Monday, June 26, 2006

Chainsaw Al Massacres Shareholder Value

The summer reading continues with another quickie, Chainsaw by John A. Byrne. Not really a biography of “Chainsaw” Al Dunlap, it only covers his Waterloo—Sunbeam. Sunbeam, which eventually declared bankruptcy after Dunlap finished with it, in one of the notorious accounting scandals of recent times. Financial Shenanigans fell back to Sunbeam for examples of financial chicanery many times—they were guilty of nearly every trick in the book. The particular thing that brought Dunlap down seems almost quaint to describe—recording revenue early and/or recording revenue of dubious quality. What this meant was that Sunbeam “sold” its customers (big retail chains) months worth of inventory, warehoused it for the customers, and gave them absurdly liberal payment and return options. This allowed the company to book sales months (and even a year) before they could ever hope to actually get paid—if they got paid. The retailers could “return” the unsold merchandise (which would mean just transferring ownership, since they hadn’t taken possession of the merchandise in the first place).

Dunlap’s reputation was as a cost cutter who would come into a company, close down most of the factories, and fire most of the workers. Wall Street routinely applauded this type of behavior in the 80s and 90s, and still does to an extent. The idea was that these slash-and-burn executives were creating shareholder value. Just announcing that Dunlap had been hired pushed Sunbeam stock way up.

But Dunlap was a fraud. His modus was to create a company that looked good to Wall Street so that he could sell it and make a fortune. Whether the company was actually good—whether its present value was increased—was immaterial to Dunlap, who was a heartless, soulless, hateful, greedy, abusive, thuggish conman.

The idea of “shareholder value” was a backlash against imperial, conglomerate-building CEOs, and it was probably a necessary corrective. But wasn’t it obvious that if Wall Street suddenly started demanding short-term profit in the name of shareholder value, that locusts like Dunlap would “create” it for them? In fact, there are always two groups of shareholders; those who currently own the stock (or options), and those who will own it in the future. Dunlap’s scheme was to steal from the future owners and reward the present owners (especially himself).

Analysts and investors that rewarded Dunlap for every announcement of layoffs deserve scorn. The book makes clear that many plant-closings had negative NPVs. When one of Dunlap’s executives tried to point this out to him, he was snarled at by Dunlap. Dunlap didn’t care if actual value was destroyed—he only cared what the perception on the Street was. And, irrationally, the Street rewarded him.

Of course, he got his comeuppance. Still, he avoided the jail sentence that he so richly deserved.

Chainsaw is an excellent book, and one that is good to read with more technical books like Financial Shenanigans and Infectious Greed.

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