10 Big business blunders
Ego and greed: a common recipe for executive error
By Alex Markels
Glance through the following list of business blunders, and you may conclude that the common denominator in financial failure is outsize hubris. Yet arrogance alone doesn't guarantee disaster. After all, if you're seriously lucky as well, the combination can catapult you into the kind of power spot that billionaire Mark Cuban plays on TV's The Benefactor.
For a tried-and-true approach to calamity, there's always the sort of book-cooking that prevailed in the 1990s. But that's an increasingly risky proposition given Eliot Spitzer's ever expanding universe of white-collar probes. And there are plenty of legit roads to ruin. Key ingredients typically include behavior that often accompanies hubris, most notably a cocksure rush to judgment, without doing enough homework. Before making big decisions, great corporate leaders "dive into the brutal facts like pigs in slop," says management guru Jim Collins, who studied the differences between winning and losing management styles in Good to Great: Why Some Companies Make the Leap ...and Others Don't. "Lesser companies tend to . . . just act."
He notes that while some of business's top performers take ample time to study new markets (see Walgreen's, whose stock has outperformed the market 15-fold since 1972), the Internet-era mantra of being "first to market" is almost always a shortcut to a bad decision (see Drugstore.com). So is the chase for the mergermaniac's holy grail: synergy, the frequently fatal belief that 1 plus 1 equals 3. Then, of course, there's the sort of thickheadedness that comes from believing that technology itself is the true holy grail.
In fact, the best corporate decisions are often the most obvious: hiring good people, training them well, and shepherding them up the corporate ladder. Yet those stories aren't nearly as much fun to read. So in the spirit of learning from (and laughing at) the mistakes of others, we present our list of best (or should it be worst?) business blunders.
AOL-TIME Warner: When 1 + 1 = 1/5th
They called it "convergence": a melding of new technology and old media that would revolutionize the business world. "By joining forces with Time Warner, we will fundamentally change the way people get information, communicate with others, buy products, and are entertained," America Online founder Steve Case said of the merger of his Internet pioneer with old media publisher Time Warner in January 2000.
But like so many other promises of synergy between merging companies, "it was a joke," says Harvard's Rosabeth Moss Kanter, author of Confidence: How Winning Streaks and Losing Streaks Begin and End. "When the people at Time Inc. refused to use AOL as their E-mail provider, it was clear how badly things were going."
Although the combined company predicted it would break $40 billion in revenue and $10 billion in profits within a year, its failure to realize the synergies--along with the collapse of the online ad market--assured that the merger would soon take its place among the worst in U.S. business history. Today, after a $54 billion write-down in the value of the deal, Time Warner is valued at a mere $76 billion, one fifth of the companies' combined market worth on the day the merger was announced.
For AOL, the deal was probably a lifesaver. Case was able to use AOL's lofty stock price to buy a highly profitable company with more than 70 years of publishing experience. On the other hand, Time Warner's bigwigs "got silly and drank the convergence Kool-Aid," says business book author Roger Lowenstein. And they're still recovering from the hangover.
The Hunt Brothers: Hi-Ho Silver
The little old ladies lined up outside of London's Hatton Garden jewelry stores in the fall of 1979 should have worried Bunker and Herbert Hunt. If enough of them were willing to sell their silver heirlooms for scrap, then the Hunt brothers' attempt to corner the world's silver supply was surely doomed.
But Bunker Hunt, second-oldest son of Texas oil tycoon H. L. Hunt, was convinced he could turn silver into gold. A big-betting oilman, Bunker became one of the richest men in the world at age 35. Beginning in the early 1970s, he and younger brother Herbert made a tidy little sum on 200,000 ounces of silver they purchased, as silver prices doubled from $1.50 to $3 an ounce.
Figuring bigger is better, over the rest of the decade they purchased an additional 59 million ounces, roughly a third of the world's supply, pushing the price to $50 an ounce and earning the Hunts a paper profit of about $4 billion. But the high prices sparked increased supplies of scrap silver and mining investment. Prices dropped.
Tapped out of cash and unable to liquidate their silver hoard without driving the price down even faster, the Hunts watched as the price fell 80 percent in a matter of days. The following year, the two were named Boneheads of the Year by the Bonehead Club of Dallas. Its motto: "To learn more and more about less and less, until eventually we shall know everything about nothing."
New Coke: It's the Real Thing ... Not!
Coca-Cola executives figured they had finally found the solution for their ailing brand. Concerned that the Pepsi Challenge campaign was dangerously eroding Coke's market share (which had fallen by nearly half since the 1950s), they formulated New Coke in 1985, then gathered focus groups to compare the two in blind taste tests. When the new formula beat Pepsi hands down, they figured they had a winner. Yet within hours of its rollout, it was clear that something had gone sour. "Damn!" exclaimed the wife of a Coca-Cola bottler upon her first sip. "This will never sell!"
