Monday, August 16, 2010

My Dog Charles, “Executing His Yadda-Yadda”


One thing I found surprising this week was learning that to many H.P. observers Ms. Fiorina no longer seemed quite so bad. It was actually her strategic vision that Mr. Hurd had executed, I heard again and again [emphasis added]. Her problem was that while she talked a good game, she lacked the skill to get that big, hulking, aircraft carrier of a company moving in the direction she pointed. Mr. Hurd was a brilliant operational executive, but had the strategic sense of a gnat, and knew only how to cut costs.

—“Real Reason for Ousting H.P.’s Chief” by Joe Nocera, New York Times, August 13, 2010.



So wrote Joe Nocera, ace New York Times business columnist, in Saturday’s paper. And the funny thing is, we’ve been hearing the exact same thing about Mark Hurd and Carly Fiorina from longtime HP-ers for the last three years, as follows:

“Hurd (and this is always said in a huffy, exasperated tone) was simply executing on Carly’s strategic vision”…


...as if spending $19 billion in precious shares of HP stock to buy an aging commodity supplier of PCs—that would be Compaq—was some kind of “vision.”

Anybody using a Compaq these days?

Carly defenders also gloss over the fact that she tried to buy the computer services business of PricewaterhouseCoopers (yes, that’s the actual name) for a cool $18 billion at close to the all-time peak of the technology business cycle in September of 2000.

One of Wall Street’s Finest said of the PWC deal at the time, “Strategically, HP is focused on being a growth company. That is the critical issue here.”

Now, Gartner Group estimated that PWC’s 30,000 service employees were generating $5.6 billion a year in revenue in those heady days, which means that Carly’s “strategy” was to become a “growth company” by paying 3-times revenue at the peak of the market for, essentially, a body shop.

Fortunately for HP, cooler heads prevailed and the $18 billion deal fell apart before it could be consummated. (Not only that, but one year later, HP and PWC announced an “alliance” to do what the $18 billion was intended to do—only the “alliance” cost HP zero.)

How, one may well wonder, is it possible for spin-doctors to insist that Mark Hurd merely “executed the strategy” formulated by his predecessor? Perhaps Hurd’s $13 billion acquisition of EDS eight years after the PWC near-miss was seen as an attempt to provide what the $18 billion PWC deal promised: an army of consultants grafting HP hardware and software onto Fortune 500 companies.

And while that may be the case, there is one difference, and it is huge: Hurd paid a mere ½ of revenue and a slight 6-times cash flow for EDS, compared to the offered 3-times revenue and who-knows-what-times cash flow for PWC.

But there is a broader aspect to this issue of “executing the strategy” that was on our minds even before Nocera’s excellent piece hit our screen Saturday afternoon, and it has been on our minds ever since the latest round of earnings calls began early last month:

Just what is “executing the strategy,” anyhow? And is there a company in America that does not “execute the strategy”?

We hereby present a list—incomplete, at that—of companies that proudly announced they have been “executing the strategy” on recent investor calls in the last 30 days.


Let’s start with the company about which this virtual column began:

8/6 Cathie Lesjak, Interim CEO, Hewlett Packard

“Finally, I can assure you that as acting CEO, my sole focus will be to keep this great company focused on executing our strategy.”

Note she does not say “Carly’s strategy” or “Mark’s strategy,” but we can be assured there is a “strategy.” Let’s move on to the other companies on our list.

8/6 Thomas Mangas, CFO, Armstrong World Industries

“Certainly…we are…thinking through what is the role of the balance sheet in executing our strategy.”

8/5 Marita Zuraitis, President, Hanover Insurance

“This morning I’ll review our operating results and…the progress we’ve made in executing our strategy.”

8/5 Koppers Holdings, Walt Turner, President

“We remain firmly committed to enhancing shareholder value by executing our strategy…”

8/5 Viacom, Thomas Dooley, COO

“…we remained focused on executing our strategy.”

8/5 MF Global Holdings, Jon Corzine, CEO

“…we’re not taking enormous market risk in executing our strategy.”


Yes, that last “strategy” was “executed” by the same man who, as Governor of the State of New Jersey forgot to wear a seatbelt while his official car was being driven at high speeds over the roads his State had not been repairing thanks to the horrible state of governance by people like him. (Apparently Mr. Corzine forgot to “execute” the “seatbelt strategy” that most Americans manage to “execute” every day.)

Moving on, we find that so many “strategies” were being “executed” last quarter, we can’t quote them all. Here we go:

8/4 Terremark, ADC Telecommunications
8/3 Mastercard
7/30 Genworth, First Potomac Realty Trust
7/29 Federal Mogul, Avon Products, Dresser-Rand, Integra Bank
7/28 Nalco Holding, Jones Apparel

And there are even more, including Harley-Davidson, Weyerhaeuser, Green Mountain Coffee and Gartner Group, not to mention perennial earnings-disappointer Take-Two Interactive, which is one company that is not exactly “top of mind” when it comes to “executing strategies,” if you get our drift.

