In 1962, the largest of the Big Three sold more than 50% of the cars bought in the US. That number is less than 20% in most months today. The reasons for the decline run into the dozens, but there are a few that are most important.
GM did not forcefully respond to the Japanese imports which began to reach the US in real numbers in the 1970s. The Japanese cars got better gas mileage than GM vehicles in a period when US drivers were worried about fuel costs. American car companies, GM included, also assumed that domestic buyers would always think that Japanese vehicles would always be of lower quality than American vehicles.
GM never forcefully addressed its rapidly rising labor expenses. The average cost per hour to employ a GM blue-collar worker rose well above those of Japanese rivals during the 1990s. GM could have gone through a painful nationwide strike to challenge the UAW to bring down labor costs. Such a move would have been risky. But such risk was not nearly as significant as building a worker cost base that could not be sustained. The high costs were particularly problematic in light of falling market share in years like 2008 and 2009 when US car sales were slow.
GM also decided to diversify in the early 1980s. It bought tech outsourcing company EDS from Ross Perot in 1984. GM became a large defense contractor in 1985 when it acquired Hughes Aircraft and merged it with its Delco division. Both acquisitions were major failures.
GM is no longer the world’s largest car company. That distinction belongs to Toyota. In the US market Ford and Toyota sell nearly as many vehicles each month as GM does.
The studio company, founded in 1924, recently filed for bankruptcy. It has produced some of the most famous films in history including “Gone With The Wind” and most of the James Bond movies. The Metro-Goldwyn-Mayer library of movies includes more than 1,400 titles.
The most extraordinary mistake that the firm made was a 2005 leveraged buyout through which several media companies and private equity firms Providence Equity Partners and TPG took control of the studio. MGM took on more than $4 billion of debt in the process and did not have adequate cash flow to support it.
MGM has recently been the target of raider Carl Icahn and other investors who have hoped to buy the company’s assets at a huge discount. The recent Chapter 11 filing by the company will allow a number of creditors to exchange equity for debt. The new structure means that MGM will probably make a very modest number of films a year to keep down costs – perhaps a half a dozen. This is a tremendous drop from the production schedule that the company had in its prime.
The greatest error that the MGM made was to assume that its large library would fuel tremendous DVD sales to cover the firm’s debt. This worked in the very early stages after the 2005 buyout, but as the DVD business collapsed and more films moved to TV video-on-demand and Internet streaming, MGM’s major source of revenue quickly eroded.
Gannett was once regarded as one of the most innovative media companies in the world. It started USA Today in 1982. The paper became the most widely circulated daily in the US.
The largest newspaper chain in the US had a stock price of $62 in 2007. The share price is now under $12. Gannett had revenue of $8 billion in 2006 and had net income of over $1.7 billion each year from 2002 to 2006. In the third quarter of this year, Gannett had revenue of only $1.3 billion, and net income of just $101 million.
Gannett’s mistake was not unlike that of other newspaper chains. It took too long to realize how news consumption patterns would change and move to the Internet. It was late to market with a major national news site like CNN.com or MSNBC.com. Gannett did not take advantage of its size and cash flow five years ago, when it could have bought a growing Internet company like MySpace. Although, the MySpace purchase has not worked for News Corp, that may be due as much to poor product management and lack of innovation as anything else.
Gannett’s management failed to look forward and realize that the print media industry’s prospects were beginning to dim.
It says a great deal when Warren Buffett buys a significant stake in a company and then sells much of that position only a short time later. He invested in Moody’s because it was one of the leaders of the rating industry and had been for a century. Along with S&P, it was the gold standard of its industry
Moody’s has been blamed for misrepresenting the independence of its rating of mortgage-backed securities. The rapid drop of the value of these securities was the major cause of the credit crisis. Referring to the ratings on subprime paper, The Week reported that the head of the US Congressional Financial Crisis Inquiry Commission said “flipping a coin would have been five times more accurate in making an investment decision than trusting Moody’s ratings of sub-prime backed securities before the credit crunch.” The magazine added, “Of the (sub-prime backed) securities given the highest AAA-rating in 2006 by Moody’s, 89 per cent were downgraded to junk status a year.”
There was no one in the management of Moody’s at the time that these ratings were offered to investors who did not know that independence and integrity were the most critical values for the company’s success. This is true with all securities that Moody’s rates and its action with sub-prime paper had the effect of calling all of its research into question. In early 2007, Moody’s shares traded above $73. Today the stock sits just above $26. The “trust” issue will dog the company into the future.
The video rental giant is destined to make any list of companies which took a wrong turn that cost it its entire franchise. The once dominant force in the industry recently went through a Chapter 11 to restructure its debt.
Blockbuster held the lead position in the distribution of feature content for nearly a decade. It was the top retailer of VHS and then DVD products and held a significant enough part of that market that there was no clear second place competitor.
Blockbuster’s business began to falter and it lost money in 2002, 2003, and 2004. Raider Carl Icahn gained de facto control of the company in 2005 to turn it around, but the trends in the industry had already moved toward DVDs-by-mail. Netflix took a lead in this business which became insurmountable even after Blockbuster launched its own mail service. The delivery of digital entertainment has since moved to streaming premium content over the Internet to people’s homes, a business in which Blockbuster has never gained a significant presence.
7. Level 3
The company has one of the largest data networks in the US with 67,000 miles of wire and fiber which can deliver voice and video via broadband across most of the country. The firm’s technology is unrivaled. A number of cable and telecom companies have been Level 3 customers. Level 3 is also one of the key networks for Voice of IP, which is rapidly replacing standard landline telecom service for millions of people.
Level 3’s strategic error was that the company did not stick to its core competency. The firm became as much an M&A machine as an operating company which left it with more than$9 billion in long-term debt. Level 3, however, did not have to cash flow to cover such a large obligation.
Management always had the same excuse about its performance. Acquisitions had not performed well. These also cost the parent company management’s time and integration expenses. Level 3’s lack of focus allowed its former customers – large telephone and cable companies – to flank it in the delivery of data to the 160 cities that it serves. A focus on operations and not building the company through buyouts would have allowed management to take advantage of the most advanced data infrastructure in the world. Level 3’s stock was above $6.50 in early 2007. It now trades for $.89.