March 13, 2004

Inorganic VS Organic Growth

This article on M&A sounds about right.
Most studies of mergers and acquisitions by consultants and academics come to the same conclusion: Mergers tend to destroy value, not create it. Work by McKinsey & Co. shows that 65% to 70% of deals fail to enhance shareholder value. Consultant Booz Allen Hamilton estimated that 47% of deals didn't meet the objectives laid out by management in the merger announcement. A recent study by economists Sara B. Moeller of Southern Methodist University, Frederick P. Schlingemann of the University of Pittsburgh, and Rene M. Stulz of Ohio State University calculates that acquiring outfit's shareholders lost $216 billion from 1991 to 2001

Still, why do so many CEOs persist in dealmaking if the long-term track record for takeovers is so poor for owners? Two arguments stand out in the literature, and neither puts CEOs in a kindly light. Richard Roll, a finance professor at UCLA, advanced in 1986 the "Hubris Hypothesis of Corporate Takeovers." In other words, all CEOs think they were born and raised in humorist and broadcaster Garrison Keillor's fictional Lake Woebegon, where all the children are above average.

CEOs believe they can beat the odds. Sure, two-thirds of mergers don't do well by owners, but they all see themselves in the one-third camp that beats the takeover odds.
This next part sounds like it was pulled verbatim from Deming's classic "Out of the Crisis"
In addition, it's a lot more fun to get into a high-stakes takeover battle surrounded by legions of investment bankers, lawyers, consultants, and the media than it is to focus on improving the flow of product through a manufacturing plant or overhauling an inventory management system. We've also learned in recent years just how much CEO compensation packages reward management for overseeing a bigger company -- even though the owners are left holding the proverbial financial bag.
That may be a little extreme. If a Big Company has a strong operating culture that also cherishes new ideas and positive change, then the "plug & play" acquisition model works pretty well.

March 09, 2004

HMOs vs Adam Smith

This was inevitable. (hat tip Brothers Judd)
Two Columbia doctors believe the health insurance industry is chronically sick, and now they’re taking the treatment into their own hands.

George and Hana Solomon have canceled their contracts with all health insurance companies, effective Dec. 1.

For patients who can’t afford the pay-as-you-go health-care method, the Solomons propose an alternative: Cancel your standard health insurance, buy a catastrophic health-insurance policy and pay for day-to-day medical care out of pocket, at a discount.

Bill Kasmann, vice president of Kasmann Insurance Agency Inc., 116 N. Garth Ave., said catastrophic policies have deductibles anywhere from less than $1,000 to $10,000. The monthly premiums usually range from $100 to $200, depending on a wide number of variables.

With major medical events covered by a catastrophic policy, patients can then put money into a medical savings account or similar tax-advantaged account. Patients use these funds to pay for day-to-day health-care.

"This is America, a free-market society, and the only way to make it work is to put the power in the hands of the patient," George Solomon said. The Solomons are offering patients a 20 percent discount on services paid for at the time of the visit.

March 07, 2004

Customers First, Brand Second

This is interesting in that I'm sure the two Apex founders (wealthy by now I imagine) didn't give two hoots about their branding strategy, nor did they hire consultants to help them map out their corporate strategy.
Globalized production strategies, however controversial they are in the political realm, have thrown bargain culture into overdrive, converting luxuries like cashmere and high-tech gizmos into affordable commodities with astonishing speed. Based in Ontario, Calif., Apex Digital was founded by two immigrants from China and Taiwan and is a thoroughly global operation: all the DVD assembly is done by subcontracted workers at a factory in Jiangsu, China, where labor costs are low. Apex has only about 100 employees on its payroll, most of them in California.

A big chunk of Apex's 2003 sales (about $1 billion) came during the run-up to Christmas -- when a kind of extreme thriftiness has come to manifest itself in virtual scrums as bargain hunters throng at low-price retailers for while-supplies-last deals. Last Christmas the Deal was often a DVD player marked down to an absurdly cheap $29, and that DVD player was often an Apex model
Not for everyone ... but losing focus on making money and supporting customers happens when we make business complicated.