When a publicly traded company announces that it is exploring “strategic alternatives” for a part of its business, something has gone terribly wrong. In the short-term, it signals a failed strategy; more importantly, it is an indicator of a company with a lack of a good long-term strategy and management discipline. There’s nothing more destructive to shareholder value than a pattern of corporate restructurings, mergers, divestitures, and other “strategic alternative” type transactions. They usually fail to deliver what they promise, cost the company tons of cash and lost focus, and generally result in a big waste of time.
HP got trounced last week when it announced it was exploring strategic alternatives for its PC business, shutting down tablet/phones, and overpaying for a software company. Huh? They just bought Palm a year ago and made the blockbuster Compaq deal less than 5 years ago (they also dub the Autonomy deal as “transformative”). HP spent billions on these deals, incurred huge transaction and restructuring costs only to completely unwind them years later. What was the point all this nonesense? HP shares are trading now below what they were prior to Compaq; wouldn’t shareholders have been better off with cash dividends or stock buybacks rather than years of poor M&A and divestitures? And think about all of the employee mindshare lost and customer confusion created during the decade long period of uncertainty. Dell is licking their chops right now.
Companies try to get bigger for many reasons and use many business school terms to justify it. Phillip Morris and PepsiCo did so to diversify away from their core businesses. What happened years later? Phillip Morris spun out its food business resulting in a standalone a cigarette company. PepsiCo sold its restaurant business and is under fire from shareholders to spin off many of its non-core assets. More recently, Kraft announced it will split into two companies only months after it completed the Cadbury deal. I thought bigger was better? And think about it, can Phillip Morris ever diversify enough from being a cigarette company?
Slow changing companies that seek growth around the trenches of its core generally are more sound for the long-term as they effectively look at the business beyond fiscal quarters. Exxon, for years, has caught flack by analysts to invest in high-growth renewable energy and alternative sources; its response has always been: We’re an oil and gas company, not a solar research company. P&G has always stayed in the consumer staple business, only making acquisitions as product or geographic extensions. They’ve rewarded shareholders well in the long-term; and further, they’ve created a culture of stability and a focused long-term vision along the way.
Besides the advisors, corporate executives and others that stand to gain from large scale corporate transactions, there is often very little value created besides a week of headlines. When companies listen to Wall Street more than its customers and employees, it usually leads to myopic thinking and superfluous deals. Sometimes the best policy is to do nothing and focus on your core business. So when a CEO wants to be transformative, he or she is basically telling you that they have no confidence in what they are doing and betting the farm on something they are even less certain about.