Posted on Tuesday, July 21, 2009
When we remodeled our homes some years back, we decided that the most expensive words known to man were, “While we’re at it. . . .” In doing the research for our book, though, we realized that the words, “Well, we have to do something,” have caused far more damage.
Executives convince themselves that, no matter what, they have to achieve some stock-price goal, some market-share goal, some profit goal. So, they lay out a strategy that might work and roll the dice, even when the odds are stacked against them. In other words, they take what they think is their best bet even though an objective review would show they aren’t making a good bet. Often, they lose.
Sometimes, they lose billions—making us feel a bit better about those bad thousand-dollar decisions we made while remodeling.
“Well, we have to do something,” is largely responsible for Pfizer’s decision to buy Wyeth for $68 billion. This is a bad bet, as we’ve written. Among other problems, while the deal is predicated on massive synergies, there is no reason to expect any meaningful benefit from combining Wyeth’s animal-health medicines and over-the-counter health products with Pfizer’s prescription medications. In addition, Pfizer has an abysmal record with major acquisitions. So does the entire pharmaceutical industry. Yet Pfizer focuses on the long-shot chance that, somehow, the Wyeth deal will work. Pfizer stands to lose a huge amount of revenue when its Lipitor cholesterol-lowering drug goes off patent in 2011, and, well, management has to do something, right?
Which brings us to Dell.
The personal-computer maker had an unbelievable run, both in terms of profitability and reputation. For many years, the business press wrote about Dell as though its make-to-order model had cracked the code and that every competitor would be forever chasing Dell but never catching it. Then the market changed. Customers stopped buying so many desktop computers and started buying more laptops, which they wanted to see and touch, rather than order over the phone or online from Dell. The balance of power shifted back to companies such as Hewlett-Packard that had a major presence in stores. Now, some recent news stories suggest that Dell may be getting desperate.
Our first hint of concern came when Dell announced that it was on the acquisition trail and had hired an in-house takeover specialist. Dealmakers do deals, just as surgeons operate and barbers always think you need a haircut. Dell will now almost certainly buy something—and, if public suggestions about targets are any indication, the acquisition will be a major mistake.
Some analysts have said Dell should buy Accenture. Never mind that Dell has shown no particular aptitude for service and surely couldn’t improve Accenture’s operations enough to justify the hefty acquisition premium that Accenture’s consulting business would command. Others have said Dell should buy Palm and enter the cellphone business. But Dell has already learned how difficult a consumer-electronics business can be, based on its ill-fated foray into televisions. Cellphones are even trickier than TVs. Cellphones are largely a flashy, design business these days, which would put them in mortal combat with the hyperefficient, manufacturing culture that exists at Dell.
Yet Dell’s recent announcement about weakness in its business makes us worry that Dell will be willing to make a bet that may feel like it’s the best chance to regain past glory, even though the chances of success are vanishingly small.
You don’t have to do something if the odds are against you. If Dell executives and investors feel differently, they should go remodel their homes. They’ll lose a lot less money that way.