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September 30, 2005

Don’t Do It For The Street

One of the reasons proposed by pundits for eBay’s somewhat inexplicable (to me) high bid for Skype is that “The Street made them do it.”  eBay’s stock has been stagnant lately, the theory goes, so they “had to do something” to convince The Street that there is still growth even after every living soul in the universe is using eBay for every transaction under their various suns.

I don’t buy that theory; Meg Whitman is too smart to do anything for such a dumb reason.  But many a lesser CEO has had his or her judgment swayed by the clamor of The Street – me, for example.

I’ve blogged here about how AT&T lost what chance it had for a future by optimizing for analysts’ expectations of the coming quarter.  And I’ve blogged here, too, about how giving public projections can warp a CEO’s judgment.  Today’s “learn from my mistakes” sermon is about letting The Street determine your strategy.  After all, quarters are only tactical.

When your stock is going up, everyone tells you that you are a genius.  Even if you don’t have the slightest idea why your stock is doing what it’s doing, you suspect that you deserve the credit for it.  ITXC went public at 12.  Less than six months later it was over 120.  Wow! 

Then the bubble burst in March of 2000.  The stock price fell relentlessly.  We were doing better as a company than we had been doing when it soared.  How could this be?  If you accepted the credit when the stock went up, it’s hard to escape blame when the stock goes down.  All of a sudden everybody knows just what you ought to be doing and you’re not so sure.  Stockholders are neither happy nor silent.  If your results are still meeting predictions – ours were - then it must be that  The Street is not happy with your prospects.

We were a wholesaler of a commodity – international long distance calls. Because we sent our calls over the Internet, we generally had lower costs than our competitors; that’s a good thing in a commodity business.  But our margins were slim; it’s that kind of business.  The Street thought we should move up the value chain, sell something with higher margins.

If you asked me then whether I was letting The Street set my strategy I would have denied it – honestly.  With hindsight, I’m not so sure.  A CEO does work for the stockholders, it’s easy to rationalize.  The stockholders deserve something better than a steadily falling stock price.  The value of a company IS very much in the eye of the beholder and we had a responsibility to make that value high.  Since our stock still had some value – unlike a lot of other Internet companies – a strategic acquisition seemed like it would make a lot of sense.

Like eBay, we could afford the price of the acquisition – especially since none of it was cash – even if the acquisition didn’t work out.  The acquisition didn’t work out.  It happens all the time.  We shut it down before we bled too much cash.  But the opportunity cost was enormous.  The year we spent distracted from our core strategy was one in which I believe, with hindsight, we could have made huge strides in our core business – albeit at our usual low margins.  We did grow the core business but not nearly as well as if we had stayed focused on it.  Our competitors made similar mistakes so we didn’t lose much ground but boy could we have done better.

We took time from the business we knew, were good at, and had a huge lead in to do something we didn’t know nearly as well.  We tried to fit disparate organizations and business models together.  We tried to make the acquisition work; lots of people get hurt when you have to cut your losses.

In short, the “strategic acquisition” was bad strategy.  We shouldn’t have worried at all about being out of favor with The Street; our whole sector was anyway.  We should have single-mindedly pursued the strategy that was working for us, made extensions where necessary, improving our market position where possible, extending the lead in technology that we had. It might have been a good idea to merge with a SIMILAR competitor.  The Street would have hated that; two low margin companies coming together to make a bigger low margin company. But it doesn’t matter what The Street hates today; it’ll change its mind tomorrow.

You change your strategy when it’s wrong; you adjust it all the time.  But you should never change your strategy because The Street is telling you to.  You especially should never do an acquisition for that reason.  And it’s very hard to know when the little voice in your head telling you to do something is actually just an echo of The Street noise.

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