Thousands of complaints flooded the company in the weeks after New Coke hit the streets. At first, the company's marketing chief called such complaints "relatively insignificant." But three months and 400,000 angry calls and letters later, New Coke faded from store shelves in favor of "Coke Classic."
Conspiracy theorists believed the whole episode was merely a deft marketing ploy to reinvigorate the brand. After all, Coke's decision to reverse itself was soon rewarded by growing sales and a stock price that reached an all-time high. The truth, however, was that while the focus group leaders had asked whether tasters liked New Coke better than Pepsi, "they never bothered to ask people how they would feel if old Coke was taken away," says Constance Hays, author of The Real Thing: Truth and Power at the Coca-Cola Company.
Long-Term Capital Management: Too smart by half
They were the epitome of the rational man: Two Nobel Prize-winning economists, a former Federal Reserve vice chairman, and 25 egghead Ph.D.'s--all armed with banks of number-crunching computers. Recruited to join Long-Term Capital Management in 1993, they were led by John Meriwether, the legendary former Salomon Brothers bond trader and star of the book Liar's Poker. Meriwether had made billions for his former employer through trades based on computer-generated charts that plotted historical relationships between related securities, like those of merging companies. In 1993, the team pulled in hundreds of millions from wide-eyed investors too impressed to ask probing questions, then leveraged the money by borrowing billions more.
The strategy was a wild success at first, netting investors an annual return of more than 40 percent in 1995 and 1996--even after the partners had grabbed a hefty 2 percent management fee and a 25 percent share of the profits.
But when a host of unexpected events (Russia's debt default, a collapse in the market for mortgage-backed securities, and a currency crisis in Asia) sent the global bond market into a tailspin in 1998, traders stopped acting like the rational buyers and sellers the eggheads had assumed. "They had programmed the market for a cold predictability that it never had," author Lowenstein writes in When Genius Failed: The Rise and Fall of Long-Term Capital Management. "They had forgotten the human factor."
XEROX: Undiscovered treasure
It must have been a sight for sore fingers: an electronic typewriter that could display written correspondence on a screen, store it with a click of a button, then send it around the office and print out hard copies?
Demonstrated at "Futures Day" during a meeting of Xerox's top managers in 1977, the fruits of nearly a decade of study at the company's Palo Alto Research Center caught the eyes of the executives' spouses, many of whom were former secretaries. But most of their manager husbands "just didn't get it," says Douglas K. Smith, coauthor of Fumbling the Future: How Xerox Invented, Then Ignored, the First Personal Computer. "So Xerox turned it down."
Meanwhile, Apple Computer's founders copied much of the technology in their Macintosh PC. And Xerox researchers like Bob Metcalfe, who had invented the Ethernet local area network, left and started their own companies, leaving Xerox largely out of what would become a trillion-dollar industry.
Under pressure to produce profits, the fast-growing Xerox "didn't see PARC's innovations as adding much more than incremental growth."
Not that Xerox was the first to make this mistake. Some 35 years earlier, IBM, Kodak, and General Electric all took passes on a new technology that could reproduce paper copies within minutes. "What's wrong with mimeographs?" IBM executives are said to have asked when they turned down the chance to buy the technology that would go on to empower Xerox.
Donald Trump: Rolling snake eyes
'You're fired!" That's exactly what any sensible board of directors would yell at a chief executive who'd run his company into the ground from Day 1. But when the CEO is Donald Trump, it's apparently easier said than done.
Convinced that Atlantic City would soon eclipse Las Vegas as the nation's gambling center, Trump invested billions beginning in the mid-1980s on behemoths like his over-the-top Trump Taj Mahal. "I can't get into trouble in Atlantic City!" he boasted at its opening in 1990.
But the Taj cannibalized revenue from its neighboring properties, the Plaza and the Castle. And when the recession of 1990-91 sent customers fleeing from the blackjack tables at all three, Trump couldn't pay the more than $1 billion in debt he'd rung up. Narrowly averting bankruptcy, he managed to keep control of the properties by relinquishing much of his original stake and taking the company public in 1995.
Yet Trump Hotels hasn't posted an annual profit since. From a high of $34 a share in 1996, the company's stock sank below 20 cents after it was delisted by the New York Stock Exchange in September. Burdened with a crushing $1.8 billion debt, the company declared bankruptcy for a second time last month. Amazingly, however, Trump saved his CEO status, thanks, in part, to his ponying up $72 million ($55 million of it in cash) to help revive the company.
It's a performance that would make his present-day apprentices blush.
IRIDIUM: The sky really is falling
Blame it all on Karen Bertiger. Just married to a Motorola engineer in 1985, she refused to go on her honeymoon because there was no cellphone service on Green Turtle Cay in the Bahamas. "If you are such a smart guy," she told her husband, Bary (who had patented the communications system for the Voyager spacecraft), why is it that "I still can't make a cellular phone call from anywhere on Earth?"
