Ten Companies That Will Never Recover From Their Mistakes – 24/7 Wall St.

Most companies that fail over time do so because of a series of modest mistakes made by generations of management. Markets shift and corporations are slow to adapt. Strategic acquisitions, which could change a company’s future for the better, are ignored or passed up. And, perhaps most common of all, a company begins to decline because it loses the creative spark of its founder or the input of employees that are the company’s creative engine.

The firms on the 24/7 Wall St. list of companies that will never recover from their mistakes are all still in business.  Each firm was a leader in its industry, if not the leader, but made a critical error or errors that destroyed their chance to have a brighter future.

For want of a nail, the kingdom was lost.

Motorola did not produce a product that leveraged the huge success of its RAZR handset, a product that propelled the company to the No.2 position among cellphone manufacturers worldwide. Boston Scientific decided that it was not enough to be a large and highly successful company. Instead, it bought another company to be even larger. Blockbuster believed that video rental stores would remain the dominant way to distribute DVDs. It did not see that the DVD industry was faltering.

It is easy to say that good management never makes disastrous strategic errors. But, the results of good management may be, in part, a product of luck. GM’s prospects fell apart while rivals VW and Toyota did well. Did GM fail to see something on the horizon that its rivals did? Or was GM unlucky because its home base was the US where the labor movement was powerful and heavy cars with large engines sold well?

There are ten companies on this list. The fortunes of each have been badly damaged. Whatever the reason, what each lost is irretrievable.

1. Motorola

The handset company sold 50 million of its Razr handsets in two years and 110 million over four years. The company shipped 12 million units in the third quarter of 2005 alone. The success of the Razr made Motorola the No.2 handset company in the world in the second half of 2006, behind perpetual leader Nokia.

Motorola failed to use its huge advantage in the early days of higher end handsets to become one of the leaders in the emerging smartphone business, which is now dominated by Apple and Research In Motion. Today, it must also compete against larger companies with stronger balance sheets such as Nokia, LG, and Samsung. These corporations are aggressively pushing for global smartphone market share. Motorola’s new Android-based handset cellphones sell well, but the momentum the company lost in 2007, 2008, and 2009 means that it will never be more than a niche supplier.

Motorola’s sales hit $42.9 billion in 2006 and the company made more than $4 billion. Motorola’s revenue, which included discontinued operations, was $4.9 billion in the most recent quarter of 2010. On that same basis, the company made only $109 million. Motorola is on a pace to reach $20 billion in revenue and $400 million in net income this year. Motorola’s stock traded for over $26 in late 2006. The shares change hands at about $8 today. The DJIA is up 10% over the last five years. Motorola is down more than 60%.

Today, Motorola’s leadership has disappeared, and it struggles near the bottom tier of an extremely competitive market. Motorola shipped only 8.3 million handsets in the second quarter of 2010.  In comparison, Nokia shipped more than 90 million in the same period. More forcefully, handset manufacturers shipped 346 million units worldwide in the most recent quarter.

2.  GM

In 1962, the largest of the Big Three sold more than 50% of the cars bought in the US. That number is less than 20% in most months today. The reasons for the decline run into the dozens, but there are a few that are most important.

GM did not forcefully respond to the Japanese imports which began to reach the US in real numbers in the 1970s. The Japanese cars got better gas mileage than GM vehicles in a period when US drivers were worried about fuel costs. American car companies, GM included, also assumed that domestic buyers would always think that Japanese vehicles would always be of lower quality than American vehicles.

GM never forcefully addressed its rapidly rising labor expenses. The average cost per hour to employ a GM blue-collar worker rose well above those of Japanese rivals during the 1990s. GM could have gone through a painful nationwide strike to challenge the UAW to bring down labor costs. Such a move would have been risky. But such risk was not nearly as significant as building a worker cost base that could not be sustained. The high costs were particularly problematic in light of falling market share in years like 2008 and 2009 when US car sales were slow.

GM also decided to diversify in the early 1980s. It bought tech outsourcing company EDS from Ross Perot in 1984. GM became a large defense contractor in 1985 when it acquired Hughes Aircraft and merged it with its Delco division. Both acquisitions were major failures.

