The answer, obviously, is yes. The question now is what form those increased rights will take, and what the consequences will be for publicly-traded companies and their management. Tara Siegel Bernard at the New York Times penned an interesting article about Shareholder Democracy in which she addressed some of the salient issues (see Voting Your Shares May Start to Matter).

What would happen if all the small investors banded together and cast their ballots during proxy season, the time of year when all shareholders get to vote on corporate issues? How much of an impact would they have?

Until recently, the votes of small investors — the ones who didn’t just throw their ballots in the trash — were largely meaningless. Even if they were angry about soaring executive pay and risky business practices, there was little they could do.

Sure, in theory, investors could vote for the people who serve on the board, many of whom are paid handsomely to oversee management and set executive pay. But investors don’t have any say on the nominees. Nor do they have much of a real choice even if they do vote. Say you withhold a vote for a candidate running uncontested. It doesn’t matter, since directors can win without a majority.

And if you chose not to vote? Your broker is allowed to cast your ballot without your permission, and brokers typically vote in line with management.

So much for shareholder democracy.

But the tide is beginning to turn, albeit slightly. In recent years, more companies have adopted a “majority rules” requirement…And starting this year, brokers can no longer vote shares held in their customers’ accounts without permission.

Investors would also stand to benefit from the so-called Shareholder Bill of Rights, legislation proposed by Senator Charles Schumer of New York and Senator Maria Cantwell of Washington…

One provision…would make it easier for certain investors to nominate independent directors to corporate boards, or what is known as proxy access.

The Senate proposal would [also] require that candidates for director receive at least half the vote in an uncontested election and require all directors to face re-election annually (unless shareholders approve otherwise). It would also give shareholders a so-called say on pay, which is a nonbinding vote on executive compensation practices.

More companies are beginning to do this voluntarily, and corporate governance experts say these votes can actually help curb excessive pay.

I am generally supportive of increasing shareholder rights. After all, shareholders are the rightful owners of the corporation, and as such, deserve to have a say in its direction.

That said however, and as I have argued before, we have to be careful what kinds of rights we bestow to what kinds of shareholders, …especially those we are willing to grant to shareholders of the short-term “trader” variety (see Different Stock Classes). As I pointed out in that post, there is an increasing wedge developing between investor/owners and investor/traders.

Historically, shareholders were individual company owners (often dispersed) who held stock for long periods of time. Today, the picture is quite different. Shareholders are represented less and less by individuals holding stocks for the long-term, but by institutions looking to make a quick buck – buying and selling with incredible frequency. The rise of such “traders” (those who seek to profit from near-term volatility in stock prices) has changed the nature of the system. Whether they be institutional or individual, it seems that there is a large class of traders (not investors) today who are looking to profit from the tiniest movement in share price. These traders are inconsistent with the spirit of the view of the shareholder as owner. They are not really “owners”, and often do not even necessarily care about the survival of the firm. They only care about micro-movements in share price.

To the extent that we end up granting increasing rights to investors of the institutional “trader” variety, we might end up with a system that wreaks havoc for corporations and their management. In the extreme, it could create an environment in which management spends too much time and attention fending off proxy attacks and not enough on the tasks with which “owners” have entrusted them in the first place – running a sound business so as to maximize profit over the long-term.

The Economist ran an interesting article that proposed a solution to short-termism, a serious problem afflicting capitalism (see A Different Class). According to the Economist:

The spectacular collapse of so many big financial firms during the crisis of 2008 has provided new evidence for the belief that stockmarket capitalism is dangerously short-termist. After all, shareholders in publicly traded financial institutions cheered them on as they boosted their short-term profits and share prices by taking risky bets with enormous amounts of borrowed money. Those bets, it turns out, did terrible damage in the longer term, to the firms and their shareholders as well as to the economy as a whole. Shareholders can no longer with a straight face cite the efficient-market hypothesis as evidence that rising share prices are always evidence of better prospects, rather than of an unsustainable bubble.

I guess what the author is suggesting is that if equity market participants could have anticipated the long-term consequences of managerial action of this sort, they would have punished those engaging in such behavior, but they cheered them on by bidding up share prices instead. OK. Fair enough. A lot of ink (pixels?) has been spilled criticizing the efficient market hypothesis on this count.

