Two and a Quarter Cheers for Harvard’s Greedy MBAs
The papers on July 22nd barely noted the reorganization of giant Kroger Co. ($17 billion in sales). The firm announced it will close 100 unprofitable of its 1,100 grocery stores, will immediately pare corporate operating expenses and staff by 25 percent, and may sell all of its 900 drug stores. Did its executives suddenly figure out that they were bloated managerially, had 100 unprofitable groceries and didn't know how to run drug stores? I doubt it.
I suspect the Hafts' (Dart Group Corp.) unfriendly takeover bid for $20 billion Safeway Stores Inc. brought Kroger to the fearful realization that such actions have been desperately needed for a long time.
Welcome to the world of junk bonds. Mike Milken, Drexel Burnham's junk bond purveyor extraordinaire, has been criticized for being the prototypical "paper entrepreneur," one of America's best and brightest, who has turned to the creation of paper wealth rather than jobs. Indeed, Milken has made a quick, legal, personal fortune from his discovery (while at the Wharton School) that low-grade bonds command a relative premium all out of proportion to their relative risk.
And while I acknowledge that junk bond-financed mergers have not induced our auto or semiconductor makers to match Japan in quality, I still say hats off to Milken, T. Boone Pickens, the Hafts, the record number of initial public offerings this year, venture capitalists and even to old J.P. Morgan.
I still believe in more managing by wandering around and in obsessive listening to customers. But that does not detract from my abiding respect for the historic role of our unparalleled capital markets in force feeding necessary economic change.
In fact, I regret that Mike Milken did not join Drexel Burnham a few years earlier. That might have imposed more pressure on U.S. Steel to rationalize its steel business in time to salvage much of it. Instead, the company ignominiously added an "X" to its name (it's now USX Corp.) in public recognition that it doesn't know what it is about.
As for Safeway, its managers are executing an entrenched management-saving leveraged buyout. The resulting huge debt load may be offset somewhat by selling off a fifth of its assets to the Hafts. More important, Safeway's performance for the last six years or so has been problematic. It has suffered strikes. It has opened new stores and sold off old ones, and tinkered interminably with superstore layouts.
These changes were not dramatic enough, say the stock market and the Hafts. Thanks to junk bonds and our incredibly vital financial market, Safeway is now forced to take much more radical, rapid steps. And the $1.5 billion-premium that goes to its shareholders will be reinvested into a capital market that will, in turn, fund growth businesses vital to our future and call other slow-moving managements to account.
Drexel Burnham's Chief Executive Fred Joseph is on target—he says the junk bond-induced takeover wave "woke up a lot of managers of large companies, who by size alone had assumed they were invulnerable." McKinsey & Co.'s perceptive Amar Bhide adds: "Many companies have begun to make the adjustment [to new conditions]. Over 900 subsidiaries were spun off from large corporations in 1984 alone. ... A few managers, unfortunately, are moving in the opposite direction, taking advantage of a liberal antitrust climate to increase corporate sprawl. Such managers may find their lack of congruence with modern capital markets straightened out by ... the hostile takeover."
I am mindful of the charge that the capital-market frenzy leads executives to take a shorter-term-than-ever view. It is true in a few cases, where targeted companies' eleventh-hour acquisitions have managed to foul up their balance sheets enough to scare off raiders for a while. But companies needing major surgery do not fool the raiders and their financiers by touching up the x-rays with accounting changes by briefly deferring some capital expenditures that spiff up earnings for a few quarters. The lion's share of besieged firms instead display a pronounced pattern of long-term investment neglect and failure to prune unwieldy portfolios.
I also concede that huge investment banker fees—call it greed, if you will—induce Wall Street to "put into play" some companies that are moving toward appropriate restructuring. The volume of transactions ensures that some share will be counterproductive, although probably far less than the share of bonehead internal management acquisition decisions.
It turns out that it's not contradictory to love factory managers more than corporate raiders and investment bankers as individuals; while favoring the capital market as a whole over corporate managements taken as a whole.
Most companies' top managements have only been fooling themselves. They, not lazy workers nor unfair foreign trade practices have gotten us into our low quality/low productivity/low innovation bind, which is now crippling our competitive position throughout the world.
I applaud anyone who can scare the daylights out of the Fortune 500 leaders—people like Drexel Burnham's Milken, T. Boone Pickens, and even the greedy little devils from the Harvard Business School who choose investment banking over the factory.
The "Casino Society," as some critics disparagingly call it, has its downsides and unnecessary casualties. But, it may be the only way to sufficiently stir us from the complacency and doldrums of the past two decades.
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