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"Panasonic tells how a typical Japanese multinational learned to restructure itself according to this flexible "American" approach while preserving some essential Japanese attributes. Panasonic is the main brand name for Matsushita Electric Industrial Company; author Francis McInerney consulted for Matsushita's American subsidiary in the late 1990s—when the firm's troubles became most apparent."
Microsoft will write down Yahoo within five years
TelecomTV, February 2, 2008
Ian Scales
You thought Sprint’s write-down of its Nextel investment was a shocker? (see Monday's story- "Sprinting down the road to nowhere – fast"). It’s going to be a similar story over at Microsoft if its takeover of Yahoo is successful, claims a leading industry watcher.
Francis McInerney of North River Ventures, a New York consulting firm, says he’ll lay his reputation on the line. “Here’s one you can call me on,” he told his clients in a recent newsletter. “If Microsoft acquires Yahoo, as it intends, it will write down Yahoo’s full value within five years.”
Any nutter can make predictions and get headlines, but McInerney has a track record for getting things pretty much right, not through the usual analysis of technology change and market forces, but through the lens of company fiscal performance. His fans include BT Chief Executive Ben Verwaayen.
But before we inspect McInerney’s certainties let’s hear some other siren voices: Microsoft is certainly not short of free advice with plenty of doom and gloom thrown in - many of the arguments, it must be said, are well-worn old familiars.
Observers note the cultural differences between the companies and they wonder whether the talent will flee Yahoo when Gates turns up to say ‘Hi Guys’. Then there’s size and complexity: bringing any two companies together is tough and huge with lots of complicated nooks, crannies and considerations are just exponentially harder to weld into one than small ones. Critics point out that, instead of marriages made in heaven, these takeovers can be a death clasp with individuals and departments spending so much time and political effort on the merger that they forget about customers and external threats and spiral down into the abyss (or at least fail to grow as fast as their rivals). That’s an easy one.
Another major objection to the merger goes back to what some argue is a just the inability of Microsoft to ‘get it’. Taking over Yahoo, they allege, is a sort of cop-out. Instead of pointing itself at new opportunities and clever interceptions of user requirements, Microsoft is always trying to play catch-up with whatever someone else is having success with - be it the Blackberry or the iPhone, instant messaging or the search engines. It then tries to weave that something into its proprietary framework to lock up the market again. Success in the Internet age, they say, is about innovation and openness: being good at something and then getting everyone else to use it too. Microsoft just can’t break the bad old habit of trying to fire up the proprietary crushing machine - except that it doesn’t works the way it used to.
And of course the crowning argument is the statistical one: most mega-mergers simply don’t work and fail to hit their financial targets.
Coming back to Francis McInerney of New York-based North River Ventures again, all these considerations are trumped by one fairly simple, but overriding imperative. How well does Microsoft work fiscally?
McInerney has devised a grading system for companies, which measures their ‘velocity’ of cash and capital - how quickly they can turn sales into cash and investment into returns.
When one company takes over another, he says, the taker inevitably shares its velocities with its new underling. If a company has low velocities it’s a disaster because it means the deal can never be accretive - in other words instead of the new company being greater than the sum of its parts, it becomes less. Oops.
Having kept a close watch on both Yahoo and Microsoft’s velocities, McInerney claims the deal just isn’t going to work. “Microsoft’s “North River Velocity of Cash Index has fallen steadily since 1999, when it was 5, to -39 today,” claims McInterney in a recent newsletter. ”That indicates a significant and steady decline in management controls. Which in turn gives you a precise indication of its ability — or inability — to make sizable acquisitions accretive.” In other words, the financial numbers say Microsoft can’t make the merger work, no matter how good the industrial logic is.
McInerney explained the process to TelecomTV. Stay with it...
“The simplest way to look at it is that all businesses breathe cash,” says McInerney.
"Breathing it efficiently is a necessary, but not sufficient condition (as Dell discovered) for success. The higher your cash velocity, and therefore the fewer your cash wait-states, the more efficiently you breathe and the more opportunity you have to compete and win.
“In general, between companies competing side-by-side, the one with the highest cash velocity always wins. The PC business is an excellent example. The suppliers have no intellectual property - it's all owned by someone else like Microsoft or Intel - and must compete on operational efficiencies alone.
“These, like Dell's delivery system for a decade, are the brand pillars of a company. They are the only things PC makers can use to manage their customer's experience of their products.
“But when another company changes the terms of the competition, as Apple has done by managing its users’ entertainment rather than just selling hardware in a box, however efficiently, and when that company manages cash as well or better, you have issues.
“I like to say, therefore, that the main function of all enterprise since the Neanderthal traded arrow heads is to use the latest IT to minimize cash wait states in the system.”
Microsoft’s low velocities indicate a decline in control and management ability, concludes McInerney. “Unless Microsoft fixes its velocities, this deal is dead on arrival.”
We’ll get back to Francis McInerney with either a bouquet or a brickbat in about 2013.