Nevertheless, I agree that short-termism is a real problem. I’ve written a bit about too, but mostly with respect to how it impacts executive pay (see Revisiting Executive Pay, The Credit Crunch and Executive Pay, or A New Approach to Executive Compensation). I have made the following point, or something closely related, in each these posts:

…let’s not forget about the accounting assumptions about the firm. The standard assumption in accounting is that firms have an infinite lifespan. They are assumed to be around forever. Moreover, in finance we assume that firms should maximize the net present value of all future cash flows. However, there is a fundamental disconnect between some of these assumptions and the state of the world. Although the firm is supposed to be around forever, human beings are not. The average lifespan of the homo sapien is around 70 years. And if you consider the lifespan/tenure of a typical CEO (now less than 4 years), the picture looks even bleaker. This creates a severe incentive problem. If I’m a typical CEO, what incentive do I have to look out for the best long-term interests of my firm? After all, I’ll probably only be around here for a few years. In this sense then, CEO’s have an incentive to increase near-term performance sometimes at the expense of long-term performance.

But I also recognize that the investment environment around the CEO has changed quite drastically, and that the CEO is often making seemingly rational decisions given the structural environment he or she faces coupled with his or her pecuniary incentives. For example, I wrote in Revisiting Executive Pay and echoed in an Op-Ed at the IB Times (see Executive Pay: The Problem is Systemic):

…we need to ask ourselves, “Who are shareholders?” Although seemingly a silly question, the answer has important implications for corporate governance and executive pay. Historically, shareholders were individual company owners (often dispersed) who held stock for long periods of time. Today, the picture is quite different. Shareholders are represented less and less by individuals holding stocks for the long-term, but by institutions looking to make a quick buck – buying and selling with incredible frequency. The rise of such “traders” (those who seek to profit from near-term volatility in stock prices) has changed the nature of the system. Whether they be institutional or individual, it seems that there is a large class of traders (not investors) today who are looking to profit from the tiniest movement in share price. These traders are inconsistent with the spirit of the view of the shareholder as owner. They are not really “owners”, and often do not even necessarily care about the survival of the firm. They only care about micro-movements in share price.

What’s more, with institutions [more] interested in trading than in ownership, the incentives of the institutions align with those of the CEO’s. That is, with institutions looking to make a quick profit, short-termism on the part of the CEO is not only condoned, but sometimes encouraged.

The Economist not only echoes that sentiment, but provides supporting evidence for the changing investor landscape:

In the early 1980s shares traded on the New York Stock Exchange changed hands every three years on average. Nowadays the average tenure [holding shares] is down to about ten months. That helps to explain the growing concern about short-termism.

In the past I offered some ideas for how to deal with the short-termist problem via executive compensation – restricted shares instead of options, board mandates, say on pay, etc. The author of the Economist article proposes an alternative that attacks the problem from the equity-market side via dual-class shares (one set of shares for investor/owners and one set of shares for trader/owners).

If the stockmarket can get wildly out of whack in the short run, companies and investors that base their decisions solely on passing movements in share prices should not be surprised if they pay a penalty over the long term. But what can be done to encourage a longer-term perspective? One idea that is increasingly touted as a solution is to give those investors who keep hold of their shares for a decent length of time more say over the management of a company than mere interlopers hoping to make a quick buck. Shareholders of longer tenure could get extra voting rights, say, or new ones could be barred from voting for a spell.

Dual-class shares are nothing new. Neither are shares with uneven voting rights. However, the evidence thus far is inconclusive with respect to the effectiveness of dual-class and/or vote-differentiated shares on firm performance. If anything, the academic literature suggests that they don’t always work in practice as they are intended in principle. It has been well documented that the holders of shares with greater control (ownership) rights can take advantage of the holders of shares with fewer control rights. Research demonstrates that firms with dual-class shares make decisions that are often not in the best interests of minority shareholders, especially when it comes to private perquisites, compensation, and investments.

That said however, I don’t think this is a reason to dismiss the idea of dual-class shares offhand. I think that the principle underlying the idea is a good one. If we can find some way to build in protections for minority shareholders, or to implement executive compensation plans that provide managers greater incentives to maximize for the long run, there just might be something to it…

For those of you following GM developments, it appears that the sale of Saab to Spyker has now closed (see Spyker Closes Purchase of Saab).

