Friday, February 1, 2013

Predicting the Outcome: A True American Capitalist

Wall Street is an old favorite movie of mine. And there is an iconic scene in that movie where Gordon Gekko, the film's antagonist, gives a speech to convince the company's shareholders at their annual meeting about buying the company out. Here's an excerpt:
Now, in the days of the free market when our country was a top industrial power, there was accountability to the stockholder. The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because it was their money at stake. Today, management has no stake in the company! All together, these men sitting up here own less than three percent of the company. And where does Mr. Cromwell put his million-dollar salary? Not in Teldar stock; he owns less than one percent. You own the company. That's right, you, the stockholder. And you are all being royally screwed over by these, these bureaucrats, with their luncheons, their hunting and fishing trips, their corporate jets and golden parachutes....
 Teldar Paper has 33 different vice presidents each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can't figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I'll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents. The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated.
It's perhaps one of the finest speeches ever caught in a movie screen. And it very clearly illustrates the power of nostalgia, accountability, and empowerment. But, because Gordon Gekko is the antagonist, that beautiful speech is used for more mundane purposes: to convince a majority of the shareholders to give control of the company over to Gekko so he can sell off the company's assets in a piecemeal fashion to make a profit. A classic example of 70s/80s style corporate raiding.

This week, we have another example. Founder and CEO Michael Dell is reportedly seeking a controlling interest in the eponymous company so he can take it private by increasing his own personal stake in the company. Faced with sagging PC sales and thinning margins, the company's stock price has been beset by a steady downward climb from its peak in 2004. One of my friends actually brought the news to my attention and my response was something along the lines of: "He's a true American capitalist. But I think he's making a big mistake."

It's incredible how fast computer technology has moved over the past decade. Dell and HP were once the top dogs in the industry and now their computer divisions have declined to such lows that HP was considering selling its PC division while Dell is currently in talks to go private in order to restore the company's former glory.

Dell is betting a pretty substantial piece of the farm that his leadership can turn the company around. I, on the other hand, think he's running a fool's errand and that he's blinded by his own pride. So here's another edition of Predicting the Outcome, although this one is going to have a very long time frame.

Here is Dell's stock price at close of business today:


Here's my prediction. Within 5 years, Michael Dell will resign as CEO of his company, whether private or public. And if it goes public within 5 years after being taken private, its market cap will be at or below 25 billion dollars (accounting for inflation during the same time period).

He's not gonna turn it around. And I think he has enough sense to hand over the reins to somebody else when it becomes clear that the company's fortunes have declined to an even worse position.

Basically, the only thing I think can turn Dell around is a gamechanger. And a company that built itself on cheap PCs and strong supply chains simply doesn't have what it takes to produce one.

Accountability Department:

Predictions Outstanding: 3 (Marissa Meyer, Fisher v Texas, this)

Predictions Vindicated: 1 (2012 Presidential election)

Predictions Erroneous: 1 (Romney Veepstakes)


  1. You have been quiet for a while, Jay. Hope all is well.

  2. I've been extremely tired and extremely busy this entire week that I just haven't had an opportunity to write something. And I came down with something a few days ago and am now just recovering from it. Expect something soon.