GM is no longer the world’s largest car company. That distinction belongs to Toyota. In the US market Ford and Toyota sell nearly as many vehicles each month as GM does.

3.  MGM

The studio company, founded in 1924, recently filed for bankruptcy. It has produced some of the most famous films in history including “Gone With The Wind” and most of the James Bond movies. The Metro-Goldwyn-Mayer library of movies includes more than 1,400 titles.

The most extraordinary mistake that the firm made was a 2005 leveraged buyout through which several media companies and private equity firms Providence Equity Partners and TPG took control of the studio. MGM took on more than $4 billion of debt in the process and did not have adequate cash flow to support it.

MGM has recently been the target of raider Carl Icahn and other investors who have hoped to buy the company’s assets at a huge discount. The recent Chapter 11 filing by the company will allow a number of creditors to exchange equity for debt. The new structure means that MGM will probably make a very modest number of films a year to keep down costs – perhaps a half a dozen. This is a tremendous drop from the production schedule that the company had in its prime.

The greatest error that the MGM made was to assume that its large library would fuel tremendous DVD sales to cover the firm’s debt. This worked in the very early stages after the 2005 buyout, but as the DVD business collapsed and more films moved to TV video-on-demand and Internet streaming, MGM’s major source of revenue quickly eroded.

4. Gannett

Gannett was once regarded as one of the most innovative media companies in the world. It started USA Today in 1982. The paper became the most widely circulated daily in the US.

The largest newspaper chain in the US had a stock price of $62 in 2007. The share price is now under $12. Gannett had revenue of $8 billion in 2006 and had net income of over $1.7 billion each year from 2002 to 2006. In the third quarter of this year, Gannett had revenue of only $1.3 billion, and net income of just $101 million.

Gannett’s mistake was not unlike that of other newspaper chains. It took too long to realize how news consumption patterns would change and move to the Internet. It was late to market with a major national news site like CNN.com or MSNBC.com. Gannett did not take advantage of its size and cash flow five years ago, when it could have bought a growing Internet company like MySpace. Although, the MySpace purchase has not worked for News Corp, that may be due as much to poor product management and lack of innovation as anything else.

Gannett’s management failed to look forward and realize that the print media industry’s prospects were beginning to dim.

5. Moody’s

It says a great deal when Warren Buffett buys a significant stake in a company and then sells much of that position only a short time later. He invested in Moody’s because it was one of the leaders of the rating industry and had been for a century. Along with S&P, it was the gold standard of its industry

Moody’s has been blamed for misrepresenting the independence of its rating of mortgage-backed securities. The rapid drop of the value of these securities was the major cause of the credit crisis. Referring to the ratings on subprime paper, The Week reported that the head of the US Congressional Financial Crisis Inquiry Commission said “flipping a coin would have been five times more accurate in making aninvestment decision than trusting Moody’s ratings of sub-prime backed securities before the credit crunch.” The magazine added, “Of the (sub-prime backed) securities given the highest AAA-rating in 2006 by Moody’s, 89 per cent were downgraded to junk status a year.”

There was no one in the management of Moody’s at the time that these ratings were offered to investors who did not know that independence and integrity were the most critical values for the company’s success. This is true with all securities that Moody’s rates and its action with sub-prime paper had the effect of calling all of its research into question. In early 2007, Moody’s shares traded above $73. Today the stock sits just above $26. The “trust” issue will dog the company into the future.

6.  Blockbuster

The video rental giant is destined to make any list of companies which took a wrong turn that cost it its entire franchise. The once dominant force in the industry recently went through a Chapter 11 to restructure its debt.

Blockbuster held the lead position in the distribution of feature content for nearly a decade. It was the top retailer of VHS and then DVD products and held a significant enough part of that market that there was no clear second place competitor.

Blockbuster’s business began to falter and it lost money in 2002, 2003, and 2004. Raider Carl Icahn gained de facto control of the company in 2005 to turn it around, but the trends in the industry had already moved toward DVDs-by-mail. Netflix took a lead in this business which became insurmountable even after Blockbuster launched its own mail service. The delivery of digital entertainment has since moved to streaming premium content over the Internet to people’s homes, a business in which Blockbuster has never gained a significant presence.

