enjoyed reading Herb Greenberg's piece on Fahlenbrach's work, I found the conclusions to be largely unsustained. I guess my expectations of outstanding CEO and investment performance are higher than those of either of those two guys.

HP's Resurgence: The Details

Today's Wall Street Journal features an article purporting to describe, in detail, the reasons for H-P's resurgence under Mark Hurd. According to the piece, it all comes down to Hurd's first new hire, Todd Bradley, late of Palm.

What Mr. Bradley did, upon arriving at H-P, was essentially three basic things:

-reviewed consumer purchase behavior research

-concommitantly focused H-P's PC marketing on retailers

-identified, tackled and solved various operational issues involving distribution to said retailers>

What ought to concern any reader, and does me, is that none of what Mr. Bradley did was all that unusual. As I wrote about Burberry's recent CEO change here, so often, the solutions are not all that novel.

Why is it so hard to find people who can do the mundane and obvious? Where was H-P's board all the while when Carly Fiorina bumbled this one, via her 'management team,' such as it was? Why wasn't that board grilling Carly & Co. as to the reasons for whatever PC strategy they had, and why it wasn't working?

As I look at Mr. Bradley's actions, they are classically excellent. Clearly, this guy is worth whatever they pay him, as is Hurd, for finding him. But why did it take just Bradley? Why wasn't there some underling in the marketing or product management ranks at H-P who has or had sufficient talent to do this?

Let's review Mr. Bradley's program for rescuing the PC business.

First, he went to the data. He learned that Dell was weak in retail.... duh! That most consumers were now moving to buy laptops and notebooks and, consequently, wanted to see, touch and feel them, then walk out of the store with them. As I wrote here last fall, one benefit of selling notebook computers is that there isn't a whole lot to customize, so a vendor can realistically cover several price points at retail, without the time and expense of custom building the products for each order.

Next, Mr. Bradley focused on channel management issues. He improved communications and service to his downstream partners, listened to their problems and ideas, forged stronger relationships with them. Now he was in a leadership position in the channel of choice for notebooks and laptops.

Finally, he went about hunting down and fixing the various logistical stumbling blocks inside H-P that threatened the successful execution of the retail strategy. Through painstaking homework to identify bottlenecks, hold frequent meetings and establish performance metrics, he brought the logistical performance up to grade, and completed the overhaul of the unit's product and marketing strategy.

What about any of this was magic? Bradley did not apparently bring a team with him, or, if he did, the article omitted this. He simply used basic, traditional marketing strategy and tactics, common sense, and good management skills.

Are these so lacking in most American businesses, and H-P, as to require an infusion of this type of skill from another company?

Honestly, I think this speaks very poorly for the continuing state of American management education, the MBA as a useful degree, and middle-to-upper management in the average large US corporation.

H-P prior to Hurd seems to have simply been allowed to become mediocre. Even the board seemed to take a long time to show Fiorina the door and usher in a more competent CEO, Mark Hurd.

How many more US corporations underperform, consistently underperform the S&P500 total return, due simply to inept management of decent products in attractive markets?

Business Media & Schumpeterian Dynamics

Today's "Financial Insight" column on the back page of the Wall Street Journal's Money & Investing section discussed Dell's recent foray back into retail, via Wal-Mart.

Essentially, the computer maker has deigned to sell some desktop units through the giant discount chain. Notably absent, however, are its notebook products. I wrote this post last fall, discussing how mistaken I believe Dell's strategy is in this respect.

At the end of the short piece, the authors wrote,

Dell has tried this strategy before, and it failed. In 1993, it began selling PCs at Sam's Clubs, a division of Wal-Mart. One year later, it pulled out. The reason: "This is a no- or low-return business," said Michael Dell. "We like to be in businesses where we can make money, and we know how to do that in the direct business. He must be hoping history doesn't repeat itself"

Guys, it never does.

What puzzles me is why much ink is even spent on this sort of Dell action anymore. History assuredly won't 'repeat' itself, in the larger sense, in that Dell is history. Its phenomenal total return and sales growth run is history. It has become just another datapoint sustaining Joseph Schumpeter's keen observations, early in the last century, on the nature of the rise and fall of businesses in a technologically-based, fast-moving capitalistic economy.

Home Depot is essentially the same. It, too, is now a market-saturating, mature company. The salad days of rapid, profitable growth and consistently-superior total returns are over.

Why can't the people in the business media see this? Companies are born, some develop strongly, they mature, then they age and go gently into that good night.

From an industrial structure point of view, aging sectors tend to consolidate, in order to preserve some vestiges of profit margin, amidst slowing or declining sales volumes and revenues. Very rarely, if ever, do leaders in a non-cyclical sector rise again, without drastically changing their business focus.

