Both Matt Yglesias and Karl Smith have blog pieces that claim businesspeople are doing pretty dumb things. The claims are in some ways mirror images. Yglesias claims that Barnes & Noble is foolishly spending money developing and selling Nook, when instead it should just return the cash to shareholders. Smith is claiming (as far as I can tell) that Apple investors haven’t figured out that Apple can’t really return much of its immense pile of cash to shareholders, because this money is required to run the business.
Yglesias says that it is an obviously bad use of shareholder funds for Barnes & Noble to invest in Nook, because their expertise is in running brick-and-mortar stores. But by this kind if logic, why would movie company Disney invest shareholder funds opening theme parks, why would brick-and-mortar retailers Walmart, Target, and Macy’s invest shareholder funds developing web businesses, and why would computer company Apple invest shareholder funds developing phones?
Core competencies and intangible assets are notoriously tricky to define and quantify for a real company, but for Barnes & Noble they almost certainly include the power of their brand name as a place to look for book-related merchandise, their expertise in developing and managing relationships with publishers, and their existing back catalog of titles. I don’t know enough about the specific situation to know whether Barnes & Noble should have developed and sold an e-reader, but based on what is in the piece, Yglesias doesn’t either.
Karl Smith is a very smart guy, but keeps digging himself in deeper and deeper on his criticism of Apple’s shareholders as foolish, in direct contradiction to the fact that Apple shareholders seem to have done very, very well for some time.
Smith argued in an earlier post that because Apple has not paid real cash dividends to shareholders, that it is more valuable to put money in a trash can and burn it than to invest it in Apple shares. I did a long post pointing why I don’t think this is true. Smith has subsequently done several posts on this same topic, amplifying and clarifying his point.
His most recent post on this subject develops an analogy between the workforce of a tech company and the particles in a sub-critical fission reactor. This is meant to be literally (as far as I can tell) a sketch of a mathematical model for why Apple requires a huge amount of cash on hand to retain its employees. At best, it is pure speculation. And based on any practical experience in a tech company, it’s also extremely implausible that Apple would start to shed important engineers, or be at a disadvantage in recruiting, if it had built up, say, $40 billion on the balance sheet instead of $80 billion.
Smith is arguing that Apple shareholders are suckers who depend on greater fools coming along, because there are hidden requirements for cash in the business that mean the true free cash flow available for distribution to shareholders is less than it seems to investors based on accounting statements. This is not a crazy idea (though his argument that the specific hidden requirement is that this amount cash is needed to retain employees does strike me as very implausible). It is also not a new question to ask, and in my experience is one that is debated by professional equity investors in relation to many stocks, ranging from technology companies to convenience-store chains.
I have no idea whether Apple stock should be a buy, sell, or hold, but if Smith is right that the current shareholder base of Apple massively misunderstands the true capital requirements of the business, then he has a huge moneymaking opportunity. If he really believes in his investment thesis, he should borrow a lot of money and short Apple’s stock.
The only thing not to like about Jim Manzi's posts is that there aren't enough of them. They are always insightful, fresh and from the unique perspective of someone who, unlike Yglesias, has walked the walk.
Reply to this commentLinkReport AbuseAfter the last market "correction", I dumped all my equities except Apple. As a longtime Apple shareholder, couldn't care less about dividends. I know Apple makes quality products that people enjoy and use in their daily lives.They are the best in the high tech sector and they have been for a long time. As long as they keep doing so my stock shares will continue to appreciate in value. And for stocks worrying about dividends is something that most investors stopped caring about a long time ago. If Smith has shares he would like to sell because there is not a dividend, would strongly recommend you buy them.
Reply to this commentLinkReport AbuseOn it's face, you will lose money with 100% certainty by burning it. One would have to know, not believe, with 100% confidence that the recovery of an equity investment will be zero to even make the two equivalent.
Don't be surprised if he declines to take up your idea of shorting the stock because of the risk of getting squeezed. But if it's a slam dunk, he shouldn't be too concerned with buying some long dated puts where he would expect his view of economic reality to converge with Apple's stock price.
Reply to this commentLinkReport AbuseI think Manzi missed the point Yglesias was making: suppose you manage a shareholder owned company (like B&N) that is destined to lose money until it folds. Maybe B&N is not in that category, but Yglesias makes a reasonable case that it is. Anyway, for the sake of argument suppose it is. The best thing for the owners is to quit immediately and distribute the current assets. The best thing for the manager is to continue to draw a salary while riding the company into the ground.
