Wisdom Without Waiting: When Growth Is Elusive, Don't Panic
How to prop up the stock price and please Wall Street
© John L. Mariotti 2002
NOTE: this is mostly taken from an IndustryWeek column I wrote in the late 1990's, I just changed the wording slightly to bring it up to date!
Growth was the hot word in business circles from 1995-2000. The era of cutting and trimming, and downsizing seemed to be over. Lean and mean was yielding to innovative, entrepreneurial growth. At least that's what my fellow pundits were saying. There was a small glitch in all this growth talk. Really meaningful growth was often hard to come by in an economy that was only growing at 2 1/2% per year. It took really new, exciting products and services. Time proved that the Dot-com/Technology explosion didn't really create much real growth. Neither did the Telcom "boom".
If we go back to basics, growth is only achieved one of three ways:
- Take market share from your competitors, which may be tough and is usually costly in terms of lower prices, which could even touch off a price war!
- Find new markets to sell something into, which infers learning new businesses and creating whole new products, services, marketing skills, etc.
- Expand the current market by innovating in products or services or adding some of either products or services to the ones already sold, and do it before (and better than) competitors do! See the glitch--this growth thing is hard work! It takes real skill and brains!
Fortunately there were other approaches that satisfied the Wall Street sharks (analysts), and that many companies were practicing. No, I'm not going to talk about mergers and acquisitions. Those weren't real growth--just rearranging who owned the real estate--that's too obvious to fool anyone. I'm talking about real subterfuge! Here's how the drill worked:
When there's the slightest inkling that the earnings estimates you gave Wall Street were a pipe dream, start this way.
- First, downsize something--a division, the whole corporation, whatever. Nothing like a little blood to get the sharks enthused.
- Next, announce some closings of facilities. There must be a few around you don't need. So what if they serve customers.Ê What's important here anyway, serving customers or propping up the stock price (so the old options pay off)?
- Then take a big write-off, to cover the severance and facility closings. Use this to disguise the chance to fill up the "cookie jars." (* "Cookie jars" are just one of the euphemisms used to describe those lovely accounting "restructuring/reserves" and "deferral/accrual accounts" that money can be charged against now and "discovered" to be available/unused later, when the earnings for the next quarter or two need to be propped up--because that old devil growth didn't materialize!)
Now we've taken care of the first "growth shortfall!" What happens when the growth dreams become nightmares the next time (in a couple quarters usually--most "cookie jars" don't hold enough to last for more than a year!). We have more trickery up our sleeve! And it sounds pretty reasonable too!
- Cut products or stock keeping units (this helps fill the "obsolete inventory cookie jar" and that's a hard one for the auditors to argue with!) Claim you are simplifying the business, and everybody knows that's good (even if customers still want those discontinued products--after all who are we here to serve anyway?)
- Next, consolidate a couple divisions. This will create more plant closing reserves; some additional heads will roll, so severance reserves can be raised again too.
- Take a big write-off and refill the "cookie jars" again. (Are you getting the hang of this yet?)
Of course, all of this was more likely to depress growth than help it, but Wall Street was usually ecstatic. The company was getting "repositioned" for profitable growth in the future, and lowering its break-even in the present. The fact that it hadn't generated any real revenue growth in several quarters went unnoticed in all this "positive" restructuring! This is like losing weight by amputating limbs!
Finally the cookie jars ran low again, and the darn growth just wasn't happening! I wonder what came next? A few variations on the old theme, of course.
- First, sell a division or two. This will generate some cash (if it is a good one) or write-offs (if it is a loser). Either way, claim that the division) was not "core" to the business. Wall Street rejoices--we are getting down to what is core! (In eating an apple, when you get to close to the "core" not much useful is left!)
- Next, make acquisitions for stock (it was up handsomely because of the "good news" about restructuring) and be sure to sell divisions for cash. This sufficiently confuses the income statement with special entries, and inflates earnings per share enough to let you do what...?
- Of course, take another write off for "absorption of acquisitions" and "exit costs for divestitures," and re-fill the cookie jars--again!
By now, smart executives had cashed in their stock options for millions more than they should have been worth and some were off to "pursue other interests"--like their vacation homes, or their new plane, boat and sports car. (Or even a new company where they can do this all over again.)
If this still wasn't enough to prop up sagging revenue and earnings, introduce the concept of "pro-forma" earnings to your reporting. In this magical approach, you simply omit what makes earnings look worse and viola'-you have earnings growth where there was none.
Or, you can capitalize costs that should have been expensed, spreading the impact over years into the future instead of taking the hit in the current year. That worked great for WorldCom-well, for a while-until it was exposed. Or you can find a co-conspirator like Global Crossing did and try that wonderful double-whammy called "round-tripping"-you know, that's where you each buy an equal amount of something from the other so no real money changes hands. Then the seller takes it as revenue and the buyer capitalizes it instead of expensing it. The result: a nice pickup in sagging revenue growth, and another deferral of expenses over years in the future.
You see, the illusion of growth paid off for the few who knew how to play it--whether they actually created any or not-as long as they were able to cash in and leave, unapprehended.Ê After several years of this manipulation, now comes the expose' of the scoundrels' escapades. Many of the perpetrators escaped with multi-million dollar severance packages (or forgiven loans) for their mischief, leaving the "little guys"-employees and shareholders--to take the hit.
Oh, yes, there is one small glitch now-it seems this form of management misdeeds will be prosecuted as criminal offenses, with sentences including jail time, and giving back the ill-gotten gains. It's about time!
PS: Those vacation homes, planes, boats and cars won't be of much use if you're in the slammer, wearing horizontal stripes or orange jump-suits?