Dell and Home Depot are now, hopefully, just interesting, Schumpeterian footnotes in business history. I wish I could write that we won't hear a lot about them anymore, but that's probably not true. Because business writers and reporters don't seem to know all that much about business theory and reality over time. At bottom, business "news" and reporting seems to be more about entertainment than providing useful insights and information.

Michael Dell's New Thoughts On Direct Sales

The New York Times' writer Damon Darlin wrote a piece on Saturday discussing a recent memo from Michael Dell to his employees. It appears that I called it right last September, in this post, when I bought a laptop from a competitor, HP, at a Staples store, and wrote about why I had checked Dell first, and declined to buy one of their machines. My sense then was that Dell had missed a sea change in computer purchasing among many consumers. Dell's memo, as related in Darlin's piece, supports this.

Mr. Darlin wrote, in part,


Michael S. Dell, the chairman and chief executive of Dell, who built his business by selling direct to his customers, is now thinking about changing the way the company markets its computers.
“The direct model has been a revolution, but it is not a religion,” Mr. Dell wrote in a memorandum sent on Wednesday to 80,000 Dell employees.

It is the first time that Mr. Dell or any other senior executive has publicly conceded that the business model that was crucial to the company’s success could — and should — be altered. Until now, the company responded with an adamant no when Wall Street analysts or customers asked whether the company would consider other ways of selling.

While Mr. Dell’s memo was short on specifics, he also told employees, “We will continue to improve our business model, and go beyond it, to give our customers what they need.”

“We know our competitors drive complexity and needless cost into customers’ environments,” he wrote. He said their “so-called service divisions” create a never-ending buying cycle with no clear return on investment.

“We intend to break this cycle,” he wrote.

I'm not so sure about Dell's last comment. I have yet to call H-P regarding the laptop we bought. It's performed flawlessly. Frankly, I've had far more trouble from my Dell desktop over the years I've owned it.

However, the important point is that, as is typical, it takes the original leader of a cult to allow for directional change. The acolytes, like the Dell employee who commented on that September post of mine, tend to simply, mindlessly, follow and believe the original, received wisdom of the founder.

Whether any of this will return Dell to its years of consistently superior total return performance is open to question. Based upon my analysis of technology-based companies, it's unlikely Dell will repeat its prior return performance, unless it somehow morphs, like Apple, into a much different product purveyor.

If all Dell does is ally itself with one or more retailers, or opens its own outlets, I doubt that will affect its ability to achieve consistently superior total returns. It might raise revenues, but it's still in a commodity products game. And that doesn't look to change any time soon, with or without Michael Dell.

The Street.Com On Dell: 'Who Cares?'

I admit, it's not something I ever thought I'd be doing. But I have to write a post to compliment The Street.com.

Finally, someone there said something with which I can strongly identify. Not that I ever expected it from staffers at firm, founded by Jim Cramer. But one of their number spoke truth to power last week on CNBC, boldly contending, about Dell's recent malaise and accounting troubles,

'who cares? it's an old tech has been,' or words to that effect.

When the CNBC on-air anchor/interviewer sputtered unbelievingly, and stated that many people have a lot of money in Dell, and it's a big company, the Street guy retorted something like,

'so is Xerox. How big is its market cap? Does anyone think it is a leading tech firm anymore?'

Very well put. Big does by no means equal important. Often, it simply means 'still bloated and primed to collapse like a souffle' when sufficient technological change finally sweeps away the last of its ancient underpinnings. Like Kodak. A victim of corporate senescence. Its best days of profitable growth are in the rear view mirror. Consistently superior returns, if they ever happened at Kodak, are a thing long past.

This is yet another example of Schumpeterian dynamics in action. Dell's model went out of fashion some years ago. The guy from the Street echoed my own analysis, noting that Dell hasn't been an outperformer in many years- nearly a decade. It's not just 'having a few bad years.' It's history, as an outperforming company. So are Xerox, Kodak, IBM, and Microsoft. Their earlier technological breakthroughs are now parts of the fabric of our current world, and no longer offer the potential for consistently profitable growth that distinguishes a consistently superior company in terms of total returns.

The truth is, companies, like athletes, slow with age, then die. Aging may be prolonged. Death may come by acquisition, dissolution, or bankruptcy. But it inevitably comes. In the meantime, watching some companies is like going to a baseball game and seeing the 'oldtimers' play between halves of a doubleheader. I guess somebody has to be CEO of Kodak, IBM and Xerox, but does anyone really care anymore? Personally, I can no longer name those people off the top of my head, as I can with Google.

The guy from The Street.com has it right. These firms may once have been fast-growing, leading tech icons. But now, they are just old, large, slow tech has-beens.