Thus began one of the largest fiascos in business history. Seizing on the idea, the can-do crowd at Motorola ran Bertiger's idea up the corporate flagpole. The leviathan effort would cost billions, but CEO Robert Galvin figured that by spinning it off and teaming with a host of worldwide partners, it just might work. More than a decade and $5 billion later, Iridium's network of 66 low-flying satellites was finally launched in 1998. "The potential uses of Iridium products are boundless," Iridium's then CEO Edward Staiano decreed.
Yet Iridium's brick-size phone was a far cry from the tiny cellphones flooding the market. Even worse, users had to be outdoors to make the line-of-sight connection needed to communicate with its satellites.
With fewer than 50,000 subscribers by 2000, the company declared bankruptcy. And the low-flying satellites were expected to fall from the sky. But before they did, Dan Colussy, who'd made a fortune refurbishing aircraft, purchased Iridium for $25 million, paying half of one cent for every dollar originally invested--perhaps the greatest deal since the Louisiana Purchase. With lower airtime fees and handsets that cost half what they did in 1998, the company recently announced that its subscriber base had grown to 100,000 and that it had even turned a before-tax profit.
IBM: Error message
Hindsight can be a painful thing. Just ask Gary Kildall, the inventor of the CP/M operating system, one of the first designed for a personal computer. In 1980, destiny knocked on his door in the form of a team of blue-suited IBM executives. They'd been referred by none other than Bill Gates, who'd struck a deal with Big Blue to create software for IBM's first personal computer.
Caught off-guard by the remarkable popularity of the Apple II computer, the IBM ers had decided to rush their own version of the PC to market. But instead of building it from scratch, they decided to slap it together with off-the-shelf parts. Gates was happy to oblige with his programming software, but he lacked an operating system, so he referred them to Kildall. His wife, however, sent them packing after refusing to sign IBM's dense nondisclosure form.
That's when Gates & Co. stepped back in. A friend across town also had an operating system called QDOS (for "quick and dirty operating system"). "We just told IBM, 'Look, we'll go and get this operating system from this small local company, we'll take care of it, we'll fix it up, and you can still do a PC,'" Microsoft CEO Steve Balmer explained in the documentary Triumph of the Nerds .
Microsoft purchased unlimited rights to QDOS for $50,000, tweaked it, and sold it to IBM for $80,000. But with one proviso. While IBM would have the right to install it royalty free in as many computers as it wanted, Microsoft would retain the right to sell the renamed MS-DOS to others. "No problem," replied the IBMers, who couldn't imagine who else might want it.
AT&T: Dialing the wrong number
The right choice seemed obvious to Charles Brown. Forced by a trust-busting federal judge in 1982 to jettison either AT&T's regulated local telephone monopoly or its equipment business, the AT&T CEO chose to keep hardware. With the personal computer business taking off and the melding of computers and telecommunications right around the corner, AT&T could leverage its vast resources to dominate the PC market and transform its stodgy image and middling stock price. AT&T Information Systems was soon born, and the company's first IBM-compatible PC, built with Italy's Olivetti, debuted in the summer of 1984.
But the computers weren't fully compatible. Moreover, AT&T's technologists weren't keen on working with outsiders. Over the next five years, the company lost as much as $3 billion. Yet AT&T's fatal attraction for PC s continued as new CEO Robert Allen set his sites on NCR, which AT&T purchased in a 1991 hostile takeover for $7.5 billion, twice what NCR shares sold for before AT&T came calling. But over the next five years, NCR lost nearly $4 billion before being spun off for less than half of what AT&T paid for it in 1991.
In the end, Brown was right about the coming PC wave. But AT&T chiefs made the classic "industry of the future" mistake, says Harvard's Kanter, "They arrogantly leapt into something totally new, thinking their past success in telephones would add up to the same in computers."
Boston Chicken: Laying an egg
Hell hath no fury like a coupon clipper scorned. Or, at least, that's how executives at Boston Market (originally Boston Chicken) first explained why they were having trouble keeping up the momentum at their restaurant chain in 1997. When management attempted to wean penny-pinching customers off a popular coupon promotion, they ran to the nearest KFC. For a company that touted itself as the next McDonald's for its "home-meal-replacement" strategy of putting a rotisserie chicken in every pot, the flattening sales led to its stock's falling more than 82 percent from its $41.50 high at the end of 1996. Shareholder lawsuits accused the company of hiding more than $750 million in losses incurred by its franchisees, which had borrowed up to 80 percent of their start-up costs from the company. Though most franchisees were losing money as the chain grew to more than 1,100 stores, the company showed a profit, partly by booking the loan repayments as income. In a move similar to those later detected at Enron and elsewhere, "they adopted a financing strategy to keep start-up costs off their balance sheet," says Dartmouth's Sydney Finkelstein, who interviewed company executives for his book Why Smart Executives Fail and What You Can Learn From Their Mistakes. Instead of Boston Market's becoming the next McDonald's, McDonald's became the next Boston Market, purchasing the by-then-bankrupt company for a pittance in 2000. How's that for eating crow?