7.  Level 3

The company has one of the largest data networks in the US with 67,000 miles of wire and fiber which can deliver voice and video via broadband across most of the country. The firm’s technology is unrivaled. A number of cable and telecom companies have been Level 3 customers. Level 3 is also one of the key networks for Voice of IP, which is rapidly replacing standard landline telecom service for millions of people.

Level 3’s strategic error was that the company did not stick to its core competency. The firm became as much an M&A machine as an operating company which left it with more than$9 billion in long-term debt. Level 3, however, did not have to cash flow to cover such a large obligation.

Management always had the same excuse about its performance. Acquisitions had not performed well. These also cost the parent company management’s time and integration expenses. Level 3’s lack of focus allowed its former customers – large telephone and cable companies – to flank it in the delivery of data to the 160 cities that it serves. A focus on operations and not building the company through buyouts would have allowed management to take advantage of the most advanced data infrastructure in the world. Level 3’s stock was above $6.50 in early 2007. It now trades for $.89.

8.  Boston Scientific

Boston Scientific was one of the leading medical device companies in the world with a huge market share in the “less invasive medical device market.” It was also highly profitable. The company posted earnings of $1.6 billion on revenue of $5.6 billion in 2005.

In early 2006, the Boston Scientific board and executives implemented a strategy. If it bought another company within its industry, it would increase its size and margins tremendously. Boston Scientific paid $27.2 billion in cash and stock for Guidant, outbidding Johnson & Johnson. The buyout increased the Boston Scientific debt eight-fold to $6 billion. To compound the problems with the buyout, Guidant products began to have quality-related problems, which made the acquisition even more troublesome. Boston Scientific also hit some bumps  as government studies questioned the the effectiveness of its own products. Guidant became a tremendous burden less than two years after the transaction. As Morningstar pointed out at the time, “Lingering quality problems and more product recalls from the acquisition of Guidant could amount to more bumpiness through 2008.”

From 2006 to 2008, Boston Scientific posted total losses of $4.5 billion. The combined company also showed no growth in revenue or meaningful expense savings. Boston Scientific has taken a large, successful business and in a bid to become the single dominant corporation in the medical device industry it ruined its own balance sheet and bought a firm with significant product problems.

Boston Scientific shares were above $25 before the Guidant deal. They now change hands for well under $7.

Also Read: FedEx Capitalizing on Growth Trends in India

9.  Abercrombie & Fitch

The specialty retailer did a poor job of judging its market beginning in early 2009. Its clothes were aimed at older teens and college aged customers. Abercrombie & Fitch kept margins high because it had built a powerful brand which allowed it to charge premium prices for its products. Although it had competition, Abercrombie believed its brand could overcome the need to ease prices when same-store sales began to drop. The plunge was unprecedented.

Same-store sales dropped nearly 30% in 2008 and in 2009 and have only just begun to recover. Abercrombie & Fitch’s stock traded between $60 and $80 from 2005 to the summer of 2008. At that point, it became clear to Wall St. that consumers may have viewed the retailer as a merchant of premium clothing, but that the teen buyer was not willing to pay a premium price for similar products available elsewhere. And lower priced retailers had begun to copy Abercrombie styles and marketing practices. Shares fell to $15 in late 2008.

Abercrombie is a clear example of a company which misread the willingness of its customer to stay with the brand when the brand became too expensive.

10. Office Depot

There are three major companies in the retail office supply business: Office Depot, Office Max, and Staples. Over the last five years, the share price of Staples has been relatively flat. The share price of Office Max is down about 35%. Office Depot’s stock is down over 80%.

Office Depot never took advantage of its brand or retail experience to develop a beachhead overseas. In contrast, almost a quarter of Staple’s sales are from outside the US. This failure cost Office Depot dearly.

The margins at all three of the office supply retailers were pressed by the recession. More importantly, big-box retailers like Sam’s Club and Costco moved into office supplies and used their broad purchasing power to offer low prices. Office Depot could not turn to overseas operations which have helped a number of companies like Walmart in recent years, to offset a slowdown in its home market.

By deciding that the US market was the only one that really mattered, Office Depot almost guaranteed that its growth rate would turn to a sales contraction.

Ten Companies That Will Never Recover From Their Mistakes – 24/7 Wall St..

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