Spyker Cars of the Netherlands closed a deal to buy Saab from General Motors for cash and shares worth $400m, saving the Swedish car brand from closure and ending a sale that has dragged on for more than a year.

Saab said on Tuesday it had exited liquidation proceedings, and that control of the brand had been returned to Jan Ake Jonsson, its chief executive. The carmaker had been in administration since February 2009, when GM said it planned to sell or wind it down as it prepared to file for bankruptcy protection in the U.S.

The deal…will save 3,400 jobs at Saab’s operations in Sweden and more at its 1,100 dealers. Saab and Spyker will now operate as sister companies under the umbrella of Euronext-listed Spyker Cars NV.

In other GM news, the agreed upon deal to sell Hummer to Sichuan Tengzhong Heavy Industrial Machines of China has fallen through (see GM to Close Hummer After Sale Fails).

General Motors said on Wednesday that it would shut down Hummer, the brand of big sport utility vehicles that became synonymous with the term gas guzzler, after a deal to sell it to a Chinese manufacturer fell apart.

The buyer, Sichuan Tengzhong Heavy Industrial Machines, said in a statement that it had withdrawn its bid because it was unable to receive approval from the Chinese government…

Tight financial markets also hurt the deal. When the commerce ministry did not bless the transaction, the well-capitalized Chinese banks became reluctant to lend money…

Interesting. Although Saab is certainly the more promising of the two GM castoffs, if you would have told me as little as six months ago that the Saab deal would close and the Hummer deal would collapse, I would probably have laughed it off as the low probability outcome.

GM was having real difficulty finding a buyer for Saab. The process was fraught with several starts and stops, included various “interested” buyers (e.g., Koenigsegg, Spyker), had the on-again/off-again support of the Swedish government, and survived the collapse of several negotiated agreements.

By contrast, the deal with Sichuan Tengzhong seemed swift and sound. I did not foresee cause for concern, even with the regulatory delay. And given the Chinese appetite for Western assets (see Chinese Acquisitions in the Auto Industry) and the government’s easy money policies (especially in housing, see Is China a Bubble Economy?), the deal looked like a pretty sure bet.

I can’t help but wonder then about the broader implication of “well-capitalized Chinese banks” becoming “reluctant to lend money”…

The Economist recently summarized an interesting a study co-authored by James Westphal (Michigan) and Melissa Graebner (Texas) that appeared in the Academy of Management Journal (for the Economist summary click How Firms Fool Equity Analysts, for information about the full research article visit the AMJ website). According to the Economist:

How do you pump up the value of your company in these difficult times? One tried and tested way is to hoodwink equity analysts, according to a new study of 1,300 corporate bosses, board directors and analysts.

The authors found that chief executives commonly respond to negative appraisals from Wall Street by managing appearances, rather than making changes that actually improve corporate governance: boards are made more formally independent, but without actually increasing their ability to control management. This is typically done by hiring directors who, although they may have no business ties to the company, are socially close to its top brass.

The tactic pays off with appreciably higher ratings. At firms that make a strenuous effort to persuade analysts that such board changes have boosted independence, and thus made management more accountable, the likelihood of a subsequent stock upgrade rises by 36%, the study concluded. The chance of a downgrade, meanwhile, falls by 45%.

In Governance modules of Corporate Strategy, it is important to stress the difference between inside/outside directors and independent/non-independent directors. The take-away: OUTSIDE ≠ INDEPENDENT. They are not mutually inclusive. Unfortunately in practice, it seems that analysts don’t treat them accordingly.

A friend and colleague from Oxford (Mike Barnett, Director of the Saïd Business School Center for Corporate Reputation) sent me a brief Op Ed he penned about the challenges Toyota faces in preserving its reputation for quality (see Toyota Can Still Save Reputation). Mike writes:

A good reputation is a dangerous thing.  If no one thinks highly of you, and you do something bad, it makes little difference. You have nothing to lose: but if you are standing high on a pedestal and you do something bad, causing you to wobble and waver, you have a long way to fall.

Toyota was high on a pedestal, reputed for its superior quality, and then life-threatening defects captured media attention.  How far will Toyota fall?  It depends upon how quickly Toyota can capture the conversation.

