Turnarounds: How Long is Too Long?

Meg Whitman is into year three of her turnaround of HPQ

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Turnarounds: How Long is Too Long?

Meg Whitman has been at the helm of Hewlett-Packard (HPQ) since September 24, 2011, and the company still faces an uncertain future. An article in the IT trade publication Datamation about Ms. Whitman’s turnaround efforts has me wondering how long is too long when it comes to fixing a business.

How long are HPQ shareholders willing to give Whitman to repair the mess she inherited — five years? Six? And what yardstick should be used to measure her performance? Let’s take a closer look at the kinds of things to consider when evaluating the captains who are brought in to save sinking ships.

A Masterful Job

Lou Gerstner’s resuscitation of IBM (IBM) is probably one of the most talked-about events in U.S. corporate history. In his book Who Says Elephants Can’t Dance, Gerstner estimated Big Blue’s corporate culture would take five years to change. You could argue that when he retired in December 2002 after almost 10 years at the firm it was still undergoing transformation.

But what you can’t argue against is that he left IBM in much better shape than he found it — which should be the goal of every CEO, not just the ones providing first aid. At the end of the day, IBM shareholders were rewarded with an annualized total return of 22% during Gerstner’s tenure. Since then its annual total return’s averaged a modest 9.5%. Clearly, shareholder return is an important component when evaluating a turnaround’s success, but it’s not the only factor.

Good Things Take Time

Sometimes investors simply don’t see what’s keeping the stock down despite obvious signs of recovery. Take Apple (AAPL) for example. Steve Jobs came in as “interim” CEO in September 1997, returning to the company he co-founded after a 12-year absence. In fiscal 1996 (September year-end), Apple lost $816 million on $9.8 billion in revenue. Jobs and the board implemented a major restructuring over the next two years that would significantly reduce the company’s expense structure. Included in the cost cutting were major job cuts.

However, it’s the non-personnel-related decisions that helped build the foundation of what’s become a great product innovator. The first was to end its licensing of the MAC operating system to other personal computer vendors. That made its operating system exclusive to Apple products, avoiding the me-too cloning of PCs and the subsequent decline in prices. The other was to increase the amount of outsourced manufacturing it used to build its products. Focusing on design and marketing, the move paved the way for its first major innovation — the iPod — in 2001.

Apple hit a revenue bottom of $5.94 billion in fiscal 1998, approximately $4 billion less than the year before Jobs took over. Nonetheless, it managed to earn $309 million. Jobs had learned the trick of any good turnaround: It doesn’t matter what kind of products you make if you don’t make money. That major shift in Jobs’ thinking was a godsend for Apple.

The company’s net profit grew to $786 million in fiscal 2000, and after rocketing up nearly 500% in Jobs’ first three years at the helm, the stock cooled back down to a 138% return. That’s market-beating performance, but other CEOs have managed to do even better in shorter time frames: Best Buy’s (BBY) CEO, Hubert Joly, has been in charge for just 14 months and its stock’s up 150% through October 23 — more than quadrupling the S&P 500 in that time.

What’s the Takeaway?

Evaluating a company solely by stock performance cuts both ways. More important than the stock price is what’s being done to alter the company’s direction. Creating a sensible plan that realistically can work and then successfully executing it is what matters most – simple in theory, but far from easy.


Article printed from InvestorPlace Media, http://investorplace.com/2013/10/turnarounds-long-long/.

©2014 InvestorPlace Media, LLC

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