Manzi argues that B&N could move into a new business -- like Disney moving into the resort business. But this is essentially a new business, and 90% of new businesses fail. Yglesias argues that the stockholders (owners) would be better served (have a higher expected return) by not using all its assets to try a new business it has no experience in.
Reply to this commentLinkReport AbuseI think Manzi missed the point Yglesias was making: suppose you manage a shareholder owned company (like B&N) that is destined to lose money until it folds. Maybe B&N is not in that category, but Yglesias makes a reasonable case that it is. Anyway, for the sake of argument suppose it is. The best thing for the owners is to quit immediately and distribute the current assets. The best thing for the manager is to continue to draw a salary while riding the company into the ground.
Manzi argues that B&N could move into a new business -- like Disney moving into the resort business. But this is essentially a new business, and 90% of new businesses fail. Yglesias argues that the stockholders (owners) would be better served (have a higher expected return) by not using all its assets to try a new business it has no experience in.
Reply to this commentLinkReport AbuseThe only way this makes sense is if B&N is currently sitting on a stockpile of assets and it closes up shop, liquifies it's assets, and distributes the money to the shareholders. Otherwise, any continuation of a company desined to fold merely reduces or loses what little assets the company has.
If a company in decline, closing up shop is one viable option. The other option is to attempt to adapt to new markets and survive and grow as a company. Staying stagnant doing what you're doing that is a losing proposition is the worst option that a poorly performing company can do.
Now, that doesn't mean that companies always make the best choices in trying to adapt and grow.
Reply to this commentLinkReport AbuseAs I said in the post, I don't know whether B&N should have invested in the Nook or not, and neither does Yglesias (based on his post). Yes, it is possible for a company to be in the situation you describe, but it takes a lot fo work to figure that out, none of which is done in the post. Just observing "hey, I think bookstores are dying and that's wha this company does" is not in the same county as the amount of work you would need to ge to that conclusion.
Reply to this commentLinkReport AbuseLet's take a look at the financial statements of the giant companies Yglesias and Smith, respectively, sit at the heads of, and see whether their practices have been consistent with those they prescribe for Apple and Barnes & Noble.
Reply to this commentLinkReport AbuseI agree that neither Smith nor Yglesias make a compelling case with these specific examples, but the question of zombie corporations is at least a little intriguing.
One thing I think Yglesias overstates is the liquidation value of these businesses. Cash and real estate are fungible, but pretty much all the other value of business is tied up in highly-specialized organizational capital. Looking at B&N's balance sheet, nearly half of their assets are inventory, and most of the rest is property, plant, and equipment. They have 2.1 billion in current liabilities plus almost a billion in other liabilities, and, unless I'm reading this wrong, ~23 million in cash on hand, with 240m in A/R.
The cash is basically zilch and even if that A/R is 100% good and collectable, it won't even pay off the debt, let alone current liabilities. So basically if you decide to flush the thing into a Chapter 7 or something, you're betting on the value of a giant mountain of books and CDs/DVDs that B&N can't make money selling, and a lot of big-box retail pads which are going for short money now thanks to all the other failed big-box retailers. I'd be amazed if the shareholders got even half of the current ~$11 per share by the time the dust settled.
Reply to this commentLinkReport AbuseThis is great as always Jim, but when are you going to weigh in on Bain & Romney.
No slight to them, but given your relevant real world experience, reading Ramesh Ponnuru, Yuval Levin, and Deroy Murdock on this while you stay silent is a bit ridiculous.
Reply to this commentLinkReport AbuseCouldn't you say the same thing about Amazon's Kindle, as an idea? Like B&N, Amazon is a content provider. Instead of wasting time and resources in an unfamiliar arena trying to compete with the iPad, Amazon should have focused on providing more and better content for existing iPad users.
Yglesias doesn't say that or lump the Kindle in with the Nook, and I assume that's because the Kindle Fire is a huge success whereas the Nook has been a disappointment.
Reply to this commentLinkReport AbuseThis is another sign of our times. We continuously care about what pols say and think, even though most of them don't even know what they're talking about. At the same time, we denigrate and deride business because they act according to what we believe or we don't try to understand them. Yglesias and this Karl Smith fellow are cases in point. I'm pretty sure that both of these guys, who are in media, can arrange an interview to get a better clarification from both companies about what it is they are doing and why they are doing it, but it is much easier just to mouth off about things they don't understand and let it fly.