To stop its descent and recover its reputation, Toyota must give people something positive to talk about.  Errors are inevitable, especially in something as complex as automobiles; recalls are a regular feature.  It is the hesitance and delay in initiating a recall, not the recall itself, which has made this into a bigger reputation destroyer than it might have been otherwise.

Toyota has an opportunity to show that, even though it may sometimes mess up, it will always make good.  This will turn the conversation to, “Hey, even when Toyota hits a bump, it is always looking out for the customers’ welfare”, and away from “Toyota screwed up and won’t admit it, so I can’t trust them”.   Do this, and the public is quick to forgive, or at least forget.  Where Toyota does not want to get bogged down is in publicly battling over fault with its sticky pedal supplier.  Avoid the Ford-Firestone trap, as the conversation will continue to drag on in the negative.

Interesting. And some wise advice.

Toyota is taking some well-deserved heat for its delay in issuing a recall in the face of evidence that problems existed with its accelerators. In fact, Toyota long maintained that there was nothing wrong with its accelerators. At first it cited driver error, until the evidence suggested that there could not possibly be so many horrible drivers. Then they shifted the blame to faulty floor mats. Strike two.

At this point, Toyota would be wise to issue (and reiterate) mea culpas. Toyota cannot apologize too much. It should then, as Mike Barnett suggests, handle the situation in an honest and transparent way – keeping the public apprised on an almost daily basis. And once it identifies the defect, claiming that a solution has been found is not enough. The problem (and its solution) must be described in detail, and in a way that customers can understand. They need to detail what happened, and why. They then need to describe how their fix remedies the problem in a non-technical way.

Halting production until they find a solution is certainly a good (however costly) first step; but along the way, Toyota ultimately needs to redeem itself in the eyes of the consumer. It is important for Toyota to understand that how it bounces back is not simply a function of how quickly it can find a fix, but also in how quickly it can win back the public trust.

The New York Times ran a feature article on Sunday about China’s dominance of the alternative/clean energy space (see China Leading the Race to Make Clean Energy). Although the author points to some interesting stylized facts, not one suggests cause for concern.

China vaulted past competitors in Denmark, Germany, Spain and the United States last year to become the world’s largest maker of wind turbines, and is poised to expand even further this year.

MY COMMENT: So what? Does this make them the technological leaders in that space? No! Why? Because most of the technological advances in alternative energy (the knowledge creation portion of the value chain) are a product of the West – Europe and the U.S., …and to a lesser extent Japan and Korea.

China has also leapfrogged the West in the last two years to emerge as the world’s largest manufacturer of solar panels.

MY COMMENT: Again, why is this a bad thing? See above.

President Obama, in his State of the Union speech last week, sounded an alarm that the United States was falling behind other countries, especially China, on energy. “I do not accept a future where the jobs and industries of tomorrow take root beyond our borders — and I know you don’t either,” he told Congress.

These efforts to dominate renewable energy technologies raise the prospect that the West may someday trade its dependence on oil from the Mideast for a reliance on solar panels, wind turbines and other gear manufactured in China.

MY COMMENT: Nonsense. To the extent that China is reliant on the knowledge/technology developed in the West to manufacture equipment, it’s good for both sides. Western alternative energy firms have a market in which to sell their valuable knowledge and Chinese producers have a market to sell the output from the factories that use those productive knowledge inputs. This is how international trade works. In fact, without demand from the Chinese market, development costs for firms in the West would be much, much higher. This allows our alternative energy firms not only to prosper, but to create jobs in the nascent sector.

So although the title of the Times article is appropriate – China certainly is “making” more clean energy in the manufacturing sense, the West is specializing in the higher value-added, higher margin, higher growth activities (see Globalization Discontents and Globalization Revisited). I don’t know about you, but I’ll take the latter.

On the 10th anniversary of the AOL-Time Warner deal, The New York Times published a set of retrospective interviews with Jerry Levin, Steve Case, and various others who were party to the deal (see How the AOL and Time Warner Merger went So Wrong).