The conclusion to which we have arrived is that a) strategies are a dime a dozen; and b) all companies execute them.


Ergo, even my dog Charles could “execute the strategy” if the “strategy” was to 1) eat, or 2) sleep, or 3) jump in whatever nearby car has an open door, or 4) eat miscellaneous weeds until he throws up.

Why, just this morning Charles successfully “executed” many “aspects” of his “strategy” several times—but he did not bother holding conference calls to brag about it.


Therefore, in light of the fact that “executing the strategy” is fast becoming the most overworked cliché on Wall Street, we here at NotMakingThisUp suggest that any CEO or CFO who for whatever reason feels compelled to use the dreaded phrase to describe whatever random actions the company has been taking recently, they should simply say “we are executing our yadda-yadda,” and get on with it.

And now that we here at NotMakingThisUp have “executed our yadda-yadda,” we can get on with it.

My dog Charles would no doubt approve: he is at this moment outside our window “executing” his “strategy” to eat miscellaneous weeds until he throws up.


And he is executing that strategy very, very successfully, we might add.


Jeff Matthews
I Am Not Making This Up


© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

18 comments:

Anonymous said...

jeff,

perhaps these executives mean that they are "executing" their strategies just as one would "execute" a mass murderer

oh, and thanks for reminding me that other dogs besides mine enjoy eating weeds until they throw up.

--gjg49

lurker said...

Jeff - Doesn't this whole Hurd saga remind you of Floyd Landis cheating in the Tour de France a few years ago?

"I failed the test because...I drank whiskey the night before. No? OK, it was because I was dehydrated. No? OK, it was because I have a naturally high testosterone level. No? OK...um...let me talk to my lawyers..."

Now that's a strategy!

Nick Gogerty said...

Jeff keep this up and your going to take all the fun out of Quarterly analyst call buzzword bingo.

Anonymous said...

The Wall Street Journal, Fox News and their fellow travelers are peddling this fantasy to build up Carly's failed career at HP for political gain.

Anonymous said...

Jeff,
Re Hurd,
He was the best CEO of HP since Messers. Hewlett and Packard. The Board made a tremendous mistake. I wonder how many of the Kibitzers a/k/a experts own HP stock and for how long. I follow HP's information daily and own
many shares for more than 40 years. I am quite upset by and wonder how saintly this Board is.
Re Charles,
Has definitely has a strategy. He doesn't throw up because he eats weeds, he probably eats weeds in order to vomit and get rid of excess acidity, which often is caused by changing diet and/or different quantities of food. Dogs stomach acid is many times stronger than human acidity (to break up bones) and dogs can throw up at will when bothered by excess acidity; weeds help this; they have no access to Tums or Prylosec .
Solution: Feed the same food and quantity at about the same time every day. Snacks and left-overs only after regular food has been eaten, and not in too large amounts.

Anonymous said...

Dude, I like your blog. But I know a bit about HP, and all this post says is that you don't like that phrase. And JeffMatthewsIsStartingToAnnoyMe.

"Anybody using a Compaq these days?" Huh? Uh, well, they merged the companies. They made choices about brand. You know, that's why they did it. Anybody use an HP these days?

It's fashionable to trash Carly's strategy for the company, and PwC at that price would have been a bad buy based on valuation, but it was sound strategy, and Hurd did pursue a very similar yadda yadda. It's not even clear, though I am not the sage condescending hedgie that you are, that it may not have been such a bad deal with inflated stock. Sort of like selling stock at the market high in 2007 and burning the cash on a new sweet ride instead of watching it evaporate.

The Compaq acquisition was about scale in the PC business, and that's about supply chain, and that's key to the strategy (oh, yadda yadda) that Hurd was pushing versus Cisco.

Maybe it was time for Hurd to go. But your post contains nothing of substance about yadda yadda.

Anonymous said...

jeff - do you know what an hp proliant server is or where it first came from? i'm guessing not. hint: we buy them by the truckload.

But What do I Know? said...

It is unfathomable to me how anyone can view Carly Fiorina as other than a self-aggrandizing, publicity-seeking seagull manager who has done nothing other than run down every organization she has been handed--some of them have been fortunate to get rid of her in time. Her mere continued appearance in the public spotlight as a figure of than anything other than ridicule speaks to the degraded political discourse of the times. I wouldn't hire her to run a lemonade stand.

Jeff Matthews said...

Anonymous asks if we know where Proliant servers came from, and notes that his/her firm buys them "by the truckload."

Indeed, that's the old Compaq Proliant, now renamed the HP Proliant, and it resides in the ESS segment of HP (Enterprise Storage and Servers), which contributed 10% of HP's $115 billion sales last FY.