Reply to this commentLinkReport AbuseThe Matt Yglesias blog is amazingly wrongheaded. Barnes & Nobel's business is undergoing a radical technological change. Barnes & Nobel is trying to keep up with this change. This change includes using some of its current core competencies, and merging in new core competencies. It's an entirely reasonable action.
Reply to this commentLinkReport AbuseRe: "Core competencies and intangible assets are notoriously tricky to define and quantify for a real company..."
I would very much like to see Jim Manzi and other Corner writers and commenters take on the concept of America's "Core Competences" and "strategic assets", and how that effects not only policy in the larger perspective but also the political platforms of the parties and the positions and perspectives of the candidates.
The core competence / strategic asset discussion would be a fruitful field of debate and provide new perspectives to a Republican party that is somewhat confused about the differences between healthy capitalisim, entrepreneurialism, venture capitalism, crony capitalism, vulture capitalism, small business capitalism, innovative start-up capitalism, etc and the propoer role of government vis-a-vis a national/federal role in industrialism.
It would clafify a confused conversation.
What are the underlying infrastructures / processes/ skills / technologies / assets that ought to be properly encouraged as the basis of American competitive strength and advantage that provides benefits to its citizens?
How are these competences built up and maintained to provide the continuing advantages and benefits? What is the competence building agenda? What is the migration path to maintain and build up the strengths over time?
Would this not be a useful perspective to have e.g. regarding the conversation on whether and how to maintain the industrial basis is America, whether automotive industry, heavy industry, manufacturing, new process innovative manufacturing vs old school manufucturing, services, etc. are essential to our future or a merely outdated form of wealth generation for our citizens.
What industrial eco-systems can and should America develop and what is the role of government (federal and state and local) is creating the environment where we are maintaining our national core competences and national strategic assets? What is turning into basic competitive requirements where we need to maintain but will have no distinctive advantage? How do we do this? And that is required to build that is missing but would comprise a portfolio of underlying core competences that would support our necessary national strategies?
Reply to this commentLinkReport AbuseBy Yglesias' logic, we should not have E-readers. New device, so it is outside anyone's core compentency.
By extension, we should not have any "garage entrepeneurs", as they have no core competencies (successfully developed, marketed, and sold products).
Reply to this commentLinkReport AbuseRe: "Core competencies and intangible assets are notoriously tricky to define and quantify for a real company..."
I would very much like to see Jim Manzi and other Corner writers and commenters take on the concept of America's "Core Competences" and "strategic assets", and how that effects not only policy in the larger perspective but also the political platforms of the parties and the positions and perspectives of the candidates.
The core competence / strategic asset discussion would be a fruitful field of debate and provide new perspectives to a Republican party that is somewhat confused about the differences between healthy capitalisim, entrepreneurialism, venture capitalism, crony capitalism, vulture capitalism, small business capitalism, innovative start-up capitalism, etc and the propoer role of government vis-a-vis a national/federal role in industrialism.
It would clafify a confused conversation.
What are the underlying infrastructures / processes/ skills / technologies / assets that ought to be properly encouraged as the basis of American competitive strength and advantage that provides benefits to its citizens?
How are these competences built up and maintained to provide the continuing advantages and benefits? What is the competence building agenda? What is the migration path to maintain and build up the strengths over time?
Would this not be a useful perspective to have e.g. regarding the conversation on whether and how to maintain the industrial basis is America, whether automotive industry, heavy industry, manufacturing, new process innovative manufacturing vs old school manufucturing, services, etc. are essential to our future or a merely outdated form of wealth generation for our citizens.
What industrial eco-systems can and should America develop and what is the role of government (federal and state and local) is creating the environment where we are maintaining our national core competences and national strategic assets? What is turning into basic competitive requirements where we need to maintain but will have no distinctive advantage? How do we do this? And that is required to build that is missing but would comprise a portfolio of underlying core competences that would support our necessary national strategies?
Reply to this commentLinkReport AbuseWell, I'm a fanatical Nook user, and I disagree totally that B&N should have stayed out of the market. They're a good product, and B&N marketed it very smartly.
Consider the following:
a. I get customer support from the local store. Last week, I went and got the OS update early, and the store loaded it for free.
b. I get content not only from B&N but from my local library and sites like Project Gutenberg using Adobe reader.
c. When I go to a store, I can read any book for an hour. And the following day continue reading it in the same place.
d. The Nook color acts as an Ipad or tablet, in the vicinity of wifi. I have just about quit using my home computer, and only keep it to run my wifi setup.
So, I think B&N is brilliant, they have a product that is more useful, has a wider library, has the plus of local support (unlike the kindle) and is competitively priced.
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