When the deal was announced on Jan. 10, 2000, Stephen M. Case, a co-founder of AOL, said, “This is a historic moment in which new media has truly come of age.” His counterpart at Time Warner, the philosopher chief executive Gerald M. Levin, who was fond of quoting the Bible and Camus, said the Internet had begun to “create unprecedented and instantaneous access to every form of media and to unleash immense possibilities for economic growth, human understanding and creative expression.”

The trail of despair in subsequent years included countless job losses, the decimation of retirement accounts, investigations by the Securities and Exchange Commission and the Justice Department, and countless executive upheavals. Today, the combined values of the companies, which have been separated, is about one-seventh of their worth on the day of the merger.

To call the transaction the worst in history, as it is now taught in business schools, does not begin to tell the story of how some of the brightest minds in technology and media collaborated to produce a deal now regarded by many as a colossal mistake.

MY COMMENT: That sounds about right. We generally refer to it as among the worst deals of all time. In fact, in the years after the merger I used the AOL Time Warner case as my final exam. I asked students to evaluate the deal – from the partner selection to the pricing to the integration. Students generally agreed that there was some real complementarity between the businesses, wedding distribution and content. However, as I’ve stressed many times on this blog, pricing and integration matter a great deal (see Why M&A Deals Go Bad and Appreciation for the Complexity of Acquisitions). The AOL Time Warner merger was fraught with integration difficulties from the get go, and it was never able to recover.

Some snippets from the interviews:

MR. LEVIN We were emerging from not just old media but from an analog world into a digital world, and philosophically people were beginning to understand that the digital world was a transformational universe.

AUTHOR COMMENTARY The deal was sealed at a dinner in early January at Mr. Case’s house in McLean, Va. The transaction was spun to the world as a merger of equals, but in reality AOL, with its more valuable stock, was acquiring Time Warner. AOL would own 55 percent of the new company and Time Warner, 45 percent. But the new board would have an equal number of AOL and Time Warner directors. Mr. Levin would be chief executive, and Mr. Case would be chairman.

Over a weekend, the two sides conducted due diligence, with teams of lawyers camped out in two law offices in Manhattan.

MR. LOGAN Dumbest idea I had ever heard in my life.

MR. LEONSIS I was one of the loudest advocates for not doing the deal.

MR. BOGGS Just real regret and dread.

MY COMMENT: Now this is news. I had no idea that some of the top executives strongly opposed the deal. Hopefully their answers do not simply exhibit some form of self-serving bias or retrospective rationality.

Back to the Times story…

AUTHOR COMMENTARY The optimism surrounding the deal was brief. In May of 2000, the dot-com bubble began to burst and online advertising began to slow, making it difficult for AOL to meet the financial forecasts on which the deal was based. The world began moving quickly to high-speed Internet access, putting AOL’s ubiquitous dial-up service in jeopardy.

The companies had another problem: both sides seemed to hate one another.

MR. PARSONS I remember saying at a vital board meeting where we approved this [deal], that life was going to be different going forward because they’re very different cultures, but I have to tell you, I underestimated how different.

MR. BEWKES …The enduring debate is whether the deal collapsed because the concept was flawed at the start, or because the cultures were too different and the execution of the merger was a failure.

MR. CASE It was a good idea, but the execution of it wasn’t what it needed to be, and I accept responsibility for that.

MR. PARSONS The business model sort of collapsed under us, and then finally this cultural matter. As I said, it was beyond certainly my abilities to figure out how to blend the old media and the new media culture. They were like different species, and in fact, they were species that were inherently at war.

My take: The strategic logic behind the deal was not terrible. Some aspects of it were even visionary. Unfortunately, the deal was a bit on the early side, during a period when the technology itself had not yet evolved to a point where the synergies were realizable. And oh yeah, the execution was horrendous too.

Interestingly, Comcast is making a similar play by acquiring  NBC Universal. Time will tell whether Comcast can succeed where AOL Time Warner failed. The outcomes of the Comcast NBC Universal deal should provide insight into whether AOL Time Warner was simply early, or truly ill-advised.

Nevertheless, the Times article was definitely worth the read. I encourage you to read it in its entirety (How the AOL and Time Warner Merger went So Wrong). Interesting stuff!!

