Why We Love Companies Who Love Their Shareholders

Lewis E. Platt liked to talk business over a plate of chicken fingers...

Platt was the CEO of Hewlett-Packard, which had humble values and a stodgy ethos. The company's billionaire co-founder, Bill Hewlett, famously drove to work in an old Ford Taurus.

Employees were used to chatting with Platt and other executives who sat with them elbow to elbow in the cafeteria.

"Management by walking around" eventually caught on with the rest of the industry thanks to HP management.

But when HP hired Carly Fiorina to be its CEO in 1999, the company's culture did a 180.

Fiorina (whom you might also recognize from a failed 2016 presidential bid) introduced herself to staff by boasting about her 52-foot yacht.

She would eat lunch isolated in her massive glass office.

Her employees were instructed to leave early-morning voice messages – no longer than one minute – with notes about how HP and its rivals had performed in overseas markets while she slept.

And if someone wanted a meeting, they might be able to grab Fiorina for 15 minutes on her corporate jet before she flew off to her next destination.

You get the picture. Every second of Fiorina's day was calculated. She seemed impersonal to many employees as a result. It was a complete reversal from prior management.

Work culture and employee relations are one thing. But as I'll explain, Fiorina's story serves as a lesson for investors too. You see, not all CEOs will have their shareholders' best interests in mind...

Fiorina was brought in for a reason. The dot-com boom was in full swing. Technology was rapidly evolving. HP's board wanted someone who could shake things up.

One of her top priorities was a big, splashy purchase... Unfortunately, her first attempt wasn't great.

After taking over as HP's CEO, she quickly announced plans to buy the PricewaterhouseCoopers' consulting arm for $18 billion. Shareholders revolted over the price tag, and Fiorina eventually gave in and withdrew the offer. (IBM paid just $4 billion for the division a couple years later.)

Fiorina then targeted Compaq Computer in 2002. The idea was that by capturing a larger chunk of the PC market, HP could find economies of scale, get better prices on parts, and eventually raise profit margins.

But the price tag of the deal was a massive $25 billion.

Walter Hewlett, the company's outspoken director and son of the company's co-founder, vigorously opposed the acquisition. So did many large shareholders, mostly family members of the founders.

In addition to the high price, the deal had other drawbacks. Compaq had many overlapping product lines with HP. And Compaq would get the company more enmeshed in the low-margin PC business. Given the pricing war in the industry, sales from personal computers barely exceeded the cost to make and sell them.

Hewlett and others waged a proxy battle to stop the merger. But Fiorina was chasing growth at all costs and wasn't too interested in profit margins.

In the end, Fiorina narrowly prevailed... 51.4% of shareholders voted to approve the deal.

You can probably guess what happened next... The merger turned out to be one of the biggest blunders in the industry.

Before buying Compaq, HP made most of its sales and nearly all its profits from selling printers. It dominated the market, and replacement sales of ink and toner were a high-margin business.

In 2004, HP brought in $24.2 billion from printers and $24.6 billion from computers. The printer business made $3.8 billion in profits, a margin of nearly 16%. But the computer business only made $200 million in profits, a margin of less than 1%.

The next year, profits fell to $2.4 billion... a billion less than when Fiorina took over the company.

Fiorina was promptly fired.

Fiorina chased growth at the expense of profits... just as many shareholders feared. And, of course, stock returns are driven by cash flow in the long run.

During Fiorina's time as CEO, the company's stock plunged 65%. Sure, it was a bad time in the market. But the S&P 500 Index was only down 15% over that period.

Despite all this, Fiorina earned roughly $100 million during her short stint as HP's CEO.

Fiorina's tale of failure is nothing out of the ordinary. There are countless examples of CEOs who pursue their own agendas instead of acting on behalf of shareholders.

That's why it's a good idea to know who's running the business you're investing in... and whether they're serving the shareholders or themselves.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig

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Further Reading

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