Warren Buffett Seconds My Views on Dell, et. al.

Yesterday, I wrote about Michael Dell's return to lead the company he founded, and the likelihood that he will return it to consistently superior total return performance.

I wrote,

"Both H-P and Dell are, for the most part, engaged in the production and marketing of commodity electronic products- desktop and laptop computers, and printers. These types of firms haven't been on my equity strategy's selection lists since 1998. In the interim, the market for consumer computers has evolved to the point that most buyers can select and take home a perfectly adequate machine from a store at any one of as many as four chains (e.g., BestBuy, CircuitCity, Staples, Costco), with competitive pricing pressure providing similar values across the vendors and products.

In such a market, can we really expect either vendor, H-P or Dell, to somehow add sufficient extra value, and be paid for it, to drive its performance to a level of consistently superior total returns over several years? We're talking about producing some of the most common, nearly-disposable electronic devices you can imagine- personal computers and printers.

The competitive environment for its products, and the behavior of its target consumers, have changed to the extent that I don't think the product/market positioning of the firm will sustain consistently superior total return performance anymore.

Instead, the action seems to have moved on to online information and advertising purveyors- notable Google. This is not really a surprise. Over the years, consistent superiority of performance among technology firms has moved up the "food chain," from Intel and Microsoft, to the box makers, then the specialty applications software firms, to the online access and content providers. Now, it's moved beyond the last group, to simply providing tools to find information.

Although Michael Dell may return his firm to profitability and some revenue growth, relative to recent years, I don't think Dell has much potential to reward shareholders anymore."

Today, my partner emailed me a piece containing excerpts from Warren Buffett's annual shareholder letter. It would seem he and I share the viewpoint which I expressed above.

Here is, in part, what Buffett wrote:

"Not all of our businesses are destined to increase profits. When an industry's underlying economics are crumbling, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance. (As a wise friend told me long ago, "If you want to get a reputation as a good businessman, be sure to get into a good business.") And fundamentals are definitely eroding in the newspaper industry, a trend that has caused the profits of our Buffalo News to decline. The skid will almost certainly continue.

Now, however, almost all newspaper owners realize that they are constantly losing ground in the battle for eyeballs. Simply put, if cable and satellite broadcasting, as well as the internet, had come along first, newspapers as we know them probably would never have existed."

In this post, last November, I discussed the odds that Maurice Greenberg or Jack Welch can turn around the daily newspapers they are interested in buying and running. Again, Buffett has come to the same conclusion I did, by writing,

"For a local resident, ownership of a city's paper, like ownership of a sports team, still produces instant prominence. With it typically comes power and influence. These are ruboffs that appeal to many people with money. Beyond that, civic-minded, wealthy individuals may feel that local ownership will serve their community well. That's why Peter Kiewit bought the Omaha paper more than 40 years ago.

We are likely therefore to see non-economic individual buyers of newspapers emerge, just as we have seen such buyers acquire major sports franchises. Aspiring press lords should be careful, however: There's no rule that says a newspaper's revenues can't fall below its expenses and that losses can't mushroom. Fixed costs are high in the newspaper business, and that's bad news when unit volume heads south. As the importance of newspapers diminishes, moreover, the "psychic value" of possessing one will wane, whereas owning a sports franchise will likely retain its cachet."

It's nice to be in the philosophical and intuitive company of someone so well-regarded as Warren Buffett.

Dell's Attempt To Regain Past Glory

Last Thursday's Wall Street Journal contained an article detailing the many recent senior level management changes at Dell Computer. I won't go into all the details. Suffice to say, the article presented the situation as one in which Michael Dell has returned to the computer maker which he founded, and is evidently leaving no organizational or personnel stone unturned, in his determination to revive the firm's fortune.

Instead, I'd like to focus on a more strategic view of the Dell situation. For starters, consider the Yahoo-sourced price chart above, comparing Dell, H-P and the S&P500 for the past five years (please click on the chart to see a larger version). While H-P has outperformed both Dell and the index, it was effectively flat from early 2003 until mid-2005, or two and a half years. Dell, too, was flat for most of 2005, until it began its recent decline. Neither has been particularly consistently superior to the index over much of the five year period.

Both H-P and Dell are, for the most part, engaged in the production and marketing of commodity electronic products- desktop and laptop computers, and printers. These types of firms haven't been on my equity strategy's selection lists since 1998. In the interim, the market for consumer computers has evolved to the point that most buyers can select and take home a perfectly adequate machine from a store at any one of as many as four chains (e.g., BestBuy, CircuitCity, Staples, Costco), with competitive pricing pressure providing similar values across the vendors and products.

