William Lazonick, an expert on the American business corporation, has written
about the rise of the conglomerate movement of the 1960s. At the time,
shareholders were clamoring for rapid growth, so they pushed for big mergers and
acquisitions. Once-successful firms were pressured to move away from their core
businesses, often to terrible effects. In an email to me, Lazonick noted that
“the ideology was that a good manager could manage anything, and that all the
central office needed was performance statistics so that it could ‘manage by the
numbers’.” This foolishness “imploded,” as Lazonick put it, in the
1970s
.
Evidently Lampert didn’t get the memo. In the 1980s, as deregulation got the
casino games rolling on Wall Street, mergers and acquisition fever once again
took hold. This time around, mergers more often involved acquisitions in the
same industry, like Bristol Meyers’ acquisition of Squibb. Two new terms entered
the American vocabulary, the “hostile takeover” and the “corporate raider.”
Oliver Stone made a movie about this episode called
Wall Street.
Some refer to Lampert as a corporate raider. He prefers the term “active
investor.” It must be admitted that Lampert wasn’t
only interested in
stripping the assets of his retail giant to make a fortune off it right away. He
thought he could increase profits, too. After making a nice wad of cash from
Kmart by selling off the valuable real estate sitting under dozens of stores,
shutting down 600 stores and laying off tens of thousands of workers in the name
of cost-cutting and thereby jacking up the stock price, he got bigger ideas. He
would use Kmart to take over another ginormous retailer, Sears.
What background did Lampert have in retail? None at all. But never mind that.
He was a Wall Street genius, and he would make this thing work by harnessing the
power of data and numbers and letting the invisible hand of the market guide his
Franken-company to glory. He even hired Paul DePodesta, the statistician of
“Moneyball” fame, to advise him. When Kmart acquired Sears, the new company,
Sears Holdings, became one of the largest retailers in the U.S., and Lampert
became its CEO. He took on the Herculean task of integrating two vastly complex
companies. And he brought on a guy that knew all about restaurants and nothing
about retail to help him, Aylwin Lewis, former president of YUM! Brands.
Reactions ranged from surprise to predictions of doom. Mark Tatge
at
Forbes called him “
Crazy Eddie” and
decided that he must be planning to liquidate the whole shebang, perhaps slowly,
by dumping stores (Sears owns a ton of valuable real estate) and using the money
to do stock buybacks (more on that later) that would further enrich him.
It turns out that contrary to Lampert’s notion, you actually do need to know
something about a business in order to manage it well. There’s really no
substitute for industry-specific experience. And bigger is not always better — a
gigantic corporation can be too unwieldy and complex to thrive, especially when
your management philosophy is derived from a writer of bad novels.
Sears and Kmart are now on well on their way to becoming vaporized as
brands.
2. Myth: Self-interest is the greatest virtue
The neoclassical economic paradigm is built upon the idea a human being is
little more than a globule of self-interest. It teaches that the market economy
is populated by rational individuals whose selfishness is constrained only by
expediency. Ayn Rand was an enthusiastic proponent of this idea in extreme form,
and her celebration of it can be found in
The Virtue of
Selfishness: A New Concept of Egoism, published in 1964, which
explains, among other things, the destructiveness of altruism and the virtue of
acting solely in your own self-interest.
At Sears, Lampert set out to create the Ayn Rand model of a giant firm. The
company got a radical restructuring. It was something that had been tried at
giant industrial conglomerates like GE, but never with a retailer.
First, Lampert broke the company into over 30 individual units, each with its
own management, and each measured separately for profit and loss. Acting in
their individual self-interest, they would be forced to compete with each other
and thereby generate higher profits.
What actually happened is that units began to behave something like the
cutthroat city-states of Italy around the time Machiavelli was penning his guide
to rule-by-selfishness. As Mina Kimes has
reported in
Bloomberg
Businessweek, they went to war with each other.
