I was doing small research on the fortunes of some of the companies mentioned in the popular management books Built to Last and Good to Great. While many companies identified as Built to Last and Good to Great continue do well in the market place creating wealth for shareholders but there were some notable exceptions. The specialty retailer Circuit City which was identified as a Good to Great company filed for bankruptcy in 2009. Fannie Mae is another Good to Great company, which has bitten the dust. Motorola was considered as a Built to Last visionary company does not exist now as an independent company with Google retaining its patents and the mobile handset business being sold to Lenova. Ford went through a near death experience and its market cap is one fifth as that of Toyota, which is the most valuable automobile company in the world. Sony has under performed its competitors in every market segments it competes with, with its iconic product Walkman almost extinct with the advent of iPods and the music app on Mobile phones, which enable users to listen & watch music on their mobile phones. Hewlett Packard is another technology pioneer, which has hugely disappointed with its overpriced acquisition of Electronic Data System and even in its mainstay personal computer business - legacy of Compaq - it is lagging behind its competitors like Lenova. Citigroup was considered with Chase-Manhatten; JP Morgan has outperformed Citigroup by any measure since 1994 and without the extensive bailout it received from the US Treasury, FDIC and the Federal Reserve, Citigroup would have filed for bankruptcy. Citigroup was created from the merger between Travellers & Citicorp and JP Morgan Chase was born out of the merger between Chase-Manhatten and Bank One. While the integration of the latter has gone very well but Citigroup subsequently divested almost 75% of the businesses it acquired from the merger with Travellers. Citigroup also divested the retail brokerage it acquired in Japan in early 2000s. The economic rationale behind Citigroups decision to acquire a low margin retail brokerage business in a saturated market like Japan, whose economy under performed its G-7 peers since 1994 is a big business mystery. In 2009, Citigroup took another blunder when it decided to scale down its mortgage business in the US when competitors like Wells Fargo was ramping up their mortgage underwriting business and private equity players like Blackstone was buying up foreclosed properties in bulk in anticipation of an improvement in the housing market and in 2011, it sold its property business in Japan to Morgan Stanley, when that market was showing signs of life and in fact in 2013 with concerted effort under Abenomics, Japanese property markets started improving. Citicorp under the legendary banker Walter Wrist on pioneered innovations like ATMs, Interstate Banking, Negotiable CDs and Credit Card business globally. Mr. Wriston justified the global franchise of Citicorp for serving the multinational corporations of the US and why would such a visionary company like Citicorp makes terrible strategic blunders over a short span of 2 decades could be the subject for a classic case study. What is surprising is, in the bull market of 2003-07, while the financial sector did well, JP Morgan under performed its sector index but if we look at the chart from the date when the merger with Bank One was announced till to date, its stock has outperformed bank index. Most of the large scale bank mergers have system compatibility issues but integration of Chase-Manhatten with Bank One has gone smoothly. Of course recently its track record has been blemished by the London Whale Trading Loss, which was a serious risk management failure when it is universally acknowledged that JP Morgan pioneered modern risk management. The huge fine of $25 billion for faulty mortgage underwriting is a legacy issue associated with the acquisition of Bear Sterns & Washington Mutual, which was done at the behest of regulators. JP Morgan is one of most undervalued stock on the DOW trading at a multiple of less than 10. GE is another visionary company - one of the original DOW component -, which still trading below its 2007 peak and its stock has under performed its standalone rivals in most of the market segments in which it competes with. Is conglomerate business model as value accretive to shareholders, when they can take exposures to much more focused standalone entities? Former GE CEO Jack Welch is universally regarded as the gold standard for aspiring CEOs and under Jack Welch, GE stock had outperformed the market and its peers but the biggest strategic shift GE undertook under Jack Welch of making GE a financial services company has not gone well for shareholders. Wells Fargo is one exception, which even during these tumultuous times transitioned from a Good to Great company to truly Built to Last company and it has weathered the credit crisis very well, its acquisition & subsequent integration of Wachovia has gone well and is one of the very few banking stocks, which new all time highs in this ongoing bull market. The authors and the bevy researchers worked on these classic management books are some of the best and brightest in the world and a lot of time & effort was devoted to carrying out the background research on selecting these truly marvellous companies and despite being identified as truly exceptional companies, went through a chaotic phase with many ceasing to exist within a short span of 2 decades shows how unpredictable the business world can be and past greatness in no guarantee for future success and companies needs to constantly reinvent themselves if they do not want to go out of business. Since corporate world is a microcosm of the society, there is a lessons for countries as well. I often wonder, what makes a country truly great? People who are more knowledgeable have written umpteen number of books about decline of civilizations and the common underlying theme is an enabling social structure, which brings out the best in its people. This enabling environment is an amalgamation of intellectual infrastructure, social infrastructure and physical infrastructure, which is manifested through the quality of the institutions and whenever societies become rigid and refused to embrace the changing environment, civilizations declined. In the modern day societies, it is the political system, which sets the agenda and it is the quality of the political system, which determines the greatness of countries and the sustainability of that greatness.
Posted on: Fri, 14 Mar 2014 07:53:25 +0000
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