Wednesday, 1 February 2012

Pack up and go home.

"Sick of this life
Not that you'd care
I'm not the only one with
Whom these feelings I share

Nobody understands,
Quite why we're here
We're searchin' for answers
That never appear

Sometimes I feel like I'm beatin' a dead horse
An I don't know why you'd be bringin' me down"

- Guns'n'Roses "Dead Horse"

There has been much discussion of the difficulties of the principal / agent relationship in executive  'compensation' as the Americans call it; quite apt for more castigated execs like Stephen Hester. However there seems to be another problem born of this relationship which is arguably a worse affliction for shareholders; beating a dead horse.

There are several examples of these kind of businesses that fall to mind. Firstly there is the dead, dead horse. HMV is a perfect example of the dead, dead horse. A business with all the growth dynamics of an entertainment focused woolworths. HMV is losing sales in everything to Amazon, music to Itunes, DVDs to Lovefilm rental culture and books to the Kindle. The business is on a slow road to being absolutely and totally worthless (except the live business which they could spin off). This begs the question why they don't just fold it, count the losses and go home? There could be some profit on liquidation? Can it really be in the interests of shareholders to carry on running this business? If it were owner managed would it still be open? Maybe because the execs are taking in around half a million pounds a year? These guys are pretty expensive given they are effectively administrators.

There is also the dead horse which wants to live again. A great example of the dead horse which hopes to survive by mutation is NII Holdings (also known as Nextel). Nextel had a great product 10 years ago with their push to talk IDEN phones helping lots of construction workers look busy by doing lots of walkie talkie stuff. However walkie talkie phones went the way of many short lived inventions such as the pager and the tamagotchi! Motorola is discontinuing manufacturing the last of these phones. So Nextel have decided instead to build a new mobile network in Latin America. From scratch. In the era of MVNOs with the great fixed capex boom of mobile technology fading away Nextel figure it would be a good idea to take shareholder funds and build a whole new network. Look up the trend for annual ROIC for this company on Bloomberg over the past decade. It is an unmitigated disaster. What could possibly justify building a new network? They figure they can emulate their push to talk service over a 3G network. This one is definitely ready for the knackers yard. Management of course are still taking bringing home the bacon. Just not to shareholders.

Finally we have the basic lame horse. This is a horse which if nursed back to health could go on surviving for a long time serving its owner well. But this horse will also never race again and it needs to know this. Such a stock is RIMM. These guys make Blackberries which are of course the best device ever for reading your work emails or BBMing your mates about where to start a riot in a London suburb. This gives RIMM a great market share with a specific product. RIMM used to be a super growth business like its lame now gelded Finnish brother Nokia. Unlike Nokia RIMM may be able to continue working in its home markets and won't get sent to Africa to finish out its days. However the management of RIMM needs to realise they will never race again and stop wasting shareholder capital on tablets and other pointless ventures.

Therefore shareholders should not be as worried about why executive pay is so high rather they should be asking whether it is helping to run their invested capital into the ground. Perhaps shareholders can get together and start petitioning for these managers to be paid all net worth in stock in future. Lets see how they like their half baked 'growth' ideas when its their money on the line. This also explains the success of Buffet; he keeps managers to run the business but allocates the excess capital to new investments rather than letting the management piss it up the wall on ill conceived projects.

Disclosure: I have no positions long or short in these stocks nor do I plan to take any in the future. This is a piece of personal opinion and is in no way a solicitation to buy or sell these investments nor does it constitute advice to do so.

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