It got crazy. Executives started undermining other units because they knew
their bonuses were tied to individual unit performance. They began to focus
solely on the economic performance of their unit at the expense of the overall
Sears brand. One unit, Kenmore, started selling the products of other companies
and placed them more prominently that Sears’ own products. Units competed for ad
space in Sears’ circulars, and since the unit with the most money got the most
ad space, one Mother’s Day circular ended up being released featuring a mini
bike for boys on its cover. Units were no longer incentivized to make
sacrifices, like offering discounts, to get shoppers into the store.
Sears became a miserable place to work, rife with infighting and screaming
matches. Employees focused solely on making money in their own unit ceased to
have any loyalty the company or stake in its survival. Eddie Lampert taunted
employees by
posting
under a fake name on the company’s internal social network.
What Lampert failed to see is that humans actually have a natural inclination
to work for the mutual benefit of an organization. They like to cooperate and
collaborate, and they often work more productively when they have shared goals.
Take all of that away and you create a company that will destroy itself.
In 2012, Lampert bought a $40 million home on Indian Creek Island, near
Miami, just around the time he decided to sell 1,200 Sears stores and close an
additional 173. That same year, Sears Holding was named the
sixth
worst place in America to work by AOL Jobs.
3. Myth: Greed always wins
In the 1980s, a noxious business philosophy developed that said that
shareholders were the only true stakeholders in a company, because they made the
investments and bore the risk. Forget about the investments and risks born by
taxpayer and the people that work for a company. They didn’t matter. A company
had no responsibility to anybody but the shareholder.
As a result, executives started using this justification for various kinds of
hustles designed to line their pockets. They got very adept at the game of
buying back their own stock in a way designed to inflate earnings per share and
hide weaknesses.
In 1977, 95 percent of distributions to shareholders came in the form of
dividend payments. Today, more than half of the cash returned to shareholders
of S&P 500 companies comes from buybacks instead of dividends.
Fortune magazine, in a
story about
what happens when Wall Street jumps into the retail business, reports that under
Lampert, Sears has gone on a stock buyback spree. Between 2005 and 2011, he took
what was once the company’s strong cash flow and spent $6.1 billion of it on
stock buybacks. During the same time period, only $3.6 billion was spent at
Sears on capital improvements. Lampert told investors that upgrades and new
stores were not an “efficient” use of capital. Neither was paying workers
decently. In fact, Sears workers are paid so badly that they have
taken
to the streets to protest.
So when you walk into a Sears store today, you find a sad, dingy scene with
scuffed floors and chipped paint. Tense-looking workers hover over merchandise
scattered onto ugly display tables. Hardly makes you want to buy a
microwave.
A handy chart on Yahoo Finance show that
buybacks
reached a high just about the time that Sears’ sales went into the toilet.
Stock buybacks are really just an effort to manipulate stock prices, and they
don’t help a company’s long-term health. They divert money away from the things
that a company needs to have to succeed, like decent salaries for workers and
investments in new products and services. Wonder why Apple is no longer making
anything interesting? Why its retail workers get paid squat? Check out what
they’ve been doing with stock buybacks.
Lampert’s buyback scheme has raked in a pile of money for him and his early
investors, but it’s also flushing the company down the drain. Hoovering cash out
of any firm, especially a retailer that needs appealing stores and strong
advertising, will eventually crush sales.
And so it has. Sears has
lost
half its value in five years.
Conclusion: The lessons of Crazy Eddie seem so obvious that
a bunch kids running a lemonade stand could understand them. You have to know
something about the business you’re running, especially a big one. Success
requires cooperation rather than constant competition. Greed is ultimately
destructive.
The invisible hand of the market appears to have attempted to slap Lampert
upside the head to teach him these things. But he remains committed to his
nonsense, and the real losers are all the hard-working people who have lost
their jobs, and the potential loss to the American economy of two revered
brands.
It’s probably a good thing Ayn Rand never tried to run a business.
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