Monday, October 25, 2010

Odland Out, Rationality In?

Office Depot announces that Steve Odland, Chairman and CEO, has resigned from co effective 11/1.2010 (4.63)

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So reads the headline crossing the proverbial “tape”—in our case, the indispensible Briefing.com.

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Seems the board of the once-mighty office products retailer has seen fit to divest itself of a once-heralded CEO who, to the applause of Wall Street’s Finest, helped lay low a thriving enterprise by, among other things, “clearing cash” from the company’s once-strong balance by buying paying absurdly high prices for its own shares.

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And by “absurd,” we mean more than 6-times the most recent price.

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Odland was not alone, of course: hundreds of companies engaged in “cash-clearing” exercises during the heady days of the pre-crisis 2000s, when balance sheets were flush and the uniform question from Wall Street’s Finest—most of whom have never so much had to meet a payroll, let alone run a public company—was “What are you doing to ‘return value to shareholders’?”

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So companies bought back stock or paid special dividends, or both, with no thought of the future being any less bright than it was in those halcyon days.

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Then, come the crisis, they were frozen, with no cash to take advantage of the once-in-generation opportunity to deploy capital at no-risk prices, while Wall Street’s Finest started peppering them with new questions, such as how in the world they were going to manage their way through the crisis with such lousy balance sheets?

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In any event, Mr. Odland is now leaving Office Depot, and we thought it worth reprinting in these virtual pages a column we wrote nearly a year ago to the day, in defense of the still-thriving Google when its cash-hoarding instincts were being questioned by none other than the Wall Street Journal:

Tuesday, October 21, 2008

Memo to Google: Don't “Grow Up”



Google's Cash Conundrum: Too Much

Could Google provide a stimulus package to help boost the ailing U.S. economy?

Google CEO Eric Schmidt revealed Monday to The Wall Street Journal that the company is "thinking" about returning cash to shareholders. It's only a concept at this point, mind you: Mr. Schmidt ruled out a dividend and said no cash return was likely anytime soon.

—The Wall Street Journal, October 21, 2008


Did Eric Schmidt learn nothing this year?

And does the Wall Street Journal not pay attention to the very headlines it has been writing these last few liquidity-deprived months?

Could it be that a single weekend without five or six bank failures around the globe has blocked out the memory of five or six months’ worth of round-the-clock meetings involving sleep-deprived Treasury officials crafting rescue packages for every major investment bank—save the one that filed Chapter 11—in America?

Did we miss something, or did Team Iceland—by losing all three of its banks in one week—not just bat 1.000 in the Bank Failure World Series?

Was this whole crisis all a dream?

Apparently it was, because the above-quoted Wall Street Journalarticle provides a circa 2005-2006 take on the miseries of a publicly traded corporation with too much cash:

Google's growth and love of experimentation is not over. But, on the financial front, it may be growing up.


If “growing up” means throwing away cash on the kind of mindless, investment banker-enriching share buybacks and special dividends that Dean Foods, Scott’s Miracle-Gro, Office Depot and many others embarked on at precisely the wrong time, financial-crisis-wise, we vote for Google remaining a strapping youth.

Readers may recall the “growing up” of Office Depot CEO Steve Odland, who “cleared the balance sheet” of nearly $1 billion in cash in fiscal 2006, buying 26 million shares of Office Depot at an average price of $37. (See
The Shareholder Letter You Should, But Won’t, Be Reading Next Spring,” from August 08, 2007 and “Attention Target Management: Pay No Attention to Analysts Begging for Buybacks,” from November 21, 2007).

Odland’s move earned kudos from Wall Street’s Finest and temporarily provided a lift to the stock price of a second-string office products distributor, but it did nothing to turn Office Depot into a first-string office products distributor, nor did it prepare the company for whatever the world's economy could throw at it: the stock could be bought yesterday at $2.85 a share.

Thus it was with some shock we read the following about Google’s supposed interest in the same sort of “cash-clearing” exercise that crippled more than a few companies at precisely the moment they could least afford being crippled:

Even so, it was a telling comment, indicating that despite Google's continued investment in a range of new business initiatives and infrastructure, the company's cash is piling up faster than it can be spent. On Sept. 30, Google had $14.4 billion in cash and marketable securities.


It may also signal that management is concerned about the roughly 50% fall in Google's stock price over the past 12 months.

We have never seen a company—particularly a supposed high-growth enterprise such as Google—that has successfully propped up its stock in any other way than by continuing to grow its business in a rational, sustainable manner.

And that includes especially the kind of “cash-clearing” follies that helped bring Office Depot from $37 a share to less than $3 in a few short years, and paralyzed hundreds of other companies that might otherwise have taken advantage of cheap prices in the current liquidity squeeze, while forcing the least healthy to seek shotgun mergers or worse.

If a lesson is to be learned from the last three months, it is that cash is not 'trash,' as the saying goes: it is a valuable strategic asset that gives a company an enormous leg up when its competitors have had their legs cut out from underneath them.

Just ask Steve Odland, Eric.



Jeff Matthews

I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews.

Mr. Matthews also acts as an advisor and 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 by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

6 comments:

Anonymous said...

Hoarding cash is similar to spending cash - both should be done in moderation, and can be pathological when carried to extremes.

You are right in that Office Depot's behavior was stupid. M&M's wonderful Nobel prize aside (sarcasm), levering up to buy back stock adds risk to a business. And doing so when equity values is only good for those who plan to sell stock immediately (for example, executives with vested options).

But Google's cash hoarding appears to have become a bit extreme. There is an opportunity cost to keeping so much in the bank when interest rates are so low.

They have $30bln in cash. This should be sufficient for pretty much any company. OK, lots it overseas, so they don't want to repatriate it for tax reasons.

But paying a chunk of their cash flow (from their US biz) as a dividend seems rather sensible.

Jeffrey said...

I'm curious about the 10x price paid on the Office Depot buyback...

I'm guessing that there is some kind of legal restriction that prohibits a company from buying it's own shares from the open market, then retiring them. That's the only reason why I could imagine paying any premium over the market price. I understand the crude analysis of "If we buy back 50% of our shares, then there will be half as many shares per dollar (or twice as many dollars per share) so a 100% premium is justified as it would not reduce shareholder value" but 10x? How can that be acceptable to the Board of Directors? Was there fraud involved? I don't get it.

Jeff Matthews said...

Jeffrey asks about the now-clearly-silly price Office Depot paid for its own stock.

At the time, of course, the price didn't seem entirely absurd: they bought shares on the open market, and they paid a price that other investors deemed rational at the time.

The problem, of course, is that like most of these buybacks it was done during a period of relative calm in the markets, and without considering what might happen.

Thus, when the world collapsed, and share prices likewise collapsed, companies could not take advantage and buy cheap.

It's the herd-mentality thing, writ large and with enduring consuences for not only shareholders but also employees, unfortunately.

JM

bjk said...

Odland came from AutoZone, where the "buy back the shares and let the stores deteriorate" seems to have worked. SHLD is less of a success story. So there may have been a method to the madness . . . at least Lampert thinks so. And Odland recently exercised over a million shares, maybe he knew this was coming or believes in ODP's future.

But What do I Know? said...

And yet I suppose Mr. Odland will be able to live a most comfortable retirement with the rewards of his "service" at ODP. He certainly will have profited by pleasing WSF.

Who's laughing now?

Timothy said...

Jeff,

Remember, this was Act II for Odland. He did the exact same thing at Autozone-cut costs, increased cash flow and bought back lots of shares, and decreased revenue growth by starving investment. It was the same strategy, although his record at AZO probably looks a bit better than his time at ODP.