In such a market, can we really expect either vendor, H-P or Dell, to somehow add sufficient extra value, and be paid for it, to drive its performance to a level of consistently superior total returns over several years? We're talking about producing some of the most common, nearly-disposable electronic devices you can imagine- personal computers and printers.

If price- and feature-based competition is so fierce, one would expect the performance differences among the firms to be in market segment growth or penetration. Here, Dell is notably scarce on dealer shelves, in a market in which buyers no longer seem content to wait for a 'custom' machine. So I don't really expect Dell to be returning to its past glory of nearly a decade ago. The competitive environment for its products, and the behavior of its target consumers, have changed to the extent that I don't think the product/market positioning of the firm will sustain consistently superior total return performance anymore.

Instead, the action seems to have moved on to online information and advertising purveyors- notable Google. This is not really a surprise. Over the years, consistent superiority of performance among technology firms has moved up the "food chain," from Intel and Microsoft, to the box makers, then the specialty applications software firms, to the online access and content providers. Now, it's moved beyond the last group, to simply providing tools to find information.

Although Michael Dell may return his firm to profitability and some revenue growth, relative to recent years, I don't think Dell has much potential to reward shareholders anymore.

Michael Dell's Return as CEO

I would be remiss if I did not remark on this past week's news concerning Michael Dell.

Dell fired Kevin Rollins, Michael Dell's replacement as CEO, and announced the return of its namesake founder.

Of course, the business media was awash in stories concerning whether Michael Dell is the right CEO for Dell, whether he can turn the company around, etc.

Frequent readers of this blog will not be surprised by my own opinion on this matter. In the many prior posts I have written (search on the word "Dell" to see some of them) about this company, I have expressed my belief that the firm's business model's best days are behind it.

Today's Wall Street Journal carries a piece in the Marketplace section, on page B4, by Joann Lublin & Erin White. Under the "Theory&Practice" column, they discuss Dell's return from the perspective of other founders returning to rescue their floundering companies.

Frankly, I find the piece to be of no value. Whether a lot of founders are returning to their companies or not, the high-profile cases are very few in number, and, thus, statistically meaningless.

My own opinion is that it's better to look at the type of product or service involved, rather than the class of phenomenon, i.e., "returning founders and their successes."

Consider, for example, Ted Waitt, of Gateway, Mark Eppley, of LapLink, and Charles Schwab, of the company that bears his name.

Waitt's company shares the same product space with Michael Dell's, and has had a similar fate. Perhaps more cataclysmic, and earlier, due to the differing sales models, but, still, it's clear the era of expensive, custom-build PCs delivering consistently superior total returns is behind us. In their prime, I owned both Gateway and Dell in my portfolio, so successful was each. But that was more than seven years ago now.

Eppley's product has been eclipsed by technology. Period. Who would even bother with a dedicated PC-to-PC cabled product anymore? I'm no expert, and even I plumped for a wireless network in my home last year. So Laplink's bankruptcy filing, as of 2003, did not surprise me.

Schwab's case is different, due to its being in the discount brokerage space. It was firmly glued to the rise, and subsequent fall, of market-bubble day-trading volumes by retail "investors" in the late '90s. True, Schwab has apparently refocused his firm on discount trading. However, as a customer, I have been the target of unwanted 'wealth management' advice which, honestly, I do not find credible, coming from Schwab. Looking at a price chart for Schwab and the S&P500, I can't help noticing that, once again, Schwab's total return performance is tied to market volumes and bull markets. Maybe "Chuck" has turned the firm around, secularly, maybe not. I don't think one could tell in the midst of this rising market.

But, back to Michael Dell. As wonderful and focused as his points were, in the leaked memo which was described in today's Journal, I don't think he'll make much of a difference in terms of returning his firm to consistently superior total returns.

Consider this. If it only takes one person to fix Dell, then how stable is the whole firm? How attractive and reliable should investors consider a firm which rises or falls on just one person, the CEO. And only the founder as CEO?

If, on the other hand, the fault lies with the markets and the business model, and not just the CEO, then what magic does Michael Dell possess that Kevin Rollins did not? Is it just personal magnetism, and pride in the company name? I think Michael Dell is a gifted and effective business leader. He absolutely earned his sizable fortune through smart business management and hard work. He may restore profit margins for Dell, and maybe some revenue growth, as well. However, the salad days of the product/market are simply gone.

As I wrote in this September 4th post last year, after shopping for a new laptop for my daughters, Dell simply missed the changes in consumer behavior with respect to requiring customization, hand-holding, and resisting instant gratification in the form of leaving a store with a PC or laptop that day.

So, while I personally wish Michael Dell success in his attempt to fix what's wrong with his company, I doubt his chances, and I don't think that, even if he enjoys some success, it will do much for long term consistent superior total returns for his shareholders.