In the aftermath of Dubai World’s near default, The Economist magazine ran an interesting article that examines the so-called “Hybrid” organization (see The Rise of the Hybrid Company). According to the Economist:

The travails of Dubai Inc have left commentators struggling for the right phrase to describe Dubai World and its various siblings. They have come up with various formulations—state-controlled, state-supported, quasi-state, parastatal—without ever quite capturing what they are talking about. And Dubai is not the only place that is challenging the business vocabulary in this way.

Wherever you look you can see the proliferation of hybrid organisations that blur the line between the public and private sector. These are neither old-fashioned nationalised companies, designed to manage chunks of the economy, nor classic private-sector firms that sink or swim according to their own strength. Instead they are confusing entities that seem to flit between one world and another to suit their own purposes.

MY COMMENT: For examples from the U.S., see Fannie and Freddie, pre-nationalization. France, in the form of their national champions, also engages in the practice. So do many emerging economies: China (and their SOE’s), Russia, Malaysia, Vietnam, Brazil, etc.

What should we make of these hybrid organisations? Their supporters have long argued that they enjoy the best of both worlds: the security of the public sector and the derring-do of the private sector. They can use their global reach to provide their home countries with the pick of the world’s resources. They can borrow money at a favourable rate thanks to “implicit” government guarantees. They can use their political muscle to outperform their less well-connected rivals.

MY COMMENT: I have never been a fan of Publicly-Backed Private Companies (PBPC’s). Although they may be able to borrow at lower rates because they are “implicitly” backed by their home governments, they often grow too large, become too bureaucratic, and eventually crater under their own inefficiency (thereby costing home-country taxpayers dearly in the process). In addition, their objective function is not always clear. Are they meant to profit-maximize for shareholders/bondholders, or are they meant to serve a larger social purpose?

The most interesting part of the Dubai World saga (in contrast with Freddie and Fannie) is that the government of Dubai has seemingly repudiated Dubai World’s debt. So much for that “implicit” guarantee. If this becomes the norm rather than the exception, you can soon say goodbye to the last remaining benefit of Public-Private hybrid companies – the ability to borrow at favorable rates.

I have nothing, in principle, against government-backed companies. Although they are generally inefficient and often do not make sense, there are instances in which they might be appropriate — e.g., in instances of severe market failure. However, if there is severe market failure such that the government must become involved to prevent perverse societal outcomes, my intuition is that private companies operating in a system of more stringent governmental oversight and regulation perform better than a system comprised of public-private hybrids.

In this sense then, I agree with the conclusion of the Economist:

The clearer the line between the state and the private sector, the better it is for those on both sides.

Robert Cyran raised a legitimate question about Cisco’s growth trajectory and corporate strategy in a recent New York Times article (see Cisco’s Run of Spending). According to Mr. Cyran:

Cisco, the computer networking giant, has spent the last decade acquiring rivals and buying back stock. It’s time to acknowledge that this strategy isn’t working. Investors who bought Cisco’s shares a decade ago have received no return on their investment.

MY COMMENT: That might be true, but in all fairness, if you’d bought the Nasdaq index a decade ago, you haven’t received much return either. In nominal price terms, Cisco’s return is more or less equivalent to that of Cisco. But we’ll come back to that later.

Results this week should give Cisco another chance to profess its optimism…Eternal ebullience is nothing new from Mr. Chambers, who once claimed Cisco could increase sales by 50 percent a year over the long run. They’ve since grown 7 percent annually.

Yet the years of deal making may be making Cisco unwieldy. Cisco has 59 standing boards and councils. This seems like a recipe for endless meetings, management confusion and reduced accountability.

MY COMMENT: This latter point is one with which I wholeheartedly agree. In fact, one of the basic tenets of transaction cost economics (see Oliver Williamson, Nobel Honoree) is that although acquisitions might make sense when there is market failure, at some point the benefits of bringing transactions within a firm (e.g., through acquisition) wear off. Size eventually yields inefficiency.

Cisco has always acquired and plugged companies into its sales and production network.

…Cisco continues to acquire new businesses — $22 billion worth since 2002 (including some $7 billion this year), according to Dealogic.

The other pillar of Cisco’s strategy, stock repurchases, hasn’t rewarded shareholders either. Returning excess cash from operations to shareholders should increase a stock price. Unfortunately, in Cisco’s case, the practice hasn’t measured up to theory. Cisco has spent close to $60 billion on stock buybacks since the start of its 2002 fiscal year. That’s about three-quarters of cash flow from operations. So why haven’t shareholders benefited?