Now, of the $15B in ESS's reported 2009 FY sales, some large amount is storage and blades, so the Proliant portion is maybe half the $15 billion, or $7 billion.

Assuming contribution margins of 15% on $7 billion of sales, that's about a billion in operating income.

The central question is, was it necessary to spend $19 billion to add $1 billion in future operating income from servers now sold under the HP name, as well as personal computers likewise now sold under the HP name, to move HP forward?

The answer is very likely no, but we're open to data suggesting otherwise.

JM

Anonymous said...

Yeah - the overused phrase du jour is very annoying.

For some reason all that talk of executing reminds me of a quote from the late John McKay, when he coached the hapless Tampa Bay Bucs. After another loss, a reporter asked McKay what he thought of his team's execution. McKay said, 'I'm in favor of it."

Anonymous said...

The truth is that Fiorina's "strategy" was only a high-level idea to combine two large companies. It came at a time in her career with HP when her star had definitely fallen, and the merger was viewed by many as a swing-for-the-fences attempt to save her job. It's ludicrous to think that Hurd was just executing Fiorina's whim. Some like to contrast the "strategy" of Fiorina with the "operations" of Hurd. Anyone who's listed to both former CEOs extensively knows that Hurd was clearly superior in BOTH strategy and operations.

Anonymous said...

Man is this the analysis you use to run your hedge fund? You write: "The central question is, was it necessary to spend $19 billion to add $1 billion in future operating income from servers now sold under the HP name, as well as personal computers likewise now sold under the HP name, to move HP forward?

The answer is very likely no, but we're open to data suggesting otherwise."

Uh, what about all the other contributions from the merger, such as much larger market share resulting in real supply chain efficiencies and stronger purchasing and pricing power (numbers not disclosed)? What about the whole approach to converged infrastructure? What are the benefits of all those things? You're the one looking like a shallow numbers assessed analytical wonk with the strategic sense of a gnat.

PhillipCharles said...

"Great quarter, er, column, Jeff! With your insightful and clever takes on earnings calls and the relevant business news of the last few weeks you've been admirably executing the strategy behind this brand. Despite some recent voices of disapproval from other commenters, my thesis regarding your blog remains intact."

Colin P said...

Jeff, On average, during earnings season, how many calls do you listen to each day? Thanks.

Jeff Matthews said...

Anonymous expresses astonishment that we have not explored "the whole approach to converged infrastructure," among other things, in our previous coverage of the Hurd-Carly thing. Alas we have no opinion on "converged infrastructure," which sounds like something that Dilbert's boss would be wowed by. Still, we have (independently of Anonymous' sentiment as expressed here) been looking at the issue of whether Hurd really did, as Larry Ellison claimed, "revive HP to its former glory," or some such statement, and will be publishing soon.

And to Colin's question, the answer is probably 5, on average, throughout the 6 weeks or so of a typical earnings season. More on especially busy days, including transcripts read; less as things wind down.

Some calls are really informative and worth listening to all the way through while doing yardwork or something so you don't get distracted, even if you don't care about the company. These include Caterpillar, Schlumberger, Costco, Cisco, Emerson, Fluor, and a host of smaller companies.

Others, particularly institutional favorites in fairly narrow businesses (such as Petsmart, for example), you should avoid the call and instead pick out the 3 interesting things they said from the transcript, thus avoiding having to listen to the incessant yabbering by Wall Street's Finest over penny-per-share, margin and tax rate nonsense, and not miss a thing.

JM

Anonymous said...

anonymous again here. about that "converged infrastructure" thing. totally agree, it does in fact sound like something dilbert's boss would be wowed by. unfortunately that does not determine its merit.

(or is this the basis of your hedge fund strategy: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1572705).

oh, and btw, I didn't say Hurd restored HP. in fact I don't think he did. i only say that there is a succinct strategy behind HP's version of "converged infrastructure" that actually does make logical sense (if you as one of wall street's *true* finest would actually do the work of researching it). oh, and btw, i don't claim it will succeed or even that its a *good* strategy...merely that no matter what it *sounds* like, it does *exist*, and is actually *logical* and will actually be *relevent* for analyzing the *stock*.

so, we here at jeffmatthewsisstartingtoannoyme, will now be looking forward to messr matthews upcoming promised analysis. in particular, we will be watching to see if messr matthews will have found enough time away from writing snark to actually be able to state the strategy succinctly.

Jeff Matthews said...

Yep, sure thing. And "converged infrastructure" or not, HP doesn't do so hot, by numbers anyway. But it sounds good!

JM

Anonymous said...

Ok the same anonymous here again. Looking forward to the analysis. Don't think HP not looking so hot by trailing numbers anyway will have much to do with "converged infrastructure" though since that is the strategy against Cisco (largely) and is an as yet un-executed yadda yadda.