First, the total count of shares outstanding has only decreased by 1.3 billion. This is partly because of dilutive acquisitions. However, if the number of shares hasn’t shrunk much and Cisco’s stock hasn’t risen, this presents a conundrum. What exactly is the benefit to shareholders of these purchases? Shouldn’t the price of a slice of Cisco increase if it is spending so much on buybacks?

MY COMMENT: Ouch! Now that is damning evidence. If the number of shares (float) decreases but the price remains the same, shareholder value is destroyed. In this sense then, Cisco’s return actually compares unfavorably in real terms to that of the Nasdaq. Moreover, it is suggestive that Cisco’s acquisitions may have played a role in destroying shareholder value (see Acquisitions, A Great Shareholder Ripoff).

So what is Mr. Cyran’s proposed solution?

After 10 years of searching for the promised land of growth, it’s time for something different. Slowing acquisitions would [be] a good start.

Moreover, if Cisco is so complex that it requires 59 councils, it should consider breaking into more manageable pieces.

MY COMMENT: After years as a Wall Street darling, I wonder whether Cisco truly deserves that distinction. And I agree that it might not be a bad idea for them to reevaluate their corporate strategy.

Good stuff!!

Ford revealed today that Geely, the Chinese automobile manufacturer, has emerged as the most likely suitor for its Volvo unit (see Geely Behind Ford’s Plan to Sell Volvo). According to Motor Trend, the price tag will be somewhere in the $2 Billion range.

Holding aside the sale price, if this deal goes through it would become the third high-profile purchase of a Western automobile manufacturer by a Chinese firm this year (Geely’s purchase of Volvo, Beijing Automotive’s participation in the Saab deal, and Sichuan Tengzhong’s acquisition of Hummer from GM).

Chinese firms are acquiring Western automobile manufacturers in an attempt to upgrade capabilities. They lag far behind the leading Japanese, US, European, and Korean auto manufacturers in technological capabilities, and the acquisition of Western firms represents an attempt to close that gap in R&D, design, styling, sales, marketing, and production.

However, as I noted in a recent interview in the Effective Executive magazine, this acquisitive behavior is not unique to the automobile industry. Chinese companies have increasingly been acquiring Western companies in a variety of industries (e.g., Lenovo’s acquisition of IBM’s PC division and TCL’s acquisition of Thomson’s TV division), all in an effort to close a still significant capabilities gap with developed country firms.

As I mentioned in that interview (see Interview in the Effective Executive):

When I think about China, Japan, and South Korea, certainly some similarities can be drawn. All three followed an export-led growth path to prosperity. However, once a certain level of prosperity had been achieved through trade, the three countries diverged with respect to international investment. South Korean firms have generally followed a more organic growth strategy – eschewing acquisitions of foreign targets in favor of building businesses from scratch. Japanese firms followed a similar strategy up to a point…Insofar as China is concerned, although we are in the early stages of China’s international expansion, it seems so far that Chinese firms are following a more growth-through-acquisition type of strategy…

My sense is that this has a lot to do with the capabilities of the firms from these countries. That is, by the time Japanese and South Korean firms began to expand, they did so from a position of technological strength. For this reason, they were able to organically extend existing advantages to other countries. China, by contrast, is expanding from a relatively weak technological position not only vis-à-vis Japan and South Korea, but also vis-à-vis the rest of the developed world. In this sense then, Chinese firms are embarking on a strategy of acquisition in order to acquire the technological capabilities their firms currently lack.

Seen through that lens, it is obvious why Chinese automobile manufacturers are interested in acquiring Volvo, Saab, and Hummer. However, the fact remains that they are purchasing extremely troubled operations in an industry plagued with overcapacity (even in China) at a time when when the demand for automobiles (certainly in the developed world) looks increasingly uncertain (see Auto Industry’s Big Little Problem).

As a proponent of free trade and globalization, I view the acquisition of Western companies by Chinese companies as a welcome development. However, given the auto industry’s ills, I wonder whether these Chinese acquirers will be able to derive value from their tired, beaten, and battered Western subsidiaries, …irrespective of the price.

Time will tell.